##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

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

For the fiscal year ended June 30, 2002

Commission File No. 0-23866

VARI-L COMPANY, INC.

(Name of Issuer in its Charter)


|                                                        |  |                                                
|------------------------------------------------------- |  | -----------------------------------------------
|Colorado
(State or other jurisdiction of incorporation) |  | 06-0679347
(I.R.S. Employer Identification No.)

4895 Peoria Street
Denver, Colorado 80239
(303) 371-1560
(Address and Telephone Number of Principal Executive Offices)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Title of Class
Common Stock, $.01 Par Value

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

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of issuers knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.

At September 30, 2002, 7,264,205 shares of Common Stock were outstanding.
The aggregate market value of the Common Stock held by non-affiliates on
September 30, 2002 was $3,922,671 based on the OTCBB closing price of $0.54 per
share on that date.





---

TABLE OF CONTENTS



|                                                   |                                                                                                         |  |  |  |  |  |  | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | Item 1. Business                                                                                       
|                                                   | Item 2. Description of Property                                                                        
|                                                   | Item 3. Legal Proceedings                                                                              
|                                                   | Item 4. Submission of Matters to a Vote of Security Holders                                            
|                                                   | Item 4A. Executive Officers of the Registrant                                                          
|PART II                                           
|                                                   | Item 5. Market for Common Equity and Related Stockholder Matters.                                      
|                                                   | Item 6. Selected Financial Data                                                                        
|                                                   | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                   | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                    
|                                                   | Item 8. Financial Statements                                                                           
|                                                   | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure           
|PART III                                          
|                                                   | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                   | Item 11. Executive Compensation                                                                        
|                                                   | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                   | Item 13. Certain Relationships and Related Transactions                                                
|                                                   | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                                        
|Financial Statements                              
|EXHIBIT INDEX                                     
|EX-3.2 Amended and Restated Bylaws                
|EX-4.7 Amendment No. 1 to Rights Agreement        
|EX-10.15 Agreement with Asvan Technology, LLC     
|EX-10.16 Amendment to Credit & Security Agreement 
|EX-10.17 Form of Indemnity Agreement              
|EX-10.18 Employment Agreement - Charles R Bland   
|EX-10.19 Employment Agreement - Russell M Crouch  
|EX-10.20 Employment Agreement - Richard Dutkiewicz
|EX-10.21 Employment Agreement - Ernest C Hafersat 
|EX-10.22 Employment Agreement - Janice E Hyland   
|EX-10.23 Employment Agreement - Matthew D Pope    
|EX-10.24 Employment Agreement - Larry M Romero    
|EX-10.25 Employment Agreement-Timothy Schamberger 
|EX-10.26 Employment Agreement - Daniel J Wilmot   
|EX-10.27 Engagement Letter-Green, Manning & Bunch 
|EX-10.29 Indemnity Agreement - Charles R Bland    
|EX-10.30 Indemnity Agreement-Richard P. Dutkiewicz
|EX-10.31 Memorandum of Understanding              
|EX-10.32 Loan Agreement - Sirenza Microdevices Inc
|EX-10.33 Security Agreement - Sirenza Microdevices
|EX-10.34 Exclusivity & Right of First Refusal Agmt
|EX-10.35 Resale Registration Rights Agreement     
|EX-23 Consent of KPMG LLP                         



---



##### Table of Contents






PART I




Item 1. Business

Introduction

We design, manufacture and market a wide variety of radio frequency and
microwave components and devices for use in wireless communications. Our
products are used in many different commercial and military/aerospace
applications, including wireless telecommunications networks, wireless base
stations, wireless point-to-point radio systems, wireless point-to-multi-point
radio systems, wireless local area networks, satellite payload, test equipment
(instrumentation) and ground communications, radar systems, weapons guidance
systems and advanced telemetry systems. We operate as a single business
segment.

Our corporate headquarters are currently located at 4895 Peoria Street, Denver,
Colorado 80239, and the telephone number is (303) 371-1560. Our website
address is www.vari-l.com. We also conduct certain portions of our operations
in three other buildings within a three-mile radius of our headquarters. The
three facilities have more than 25,000 square feet of manufacturing space.

Impact of Industry Condition on our Liquidity and Related Actions

The continuing weakness in the wireless telecommunications industry has caused
our customers to continually revise their estimates of demand for our products
downward. These downward adjustments have required us to provide revised
financial projections to our lender, Wells Fargo Business Credit, Inc. (Wells
Fargo). In early May 2002, we determined that additional equity capital or
subordinated debt would be necessary to provide sufficient liquidity through
this period of weakened sales. At that time, we commenced efforts to identify
potential investors and solicit their interest in a financing transaction.

In late May 2002, as a result of declining revenues, we determined that we were
not in compliance with the minimum tangible net worth covenant of our loan
agreement with Wells Fargo, which constitutes an event of default. We met with
Wells Fargo and identified our plan to find additional sources of financing
sufficient to potentially cure the default. In subsequent meetings with Wells
Fargo, we identified various alternatives to our default and potential
solutions to the default for the near term. In early July 2002, we received
notice from Wells Fargo confirming that an event of default had occurred. Wells
Fargo implemented the default rate of interest on our outstanding loans, but
took no other actions at that time.

For the period from May 2002 to August 2002, we received several indications of
interest in an acquisition of all or substantially all of our assets or a
potential private equity infusion. As a result, we decided to engage the
investment-banking firm of Green, Manning & Bunch, LTD (GMB) to act as our
financial advisor to assist in evaluating our strategic alternatives, including
a financing transaction or the sale of all or part of the Company. We worked
with GMB to identify potential financing sources and potential acquirers and
held discussions with a number of parties about these potential transactions in
August 2002. Potential acquirers were advised that the Company would require
substantial bridge financing pending completion of any acquisition in order to
repay the Wells Fargo credit line and to meet our working capital needs pending
completion of any acquisition transaction.

On September 26, 2002, we entered into a forbearance agreement with Wells Fargo
that is in effect until November 15, 2002. The forbearance agreement, which is
explained in detail in Item 7 Liquidity and Capital Resources  Credit
Facility, provides us with access to our revolving line of credit for our
immediate cash flow needs.

On October 7, 2002, we entered into an agreement for a $5.3 million senior
secured bridge loan facility (Loan Facility) with Sirenza Microdevices, Inc.
(Sirenza). As a condition to the Loan Facility, we signed an Exclusivity and
Right of First Refusal Agreement (Exclusivity Agreement) with Sirenza. The
Loan Facility is effective for the period October 7, 2002 to September 25,
2003, is secured by

-2-



---



##### Table of Contents



substantially all of our assets, and has an annual interest rate of 25%. The
Loan Facility provides for an initial loan of approximately $1.4 million to be
drawn down immediately to pay off our obligations to Wells Fargo, and an
additional $3.9 million credit facility which may be drawn down in accordance
with an agreed schedule. The initial $1.4 million loan is convertible upon
certain occurrences at Sirenzas option into shares of common stock
representing 19.9% of our then outstanding fully-diluted shares of common
stock. The Loan Facility provides for a prepayment fee of $1 million in the
event we undertake a change of control transaction with a party other than
Sirenza. In addition, the Exclusivity Agreement limits our ability to solicit
or negotiate transactions with other potential acquirers or financing sources,
and grants Sirenza a right of first refusal if a third party submits an
acquisition proposal. The Loan Facility and Exclusivity Agreement are
discussed more fully in Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital
Resources.

As described in Item 3. Legal Proceedings, we are a party to a securities
class action. One of the key conditions to the financing transaction with
Sirenza was a settlement of the securities class action brought upon behalf of
certain shareholders (the Class). Throughout fiscal 2002, we have been in
negotiations with the Class to reach a settlement that was fair and equitable
to both our current and former shareholders. On October 3, 2002, we signed a
memorandum of understanding (MOU) to settle the securities class action. The
MOU, which is subject to final approval by the United States District Court for
the District of Colorado, requires us to:



| |  |  | issue 2.0 million shares of our common stock;                                                                                                                                                                                                                                           
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | pay $250,000 to the Class by December 15, 2002;                                                                                                                                                                                                                                         
|
| |  |  | transfer our claims against Joseph H. Kiser, David G. Sherman, Jon
C. Clark and Derek L. Bailey to the Class, except that we will retain
our claims related to the lawsuit filed against David Sherman, Joseph
Kiser, Joan Sherman, the Kathryn Sherman Trust and J.C. Enterprises;
and,
|
| |  |  | assign the proceeds or other damages to the Class from the
directors and officers insurance policies with Reliance Insurance
Company in the policy amount of $5.0 million and Agricultural Excess
and Surplus Insurance Company in the policy amount of $2.5 million.                   

The MOU will be submitted to the court and provides for a dismissal of all
actions against us, our current and former members of our board of directors
who have never been included in the lawsuit, and our current and former
officers except for Messrs. Bailey, Clark, Kiser and Sherman. The elements of
the MOU are described more fully in Item 3. Legal Proceedings.

Accounting Restatement and Related Issues

In late 1999, the Securities and Exchange Commission (the SEC) commenced an
investigation into our accounting and reporting practices for the periods prior
to and including 1999. The investigation ultimately led to the withdrawal of
audit reports issued by our previous auditors for the 1997, 1998 and 1999
financial statements. In September 2001 we agreed to a settlement with the SEC
under which a federal district court issued an injunction against future
violations of reporting, proxy and anti-fraud provisions by us, but did not
require us to pay any civil penalties or money damages. See Legal
Proceedings.

As a result of the withdrawal of audit reports for the 1997, 1998 and 1999
financial statements, we no longer met the requirements for listing on NASDAQ.
Beginning September 11, 2000, our securities were quoted on the other OTC
market. In May 2002, an application for listing was filed with the Over the
Counter Bulletin Board system (the OTCBB). On June 26, 2002, the application
was accepted and our common stock began trading on the OTCBB under the stock
symbol VARL.

-3-



---



##### Table of Contents



Acquisition of Asvan Technology, LLC

In January 2002, we acquired certain assets of Asvan Technology, LLC. The
purchase price was $100,000 in cash and a two year promissory note in the
amount of $175,000 secured by a letter of credit and provides for certain
additional payments based upon certain sales by the Company of Yttrium Iron
Garnet (YIG) based products. The note has principal and interest payable in
equal monthly installments at an annual rate of 10%. The assets acquired
include YIG based technology, which enables improved performance in wireless
components and systems. The YIG-based technology forms the basis of a new line
of advanced products that addresses a wide range of new and existing wireless,
military and instrumentation applications.

Industry Background

Although the industry is currently experiencing a slowdown, we believe that, in
the long term, worldwide demand for integrated voice, data and video
communications services will increase. The volume of high-speed data traffic
across global communications networks has grown as the public internet and
private business intranets have become essential for daily communications and
electronic commerce. The number of people using the internet to buy and sell
goods and services is also expected to continue to grow. Servicing the
increasing demand for higher bandwidth content and applications requires
cost-effective and high-speed connections, which are often unavailable or
inadequate over existing wire-based networks. For many users, wireless
communications provide an advantageous access solution for high-speed internet
and multimedia services. This is underscored by the increasing number of
wireless subscribers worldwide.

Despite this growth in customer demand, expenditures for capital infrastructure
equipment by service providers began to decline rapidly during the later half
of calendar year 2001. This severe market downturn has had a negative impact on
all of our wireless product lines, and it appears that these unfavorable
wireless market conditions may continue at least through calendar year 2002.

The demand for Radio Frequency (RF) components for the military systems and
defense applications has been a consistent portion of our sales. These
components are used in radar application, smart bombs, missiles and military
communications. These applications are expected to remain in demand with the
increased readiness stance adopted by the US Government after the events of
September 11, 2001. Many of these applications are seeking cost effective
solutions and a mix of commercial and mil standard design and manufacturing
techniques to meet the reliability, cost and rapid deployment needs now
demanded of the US military. We are positioned to apply both design and
manufacturing techniques to meet those demands.

Overview

Our products are primarily used as parts or components of other manufacturers
wireless communications products or equipment. Wireless communication is the
transmission of voice or data signals through the air, without a physical
connection, such as a metal wire or fiber-optic cable. Information transmitted
through wireless communications equipment is transmitted by electromagnetic
waves, also known as signals. Electromagnetic waves vary in length, frequency,
and intensity. The range of electromagnetic waves is called the spectrum which
encompasses audio near the low end and light toward the higher end. In between
is the radio spectrum used in most wireless communications. RF refers to the
lower frequencies in the spectrum while microwave refers to higher
frequencies.

For more than 49 years, we have supplied wireless communications products to
the military/aerospace industry. In 1993, we expanded our engineering,
manufacturing and sales efforts to address the growing demand for commercial
wireless communications products. In 2002, we expanded our current product line
by introducing wideband voltage-controlled oscillators, stripline couplers and
YIG-based technology.

-4-



---



##### Table of Contents



Currently, our principal commercial customers are original equipment
manufacturers (OEMs) and contract manufacturers that design and build
electronic products and equipment such as cellular base stations, point to
point radios, pagers and radar systems. In recent years, the trend in the
electronics industry has been for many OEMs to use contract manufacturers to
build all or a potion of their end products. However, OEMs often control the
decision as to which component designs best meet their needs. Accordingly, we
consider OEMs to be customers for our products even if they purchase our
products through contract manufacturers. These contact manufacturers include
Solectron, Flextronics and Sanmina-SCI. Our commercial product lines are
marketed to OEMs including Motorola, Ericsson, Lucent, Nokia, Microwave Data
Systems, Agere, Hughes Network Systems, GE Medical and Siemens. We sell our
military/aerospace product lines to companies such as Raytheon, Lockheed
Martin, Northrup Grumman and Textron. We have been recognized by our customers
through the years for our ability to develop, manufacture and deliver highly
reliable, innovative products.

Our product lines fall into two major categories: products which produce
electromagnetic signals, which we refer to as signal source components, and
products which receive or process electromagnetic signals, or passive
components. Sales of our products are generated through a combination of
manufacturers representatives and our own direct sales force team, and are
supplemented by advertising in trade magazines, participating in trade shows
and on our website. Most of our products are customized according to our
customers specifications, but we also produce some standard products. We
publish product specifications and capabilities in trade magazines, on our
website and in our own catalog. We also design and manufacture custom products
in response to specific customer requirements. The majority of our sales are in
parts that are customized to meet the performance requirements of specific
customers.

Products

We have three primary product lines:



| |  |  | Commercial Signal Sources            
| | - |  | -------------------------------------
|
| |  |  | High-Reliability Signal Sources      
|
| |  |  | Military Signal Processing Components

Our product strategy is to offer standardized design platforms which can be
efficiently manufactured in mass production but, at the same time, can also be
customized for the needs of each customer.

Most of our revenue comes from sales of signal source components namely,
voltage-controlled oscillators (VCOs) and phase locked loop synthesizers
(PLLs). These signal source components are designed to produce a high
quality signal that can be used over a range of radio frequencies. We hold six
patents related to signal source design and technology.

Commercial Signal Source Components

Our signal source products are designed to permit high-volume, lower cost
manufacturing. We have also developed manufacturing techniques that allow parts
to be very closely spaced when assembled without sacrificing quality or
capacity. This allows a component to be smaller in size or to deliver improved
performance in the same size component. We produce these products in
surface-mount packages compatible with the high-speed assembly techniques used
in the industry and typically delivered to the customers on tape and reel.

Over the last seven years, most of our revenues have come from sales of our
commercial narrowband VCOs. However we are beginning to see a shift in the
wireless industry from VCOs to PLLs resulting in steadily increasing sales of
our PLLs. The PLL assemblies consist of our VCOs integrated with other
components and have a higher average selling price than our VCOs. Our VCOs and
PLLs are higher

-5-



---



##### Table of Contents



performance products. Accordingly, they are used in high-performance cellular
base stations and other demanding applications where signal quality is
especially important. For example, low phase noise is an extremely desirable
quality in a wireless signal because it usually means better signal quality and
greater transmission range or higher data rates. Lower phase noise is one of
the key features of our VCOs, PLLs and other signal source products. Through
our research and development efforts, we continue to work to improve our
products performance, including our low noise designs.

As part of our continuing research and development efforts to provide advanced
solutions to our customers, we introduced a new wide-band family of VCOs in
February 2002. For many years we have been a leader in developing VCOs for the
narrowband market so a move into the wideband market was a natural progression.
Our wideband VCOs are used in satellite, cable and military applications where
demand is highest for low phase noise, combined with wide bandwidth and cost
effective products.

Our customers constantly demand even smaller sizes for the same or even higher
performance products. Responding to this demand with competitively priced
products is one of our biggest challenges.

High-Reliability Signal Source Components

Our high reliability, or hi-rel, signal source components perform the same
function as the commercial signal source components. Our hi-rel signal source
components, however, are constructed using different assembly techniques
because they are designed to operate in different operating environments. These
components are designed for wideband applications (i.e., applications involving
a wider range of signal frequencies) and are constructed in hermetically sealed
packages for use over extended temperature ranges and in adverse environments.
Hi-rel products are typically specified for both military/aerospace and
high-end industrial applications. These components are designed for use in
either through-hole or surface-mount packages, depending on customer
requirements. These products generally sell for a substantial premium over our
commercial products due to the additional labor and material content required.
In recent years we have seen an increasing demand where commercial products are
used in military applications. If this trend continues, it could have an
adverse effect on this product line.

Military Signal Processing Components

Our military signal processing components are primarily used in military and
aerospace applications. Among these products are power dividers and combiners
used for directing RF and microwave signals, solid state switches used to
change the routing of RF and microwave signals, and transformers used to
convert signals between different impedances. We also produce mixers, which
are used to convert the frequency of RF and microwave signals to baseband
signals. The production of custom-designed components usually entails the
modification of existing products to meet the specific performance criteria of
our customer, but may, in certain instances, require the design of an entirely
new product.

Other Products

In January 2002, we acquired certain assets of Asvan Technology, LLC. The
assets acquired include YIG- based technology, which enables improved
performance in wireless components and systems. The YIG-based technology forms
the basis of a new line of advanced products that addresses a wide range of new
and existing wireless applications. The acquisition is consistent with our
strategy to diversify our product mix with the addition of next generation
wireless technologies that are complementary to our existing signal source
product lines. We believe the YIG technology can effectively be applied to
military, test equipment (instrumentation) and telecommunications applications.

In March 2002, we further expanded our product mix with the introduction of a
line of 3-dB hybrid couplers. 3-dB hybrid couplers are critical components used
to build high-power amplifiers, vector modulators and antenna systems.

-6-



---



##### Table of Contents



We also offer other passive components (couplers, transformers and power
dividers) that are used in a variety of fiber-optic applications, including
cable television and point-to-point data transmission networks. These are used
in specific wideband, high performance niche applications. However, these
products do not account for a significant percentage of total revenue for the
year ended June 30, 2002.

Manufacturing

We currently manufacture most of our products in our own facilities in Denver,
Colorado. All of our products are completed and tested at our manufacturing
facilities in Denver, Colorado, although we are actively considering increasing
our use of overseas contract manufacturers to reduce our production costs. Our
3dB hybrid couplers are manufactured by a contract manufacturer who specializes
in the unique production process required by this product. Final testing and
marking is performed at our facilities in Denver, Colorado.

We use automated and semi-automated equipment to manufacture our commercial
signal source components. This equipment includes pick and place machines,
automated test stations, soldering robots, laser marking equipment and tape and
reel equipment. The automated equipment improves product consistency and
quality and reduces labor cost. We have three automated pick and place
assembly lines which have been upgraded to meet higher demand. In 1998 and
1999, we automated other aspects of our manufacturing process and upgraded our
pick and place capacity to meet increased demand. In 2000 and 2001, we
continued to add additional manufacturing capacity, and we now have production
capacity of more than twelve million parts per year. During fiscal year 2002,
we automated other operations in the production process, thereby increasing
quality and repeatability while lowering direct labor costs and cycle times.

We utilize a modular approach to our commercial manufacturing, allowing the
equipment to be used for several different products. This approach reduces the
set-up time needed to change products, allowing us to respond quickly to
customers demands.

Manufacturing of our other products is accomplished using hand-assembly
techniques and some automated testing. The order fulfillment cycle for these
products varies widely, from one to fifty-two weeks from the time the customer
places an order. The volume of products produced is also smaller, with typical
production lots of less than 100 pieces. Some of these components are
assembled in our class 10,000 clean room, or by utilizing laminar flow
benches.

Suppliers

We currently have a number of suppliers of raw material and components for our
products. In some cases, we utilize a single source of supply for raw
materials and components. We are continuously attempting to identify
alternative suppliers to minimize the risks of depending on a single supplier
and reduce cost. Our ability to use otherwise qualified alternative suppliers
is sometimes limited, however, by the fact that some of our customers reserve
the right to approve which suppliers we use in manufacturing their products.

In the past, we sometimes increased our inventory of certain parts used in our
products to reduce the risk of part shortages. However, this strategy exposed
us to the countervailing risk of accumulating excess inventory. Additionally,
changes in market demand for our products, combined with changes in product
design can result in excess inventory parts.

Our hi-rel signal source and military signal processing product lines use
custom and unique materials. During the late 1990s, demand in the
military/aerospace marketplace declined. As a result, some of our suppliers
exited the business and others adopted minimum lot buy policies. In some cases,
we have found new suppliers to replace them. In other cases, we have elected to
purchase portions of the excess

-7-



---



##### Table of Contents



inventory of those vendors who exited the business for use in our future
products or we have re-designed the product to accommodate substitute parts.

Sales and Marketing

Originally, our primary business was to engineer, manufacture and market
high-performance, high-reliability, RF and microwave signal source and signal
processing components used in military/aerospace applications, such as missile
guidance systems, advanced navigational systems and advanced radar systems. In
1993, we expanded our market focus to include the commercial market. We did so
to lessen our susceptibility to cyclical trends in defense spending and to seek
a share of the growing market for commercial wireless communications products.
As a result of this shift, our business became less dependent on U.S. military
spending and more dependent on the commercial telecommunications market. During
the past year, demand for our core products sold to the telecommunications
equipment providers has fallen dramatically. We have focused our new product
development on products such as our YIG-based technology and our 3-dB hybrid
couplers, which are not as dependant on the demand for wireless
telecommunications equipment. Our success remains heavily dependent, however,
on our ability to deliver technological innovations of our own and in response
to other requests from a variety of wireless customers.

Various aspects of our business are affected by governmental actions or
policies. For example, the delays and other problems encountered, in the U.S.
and elsewhere, in the authorization and allocation of new wireless frequencies
in the last decade made it difficult to forecast demand for many of our
products. Also, in some cases, the export of our products to certain countries
may be restricted by the U.S. government for military or political reasons.
These governmental actions are beyond our control, yet may significantly affect
demand for our products.

Our commercial signal source product line accounted for 73%, 84% and 85% of
revenue for the years ended June 30, 2002 and 2001 and the six months ended
June 30, 2000, respectively.

The following table summarizes our net sales by product line (in thousands of
dollars):

|                                      |  |          |        |          |  |          |        |  |  |  |        | 
|------------------------------------- |  | -------- | ------ | -------- |  | -------- | ------ |  |  |  | ------ | 
|                                      |  | Fiscal   |        | Fiscal   |  | Twelve  
|                                      |  | Year     |        | Year     |  | Months  
|                                      |  | Ended    |        | Ended    |  | Ended   
|                                      |  | June 30, |        | June 30, |  | June 30,
|                                      |  | 2002     |        | 2001     |  | 2000    
|                                      |  |          |        |          |  |         
|Commercial Signal Source Components   |  | $        | 15,615 |          |  |          | 34,899 |  |  |  | 25,079 | 
|Hi-Rel Signal Source Components       |  |          | 3,651  |          |  |          | 2,808  |  |  |  | 2,621  | 
|Military Signal Processing Components |  |          | 1,848  |          |  |          | 1,318  |  |  |  | 1,366  | 
|Other Products                        |  |          | 234    |          |  |          | 2,352  |  |  |  | 1,531  | 
|                                      |  |          |        |          |  |          |        |  |  |  |        | 
|                                      |  | $        | 21,348 |          |  |          | 41,377 |  |  |  | 30,597 | 
|                                      |  |          |        |          |  |          |        |  |  |  |        | 

We sell our products primarily through manufacturers representatives who
promote and solicit orders for our products on a commission basis in exclusive
marketing territories. We select our manufacturers representatives on the
basis of technical and marketing expertise, reputation within the industry, and
financial stability. Our goal is to engage manufacturers representatives who
also represent other manufacturers with products complementary to, rather than
competitive with, our products. We typically engage 14 to 16 manufacturers
representative firms in the U.S.

-8-



---



##### Table of Contents



We also have 20 manufacturers representatives covering 18 foreign countries.
In addition, we have a direct-sales force team lead by the following principal
positions:



| |  |  | Vice President of Sales & Marketing   
| | - |  | --------------------------------------
|
| |  |  | Directors of Strategic Accounts(2)    
|
| |  |  | Regional Sales Manager  East         
|
| |  |  | Regional Sales Manager  West         
|
| |  |  | Regional Sales Manager  International
|
| |  |  | Manager of Military Accounts          

This team oversees and mentors our manufacturer representative network and also
directly promotes our products through technical seminars and field visits to
customers. Additionally, we use other methods to directly promote our products,
including our website, advertising in trade journals, authoring technical
articles for publication in trade journals and participating in trade show
product seminars and exhibitions.

Backlog

In our business, it is common practice for our large OEM customers (Ericsson,
Motorola, Nokia, Microwave Data Systems and Siemens) to negotiate pricing with
us in advance based on their estimated annual purchase volumes. Then, on a
weekly basis, they place firm orders approximately two to six weeks prior to
shipment. Our policy is to report as backlog only firm orders for our products
as represented by a purchase order. While we believe that the orders currently
in our backlog are firm, ongoing changes and uncertainties in the wireless
communications industry have resulted in delays or cancellations from our
customers. In some cases, we bill customers for cancellation charges while in
other cases, we are not able to bill or collect cancellation charges. This
practice has resulted in both significant one-time benefits, as well as
material and adverse effects. Therefore, we do not believe that our backlog is
necessarily an accurate indicator of future sales. At June 30, 2002 and 2001,
our backlog of undelivered orders was $2,523,000 and $6,249,000, respectively.

Customers

Our principal customers are OEMs and contract manufacturers of communications
equipment in either the commercial or military/aerospace marketplace. Many of
our customers are large international and domestic companies with worldwide
operations or prime contractors for military/aerospace work. We believe we
have a strong reputation with these and other customers for high-performance
products and solutions.

Our key customers include ACAL Electronics, Agere, Hughes Network Systems,
Ericsson, Motorola, Netro, Nokia, Microwave Data Systems, Siemens and Solectron
in the commercial market, and Harris, Boeing (formerly Hughes), Lockheed
Martin, Textron, Northrop Grumman, Raytheon and Saab Ericsson in the
military/aerospace market.

-9-



---



##### Table of Contents



The following represents the sales revenues from our largest customers as a
percentage of our total sales:

|                                                          |  |             |    |             |  |            |    |   |  |  |    |  
|--------------------------------------------------------- |  | ----------- | -- | ----------- |  | ---------- | -- | - |  |  | -- | -
|                                                          |  | Fiscal year |    | Fiscal year |  | Six months
|                                                          |  | ended       |    | ended       |  | ended     
|                                                          |  | June 30,    |    | June 30,    |  | June 30,  
|                                                          |  | 2002        |    | 2001        |  | 2000      
|                                                          |  |             |    |             |  |           
|Nokia                                                     |  |             | 18 | %           |  |            | 15 | % |  |  | 14 | %
|Motorola                                                  |  |             | 17 | %           |  |            | 13 | % |  |  | 20 | %
|ACAL Electronics (includes Siemens)                       |  |             | 13 | %           |  |            | 25 | % |  |  | 14 | %
|Solectron (contract manufacturer
for Motorola and others) |  |             | 8  | %           |  |            |   |   |  |  |   |  

Our customers have historically purchased products from us as needed, rather
than through long-term supply contracts. We do, however, enter into long-term
purchase agreements with some of our larger customers that establish preferred
vendor status for us and, in most cases, indicate estimated purchase quantities
over the term of the agreement.

Competition

The market for virtually all of our products is extremely competitive. Many of
our competitors, including divisions of major corporations, have significantly
greater resources than those currently available to us. Additionally, some of
our customers compete with us by manufacturing certain components themselves,
rather than purchasing them from us. Some multi-national manufacturing firms
also have the ability to manufacture competitive products in larger production
runs than us.

We believe that our surface-mount products for commercial applications compete
with other manufacturers products on the basis of their unique features, price
and performance. We believe that our products manufactured for
military/aerospace applications, including our signal processing components and
high rel VCOs, compete on the basis of quality and performance. These products
are typically high-performance, high-reliability components which are required
to meet high quality system standards. Increasingly, these customers are
willing to consider commercial alternatives to our military products.

We consider Mini-Circuits, M/A-COM, Matsushita, ALPs, Temex and Z-Com to be our
largest competitors in the commercial signal source components market.
Additionally, we believe Merrimac Industries is our largest competitor in the
military signal processing components market. Remec/Magnum is our primary
competitor in the Hi-Rel signal source components market and Anaren Microwave
is our primary competitor in the coupler market. We intend to continue to
compete in these markets on the strength of our product performance and our
ongoing commitment to technological innovation.

Research and Development

We are focusing our research and development efforts in the following areas:



| |  |  | Application engineering,                                     
| | - |  | -------------------------------------------------------------
|
| |  |  | Improvement of the Commercial Signal Source product line, and
|
| |  |  | Development of new product lines.                            

Our research and development team focuses on developing both new base
technologies and design methodologies for existing base technologies. The
application and design engineering team uses these efforts and modifies and/or
extends them to meet specific customer needs.

We have an ongoing product improvement program designed to maintain or extend
the technology gap between us and our competitors. To this end, we are
dedicating resources to the improvement of the

-10-



---



##### Table of Contents



phase noise performance of our commercial product lines. Additionally, we are
employing research and development resources in order to release the YIG
product to production.

Our research and development expenses for the year ended June 30, 2002 were
$2.7 million compared to $4.0 million for the year ended June 30, 2001 and $5.6
million for the twelve months ended June 30, 2000.

Patents

Consistent with other companies in our business, we rely on nondisclosure and
noncompete agreements and trade secret laws to protect our confidential and
proprietary information. Due to the rapid rate of technological change in the
market, we believe that the ability to innovate is of greater importance in our
business than the availability of patents and proprietary rights protection.
Barriers to competitor entry for non-patented technology include the time and
expense to design and manufacture components and the difficulty of marketing to
our customers who have already designed our components into their equipment.

We currently have nine active U.S. Patents, of which six patents relate to
signal source products. Our current design methodologies utilize three of these
patents. To the best of our knowledge, there are no asserted claims by other
parties against these patents or our other proprietary technologies.

Government Regulation

In certain instances, we are required to obtain both Department of Commerce and
Department of State export licenses before filling foreign orders. The Bureau
of Export Administration has listed certain criteria whereby some of our
products are regulated for export for reasons of national security, missile
technology, and regional stability, principally with regard to
military/aerospace applications. Any foreign sales of our products requiring
export licenses must comply with these regulations.

Employees

Excluding contract/agency personnel, we had 202 employees as of June 30, 2002.
None of our employees are covered by a collective bargaining agreement and we
have not experienced any work stoppages. We believe that management has a good
relationship with our employees and that employee morale is good at all levels.

To date, we have been able to attract the engineering, technical and other
personnel required by our business. Several of our management and professional
employees have advanced degrees. Such experienced professionals are in demand,
and we must compete for their services with other organizations which may be
able to offer more favorable salary and benefits. Historically, our turnover
among technical and professional employees has been very low.

-11-



---



##### Table of Contents



Financial Information about Geographic Regions

We attribute sales to customers based on the country to which the products are
shipped. Net sales by country are as follows:

|              |  |                           |        |            |  |          |        |  |  |            |        | 
|------------- |  | ------------------------- | ------ | ---------- |  | -------- | ------ |  |  | ---------- | ------ | 
|              |  |                           |        |            |  |          |        |  |  | Six months
|              |  | Year ended                |        | Year ended |  | ended   
|              |  | June 30,                  |        | June 30,   |  | June 30,
|              |  | 2002                      |        | 2001       |  | 2000    
|              |  |                           |        |            |  |         
|              |  | (in thousands of dollars)
|United States |  | $                         | 8,985  |            |  |          | 15,596 |  |  |            | 7,464  | 
|China         |  |                           | 3,800  |            |  |          | 1,532  |  |  |            |       | 
|Finland       |  |                           | 2,995  |            |  |          | 4,110  |  |  |            | 1,297  | 
|England       |  |                           | 1,349  |            |  |          | 5,393  |  |  |            | 3,938  | 
|Sweden        |  |                           | 1,321  |            |  |          | 1,527  |  |  |            | 481    | 
|Germany       |  |                           | 1,147  |            |  |          | 4,731  |  |  |            | 1,142  | 
|Italy         |  |                           | 462    |            |  |          | 4,788  |  |  |            | 1,143  | 
|Canada        |  |                           | 109    |            |  |          | 1,540  |  |  |            | 567    | 
|Other         |  |                           | 1,180  |            |  |          | 2,160  |  |  |            | 1,126  | 
|              |  |                           |        |            |  |          |        |  |  |            |        | 
|Net Sales     |  | $                         | 21,348 |            |  |          | 41,377 |  |  |            | 17,158 | 
|              |  |                           |        |            |  |          |        |  |  |            |        | 




Item 2. Description of Property

We currently lease four buildings.



| |  |  | We lease a 31,000 square foot building in Denver, Colorado that is
our principal executive office. This facility houses our
administrative, sales and engineering functions as well as a pilot
plant for pre-production and prototype development. The lease expires
on August 31, 2013. The current lease rate on this building is $41,204
per month. We believe that the lease rate for this facility is
approximately 70% higher than the fair market value lease rate of
comparable facilities within the area.                                                                                   
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We lease a 13,500 square foot building in Denver, Colorado that is
our main commercial products manufacturing facility. We lease this
facility from a partnership that includes our former Chief Scientific
Officer as the general partner. This lease expires on October 31, 2005
and the current lease rate is $10,801 per month. We believe that the
lease rate for this facility is approximately double the fair market
value lease rates for comparable facilities within the area. We are
currently engaged in litigation with our landlord of this facility.
See Item 3  Legal Proceedings.
|
| |  |  | We lease a 20,600 square foot building in Denver, Colorado that is
our military/aerospace products manufacturing facility. This lease
expires on June 30, 2003, and we are reviewing our facility needs to
determine if we should renew this lease. The current lease rate is
$10,920 per month.                                                                                                                                                                                                                                                                                                      
|
| |  |  | We lease a 6,000 square foot warehouse facility in Denver, Colorado
that is used as a machine shop and for storage of inventory, supplies,
excess machinery and equipment, and corporate records. The lease
expires on July 14, 2003 and the lease payment is $3,125 per month.                                                                                                                                                                                                                                                                                                                       

-12-



---



##### Table of Contents






Item 3. Legal Proceedings

Securities and Exchange Commission Investigation

In December 1999, the Company learned that the SEC was conducting an
investigation to determine whether there were violations of the federal
securities laws by the Company or any of its officers, directors, or
employees. The Commissions investigation was focused primarily on the
Companys prior financial reporting and its accounting practices and
procedures. In September 2001, the Company agreed to a settlement with the
SEC under which the Company, without admitting or denying that it violated
any laws, consented to the entry of an injunction prohibiting future
violations by the Company of certain periodic reporting, record keeping,
internal controls, proxy solicitation and antifraud provisions of the
Securities Exchange Act of 1934. On November 9, 2001, the Companys
settlement with the Securities and Exchange Commission was approved by the
United States District Court for the District of Colorado.

Private Securities Class Action

A number of private shareholder class actions alleging violations of
federal securities laws were filed against the Company and certain of its
former officers in the United States District Court for the District of
Colorado beginning in June 2000. Those actions have since been
consolidated and an amended consolidated complaint has been filed by the
class representatives. On November 21, 2001, the Company filed a motion to
dismiss all claims against the Company in the consolidated private
securities class action, Rasnerv. Vari-L Company, Inc., Civ. No.
00-S-1181, D. Colo. The Companys motion argues that the amended
consolidated complaint alleges wrongdoing by former corporate employees in
furtherance of their personal interests, as opposed to corporate interests,
which does not state a claim for securities fraud against the Company. The
class action representatives have filed their response to the Companys
motion to dismiss and the Company has filed a reply to that response but
the court has not yet ruled on the motion.

On October 3, 2002, the Company and the class action representatives
reached an agreement in principle for the settlement of the litigation and
executed a memorandum of understanding (the MOU), subject to court
approval. The MOU outlines the general terms of the proposed settlement and
is intended to be used as a basis for drafting a Stipulation of Settlement.
The MOU requires the Company to pay $250,000 in cash and issue 2.0 million
shares of the Companys common stock. The number of shares issuable
pursuant to the MOU is subject to certain anti dilution adjustments in the
event the Company sells its common stock or securities convertible into its
common stock below certain threshold prices. The Company has calculated the
value of shares to be issued based upon the closing price of the Companys
common stock on the date in which all substantive aspects with respect to
the MOU were agreed upon. At June 30, 2002, the Company recorded $1.45
million representing the approximate cost to settle this litigation. This
amount has been included in expenses of accounting restatements and related
matters in the statements of operations.

The Company is also required to transfer its claims against Joseph H.
Kiser, David G. Sherman, Jon C. Clark and Derek L. Bailey to the
plaintiffs. However, the Company will retain the claims from the lawsuit
filed in the District Court for the City and County of Denver as a result
of the Special Litigation Committee investigation, against David G.
Sherman, Joseph H. Kiser, Joan Sherman, the Kathryn Sherman Trust and J.C.
Enterprises. The Company will also assign to the Plaintiffs any right it
might have to proceeds or other damages from the Directors and Officers
insurance policies with Reliance Insurance Company and Agricultural Excess
and Surplus Insurance Company. There can be no assurance that the court
will accept our proposal. Moreover, irrespective of the outcome with
respect to the Company, the individual defendants may assert claims against
the Company for advancement or indemnification of their attorneys fees and
other costs of defense, which claims may be material.

-13-



---



##### Table of Contents



Shareholder Derivative Suit

On August 4, 2000, a shareholder derivative action was filed, purportedly
on behalf of the Company, in District Court, City and County of Denver
against the same officers named in the class action as well as the members
of the Companys board of directors at the time. The Company was also
named as a nominal defendant. The derivative complaint alleged many of the
same facts as in the federal securities class action, claiming that those
facts demonstrate that the individual defendants breached their fiduciary
duties to the Company and the shareholders. The action was dismissed
without prejudice in April 2001 but an amended complaint was filed by the
same plaintiff in September 2001.

On October 9, 2001, the Company filed a motion to dismiss the amended
shareholder derivative action, on various grounds, including the failure to
make the required demands, the failure to commence a new action rather than
trying to revive the previously dismissed case, and the availability of new
management and a new independent Board member to evaluate the merits, and
the timing, of any claims which could be brought by the Company against the
individual defendants. Substantially all of the individually named
defendants subsequently joined in the Companys motion.

On April 4, 2002, the court granted the plaintiffs motion for a stay of
the shareholders derivative action against certain of the Companys former
officers and directors pending the results of the investigation by the
Special Litigation Committee of the Board of Directors (the SLC) of the
claims raised in that action. On June 28, 2002, the Company filed a motion
to dismiss or in the alternative a motion for summary judgment based on the
findings of the SLC, which recommended dismissal of the action without
prejudice. On August 21, 2002, the court granted the Companys motion and
dismissed the amended action without prejudice.

Insurance Claims

Reliance Insurance Company (Reliance) is the issuer of the $5 million
primary directors and officers liability insurance policy in effect for
the period of time covered by the securities class action and the
derivative action. In January 2002, the Reliance liquidator notified
claimants concerning the procedures by which insureds and other claimants
may file claims against the Reliance estate. The Company intends to file a
claim against the Reliance estate, however, all rights under the claim have
been assigned to the plaintiffs pursuant to the MOU.

Declaratory Judgment Action by Excess Insurer

On June 5, 2001, Agricultural Excess and Surplus Insurance Company
(AESIC), which had issued to the Company a $2.5 million excess directors
and officers liability insurance policy for the period of time covered by
the shareholder and class action litigation referenced above, filed suit in
United States District Court for the District of Colorado asking the court
to find that it is not obligated to provide coverage, or in the
alternative, seeking permission to rescind its policy.

A settlement conference was held in February 2002 before the U.S.
Magistrate assigned to this declaratory judgment action brought by the
Companys excess liability directors and officers liability insurance
carrier. Representatives of the excess insurer, the Company, the
individual defendants in the securities class action, and the plaintiffs in
the securities class action attended the conference. While meaningful
discussions were held at that conference, no settlement was reached and no
further settlement conference has been scheduled.

-14-



---



##### Table of Contents



Company Action against Former Officers

On December 5, 2001, the Company formed the SLC. The SLC is comprised of
two outside directors who joined the Companys Board subsequent to the time
of certain alleged wrongdoings as discussed below.

On December 20, 2001, the SLC retained independent counsel to advise the
SLC in its investigation of the allegations of wrongdoing during prior
periods by former employees, as well as current and former members of the
Companys Board of Directors. Additionally, the SLC suspended the
advancement of certain legal fees and expenses being paid on behalf of
former officers of the Company.

On March 19, 2002, the Company filed a lawsuit in the District Court, City
and County of Denver, against Mr. David Sherman, Mr. Joseph Kiser,
individuals, and J.C. Enterprises, a Colorado general partnership. Mr.
Sherman is the former president of the Company and Mr. Kiser is the former
Chairman of the Companys Board of Directors and Chief Scientific Officer.
Additionally, Mr. Kiser is the General Partner of J.C. Enterprises. On
April 2, 2002, the Company filed an Amended Complaint and Jury Demand. On
May 17, 2002, the Company filed a Second Amended Complaint and Jury Demand
and added Ms. Joan Sherman, an individual, and the Kathryn Sherman Trust, a
Colorado trust, as defendants. In its lawsuit, the Company seeks to
rescind certain employment and consulting agreements between the Company
and Messrs. Kiser and Sherman, and to rescind certain stock and stock
option grants made to them, on the basis that such agreements were entered
into, and such stock option grants were made, based upon mistaken or
misrepresented information regarding the Companys true financial
performance. The Company also seeks to recover the compensation and
bonuses paid to them as a result of such mistaken or misrepresented
information. In addition, the Company seeks to recover excessive rent it
paid pursuant to a lease agreement between the Company and J.C. Enterprises
in reliance on misrepresented information provided by Messrs. Kiser and
Sherman. The Company added Ms. Sherman and the Kathryn Sherman Trust to
this action because they may possess assets from Mr. Sherman that Vari-L is
entitled to recover.

On April 30, 2002, Mr. Kiser filed a motion to dismiss our lawsuit in its
entirety. On June 13, 2002, the motion to dismiss was denied.

On May 30, 2002, David Sherman filed a counter-claim against the Company
alleging that the Company breached its obligation to him by suspending
payment of consulting fees under the Termination and Consulting Agreement.
On July 8, 2002, Joseph Kiser filed counter-claims against the Company,
Charles R. Bland, Richard P. Dutkiewicz, Gil J. Van Lunsen and David M.
Risley. Mr. Bland is our President and Chief Executive Officer. Mr.
Dutkiewicz is our Vice President of Finance and Chief Financial Officer.
Messrs. Risley and Van Lunsen are on our Board of Directors and are members
of the SLC. The counter-claim alleges claims for: (i) violation of the
Colorado Wage Act against all counter-claim defendants; (ii) breach of
contract relating to Mr. Kisers employment agreement with the Company
against the Company only; (iii) breach of contract relating to the
Companys promise to fulfill the obligations of Mr. Kisers employment
agreement against the Company only; (iv) breach of contract relating to the
indemnification agreements with the Company against the Company only; (v)
promissory estoppel relating to Mr. Kisers retirement from the Company
against the Company only; (vi) intentional interference with Mr. Kisers
employment agreement with the Company against Mr. Bland only; and (vii)
negligent misrepresentation relating to Mr. Kisers plans for retirement
against Mr. Bland only.

A trial date of February 24, 2003 has been set and the parties are about to
commence discovery.

Mr. Kisers employment contract requires him to perform any directive of
the Companys Board of Directors. Subsequent to March 19, 2002, Mr. Kiser
has not performed any services for the Company. The Company believes that
its claim to rescind Mr. Kisers employment contract based

-15-



---



##### Table of Contents



upon mistaken or misrepresented information regarding the Companys true
financial performance is based upon a valid principle of law. Since March
19, 2002, the Company has suspended all payments required by Mr. Kisers
employment contract. The Company has recorded approximately $203,000 of
liabilities representing the present value of post-employment health care
obligations and a one time separation bonus to be paid to Mr. Kiser upon
termination of contract payments.

In the event that Mr. Kiser prevails in requiring us to comply with the
terms of the employment contract, we could be obligated to total future
payments of approximately $1,400,000 payable over ten years. If we are
successful in our claims against Mr. Kiser, we could be awarded as much as
$5,600,000 plus attorneys fees. Additionally, we would reverse all
previously recorded liabilities associated with this matter.

If Mr. Kiser prevails on his breach of contract action related to the
indemnification agreements he had with the Company, the Company could be
liable for attorney fees and costs incurred in the various actions as well
as for future covered attorneys fees, the present amount of which is
unknown.

Under Mr. Shermans termination and consulting agreement, the Company
agreed to engage Mr. Sherman as a consultant for the period August 1, 2000
through July 31, 2001. As a consultant he was to receive compensation of
$195,000 as consulting fees along with certain other benefits. Due to his
failure to submit certain documentation for travel expenses in which
amounts were advanced, the Audit Committee suspended payment of the
consulting fees in October 2000 and elected to terminate the agreement due
to misappropriation of funds. During the quarter ended December 31, 2001,
the Company recognized a $145,000 benefit from an insurance recovery for
Mr. Shermans undocumented travel advances. If Mr. Sherman prevails on his
breach of contract action, the Company could be liable for amounts under
his termination and consulting agreement, attorney fees and costs incurred
in the various actions as well as for future covered attorneys fees, the
present amount of which is unknown.

Patent Litigation

On August 8, 2002, Anaren Microwave, Inc. (Anaren) sued the Company for
infringement of U.S. Patent No. 4,821,007. The Company has not been served
with the complaint. The Company has been advised that a license may be
available under the patent, and the Company and its counsel are
investigating Anarens allegations.

Financial Impact of Litigation

All of these legal actions have the potential of a possible loss to the
Company. The Company Action against Former Officers is a potential gain
contingency for the Company. At this time, we are unable to reasonably
estimate the possible future cost or net loss or gain, if any, associated
with certain of these matters. Accordingly, we have not recorded any loss
or gain contingencies associated with certain of these matters as of June
30, 2002. It is reasonably possible that such amounts could be material to
our financial condition, results of operations or liquidity.

-16-



---



##### Table of Contents






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

None




Item 4A. Executive Officers of the Registrant

Following is a list of our executive officers, their respective ages as of June
30, 2002 and their positions within the Company:

|                       |  |     |    |          |  |                                                                
|---------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------
|Name                   |  | Age |    | Position
|                       |  |     |    |         
|Charles R. Bland       |  |     | 54 |          |  | President, Chief Executive Officer and Director                
|Richard P. Dutkiewicz  |  |     | 47 |          |  | Vice President  Finance, Chief Financial Officer and Secretary
|Ernest C. Hafersat     |  |     | 52 |          |  | Vice President  Manufacturing                                 
|Timothy G. Schamberger |  |     | 40 |          |  | Vice President  Sales and Marketing                           
|Daniel J. Wilmot       |  |     | 36 |          |  | Vice President  Research and Development                      

Charles R. Charles R. Bland -President, Chief Executive Officer and Director. Mr.
Bland, age 54, joined us in May 2001 as our President and Chief Executive
Officer. On December 26, 2001, he was appointed to the Board of Directors. From
June 1, 2000 until he joined us, he served as the President of Growzone, Inc.,
a software company focused on the horticultural industry, and from June 1999
until June 2000, he was the President of AmericasDoctors.com, an Internet
health care content site. From 1998 to 1999, Mr. Bland was the Chief Operating
Officer at Quark Incorporated, provider of shrink wrap and client server
software for the publishing industry. For the previous 24 years, Mr. Bland
worked in positions of increasing responsibility with Owens Corning Fiberglas,
a world leader in high performance glass composites and building materials,
with his final assignment being President, Africa/Latin American Operations.
Mr. Bland received his B.S., Accounting and Finance, from Ohio State University
and his MBA from the Sloan School, Massachusetts Institute of Technology.

Richard P. Dutkiewicz  Vice President of Finance, Chief Financial Officer and
Secretary. Mr. Dutkiewicz, age 47, joined us in January 2001 as our Vice
President of Finance, Chief Financial Officer and Assistant Secretary. On
December 31, 2001, he was appointed Secretary of the Corporation. From 1995 to
2001, Mr. Dutkiewicz was Vice President  Finance, Chief Financial Officer,
Secretary and Treasurer of Coleman Natural Products, Inc., located in Denver,
Colorado, a leading supplier of branded natural beef in the United States. Mr.
Dutkiewicz previous experience includes senior financial management positions
at Tetrad Corporation, MicroLithics Corporation and various divisions of United
Technologies Corporation. Mr. Dutkiewicz was an Audit Manager at KPMG LLP. Mr.
Dutkiewicz also serves on the Board of Directors of CareerLab.com. He received
his BBA degree from Loyola University of Chicago in 1977. He is a member of the
American Institute of Certified Public Accountants, Financial Executives
International and the Association for Corporate Growth.

Ernest C. Hafersat  Vice President of Manufacturing. Mr. Hafersat, age 52,
became our Vice President of Manufacturing in March 2001. Prior to joining us,
he served in various management capacities, including Senior Director of
Engineering at Maxtor Corporation, a disk storage manufacturer, since 1994. Mr.
Hafersat also served as the acting Vice President and General Manager/Senior
Director of Operations, Engineering and Materials at Read-Rite Corporation, a
manufacturer of magnetic recording components for the hard drive industry
located in Malaysia and the Philippines from January 1998 to December 1999. His
previous assignments included positions as Senior Manager of Engineering with
Exabyte Corporation, a manufacturer of tape storage products; Director of
Manufacturing with Optotech Inc.,

-17-



---



##### Table of Contents



an optical disk storage product manufacturer; Director of Manufacturing
for Kennedy Corporation, a manufacturer of tape storage products; and Manager
of Manufacturing/Industrial/Cost Engineering with IBM-MCA Joint Venture
(Discovision), a videodisk and technology transfer manufacturing. Mr. Hafersat
completed his BSIE degree at Kentucky Christian University in 1970.

Timothy G. Schamberger  Vice President, Sales and Marketing. Mr. Schamberger,
age 40, became our Vice President of Sales and Marketing in May 2002. Prior to
joining us, he served in various capacities including Strategic Account Manager
with M/A-COM Inc., a leading wireless RF components manufacturer since 1993.
Mr. Schambergers previous experience also includes sales management and
engineering positions with Allied Signal Aerospace Corp., a manufacturer of
non-nuclear systems for nuclear weapons, and Wilcox Electric, a manufacturer of
ground-based navigation aid equipment. Mr. Schamberger received his BSEE from
Kansas State University in 1983.

Daniel J. Wilmot  Vice President of Research and Development. Mr. Wilmot, age
36, joined us in August 1992. He served as Product Development PLL Design
Engineer and Director of Advanced Product/Development Engineer in 1993 before
he was appointed Vice President of Research and Development in November 1993.
Prior to joining us, Mr. Wilmot was an RF Lead Engineer with Rockwell
International where he worked in management, design, development, cost
management and containment for PLLs and VCOs among other hybrid RF devices.
Before Rockwell International, he worked at Interstate Electronics Corp. in
Anaheim, California as a Radio subsystem designer for GPS applications. Mr.
Wilmot received his BSEE from University of California at Santa Barbara in June
1986 and an MSEE from the California State University at Fullerton in December
1991. Mr. Wilmot also completed the AEA/Stanford Executive Institute for
Management of High-Technology Companies at Stanford University, California in
August 1999. Mr. Wilmot is currently pursuing his MBA at the University of
Colorado.

Our Executive Officers are elected by the Board of Directors at the first
meeting after each annual meeting of Shareholders and hold office until the
next such meeting of Directors or their earlier resignation or removal.

-18-



---



##### Table of Contents






PART II




Item 5. Market for Common Equity and Related Stockholder Matters.

Market

In May 2002, an application for listing was filed with the Over the Counter
Bulletin Board system (the OTCBB). The application was accepted and we began
trading on the OTCBB under the stock symbol VARL. Formerly, our common stock
was traded on the Nasdaq National Market until July 7, 2000 when it was
suspended by Nasdaq. During the period from July 7, 2000 through September 9,
2000 when the stock was delisted by Nasdaq, there was no active public trading
market for our stock. Beginning September 11, 2000, our stock was quoted on the
other OTC market until our subsequent listing with the OTCBB on June 26, 2002.

The following table sets forth the high and low prices for the common stock for
the periods indicated:

|                                               |  |      |       |     |  |   |       | 
|---------------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                               |  | High |       | Low
|                                               |  |      |       |    
|NASDAQ National Market:                        |  |      |       |     |  |   |       | 
|Period from July 1 to July 7, 2000             |  | $    | 12.63 |     |  | $ | 11.63 | 
|                                               |  |      |       |     |  |   |       | 
|As quoted on other OTC Market                  |  |      |       |     |  |   |       | 
|Period from September 11 to September 30, 2000 |  | $    | 6.05  |     |  | $ | 2.50  | 
|Quarter ended December 31, 2000                |  | $    | 4.50  |     |  | $ | 0.75  | 
|Quarter ended March 31, 2001                   |  | $    | 4.75  |     |  | $ | 1.25  | 
|Quarter ended June 30, 2001                    |  | $    | 3.00  |     |  | $ | 1.25  | 
|Quarter ended September 30, 2001               |  | $    | 3.50  |     |  | $ | 1.00  | 
|Quarter ended December 31, 2001                |  | $    | 2.50  |     |  | $ | 1.00  | 
|Quarter ended March 31, 2002                   |  | $    | 1.75  |     |  | $ | 1.00  | 
|Period from April 1 to June 25, 2002           |  | $    | 1.40  |     |  | $ | 0.55  | 
|                                               |  |      |       |     |  |   |       | 
|OTCBB                                          |  |      |       |     |  |   |       | 
|Period from June 26 to June 30, 2002           |  | $    | 1.15  |     |  | $ | 0.60  | 

Holders

As of September 30, 2002, there were approximately 400 holders of record of our
common stock.

Dividends

We have never declared or paid a cash dividend on our common stock. Our Board
of Directors presently intends to retain any and all earnings for use in the
business and, therefore, does not anticipate paying cash dividends in the
foreseeable future. The declaration of cash dividends, if any, in the future
would be subject to the discretion of the Board of Directors, which may
consider such factors as our results of operations, financial condition,
capital needs, and any contractual or other restrictions.

Equity Compensation Plan Information

The information appearing under the caption Equity Compensation Plan
Information in Item 12 is incorporated herein by reference.

Sales of Unregistered Securities

Stock Grant Plan.During the fiscal year ended June 30, 2002, we issued 2,900
shares of our common stock with a fair market value of $4,000 to non-management
members of our Board of Directors under

-19-



---



##### Table of Contents



our Stock Grant Plan. Although we have filed a registration statement on Form
S-8 covering the shares issuable under the Stock Grant Plan, due to the fact
that certain of our financial statements for the periods prior to June 30, 2000
are unaudited as discussed in Item 8, we have issued such shares in reliance on
Section 4(2) under the Securities Act of 1933, as amended.

Employee Stock Purchase Plan.During the fiscal year ended June 30, 2002, we
sold 76,011 shares of our common stock for a weighted average price of $1.64
per share to employees pursuant to our Employee Stock Purchase Plan. Although
we have filed a registration statement on Form S-8 covering the shares issuable
under the Employee Stock Purchase Plan, fact that certain of our financial
statements for the periods prior to June 30, 2000 are unaudited as discussed in
Item 8, we have issued such shares in reliance on Section 4(2) under the
Securities Act of 1933, as amended.

-20-



---



##### Table of Contents






Item 6. Selected Financial Data

The selected historical financial information presented below should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations which follows and our financial statements and
related notes thereto beginning on page F-1. Certain fiscal year 2001 amounts
have been reclassified to conform to the fiscal year 2002 presentation.
Information prior to January 1, 1999 cannot be prepared without unreasonable
effort and expense. The financial statements for periods prior to June 30, 2000
have not been audited.

|                                                                |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |       |        |        |  
|--------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------ | ----------------------------- | ----- | ---------------------------------------------------------- | ------ | ------------- | ------ | ------------- | ------ | --------- | ----- | ------ | ------ | -
|                                                                |                                                                                    |                          |                               |       | Fiscal                                                     |        | Fiscal        |        |               |        |          
|                                                                |                                                                                    |                          |                               |       | Year                                                       |        | Year          |        | Twelve Months
|                                                                |                                                                                    |                          |                               |       | Ended                                                      |        | Ended         |        | Ended        
|                                                                |                                                                                    |                          |                               |       | June 30, 2002                                              |        | June 30, 2001 |        | June 30, 2000
|                                                                |                                                                                    |                          |                               |       |                                                            |        |               |        |              
|                                                                |                                                                                    |                          |                               |       | (In thousands of dollars, except share and per share data)
|Statement of Operations Data (1):                               |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |      
|Net sales                                                       |                                                                                    | $                        | 21,348                        |       |                                                            |        | 41,377        |        |               |        | 30,597    |      
|Cost of goods sold                                              |                                                                                    |                          | 13,647                        |       |                                                            |        | 21,747        |        |               |        | 17,540    |      
|                                                                |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |      
|                                                                |                                                                                    | Gross profit             |                               |       | 7,701                                                      |        |               |        | 19,630        |        |           |       | 13,057 |       
|                                                                |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |      
|Operating expenses:                                             |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |      
|                                                                | Selling                                                                            |                          |                               | 2,925 |                                                            |        |               | 4,268  |               |        |           | 3,636 |       
|                                                                | General and administrative                                                         |                          |                               | 6,418 |                                                            |        |               | 9,664  |               |        |           | 4,436 |       
|                                                                | Research and development                                                           |                          |                               | 2,669 |                                                            |        |               | 4,021  |               |        |           | 5,646 |       
|                                                                | Expenses related to accounting
restatements and the related
shareholder litigation |                          |                               | 1,805 |                                                            |        |               | 2,387  |               |        |           | 469   |       
|                                                                |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |      
|                                                                |                                                                                    | Total operating expenses |                               |       | 13,817                                                     |        |               |        | 20,340        |        |           |       | 14,187 |       
|                                                                |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |      
|                                                                |                                                                                    | Operating loss           |                               |       | (6,116                                                     | )      |               |        | (710          | )      |           |       | (1,130 | )     
|                                                                | Other income (expense):                                                            |                          |                               |       |                                                            |        |               |        |               |        |           |       |       
|                                                                | Interest income                                                                    |                          |                               | 48    |                                                            |        |               | 416    |               |        |           | 460   |       
|                                                                | Interest expense                                                                   |                          |                               | (199  | )                                                          |        |               | (1,062 | )             |        |           | (873  | )     
|                                                                | Other, net                                                                         |                          |                               | 12    |                                                            |        |               | (43    | )             |        |           | (35   | )     
|                                                                |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |      
|                                                                |                                                                                    |                          | Total other income (expenses) |       |                                                            | (139   | )             |        |               | (689   | )         |       |        | (448   | )
|                                                                |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |      
|                                                                |                                                                                    |                          | Net loss                      |       | $                                                          | (6,255 | )             |        |               | (1,399 | )         |       |        | (1,578 | )
|                                                                |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |      
|Loss per share                                                  |                                                                                    | $                        | (0.87                         | )     |                                                            |        | (0.20         | )      |               |        | (0.25     | )    
|                                                                |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |      
|Weighted average shares outstanding                             |                                                                                    |                          | 7,152,342                     |       |                                                            |        | 7,083,866     |        |               |        | 6,232,964 |      
|                                                                |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |      
|Balance Sheet Data at Period End:                               |                                                                                    |                          |                               |       |                                                            |        |               |        |               |        |           |      
|Cash and cash equivalents                                       |                                                                                    | $                        | 553                           |       |                                                            |        | 2,013         |        |               |        | 11,030    |      
|Working capital                                                 |                                                                                    |                          | 1,999                         |       |                                                            |        | 7,093         |        |               |        | 6,742     |      
|Total assets                                                    |                                                                                    |                          | 13,394                        |       |                                                            |        | 20,454        |        |               |        | 32,571    |      
|Notes payable and current installments
of long-term obligations |                                                                                    |                          | 1,611                         |       |                                                            |        | 1,764         |        |               |        | 11,566    |      
|Long-term obligations                                           |                                                                                    |                          | 55                            |       |                                                            |        | 1,321         |        |               |        | 92        |      
|Total stockholders equity                                      |                                                                                    |                          | 7,739                         |       |                                                            |        | 13,829        |        |               |        | 14,685    |      

-21-



---



##### Table of Contents






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

Forward Looking Statements

The Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are based on a number of assumptions by us about the future, usually
based on current conditions or on the broader expectations of others. These
assumptions may or may not prove to be correct and, as a result, our own
forward-looking statements may also be inaccurate. On the other hand, based on
what we know today and what we expect in the future, we believe that the
forward-looking statements we make in this report are reasonable. In most
cases, when we use words like believe, expect, estimate, anticipate,
project, plan, or predict to describe something which has not yet
occurred, we are making a forward-looking statement.

We cannot list here all of the risks and uncertainties that could cause our
actual future financial and operating results to differ materially from our
historical experience and our present expectations or projections but we can
identify many of them. For example, our future results could be affected by
the overall market for various types of wireless communications products, the
success of the specific products into which our products are integrated,
governmental action relating to wireless communications, licensing and
regulation, the accuracy of our internal projections as to the demand for
certain types of technological innovation, competitors products and pricing,
the success of new product development efforts, the timely release for
production and the delivery of products under existing contracts and the
ultimate outcome of pending and threatened litigation and regulatory action.
It is also important to remember that forward-looking statements speak only as
of the date when they are made and we do not promise that we will publicly
update or revise those statements whenever conditions change or future events
occur. Accordingly, we do not recommend that any person seeking to evaluate
our company should place undue reliance on any forward-looking statement in
this report.

The following discussion and analysis should be read in conjunction with the
selected financial data in Item 6 and our financial statements and the notes
thereto beginning on page F-1. The financial statements for periods prior to
June 30, 2000 have not been audited. Our fiscal year end was changed to June 30
effective in 2000. Previously, our fiscal year ended on December 31. Our
operations consist of a single business segment  the design, manufacture and
sale of a wide variety of radio frequency and microwave components and devices
mainly used in the wireless communications industry.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an on-going basis, we evaluate our
estimates, including those related to revenue recognition, allowances for
doubtful accounts, inventory valuation and commitments and contingencies. We
base our estimates on historical experience 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 value of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.

-22-



---



##### Table of Contents



We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.

Revenue Recognition and Allowances for Doubtful Accounts

Revenues are recognized at the time of shipment to, or acceptance by, the
customer provided title and risk of loss is transferred to the customer.

We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. The allowance
for doubtful accounts is determined based on review of the overall condition
of accounts receivable balances and review of significant past due accounts.
Additionally, we maintain credit insurance on certain of our foreign
accounts receivable. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.

Inventory Valuation

We value our inventories at lower of cost or market on a part-by-part basis.
Additionally, we make estimates regarding the market value of our inventory,
including an assessment of excess or obsolete inventory. We determine
excess and obsolete inventory based on an estimate of the future demand
within a specified time horizon, generally twelve months. The estimates we
use for demand are also used for near-term capacity planning and inventory
purchasing and are consistent with our revenue forecasts. If our actual
forecast is less than our demand forecast, we may be required to take
additional excess inventory charges, which will decrease gross margin and
net operating results in the future.

Commitments and Contingencies

We are party to various legal proceedings and claims, as well as various
other commitments and contingencies. We have recorded a liability if it is
(1) probable that an obligation has been incurred because of a transaction
or event happening on or before the date of the financial statements and (2)
the amount of the obligation can be reasonably estimated.

All of our legal actions have the potential of a possible loss to the
Company. We believe that certain of the actions could be potential gain
contingencies. However, at this time we are unable to reasonably estimate
the possible future cost, net loss or gain, if any, associated with certain
of our pending legal proceedings.

Results of Operations for the Fiscal Year Ended June 30, 2002 Compared with the
Fiscal Year Ended June 30, 2001

Net Sales

Net sales for the year ended June 30, 2002 decreased 48.4% to $21.3 million
compared with $41.4 million for the year ended June 30, 2001. This decline is
primarily due to a decrease in demand for the quantity of commercial signal
source products consistent with an overall slowdown in the wireless
communications industry.

Revenue from commercial signal source products was $15.6 million for the year
ended June 30, 2002, a 55.3% decrease from the $34.9 million for the year ended
June 30, 2001. Revenue from commercial signal source products for the year
ended June 30, 2001 included fees earned from a contract modification of
$295,000. Revenue from all other products was $5.7 million for the year ended
June 30, 2002, a 12.3% decrease from the $6.5 million for the year ended June
30, 2001. Revenue from all other products for the year ended June 30, 2001
included a significant end-of-life production run generating net sales of
$809,000.

-23-



---



##### Table of Contents



Gross Profit

Gross profit for the year ended June 30, 2002 decreased 60.6% to $7.7 million,
or 36.1% of net sales, compared with $19.6 million, or 47.4% of net sales, for
the year ended June 30, 2001. The gross profit percent in any period can be
affected significantly by volume and unusual items.

Fixed manufacturing overhead adversely affects gross profit at lower sales
volumes. Accordingly, the reduced sales level for the year ended June 30, 2002
had the effect of lowering gross profit as a percentage of sales. Additionally,
changes in market demand for our products, combined with changes in product
design can result in excess inventory parts, such as printed circuit boards. On
a quarterly basis, we review our inventory on hand and firm purchase
commitments versus our sales forecast to determine the adequacy of the existing
reserve for excess and obsolete inventory.

Included in cost of goods sold for the years ended June 30, 2002 and 2001 are
charges of $564,000 and $1.4 million, respectively, for excess and obsolete
inventory. Additionally, for the year ended June 30, 2002, we charged $65,000
to cost of goods sold for severance costs related to a reduction in our work
force. These charges were offset by $268,000 of recoveries for previously
written-off inventory.

During the quarter ended June 30, 2002, we sold inventories with a net book
value of approximately $250,000 for $75,000. As a result, we recorded a charge
to cost of goods sold for $175,000. Additionally, due to the continuing decline
in the industry and weak demand of our commercial signal source products, we
offered certain of our preferred customers price decreases which resulted in a
$152,000 decrement in gross margin for the quarter ended June 30, 2002.

Operating Expenses

Included in operating expenses are charges for non-cash stock compensation of
$44,000 and $487,000 for the years ended June 30, 2002 and 2001, respectively.
The charges for stock compensation principally relate to amortization of
deferred stock compensation attributable to stock options granted at less than
the market price of the common stock on the date of the grant. Of the $487,000
total amount of stock compensation expense recorded for the year ended June 30,
2001, $409,000 relates to options granted in December 1999. In December 2000,
these options were re-priced at $34.50 per share, the market price of the
common stock at the date of the original grant. As a result, the remaining
unamortized stock compensation associated with these option grants was reversed
in December 2000.

In April 2002, we filed a Tender Offer (the Offer) with the SEC which offered
employees the right to exchange all outstanding options to purchase shares of
the Companys common stock with an exercise price equal to $34.50 per share for
replacement options to be granted no earlier than six months and one day from
the expiration of the Offer at an exercise price equal to no less than the fair
market value of the common stock on the grant date. Under the terms and subject
to the conditions set forth in the Offer, 180,579 options were surrendered by
eligible employees and cancelled on May 23, 2002. We will issue replacement
options to purchase an aggregate of up to 180,579 shares of common stock in
exchange for the options surrendered pursuant to the Offer on or around
November 24, 2002.

Selling Expenses

Selling expenses for the year ended June 30, 2002 decreased 31.5% to $2.9
million, or 13.7% of net sales, compared with $4.3 million, or 10.3% of net
sales, for the year ended June 30, 2001. The dollar decrease in selling
expenses was primarily attributable to lower commissions paid to manufacturers
representatives as a result of reduced sales volume and a decrease in charges
for non-cash stock compensation.

-24-



---



##### Table of Contents



General and Administrative Expenses

General and administrative expenses for the year ended June 30, 2002 decreased
33.6% to $6.4 million, or 30.1% of net sales, compared with $9.7 million, or
23.4% of net sales, for the year ended June 30, 2001. The dollar decrease was
primarily attributable to reduced spending on independent contractors for
interim management and accounting services, the timing of audit fees paid in
connection with the audit of our financial statements for the years ended June
30, 2001 and 2000 and a decrease in charges for non-cash stock compensation,
partially offset by an increase in salaries and wages for the permanent
transfer of personnel to assist in business development efforts, as well as new
employees hired in 2002. Additionally, we recognized a $125,000 benefit from
the recovery of a disputed amount that was written off in a previous period and
a $145,000 benefit from an insurance recovery for undocumented travel advances
to a former officer, offset by $20,000 for severance costs related to a
reduction in our work force.

Research and Development Expenses

Research and development expenses for the year ended June 30, 2002 decreased
33.6% to $2.7 million, or 12.5% of net sales, compared with $4.0 million or
9.7% of net sales, for the year ended June 30, 2001. The dollar decrease was
primarily attributable to lower salaries and benefits from the permanent
transfer of personnel to assist in business development efforts, fewer
employees engaged in research and development efforts, a reduction in stay
bonuses and production bonuses paid to employees and a decrease in charges for
non-cash stock compensation offset by $16,000 for severance costs related to a
reduction in our work force.

Expenses Relating to Accounting Restatements and Related Legal Matters, Net of
Recoveries

Expenses relating to the accounting restatements and related legal matters, net
of recoveries for the year ended June 30, 2002 and 2001 were $1.8 million and
$2.4 million, respectively.

Included in these expenses for the year ended June 30, 2002, is $1.45 million
representing the approximate cost to settle the Private Securities Class Action
as described in Item 3, Legal Proceedings offset by a benefit of $117,000
resulting from an adjustment of an estimated liability recorded in a previous
period. These expenses include the cost of external counsel for services
provided in connection with shareholder lawsuits and the SEC investigation, the
cost of certain consultants and temporary labor hired to assist in the
accounting restatements, and reimbursements to current and former employees for
their legal fees and expenses. The accounting restatements were completed in
February 2001, however we continue to incur costs related to shareholder
litigation.

In December 1999, we learned that the SEC was conducting an investigation to
determine whether there were any violations of the federal securities laws. In
September 2001, we agreed to a settlement with the SEC. In December 2001, we
formed the SLC. The SLC retained independent counsel to advise the Committee
in its investigation of allegations of wrong doing during prior periods by
former employees, as well as current and former members of our Board of
Directors. For the year ended June 30, 2002, approximately $226,000 of these
expenses related to fees charged by the independent counsel to the SLC.

Other Income (Expense)

Interest income decreased 88.5% to $48,000 for the year ended June 30, 2002
compared with $416,000 for the year ended June 30, 2001. The decrease was
attributable to lower average cash balances available during the year for
investing, along with lower interest rates on invested balances. Interest
expense and other, net, decreased 83.1% to $187,000 for the year ended June 30,
2002 compared with $1.1 million for the year ended June 30, 2001. The decrease
was primarily attributable to less interest expense as a result of a reduction
in the outstanding debt and a decrease in the lenders prime rate.

-25-



---



##### Table of Contents



Net Loss and Loss per Share

We believe that the disclosure of as adjusted net income (loss) and earnings
(loss) per share, calculated based on criteria determined by management,
provides useful information regarding our operations. As adjusted, net income
(loss) excludes the impact of stock compensation, which is a non-cash charge,
expenses relating to accounting restatements and related legal matters (which
management believes are not indicative of normal operating expenses, but will
continue until the litigation is resolved), and severance costs associated with
the reduction in our workforce, offset by the benefit from recovery of a
disputed amount, the benefit of an inventory recovery and an insurance recovery
for undocumented travel advances. However, as adjusted financial information
should not be considered a substitute for operating income (loss) or cash flow
from operations determined in accordance with generally accepted accounting
principles.

The following table reconciles the reported net income (loss) to as adjusted
net income (loss) and earnings (loss) per share by each discrete element for
the years ended June 30, 2002 and 2001:

|                                                          |                                                                                          |   |               |           |               |   |            |           | 
|--------------------------------------------------------- | ---------------------------------------------------------------------------------------- | - | ------------- | --------- | ------------- | - | ---------- | --------- | 
|                                                          |                                                                                          |   | Year          |           | Year         
|                                                          |                                                                                          |   | Ended         |           | Ended        
|                                                          |                                                                                          |   | June 30, 2002 |           | June 30, 2001
|                                                          |                                                                                          |   |               |           |              
|Net loss, as reported                                     |                                                                                          | $ | (6,255,000    | )         |               | $ | (1,399,000 | )        
|                                                          | Stock compensation                                                                       |   |               | 44,000    |               |   |            | 487,000   | 
|                                                          | Expenses related to accounting restatements
and related legal matters, net of recoveries |   |               | 1,805,000 |               |   |            | 2,387,000 | 
|                                                          | Severance costs                                                                          |   |               | 101,000   |               |   |            |          | 
|                                                          | Benefit of recoveries                                                                    |   |               | (538,000  | )             |   |            |          | 
|                                                          |                                                                                          |   |               |           |               |   |            |          
|As adjusted net income (loss)                             |                                                                                          | $ | (4,843,000    | )         |               | $ | 1,475,000  |          
|                                                          |                                                                                          |   |               |           |               |   |            |          
|Loss per share, as reported  basic and diluted           |                                                                                          |   | (0.87         | )         |               |   | (0.20      | )        
|                                                          |                                                                                          |   |               |           |               |   |            |          
|As adjusted earnings (loss) per share  basic and diluted |                                                                                          | $ | (0.68         | )         |               | $ | 0.21       |          
|                                                          |                                                                                          |   |               |           |               |   |            |          

Results of Operations for the Fiscal Year Ended June 30, 2001 Compared with the
Twelve Months Ended June 30, 2000

Net Sales

Net sales for the year ended June 30, 2001 increased 35.3% to $41.4 million
compared with $30.6 million for the twelve months ended June 30, 2000. This
improvement primarily reflects increased demand for commercial signal source
products. Net sales from commercial signal source products was $34.9 million
for the year ended June 30, 2001, a 39.0% increase from the $25.1 million for
the twelve months ended June 30, 2000. The year ended June 30, 2001 included a
significant end-of-life production run generating net sales of $809,000 and
fees earned from contract modifications of approximately $295,000. Net sales
from all other products was $6.5 million for the year ended June 30, 2001, an
18.2% increase from the $5.5 million for the twelve months ended June 30, 2000.

Gross Profit

Gross profit for the year ended June 30, 2001 increased 49.6% to $19.6 million
or 47.3% of sales, compared with $13.1 million, or 42.8% of sales for the
twelve months ended June 30, 2000. Included in cost of goods sold for the year
ended June 30, 2001 is a charge of $1.4 million for obsolete and excess
inventory, compared to $516,000 for the twelve months ended June 30, 2000. The
higher gross profit margin in the 2001 period was due to improved production
yields and the absorption of manufacturing

-26-



---



##### Table of Contents



overhead over a larger volume of sales, the benefit from the end-of-life
production run and contract modification, partially offset by inventory
shrinkage and scrap and the above noted provision.

Operating Expenses

Included in operating expenses are charges for non-cash stock compensation. The
charges for stock compensation principally relate to amortization of deferred
stock compensation attributable to stock options granted at less than the
market price of the common stock on the date of the grant. Of the $487,000
total amount of stock compensation recorded for the year ended June 30, 2001,
$409,000 relates to options granted in December 1999. In December 2000, these
options were reformed to $34.50 per share, the market price of the common stock
on the date of the original grant. As a result, the remaining unamortized stock
compensation cost associated with these option grants was reversed in December
2000.

The following table summarizes stock compensation expense included in each
category of operating expenses:

|                                          |  |                           |       |               |  |  |       | 
|----------------------------------------- |  | ------------------------- | ----- | ------------- |  |  | ----- | 
|                                          |  | Fiscal Year               |       | Twelve Months
|                                          |  | Ended                     |       | Ended        
|                                          |  | June 30,                  |       | June 30,     
|                                          |  | 2001                      |       | 2000         
|                                          |  |                           |       |              
|                                          |  | (in thousands of dollars)
|Selling:                                  |  |                           |       |               |  |  |       | 
|Non-cash stock compensation               |  | $                         | 78    |               |  |  | 88    | 
|Other selling expenses                    |  |                           | 4,190 |               |  |  | 3,548 | 
|                                          |  |                           |       |               |  |  |       | 
|Total selling expenses                    |  | $                         | 4,268 |               |  |  | 3,636 | 
|                                          |  |                           |       |               |  |  |       | 
|General and administrative:               |  |                           |       |               |  |  |       | 
|Non-cash stock compensation               |  | $                         | 180   |               |  |  | 204   | 
|Other general and administrative expenses |  |                           | 9,484 |               |  |  | 4,232 | 
|                                          |  |                           |       |               |  |  |       | 
|Total general and administrative expenses |  | $                         | 9,664 |               |  |  | 4,436 | 
|                                          |  |                           |       |               |  |  |       | 
|Research and development:                 |  |                           |       |               |  |  |       | 
|Non-cash stock compensation               |  | $                         | 229   |               |  |  | 259   | 
|Other research and development expenses   |  |                           | 3,792 |               |  |  | 5,387 | 
|                                          |  |                           |       |               |  |  |       | 
|Total research and development expenses   |  | $                         | 4,021 |               |  |  | 5,646 | 
|                                          |  |                           |       |               |  |  |       | 

Selling Expenses

Selling expenses for the year ended June 30, 2001 increased 17.4% to $4.3
million or 10.3% of net sales, compared with $3.6 million or 11.8% of net sales
for the twelve months ended June 30, 2000. Excluding non-cash stock
compensation, selling expenses for the year ended June 30, 2001 increased 18.1%
to $4.2 million or 10.1% of net sales compared with $3.5 million or 11.4% of
net sales for the twelve months ended June 30, 2000. The increase in selling
expenses was primarily attributable to higher commissions paid to
manufacturers representatives due to higher net sales.

-27-



---



##### Table of Contents



General and Administrative Expenses

General and administrative expenses for the year ended June 30, 2001 increased
117.9% to $9.7 million or 23.4% of net sales, compared with $4.4 million or
14.4% of net sales for the twelve months ended June 30, 2000. Excluding
non-cash stock compensation, general and administrative expenses for the year
ended June 30, 2001 increased 124.1% to $9.5 million or 22.9% of net sales
compared with $4.2 million or 13.7% of net sales for the twelve months ended
June 30, 2000. The increase was primarily attributable to higher amounts paid
to independent contractors for interim management and accounting services, stay
bonuses paid to employees, higher insurance premiums, increased audit and legal
fees, and severance costs associated with the retirement benefits accrued for
the planned retirement of our former Chief Scientific Officer.

Research and Development Expenses

Research and development expenses for the year ended June 30, 2001 decreased
28.8% to $4.0 million or 9.7% of net sales, compared with $5.6 million or 18.3%
of net sales for the twelve months ended June 30, 2000. Excluding non-cash
compensation, research and development expenses for the year ended June 30,
2001 decreased 29.6% to $3.8 million or 9.2% of net sales, compared with $5.4
million or 17.6% of net sales for the twelve months ended June 30, 2000. The
decrease was primarily attributable to the temporary transfer of research and
development personnel to assist in manufacturing cost reduction efforts.

Expenses Relating to Accounting Restatements and the Related Shareholder
Litigation

Expenses relating to the accounting restatements and the related shareholder
litigation for the year ended June 30, 2001, were $2.4 million compared with
$469,000 for the twelve months ended June 30, 2000. These expenses include the
cost of external counsel for services provided in connection with shareholder
lawsuits and the Securities and Exchange Commission investigation, the cost of
certain consultants and temporary labor hired to assist in the accounting
restatements, and reimbursements to current and former employees for their cost
of counsel.

Total Other Income (Expense)

Interest income decreased 9.6% to $416,000 for the year ended June 30, 2001
compared with $460,000 for the twelve months ended June 30, 2000. The decrease
was attributable to lower average cash balances available in the year for
investing. Interest expense and other, net increased 21.1% to $1.1 million for
the year ended June 30, 2001 compared with $908,000 for the twelve months ended
June 30, 2000. The increase was primarily attributable to interest and fees
associated with forbearance agreements and higher interest rates on our former
credit facility.

Net Loss and Loss Per Share

The net loss for the year ended June 30, 2001 was $1.4 million, or $0.20 per
share, compared with a net loss of $1.6 million, or $0.25 per share, in the
comparable period in 2000. Excluding the impact of stock compensation (which
is a non-cash charge to earnings) and expenses relating to accounting
restatements and related shareholder litigation (which management believes are
not indicative of continuing operating expenses), net income for the year ended
June 30, 2001 would have been $1.5 million, or $0.21 per share, compared with a
loss of $558,000, or $0.09 per share, in the 2000 period.

-28-



---



##### Table of Contents



Factors Affecting Our Future Results

In addition to the factors discussed elsewhere in this Form 10-K, the following
are important factors which could cause actual results or events to differ
materially from those contained in any forward looking statements made by or on
behalf of the Company. If we are adversely affected by such risks, then the
trading price of our common stock could decline, and you could lose all or part
of your investment.

We may require additional sources of cash to meet our capital and operational
requirements. As a result, we may face uncertainty in obtaining sources of
capital on satisfactory terms.

Our liquidity and cash flows from our operations may be insufficient to meet
our capital and operating requirements. Although Sirenza has agreed to provide
a bridge financing facility to us, their obligation to do so is subject to our
compliance with financial and other covenants and other conditions set forth in
our loan agreement with Sirenza. If we do not meet those requirements, we may
be unable to draw down additional amounts and Sirenza may be able to declare
the loan to be in default and demand repayment of outstanding amounts.
Furthermore, unanticipated changes in our business, financial condition or
results of operations may cause our capital requirements to exceed the amounts
available under the Sirenza bridge loan facility. There is no assurance that
additional financing would be available from Sirenza or any other source. Given
the current market price for our common stock and the state of the capital
markets generally, we do not expect that we would be able to raise funds
through the issuance of our capital stock. Our ability to seek other sources
of capital is limited by virtue of the terms of the Exclusivity and Right of
First Refusal Agreement entered into in connection with the bridge loan. Our
capital requirements depend on numerous factors beyond our control. If adequate
funds are not available or not available on acceptable terms, we may be unable
to continue operations, develop, enhance and market products, retain qualified
personnel, take advantage of future opportunities, or respond to competitive
pressures, any of which could have a material adverse effect on our business,
operating results, financial condition or liquidity. There can be no assurance
that any means of raising capital will be available, or if available, that it
will be acceptable on terms or in sufficient amounts to meet our needs.

We may not be able to successfully negotiate the sale of our business.

Although we intend to negotiate with Sirenza to sell substantially all of our
assets to them, there can be no assurance that we will be successful in
reaching a definitive agreement. In the event that we are able to reach an
agreement with Sirenza, such agreement would most likely be subject to numerous
conditions. There can be no assurance that we would be able to meet those
conditions or that the sale of the assets would be consummated even if our
shareholders were to approve such an agreement. If the sale of the assets to
Sirenza is not consummated, we may not be able to sell our assets or our
business to another buyer on terms as favorable as those provided in a
definitive agreement with Sirenza, or at all. Additionally, pursuant to the
terms of the Exclusivity Agreement, our ability to negotiate with other
potential buyers is greatly limited.

Our future results are likely to fluctuate.

Our quarterly and annual results of operations have historically been, and will
continue to be, subject to quarterly and other fluctuations due to a variety
factors, including; general economic conditions; changes in pricing policies by
us, our competitors or our suppliers; anticipated and unanticipated changes in
unit average selling prices of our products; fluctuations in manufacturing
yields, availability and cost of products from our suppliers; the timing of new
product announcements and introductions by us or our competitors; changes in
the mix of products sold; the cyclical nature of the telecommunications and
military supplies industries; the gain or loss of significant customers;
increased research and development expenses associated with new product
introductions; market acceptance of new or enhanced versions of our products;
seasonal customer demand; and the timing of significant orders. Results of
operations could also be adversely affected by economic conditions generally or
in various geographic

-29-



---



##### Table of Contents



areas, other conditions affecting the timing of customer orders and capital
spending, a continued downturn in the wireless communications market, or order
cancellations or rescheduling. Additionally, because we are continuing to
increase our operating expenses for personnel and new product development in
order to create more sales opportunities and increase sales levels, our results
of operations will be adversely affected if such sales levels are not achieved.

We are exposed to the risks associated with the slowdown in the U.S. and
world-wide economy.

Among other factors, concerns about inflation, decreased consumer confidence
and spending and reduced corporate profits and capital spending have resulted
in a downturn in the U.S. economy generally and in the wireless communications
industry in particular. As a result of these unfavorable economic conditions,
we have experienced a significant slowdown in customer orders in our commercial
signal source components product line during fiscal 2002. In addition, we are
experiencing corresponding decreases in revenues and average selling prices and
expect continued pressure on average selling prices in the future. If the
adverse economic conditions continue or worsen, restructuring of our operations
may be required, and our business, financial condition and results of
operations may be seriously harmed.

We are affected by a general pattern of product price decline and fluctuations,
which can harm our business.

The markets for our products are characterized by rapid technological change,
evolving industry standards, product obsolescence, and significant price
competition and, as a result, are subject to decreases in average selling
prices. We have experienced deterioration in demand for our commercial signal
source products during the last fiscal year. We are unable to predict future
prices for our products, but we expect that the average selling price for our
products will decline. Accordingly, our ability to maintain or increase
revenues will be highly dependant on our ability to increase unit sales volumes
of existing products and to successfully develop, introduce and sell new
products. Declining average selling prices will also adversely affect our gross
margins. There can be no assurance that we will be able to increase unit sales
volumes of existing products, develop, introduce and sell new products or
significantly reduce our costs per unit. There also can be no assurance that
even if we were able to increase unit sales volumes and sufficiently reduce our
costs per unit, that we would be able to maintain or increase revenues or gross
margins.

Our financial results could be adversely affected if we fail to develop,
introduce, and sell new products.

Like many wireless communications companies, which frequently operate in a
highly competitive, quickly changing environment marked by rapid obsolescence
of existing products, our future success depends upon our ability to develop
and introduce new products that customers choose to buy. The markets for our
products are characterized by swift technological innovation which can leave a
product line with little or no demand. If we fail to introduce new product
designs in a timely manner or are unable to manufacture products according to
the requirements of these designs, or if our customers do not successfully
introduce new systems or products incorporating our products, or market demand
for our new products does not exist as anticipated, our business, financial
condition and results of operations could be seriously harmed.

-30-



---



##### Table of Contents



We must build products based on demand forecasts; if such forecasts are
inaccurate, we may incur significant losses.

Due to the relatively long lead times in obtaining raw material parts, our
ability to maintain adequate levels of inventory is primarily dependant upon us
obtaining sufficient supply of raw material to meet future demand and any
inability to maintain adequate inventory levels may adversely affect our
relationship with our customers. In addition, we must order product and build
inventory in advance of product shipment. There is a risk that because demand
for our products is volatile and subject to technological and price changes, we
will forecast incorrectly and produce excess or insufficient inventories of a
particular product. The risk is heightened because certain of our key customers
place orders with short lead times. Our customers ability to reschedule or
cancel orders without significant penalty could adversely affect our liquidity
as we may be unable to adjust our purchases from our suppliers to match such
customer changes and cancellations. In the past, we have produced excess
quantities of certain parts, which had a material adverse affect on our results
of operations. There can be no assurance that in the future, we will not
produce excess quantities of any of our products. To the extent that we produce
excess or insufficient inventories of particular products, our results of
operations could be adversely affected.

Increases in raw materials prices may significantly harm our results.

Our manufacturing operations require raw materials that must meet exacting
standards. We generally have more than one source available for these
materials, but there are only a limited number of suppliers capable of
delivering certain raw materials that meet our standards. There is an ongoing
risk that our suppliers may increase their prices to the point that we may not
be able to maintain our gross margins. The occurrence of such price increases
could have a material adverse affect on our results of operations.

The OEMs increased use of contract manufacturers creates pricing pressures that
could adversely affect our results of operations.

In recent years, the trend in the electronics industry has been for many OEMs
to use contract manufacturers primarily or exclusively to build their products.
OEMs continue to look to outsourcing arrangements for the design and
manufacture of certain products and/or components to achieve operational cost
reductions. Additionally, the recent economic contraction has significantly
increased the pressure on the OEMs to seek lower prices from their contract
manufacturers. As a result, our customers are likely to continue to demand
lower prices from us. To maintain our margins and remain profitable, we must
continue to meet our customers design needs while reducing costs through
efficient raw material procurement and process and product improvements. Our
profit margins will suffer if we are unable to reduce our costs of production
as sales prices decline

Losing the services of our executive officers or our other highly qualified and
experienced employees could adversely affect our business.

Our success depends upon the continued contributions of our executive officers,
many of whom have many years of experience and would be extremely difficult to
replace. We must also attract and maintain experienced and highly skilled
engineering, sales and marketing and managerial personnel. Competition for
qualified personnel is intense, and we may not be successful in hiring and
retaining these people. If we lose the services of our executive officers or
cannot attract and retain other qualified personnel, our business could be
adversely affected.

-31-



---



##### Table of Contents



We face additional problems and uncertainties associated with international
operations that could adversely affect us.

We sell a significant portion of our products internationally and are subject
to a number of risks including political and economic instability, changes in
diplomatic and trade relationships, unexpected changes in regulatory
requirements, delays resulting from difficulty in obtaining export licenses for
certain technology, tariffs and other barriers and restrictions, and the
burdens of complying with a variety of foreign laws. Our current or potential
customers in Asia, for instance, may become unwilling or unable to purchase our
products and our competitors in Asia may be able to become more
price-competitive relative to us due to declining values of their national
currencies. There can be no assurance that such factors will not adversely
impact our results of operations in the future or require us to modify our
current business practices.

We may fail to successfully integrate businesses that we acquire.

During fiscal 2002, we completed an acquisition of certain assets of Asvan
Technologies, LLC and may acquire additional companies and/or assets in the
future. If we fail to integrate these businesses successfully, or properly, our
quarterly and annual results may be seriously harmed. Integrating businesses is
expensive, time-consuming, and a great strain on our resources. Some specific
difficulties in the integration process may include failure to successfully
develop acquired in-process technology, the difficulty of integrating acquired
technology or products, unanticipated expenses related to technology
integration and the potential unknown liabilities associated with acquired
businesses.

We may not be able to compete successfully in a highly competitive industry.

We face intense competition and many of our principle competitors and potential
competitors have substantially greater financial, technical, marketing,
distribution and other resources, broader product lines and longer standing
relationships with customers than do we, any of which factors may place such
competitors and potential competitors in a stronger competitive position.

Our customers may be unable to pay their outstanding obligations to us.

The competitive environment in which we operate requires us to provide certain
credit terms to our customers. In some circumstances, the credit terms can be
significant. Given the general downturn in the US and world-wide economy, we
may see an increase in customer defaults. Should customers fail to meet their
obligations, losses could be incurred and such losses could have an adverse
effect on us.

We may face significant expenses as a result of ongoing or future litigation.

We intend to vigorously defend the Company in ongoing litigation, however,
should the outcome of any of the actions be unfavorable, we may be required to
pay damages and other expenses which could have a material adverse affect on
our financial position or results of operations.

Liquidity and Capital Resources

As of June 30, 2002, working capital was $2.0 million including cash and cash
equivalents of $553,000. Operations generated $897,000 of cash primarily
attributable to the reduction of accounts receivable through collections and
lower sales volumes during the year. Additionally, we continued our focus of
reducing inventory levels and increasing inventory turns. The cash generated
from these efforts was partially offset by the net loss, adjusted for non-cash
charges, the payment of semi-annual bonuses to employees and reduced accounts
payable due to lower costs and expenses attributable to lower sales volumes.

-32-



---



##### Table of Contents



Capital expenditures for the fiscal year ended June 30, 2002 were $953,000. We
focused capital expenditures on further automation of existing production
equipment and further development of our IT infrastructure.

Throughout the fiscal year ended June 30, 2002, we reduced our notes payable
and long term obligations by $1.4 million.

Wells Fargo Credit Facility

On June 28, 2001, we entered into a credit agreement with Wells Fargo Business
Credit, Inc. (Wells Fargo) (the Credit Facility), consisting of, among
other things, a revolving loan (Revolving Loan) and a term loan Term Loan).
During fiscal 2002, we have renegotiated amendments in an attempt to avoid
potential default under the Credit Facility due to the continuing softness of
demand of our products and within the wireless industry.

In late May 2002, we determined that we were not in compliance with our minimum
tangible net worth covenant of the Credit Facility, which constitutes an event
of default. In early July 2002, we received notice from Wells Fargo confirming
that an event of default had occurred. Accordingly, the amounts outstanding as
of June 30, 2002 have been classified as current. A default interest rate of 3%
over the floating rate is currently being charged against amounts outstanding
under the loan agreement. No other default remedies were sought by the lender.

On September 26, 2002, we entered into a forbearance agreement with Wells Fargo
that is in effect until November 15, 2002. The forbearance agreement allows us
to borrow amounts on our Revolving Loan up to the lesser of the amount
available under a borrowing base formula or $2,500,000. The Credit Facility is
secured by substantially all of our accounts receivable, inventories,
intellectual property and equipment. The forbearance agreement also imposes
certain financial covenants along with limitations on capital expenditures and
investments, and restricts certain payments and distributions.

At June 30, 2002, the interest rates on the Revolving Loan and the Term Loan
were 8.75% and 10.25%, respectively. We had additional borrowing availability
of $1.8 million under the Revolving Loan.

For the period from May 2002 to August 2002, we received several indications of
interest in an acquisition of all or substantially all of our assets or a
potential private equity infusion. As a result, we decided to engage the
investment-banking firm of Green, Manning & Bunch, LTD (GMB) to act as our
financial advisor to assist in evaluating our strategic alternatives, including
a financing transaction or the sale of all or part of the Company. We worked
with GMB to identify potential financing sources and potential acquirers and
held discussions with a number of parties on these potential transactions in
August 2002. Potential acquirers were advised that the Company would require
substantial bridge financing pending completion of any acquisition in order to
repay the Wells Fargo credit line and to meet our working capital needs pending
completion of any acquisition transaction.

Sirenza Loan Facility

On October 7, 2002, we entered into a Loan Agreement with Sirenza Microdevices,
Inc. (Sirenza) which provides for a $5.3 million senior secured bridge loan
facility (the Loan Facility). As a condition to the Loan Facility, we
entered into an Exclusivity and Right of First Refusal Agreement (the
Exclusivity Agreement) with Sirenza to evaluate a potential acquisition of
all or substantially all of our assets.

The Loan Facility is effective for the period October 7, 2002 to September 25,
2003, is secured by substantially all of our assets and has an annual interest
rate of 25%. Additionally, the Loan Facility is subject to covenants that
among other things impose limitations on capital expenditures and investments,
restrict certain payments and distributions and require us to maintain certain
financial ratios.

-33-



---



##### Table of Contents



Under the terms of the Loan Facility, Sirenza has provided for funding in two
tranches. The first tranche (Tranche A ) consists of an initial term loan of
approximately $1.4 million to repay amounts outstanding under the Credit
Facility at Wells Fargo. The second tranche (Tranche B) consists of
additional term loans of up to $3.9 million which may be drawn down in
accordance with an agreed schedule. We expect to use the proceeds from any
advances under Tranche B to fund our working capital requirements.

In the event of a change of control or execution of a definitive acquisition
agreement with any party other than Sirenza, amounts outstanding under the Loan
Facility are due in full within five business days. Additionally, we must pay a
prepayment fee in the amount of $1,000,000 (the Prepayment Fee). Under the
terms of the Loan Facility, we may voluntarily prepay the Tranche A and Tranche
B loan provided that in the event of a change of control or execution of a
definitive acquisition agreement with any party other than Sirenza within 180
days of such prepayment, we must pay the Prepayment Fee.

Additionally under the terms of the Loan Facility, at Sirenzas option, the
Tranche A loan is convertible into 19.9% of our Common Stock on a fully diluted
basis at the following times: five business days prior to the maturity date of
the Tranche A loan, the date Sirenza receives written notice of our intent to
prepay the Tranche A loan, the date of the commencement of a tender offer by a
party other than Sirenza, and the date we execute a definitive acquisition
agreement with another party. The shares of common stock issuable upon
conversion of the Tranche A Note are subject to certain registration rights as
set forth in the Resale Registration Rights Agreement between the parties. We
have amended our Rights Agreement with American Securities Transfer, Inc. to
make the rights thereunder inapplicable to certain transactions with Sirenza
that are approved by our board of directors, including the conversion of the
Tranche A Note.

Our ability to draw down amounts under Tranche B is conditioned upon, among
other things, the absence of an event of default and our representations and
warranties being true and correct at the time of such draw down request. In
the event we are unable to draw down amounts under Tranche B, we may be
required to seek additional capital through other sources, which ability is
limited by the terms of the Exclusivity Agreement described below. There can
be no assurance that we would be able to procure adequate funds in such an
event. If such funds are not available, we may be forced to curtail or suspend
our operations.

Pursuant to the terms of the Exclusivity Agreement, we have agreed, subject to
certain exceptions, not to solicit acquisition proposals from other parties or
otherwise negotiate with such parties with respect to an acquisition proposal.
Such exclusivity period terminates upon the earlier of March 31, 2003 or the
occurrence of certain other events. Under the Exclusivity Agreement we have
granted Sirenza a right of first refusal in the event that we receive any
future offer to acquire us or substantially all of our assets. Such right of
first refusal terminates upon the earlier of: the date that Sirenza advises us
in writing that they are terminating all negotiations with us regarding a
transaction or that they are no longer interested in pursuing a transaction
with us, such time as the Loan Facility has terminated and no loans remain
outstanding thereunder, or such time as they default on their obligations to
make loans to us pursuant to the Loan Facility.

Other

On December 5, 2001, the SLC was formed to investigate allegations of
wrongdoings during prior periods by former employees, as well as current and
former members of our Board of Directors. The SLC is comprised of two outside
directors who joined our Board of Directors subsequent to the time of certain
alleged wrongdoings. On December 20, 2001, the SLC retained independent counsel
to assist in its investigation.

-34-



---



##### Table of Contents



On March 19, 2002, under the direction of the SLC, we filed a lawsuit against
Mr. David Sherman, Mr. Joseph Kiser, individuals, and J.C. Enterprises, a
Colorado general partnership. Mr. Sherman is the former president of the
Company and Mr. Kiser is the former Chairman of the Board of Directors and
former Chief Scientific Officer. Additionally, Mr. Kiser is the General Partner
of J.C. Enterprises. In the lawsuit, we seek to rescind certain employment and
consulting agreements between the Company and Messrs. Kiser and Sherman, and to
rescind certain stock option grants made to them, on the basis that such
agreements were entered into, and such option grants were made, based upon
mistaken or misrepresented information regarding the Companys true financial
performance. We also seek to recover the compensation and bonuses paid to them
as a result of such mistaken or misrepresented information. Additionally, we
seek to recover rent paid in excess of market prices pursuant to a lease
agreement between the Company and J.C. Enterprises in reliance on
misrepresented information provided by Mr. Kiser and Mr. Sherman.

On April 30, 2002, Mr. Kiser filed a motion to dismiss our lawsuit in its
entirety. On June 13, 2002, the motion to dismiss was denied.

Mr. Kisers employment contract requires him to perform any directive of the
Companys Board of Directors. Subsequent to March 19, 2002, Mr. Kiser has not
performed any services for the Company. We believe that our claim to rescind
Mr. Kisers employment contract based upon mistaken or misrepresented
information regarding the Companys true financial performance is based upon a
valid principle of law. Since March 19, 2002 we have suspended all payments
required by Mr. Kisers employment contract. We have recorded approximately
$203,000 of liabilities representing the present value of post-employment
health care obligations and a one time separation bonus to be paid to Mr. Kiser
upon termination of contract payments.

In the event that Mr. Kiser prevails in requiring us to comply with the terms
of the employment contract, we could be obligated to total future payments of
approximately $1.4 million payable over ten years. If we are successful in our
claims against Mr. Kiser, we could be awarded as much as $5,600,000 plus
attorneys fees. Additionally, we would reverse all previously recorded
liabilities associated with this matter.

The jury trial date for this suit has been scheduled for February 24, 2003.

At this time, we are unable to reasonably estimate the possible future cost,
net loss or net gain, if any, associated with this matter or other legal
proceedings and claims for which we may be exposed to a certain amount of risk.
Accordingly, we have not recorded any loss or gain contingencies associated
with these matters as of June 30, 2002. It is reasonably possible that such
amounts could be material to our financial condition, results of operations or
liquidity.

We own various term life and whole life insurance policies in which certain
former officers are named as the insured. Under these policies, we are entitled
to 100% of the net death benefits. As of June 30, 2002, the aggregate death
benefits receivable under these policies was approximately $6.4 million and the
cash surrender value was approximately $273,000. During July 2002, we borrowed
approximately $259,000 against the whole life insurance policies. We have not
recorded any gain contingency associated with the aggregate death benefits
receivable, however in the event of death, the net death benefit could be
material to our financial condition, results of operations and liquidity.

Effect of Recently Issued Accounting Standards

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No.142, Accounting for Goodwill and
Intangible Assets. SFAS No. 142 provides that an intangible asset may be
amortized over its respective estimated useful life to its estimated residual
value in proportion to the economic benefits consumed. The method of
amortization should be systematic and rational but need not necessarily be the
straight-line method. Amortization is

-35-



---



##### Table of Contents



not required for intangible assets which are determined to have an indefinite
useful life. Useful lives of amortizable intangible assets are required to be
re-evaluated each reporting period. We adopted SFAS No. 142 in January 2002.
Prior to adoption, we did not have any goodwill recorded. As a result, we had
no impact on our financial condition or results of operations.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 requires an enterprise to record the fair
value of an asset retirement obligation as a liability in the period in which
it incurs a legal obligation associated with the retirement of tangible
long-lived assets. Adoption of SFAS No. 143 may result in increases in
liabilities, assets, and expense recognition in financial statements. We do
not anticipate a material impact on our financial condition or results of
operations as a result of implementing this standard. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.SFAS No. 144 supercedes SFAS No. 121, by
requiring one accounting model to be used for long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operations to include more disposal
transactions. We do not anticipate a material impact on our financial condition
or results of operations as a result of implementing this standard. SFAS No.
144 is effective for fiscal years beginning after December 15, 2001.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement provides guidance on the classification of gains and losses from
the extinguishment of debt and on the accounting for certain specified lease
transactions. We do not anticipate a material impact on our financial
condition or results of operations as a result of implementing this standard.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). Generally, SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized as incurred, whereas EITF Issue No. 94-3 required such a
liability to be recognized at the time that an entity committed to an exit
plan. We are currently evaluating the provisions of the new rule, which is
effective for exit or disposal activities that are initiated after December 31,
2002.




Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks, including the effects of adverse
changes in interest rates. Our exposure to changes in interest rates results
from borrowings with floating interest rates. At the present time, we have no
financial instruments in place to manage the impact of changes in interest
rates. As of June 30, 2002, we had notes payable outstanding of $1.5 million
under our Term Loan at an interest rate of 10.25%. No amounts were outstanding
under our Revolving Loan. Additionally, in connection with the acquisition of
certain assets of Asvan Technology, LLC, we had $139,000 outstanding on a
two-year promissory note at an interest rate of 10.00%. We estimate that a 10%
upward movement in interest rates would have impacted our results of operations
by less than $200,000 for the year ended June 30, 2002.




Item 8. Financial Statements

The financial statements begin on page F-1. Financial statements prior to
January 1, 1999 cannot be prepared without unreasonable effort and expense.

-36-



---



##### Table of Contents



The financial statements for periods prior to June 30, 2000 have not been
audited. We have been informed by our independent auditors that they could not
express unqualified audit opinions for periods prior to June 30, 2000, based on
their determination that the internal controls over inventory accounting and
management systems prior to June 30, 2000 were not sufficiently reliable to
enable them to audit the inventory quantities, and that they are unable to
apply alternative auditing procedures to the inventory balances for periods
prior to June 30, 2000.




Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

Incorporated by reference is the information contained in Item 4 of our prior
Forms 8-K filed on July 12, 2000, July 20, 2000 and September 15, 2000,
respectively.

-37-



---



##### Table of Contents






PART III




Item 10. Directors and Executive Officers of the Registrant

Board of Directors

Sarah L. Booher  Director. Ms. Booher, age 60, was elected a Director on
January 18, 1994. She has been a managing partner of Good Earth Farm, a
horse-breeding farm, since 1992. Ms. Booher was the Executive Director of the
Park Ridge Foundation, a nonprofit health care foundation located in Rochester,
New York, from February 15, 1988 until September 1, 1996. She remained as a
consultant to the Foundation until August 30, 1997. After September 1, 1996,
she became Vice President of PMA Associates of Genesee Valley, Inc., a
nonprofit strategic planning corporation in Livonia, New York, where she
remains as a consultant and Secretary/Treasurer. She has also been a
fund-raising consultant for the Cordelia A. Greene Library in Castile, New
York, and the Hope Hall School of Rochester, New York, since 1998. During 1996
and 1997, Ms. Booher served as President of the Genesee Valley New York Chapter
of the National Society of Fundraising Executives, a nonprofit organization,
where she also served on the Board of Directors from 1986 to 1997. She received
a BA degree from the University of Colorado in 1964.

Robert C. Dixon  Director. Mr. Dixon, age 70, was elected a Director on
January 11, 2002. Mr. Dixon currently serves on the Boards of Sunwest, a
telephone company in Colorado Springs, and Ditrans Corp., in Irvine,
California, where he is Chairman. Mr. Dixon has more than 46 years of
experience as a senior scientist and development engineer with some of the
worlds leading defense, communications and electronics organizations. He was a
Founder and Chief Scientist of Omnipoint Corporation, a cellular service
provider that was recently purchased by VoiceStream. Other assignments have
included Chief Scientist at Hughes Aircraft, Senior Research Engineer at
Northrop Corporation, Senior Staff Engineer at Magnavox Research Labs, Staff
Engineer at TRW, and Senior Staff Engineer at Hoffman Electronics. He was also
President and Founder of Spectrack Systems Inc., Division Manager of the
Spectrack Division of R&D Associates, and Chief Scientist and Founder of Spread
Spectrum Sciences Inc. Mr. Dixon has served as a consultant to more than 100
companies and to the U.S. government. Additionally, he taught at UCLA and
George Washington University and has served as co-editor of a special issue of
IEEE Transactions (Institute of Electrical and Electronics Engineers) and on
the editorial board of IEEE Proceedings. Mr. Dixon is licensed by the Federal
Communications Commission, is a Licensed Professional Engineer, and is a Fellow
of the IEEE.

David A. Lisowski  Director. Mr. Lisowski, age 49, was elected a Director
on June 26, 1996. Mr. Lisowski is the President and a Director of the Denver
Wholesale Florist Company, a national wholesale florist, for which he has been
the General Manager and Chief Executive Officer since 1993. He was employed by
Central Bank of Denver, N.A., a commercial bank in Colorado, and various
affiliated banks from 1972 to 1992. His employment with Central Bank included
serving as Senior Vice President of Commercial Lending in Southern Colorado as
well as various other positions. Mr. Lisowski attended Metropolitan State
College where he received a BS degree in Finance in 1988.

Anthony B. Petrelli  Acting Chairman of the Board and Director. Mr.
Petrelli, age 49, was elected a Director on October 17, 1997 and became Acting
Chairman of the Board of Directors on July 3, 2001. Mr. Petrelli has served as
Senior Vice President of Investment Banking Services at Neidiger, Tucker,
Bruner, Inc., an investment banking firm and registered broker-dealer in
Denver, Colorado, since May of 1987. He formerly served as a Director of
Guardian Acceptance Corp., a consumer finance company in Denver, Colorado, for
which he served as President from September 1996 until December 1997. Mr.
Petrelli received a BS degree in Business in 1974 and an MBA in 1979 from the
University of Colorado.

David M. Risley  Director. Mr. Risley, age 58, was elected a Director on
November 27, 2001. He currently serves as Senior Vice President and Chief
Financial Officer of La-Z-Boy Inc., a $2.2 billion furniture manufacturer.
Prior to joining La-Z-Boy, he was Vice President of Finance and Chief Financial

-38-



---



##### Table of Contents



Officer with Aeroquip Vickers, Inc., a manufacturing firm serving the
industrial, aerospace and automotive markets with power and motion control
devices, fluid connectors and composite components. He also had served as Vice
President and Controller of Heizer Corporation, a venture capital and business
development firm and in various positions with TransUnion Corporation, a
diversified conglomerate. He began his career as a Certified Public Accountant
with Arthur Young & Company (now Ernest & Young LLP). He holds a BBA in
Accounting from the University of Iowa and an MBA in Finance from Loyola
University of Chicago.

Gil J. Van Lunsen  Director. Mr. Van Lunsen, age 60, was elected a
Director on June 1, 2001. He recently retired from KPMG following 32 years of
service. Nine years after joining KPMG in 1968 as an assistant accountant, he
became partner and subsequently was promoted to partner in charge of national
accounting and audit training. In 1994, he was appointed managing partner of
the Tulsa, Oklahoma office, a position he held until his retirement in 2000.
Mr. Van Lunsen was recently appointed Chairman of the Audit Committee of
Hillcrest Healthcare Systems, a Tulsa, Oklahoma-based hospital system. He is
also a member of the Ethics Compliance Committee of Tyson Foods. He received
his BSBA in Accounting and Finance from the University of Denver in 1968 and is
a Certified Public Accountant.

Charles R. Bland  President, Chief Executive Officer and Director. Mr.
Bland, age 54, joined us in May of 2001 as our President and Chief Executive
Officer. On December 26, 2001, he was appointed to the Board of Directors. From
June 1, 2000 until he joined us, he served as the President of Growzone, Inc.,
a software company focused on the horticultural industry, and from June 1999
until June 2000, he was the President of AmericasDoctors.com, an Internet
health care content site. From 1998 to 1999, Mr. Bland was the Chief Operating
Officer at Quark Incorporated, provider of shrink wrap and client server
software for the publishing industry. For the previous 24 years, Mr. Bland
worked in positions of increasing responsibility with Owens Corning Fiberglas,
a world leader in high performance glass composites and building materials,
with his final assignment being President, Africa/Latin American Operations.
Mr. Bland received his B.S., Accounting and Finance, from Ohio State University
and his MBA from the Sloan School, Massachusetts Institute of Technology.

The information regarding our executive officers required by this Item is
included in Item 4A hereof.

-39-



---



##### Table of Contents






Item 11. Executive Compensation

The following table summarizes the compensation for the years ended June 30,
2002 and 2001, six months ended June 30, 2000 and for the year ended December
31, 1999 of our Chief Executive Officer and our Executive Officers whose salary
and bonus exceeded $100,000:

|                            |  |      |        |            |  |                     |         |           |  |     |         |          |  |         |         |            |  |                        |        |      |  |  |         | 
|--------------------------- |  | ---- | ------ | ---------- |  | ------------------- | ------- | --------- |  | --- | ------- | -------- |  | ------- | ------- | ---------- |  | ---------------------- | ------ | ---- |  |  | ------- | 
|                            |  |      |        |            |  |                     |         |           |  |     |         |          |  |         |         |            |  | Long-Term Compensation
|                            |  |      |        |            |  | Annual Compensation |         | Awards   
|                            |  |      |        |            |  |                     |         |          
|                            |  |      |        |            |  |                     |         |           |  |     |         |          |  | Other   |         | Restricted |  | Securities            
|                            |  |      |        |            |  |                     |         |           |  |     |         |          |  | Annual  |         | Stock      |  | Underlying            
|                            |  |      |        |            |  |                     |         |           |  |     |         |          |  | Compen- |         | Award(s)   |  | Options/              
|Name and Principal Position |  | Year |        | Salary ($) |  | Bonus ($)           |         | sation($) |  | ($) |         | SARs (#)
|                            |  |      |        |            |  |                     |         |           |  |     |         |         
|Charles R. Bland            |  |      | 2002   |            |  |                     | 238,462 |           |  |     | 20,100  |          |  |         | 10,000  | (1)        |  |                        | -0-    |      |  |  | 51,000  | 
|President and               |  |      | 2001   |            |  |                     | 31,250  |           |  |     | -0-     |          |  |         | 1,538   | (2)        |  |                        | -0-    |      |  |  | 85,000  | 
|CEO                         |  |      | 2000*  |            |  |                     | -0-     |           |  |     | -0-     |          |  |         | -0-     |            |  |                        | -0-    |      |  |  | -0-     | 
|                            |  |      | 1999** |            |  |                     | -0-     |           |  |     | -0-     |          |  |         | -0-     |            |  |                        | -0-    |      |  |  | -0-     | 
|Richard P. Dutkiewicz       |  |      | 2002   |            |  |                     | 152,192 |           |  |     | 28,500  |          |  |         | 10,000  | (3)        |  |                        | -0-    |      |  |  | 40,000  | 
|Vice President of           |  |      | 2001   |            |  |                     | 63,462  |           |  |     | 10,000  | (4)      |  |         | 2,692   | (5)        |  |                        | -0-    |      |  |  | 20,000  | 
|Finance and CFO             |  |      | 2000*  |            |  |                     | -0-     |           |  |     | -0-     |          |  |         | -0-     |            |  |                        | -0-    |      |  |  | -0-     | 
|                            |  |      | 1999** |            |  |                     | -0-     |           |  |     | -0-     |          |  |         | -0-     |            |  |                        | -0-    |      |  |  | -0-     | 
|Ernest C. Hafersat          |  |      | 2002   |            |  |                     | 169,731 |           |  |     | 20,000  |          |  |         | 10,000  | (6)        |  |                        | -0-    |      |  |  | 40,000  | 
|Vice President of           |  |      | 2001   |            |  |                     | 25,846  |           |  |     | -0-     |          |  |         | 1,538   | (7)        |  |                        | -0-    |      |  |  | 20,000  | 
|Manufacturing               |  |      | 2000*  |            |  |                     | -0-     |           |  |     | -0-     |          |  |         | -0-     |            |  |                        | -0-    |      |  |  | -0-     | 
|                            |  |      | 1999** |            |  |                     | -0-     |           |  |     | -0-     |          |  |         | -0-     |            |  |                        | -0-    |      |  |  | -0-     | 
|Joseph H. Kiser             |  |      | 2002   |            |  |                     | 200,864 |           |  |     | 25,000  |          |  |         | 42,095  | (8)        |  |                        | -0-    |      |  |  | 15,000  | 
|Former Chief Scientific     |  |      | 2001   |            |  |                     | 286,786 |           |  |     | 25,010  |          |  |         | 15,190  | (9)        |  |                        | -0-    |      |  |  | -0-     | 
|Officer and Secretary       |  |      | 2000*  |            |  |                     | 154,875 |           |  |     | 100,000 |          |  |         | 101,605 | (10)       |  |                        | -0-    |      |  |  | -0-     | 
|                            |  |      | 1999** |            |  |                     | 295,000 |           |  |     | 75,000  |          |  |         | 152,505 | (11)       |  |                        | 37,501 | (12) |  |  | 100,000 | 
|Timothy G. Schamberger(13)  |  |      | 2002   |            |  |                     | 19,038  |           |  |     | -0-     |          |  |         | 1,154   | (14)       |  |                        | -0-    |      |  |  | 25,000  | 
|Vice President of           |  |      | 2001   |            |  |                     | -0-     |           |  |     | -0-     |          |  |         | -0-     |            |  |                        | -0-    |      |  |  | -0-     | 
|Sales and Marketing         |  |      | 2000*  |            |  |                     | -0-     |           |  |     | -0-     |          |  |         | -0-     |            |  |                        | -0-    |      |  |  | -0-     | 
|                            |  |      | 1999** |            |  |                     | -0-     |           |  |     | -0-     |          |  |         | -0-     |            |  |                        | -0-    |      |  |  | -0-     | 
|Timothy M. Micun            |  |      | 2002   |            |  |                     | 120,692 |           |  |     | 23,048  |          |  |         | 10,000  | (15)       |  |                        | -0-    |      |  |  | 35,000  | 
|Former Vice President       |  |      | 2001   |            |  |                     | 99,352  |           |  |     | 47,884  |          |  |         | 3,077   | (16)       |  |                        | -0-    |      |  |  | 30,000  | 
|of Sales and Marketing      |  |      | 2000*  |            |  |                     | 13,385  |           |  |     | -0-     |          |  |         | -0-     |            |  |                        | -0-    |      |  |  | -0-     | 
|                            |  |      | 1999** |            |  |                     | -0-     |           |  |     | -0-     |          |  |         | -0-     |            |  |                        | -0-    |      |  |  | -0-     | 
|Daniel J. Wilmot            |  |      | 2002   |            |  |                     | 146,077 |           |  |     | 28,723  |          |  |         | 23,249  | (17)       |  |                        | -0-    |      |  |  | 35,000  | 
|Vice President of           |  |      | 2001   |            |  |                     | 133,846 |           |  |     | 51,168  |          |  |         | 8,990   | (18)       |  |                        | -0-    |      |  |  | -0-     | 
|Advanced Technology         |  |      | 2000*  |            |  |                     | 62,500  |           |  |     | 35,000  |          |  |         | 30,974  | (19)       |  |                        | -0-    |      |  |  | -0-     | 
|                            |  |      | 1999** |            |  |                     | 125,000 |           |  |     | 54,937  |          |  |         | 12,698  | (20)       |  |                        | -0-    |      |  |  | 22.500  | 



---

|*   |  | The data presented is for the six months ended June 30, 2000.     
|--- |  | ------------------------------------------------------------------
|   
|**  |  | The data presented is for the fiscal year ended December 31, 1999.
|   
|(1) |  | Includes automobile benefit of $10,000.                           
|   
|(2) |  | Includes automobile benefit of $1,538.                            
|   
|(3) |  | Includes automobile benefit of $10,000.                           
|   
|(4) |  | Includes sign-on bonus of $10,000.                                
|   
|(5) |  | Includes automobile benefit of $2,692.                            
|   
|(6) |  | Includes automobile benefit of $10,000.                           
|   
|(7) |  | Includes automobile benefit of $1,538.                            
|   
|(8) |  | Includes a gift of a car of $42,095.                              
|   
|(9) |  | Includes automobile benefit of $11,750 and insurance of 3,440.    

-40-



---



##### Table of Contents



|(10) |  | Includes tax reimbursement of $84,501, automobile benefit of $5,875,
insurance of $9,229 and an IRA contribution of $2,000.                                                                                    
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(11) |  | Includes tax reimbursement of $84,501, automobile benefit of $11,750,
insurance of $17,421, accrued vacation earned but not taken of $11,342,
tax preparation fees of $2,790 and an IRA contribution of $2,000.
|    
|(12) |  | Includes 6,250 shares valued at $37,501 earned in 1998, but not issued
until 1999. These shares were subsequently sold by the holders.                                                                         
|    
|(13) |  | Mr. Schamberger joined us on May 13, 2002 after the resignation of Mr.
Timothy M. Micun.                                                                                                                       
|    
|(14) |  | Includes automobile benefit of $1,154.                                                                                                                                                                         
|    
|(15) |  | Includes automobile benefit of $10,000.                                                                                                                                                                        
|    
|(16) |  | Includes automobile benefit of $3,077.                                                                                                                                                                         
|    
|(17) |  | Includes automobile benefit of $6,923 and tuition reimbursement of
$16,326.                                                                                                                                    
|    
|(18) |  | Includes automobile benefit of $8,990.                                                                                                                                                                         
|    
|(19) |  | Includes tax reimbursement of $24,301, automobile benefit of $4,375,
insurance of $298 and an IRA contribution of $2,000.                                                                                      
|    
|(20) |  | Includes tax reimbursement of $719, automobile benefit of $8,600,
miscellaneous of $778, insurance of $601, and an IRA contribution of
$2,000.                                                                 

None of the named Executive Officers received additional perquisites or other
personal benefits the aggregate amount of which was the lesser of either
$50,000 or 10% of the total of annual salary and bonus reported for such
persons.

Option/SAR Grants in Last Fiscal Year

The following table sets forth the information concerning individual grants of
stock options and appreciation rights during the last fiscal year to each of
the named Executive Officers:

|                       |  |            |        |            |  |            |     |            |  |                   |      |                         |  |                         |         |                      |  |   |        |  |  |   |         | 
|---------------------- |  | ---------- | ------ | ---------- |  | ---------- | --- | ---------- |  | ----------------- | ---- | ----------------------- |  | ----------------------- | ------- | -------------------- |  | - | ------ |  |  | - | ------- | 
|                       |  |            |        |            |  | % of Total |     |            |  |                   |      |                         |  |                         |         | Potential Realizable
|                       |  | Number Of  |        | Options    |  |            |     |            |  |                   |      |                         |  | Value at Assumed Annual
|                       |  | Securities |        | Granted to |  | Exercise   |     |            |  |                   |      | Rates of Stock Price   
|                       |  | Underlying |        | Employees  |  | or Base    |     |            |  |                   |      | Appreciation For Option
|                       |  | Options    |        | in Fiscal  |  | Price      |     | Expiration |  | Term 5%($)(1) and
|Name                   |  | Granted    |        | Year       |  | ($/share)  |     | Date       |  | 10%($)(2)        
|                       |  |            |        |            |  |            |     |            |  |                  
|Charles R. Bland       |  |            | 51,000 | (3)        |  |            | 6.3 | %          |  | $                 | 2.00 |                         |  |                         | 9/17/11 |                      |  | $ | 64,147 |  |  | $ | 162,562 | 
|Richard P. Dutkiewicz  |  |            | 40,000 | (3)        |  |            | 4.9 | %          |  | $                 | 2.00 |                         |  |                         | 9/17/11 |                      |  | $ | 50,312 |  |  | $ | 127,499 | 
|Ernest C. Hafersat     |  |            | 40,000 | (3)        |  |            | 4.9 | %          |  | $                 | 2.00 |                         |  |                         | 9/17/11 |                      |  | $ | 50,312 |  |  | $ | 127,499 | 
|Joseph H. Kiser        |  |            | 15,000 | (3)        |  |            | 1.8 | %          |  | $                 | 2.00 |                         |  |                         | 9/17/11 |                      |  | $ | 18,867 |  |  | $ | 47,812  | 
|Timothy G. Schamberger |  |            | 25,000 | (3)        |  |            | 3.1 | %          |  | $                 | 1.05 |                         |  |                         | 6/03/12 |                      |  | $ | 16,508 |  |  | $ | 41,836  | 
|Timothy M. Micun       |  |            | 35,000 | (3)        |  |            | 4.3 | %          |  | $                 | 2.00 |                         |  |                         | 9/17/11 |                      |  | $ | 44,023 |  |  | $ | 111,562 | 
|Daniel J. Wilmot       |  |            | 35,000 | (3)        |  |            | 4.3 | %          |  | $                 | 2.00 |                         |  |                         | 9/17/11 |                      |  | $ | 44,023 |  |  | $ | 111,562 | 



---

|(1) |  | This column represents the potential realizable value of each grant of
options, based on the assumption that the market price of shares of Common
Stock underlying the options will appreciate in value from the date of the
grant to the end of the option term at the annual rate of five percent.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | This column represents the potential realizable value of each grant of
options, based on the assumption that the market price of shares of Common
Stock underlying the options will appreciate in value from the date of the
grant to the end of the option term at the annual rate of ten percent. 
|   
|(3) |  | Of this grant, all options were incentive stock options.                                                                                                                                                                                                                                            

-41-



---



##### Table of Contents



Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year End Option/SAR Values

The following table sets forth information concerning each exercise of stock
options during the last fiscal year by each of our Executive Officers and the
fiscal year end value of unexercised options:

|                       |  |             |     |                |  |                    |     |                |  |                 |                |               |  |  |       | 
|---------------------- |  | ----------- | --- | -------------- |  | ------------------ | --- | -------------- |  | --------------- | -------------- | ------------- |  |  | ----- | 
|                       |  |             |     |                |  |                    |     |                |  | Number of       |                | Value of     
|                       |  |             |     |                |  |                    |     |                |  | Securities      |                | Unexercised  
|                       |  |             |     |                |  |                    |     |                |  | Underlying      |                | In-the-Money 
|                       |  | Shares      |     |                |  |                    |     | Unexercised    |  | Options/SARs at
|                       |  | Acquired on |     | Value Realized |  | Options/SARs at    |     | Fiscal        
|Name                   |  | Exercise(#) |     | ($)            |  | Fiscal Year-End(#) |     | Year-End($)(1)
|                       |  |             |     |                |  |                    |     |               
|                       |  |             |     |                |  |                    |     |                |  | Exercisable/    |                | Exercisable/ 
|                       |  |             |     |                |  |                    |     |                |  | Unexercisable   |                | Unexercisable
|                       |  |             |     |                |  |                    |     |                |  |                 |                |              
|Charles R. Bland       |  |             | -0- |                |  |                    | N/A |                |  |                 | 31,450/104,550 |               |  |  | $0/$0 | 
|Richard P. Dutkiewicz  |  |             | -0- |                |  |                    | N/A |                |  |                 | 13,000/47,000  |               |  |  | $0/$0 | 
|Ernest C. Hafersat     |  |             | -0- |                |  |                    | N/A |                |  |                 | 12,000/48,000  |               |  |  | $0/$0 | 
|Joseph H. Kiser        |  |             | -0- |                |  |                    | N/A |                |  |                 | 0/0            |               |  |  | $0/$0 | 
|Timothy G. Schamberger |  |             | -0- |                |  |                    | N/A |                |  |                 | 0/25,000       |               |  |  | $0/$0 | 
|Timothy M. Micun       |  |             | -0- |                |  |                    | N/A |                |  |                 | 15,000/50,000  |               |  |  | $0/$0 | 
|Daniel J. Wilmot       |  |             | -0- |                |  |                    | N/A |                |  |                 | 124,909/33,541 |               |  |  | $0/$0 | 



---

|(1) |  | Based on the fair market value of the Common Stock on August 30, 2002 of
$0.66, the closing price as quoted on the OTCBB.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

Directors Compensation

We currently have an arrangement whereby each outside Director receives $1,000
per day for attendance in person at any meeting of more than an hour of the
Board of Directors or a committee thereof or a meeting with management or other
Directors for Company business or affairs, including meetings held by
telephone. We reimburse outside Directors for their expenses in attending
meetings of the Board of Directors and its committees.

In addition, pursuant to the Companys Tandem Stock Option and Stock
Appreciation Rights Plan, outside directors receive a grant of ten-year, fully
vested options to purchase 500 shares of Common Stock for each meeting of the
Board of Directors or a committee thereof or a meeting with management of the
Company or other Directors for Company business or affairs, attended in person,
including meetings held by telephone. These options are granted and priced on
the first business date of the month following the meeting. Also, the members
of each Board committee receive a grant of 50 shares each of Common Stock per
month from the Companys Stock Grant Plan. These shares are issued on a
quarterly basis.

Employment Agreements with Current Officers

Employment Agreement with Chief Executive Officer. Effective as of August 1,
2002, the Company entered into an employment agreement with Charles R. Bland.
The agreement provides for an employment term of one year which automatically
renews for an additional year on each subsequent August 1 without any further
action on the part of the Company or Mr. Bland unless terminated under certain
provisions of the agreement. Under the terms of the agreement, the Company
will pay Mr. Bland an annual base salary as determined by the Compensation
Committee of the Board of Directors. Mr. Bland is also eligible to receive
annual incentive pay equal to 40% of his annual salary, which amount

-42-



---



##### Table of Contents



shall be based on his performance and merit and the Companys financial success
in the year to which the incentive pay corresponds. Additionally, under the
terms of the agreement Mr. Bland receives an automobile allowance of $10,000
per year.

Either the Company or Mr. Bland can terminate Mr. Blands employment upon
thirty days written notice at any time. However, in the event of an
involuntary termination (which includes, without limitation, the resignation of
Mr. Bland at his election not more than thirty days after a Change of
Compensation, Duties or Benefits (as defined in the agreement)) during the
twelve month period immediately following a change in control, the agreement
provides for severance pay equal to two times Mr. Blands annual base salary
plus two times 100% of his annual incentive pay opportunity and the
continuation of his car allowance for two years. In the event of any other
involuntary termination, the agreement provides for severance pay equal to one
years worth of Mr. Blands annual base salary plus the same portion of Mr.
Blands annual incentive pay opportunity for the one year following such
termination as the average portion of the respective annual incentive pay
opportunity paid to other executive officers of the Company during such year
and the continuation of his car allowance for one year. Additionally, upon any
involuntary termination, all unvested stock options and stock appreciation
rights that have previously been granted to Mr. Bland will fully vest and
remain exercisable for three months after such termination and to the extent
that Mr. Bland or his dependents are covered under the terms of any medical and
dental plans of the Company immediately prior to the termination, the Company
will provide Mr. Bland and those dependents with the same or equivalent
coverage until three months after any such termination of employment. In the
event of voluntary termination after the completion of at least one full year
of service to the Company, Mr. Blands severance pay would be equal to one
months salary for every year of service completed up to a maximum of three
months salary. In the event of Mr. Blands retirement, the agreement provides
for severance pay equal to one months salary for every year of service
completed to the Company up to a maximum of twelve months salary. In the event
of Mr. Blands death, the agreement provides for severance pay equal to Mr.
Blands then current annual base salary for the greater of one year or the
remaining term of the agreement without additional extensions, together with
any bonuses which the Board of Directors shall determine in its sole discretion
to be due and payable to Mr. Bland.

Mr. Blands employment agreement also contains a covenant not to compete with
the Company during the term of the agreement plus the greater of (a) one year
or (b) the period during which severance or consulting payments are being made
to Mr. Bland.

Employment Agreements with Certain other Officers.  Effective as of August 1,
2002, the Company entered into individual employment agreements with each of
Richard P. Dutkiewicz, Ernest C. Hafersat, Timothy G. Schamberger and Daniel J.
Wilmot (the Current Officers). Each agreement provides for an employment
term of one year which automatically renews for an additional year on each
subsequent August 1 without any further action on the part of the Company or
the respective Current Officer unless terminated under certain provisions of
the employment agreement. Under the terms of each agreement, the Company will
pay each Current Officer an annual base salary as determined by the
Compensation Committee of the Board of Directors. Each Current Officer is also
eligible to receive annual incentive pay equal to 35% of his annual salary,
which amount shall be based on his performance and merit and the Companys
financial success in the year to which the incentive pay corresponds.
Additionally, under the terms of each agreement each Current Officer receives
an automobile allowance of $10,000 per year.

Either the Company or the respective Current Officer can terminate a Current
Officers employment upon thirty days written notice at any time. However, in
the event of an involuntary termination during the six month period immediately
following a change in control (with involuntary termination to include a
unilateral election by the Current Officer to terminate his employment
agreement with the Company during such period), each agreement provides for
severance pay equal to a Current Officers annual base salary plus 100% of his
annual incentive pay opportunity and the continuation of his car allowance for
one year. In the event of a Change in Duties, Compensation, or Benefits (as
defined in the agreement), at

-43-



---



##### Table of Contents



the election by the Current Officer to terminate his employment agreement with
the Company, each agreement provides for severance pay equal to six months
worth of a Current Officers annual base salary plus a pro rata share of his
incentive pay earned over the last six months and the continuation of his car
allowance for six months. In the event of any other involuntary termination,
the agreement provides for severance pay equal to six months worth of a Current
Officers annual base salary plus a pro rata share of his incentive pay earned
over the last six months and the continuation of his car allowance for six
months. Additionally, upon any involuntary termination, all unvested stock
options and stock appreciation rights that have previously been granted to a
Current Officer will fully vest and remain exercisable for three months after
such termination and to the extent that a Current Officer or his dependents are
covered under the terms of any medical and dental plans of the Company
immediately prior to the termination, the Company will provide such Current
Officer and those dependents with the same or equivalent coverage until three
months after any such termination of employment. In the event of voluntary
termination after the completion of at least one full year of service to the
Company, a Current Officers severance pay would be equal to one months salary
for every year of service completed up to a maximum of three months salary.
In the event of a Current Officers death, each agreement provides for
severance pay equal to the amount that would have been payable to such Current
Officer if there had been a voluntary termination on the date of such Current
Officers death.

Each Current Officers employment agreement also contains a covenant not to
compete with the Company during the term of the agreement plus the greater of
(a) one year or (b) the period during which severance or consulting payments
are being made to such Current Officer.

Employment Agreements with Former Officer

Effective June 1, 1997, the Company entered into a four-year employment
agreement with Mr. Joseph H. Kiser which provides for a minimum annual base
salary during Mr. Kisers employment with the Company of at least $295,000, and
severance pay in the event of termination. In the case of involuntary
termination by the Company, severance payments to Mr. Kiser are equal to the
greater of (a) Mr. Kisers annual base salary multiplied by the remaining term
of the agreement or (b) 2.99 times Mr. Kisers average annual compensation over
the last five years. In the case of voluntary termination or retirement, Mr.
Kiser will be entitled to (i) one-half of his annual base salary as severance
pay, (ii) be engaged as a consultant for a period of up to five years for which
he is paid a fee equal to 50 percent of his annual base salary upon termination
of employment, and (iii) an annual retirement benefit equal to 25 percent of
his annual base salary payable during the period he provides consulting
services to the Company. All unvested stock awards and options and stock
appreciation rights previously granted to Mr. Kiser will fully vest in the
event of a change of control of the Company or an involuntary termination. In
addition, Mr. Kiser has agreed he will not compete against the Company for the
duration of the agreement plus a period of one year after termination or the
expiration of his employment agreement, or the period covered by any consulting
arrangement or retirement benefit, whichever is greater.

In early March 2002, Mr. Kiser was informed of the Companys intent to
terminate the employment agreement the Company had entered into with Mr. Kiser.
As a result, Mr. Kiser is not currently being paid compensation under the
agreement. On March 19, 2002, the Company filed a lawsuit against Mr. Kiser
and another former officer. In the lawsuit, the Company seeks to terminate and
rescind certain employment and consulting agreements between the Company and
the former officers, and to rescind certain stock option grants made to the
former officers, on the basis that such agreements were entered into, and such
option grants were made, based upon mistaken or misrepresented information
regarding the Companys true financial performance. See Item 3  Legal
Proceedings  Company Action against Former Officers.

-44-



---



##### Table of Contents



Compensation Committee Interlocks

We have a Compensation Committee which, in fiscal 2002, was comprised of David
A. Lisowski (Chairman), Sarah L. Booher and Anthony B. Petrelli. None of the
directors is or was in the past one of our officers or employees. No
interlocking relationship exists between the Board of Directors or the
Compensation Committee and the board of directors or compensation committee of
any other company, nor has such an interlocking relationship existed in the
past.




Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plan Information

The following table provides certain information with respect to the Companys
equity compensation plans in effect as of June 30, 2002.

|                                                           |  |                         |           |                      |  |                          |      |  |  |                         |           | 
|---------------------------------------------------------- |  | ----------------------- | --------- | -------------------- |  | ------------------------ | ---- |  |  | ----------------------- | --------- | 
|                                                           |  |                         |           |                      |  |                          |      |  |  | Number of securities   
|                                                           |  |                         |           |                      |  |                          |      |  |  | remaining available for
|                                                           |  | Number of securities to |           | Weighted-average     |  | issuance under equity   
|                                                           |  | be issued upon exercise |           | exercise price of    |  | compensation plans      
|                                                           |  | of outstanding options, |           | outstanding options, |  | (excluding securities   
|                                                           |  | warrants and rights     |           | warrants and rights  |  | reflected in column (a))
|Plan Category                                              |  | (a)                     |           | (b)                  |  | (c)(1)                  
|                                                           |  |                         |           |                      |  |                         
|Equity compensation
plans approved by
security holders     |  |                         | 1,737,834 |                      |  | $                        | 5.58 |  |  |                         | 1,333,515 | 
|Equity compensation
plans not approved
by security holders |  |                         | None      |                      |  |                          | None |  |  |                         | None      | 
|Total                                                      |  |                         | 1,737,834 |                      |  | $                        | 5.58 |  |  |                         | 1,333,515 | 



---

|(1) |  | Numbers in this column include 51,900 shares available for grant under the
Companys Stock Grant Plan and 601,232 shares available for grant under the
Companys Employee Stock Purchase Plan.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth the number and percentage of shares of our
Common Stock owned beneficially, as of August 30, 2002, by any person who is
known to us to be the beneficial owner of five percent or more of such Common
Stock, and, in addition, by each of our Directors and Executive Officers, and
by all of our Directors and Executive Officers as a group. Information as to
beneficial ownership is based upon statements furnished to us by such persons.
For purposes of this disclosure, the amount of our Common Stock beneficially
owned is the aggregate number of shares of the Common Stock outstanding on such
date plus an amount equal to the aggregate amount of Common Stock which could
be issued upon the exercise of stock options within 60 days of such date by
each individual, irrespective of exercise price.

|                                                |  |                   |         |          |  |  |     |  
|----------------------------------------------- |  | ----------------- | ------- | -------- |  |  | --- | -
|                                                |  | Amount and Nature |         |          |  | 
|                                                |  | of Beneficial     |         | Percent 
|Name of Beneficial Owner                        |  | Ownership         |         | of Class
|                                                |  |                   |         |         
|Joseph H. Kiser(1)                              |  |                   | 394,543 |          |  |  | 5.4 | %
|6160 South Olathe Street
Aurora, Colorado 80016 |  |                   |         |          |  |  |     |  

-45-



---



##### Table of Contents



|                                                      |  |                   |         |          |  |  |     |  
|----------------------------------------------------- |  | ----------------- | ------- | -------- |  |  | --- | -
|                                                      |  | Amount and Nature |         |          |  | 
|                                                      |  | of Beneficial     |         | Percent 
|Name of Beneficial Owner                              |  | Ownership         |         | of Class
|                                                      |  |                   |         |         
|Sarah L. Booher(2)                                    |  |                   | 77,033  |          |  |  | 1   | %
|8253 Green Road
Dansville, New York 14437             |  |                   |         |          |  |  |     |  
|David A. Lisowski(3)                                  |  |                   | 48,750  |          |  |  | <1  | %
|4800 Dahlia
Denver, Colorado 80216                    |  |                   |         |          |  |  |     |  
|Anthony B. Petrelli(4)                                |  |                   | 41,050  |          |  |  | <1  | %
|1675 Larimer St., #300
Denver, Colorado 80202         |  |                   |         |          |  |  |     |  
|Gil J. Van Lunsen(5)                                  |  |                   | 11,800  |          |  |  | <1  | %
|171 Crazy Horse Drive
Durango, Colorado 81301         |  |                   |         |          |  |  |     |  
|David M. Risley(6)                                    |  |                   | 4,950   |          |  |  | <1  | %
|1284 North Telegraph Road
Monroe, Michigan 48162-3390 |  |                   |         |          |  |  |     |  
|Robert C. Dixon(7)                                    |  |                   | 1,900   |          |  |  | <1  | %
|1807 Pine Mesa Grove
Colorado Springs, Colorado 80918 |  |                   |         |          |  |  |     |  
|Charles R. Bland(8)                                   |  |                   | 46,400  |          |  |  | <1  | %
|4895 Peoria Street
Denver, Colorado 80239             |  |                   |         |          |  |  |     |  
|Richard P. Dutkiewicz(9)                              |  |                   | 16,423  |          |  |  | <1  | %
|4895 Peoria Street
Denver, Colorado 80239             |  |                   |         |          |  |  |     |  
|Daniel J. Wilmot(10)                                  |  |                   | 124,909 |          |  |  | 1.7 | %
|4895 Peoria Street
Denver, Colorado 80239             |  |                   |         |          |  |  |     |  
|All Directors and Executive                           |  |                   | 373,215 |          |  |  | 5.1 | %
|Officers as a Group(11)
(9 Persons)                   |  |                   |         |          |  |  |     |  



---

|(1) |  | Excludes options to purchase 265,000 shares which the Company seeks to
rescind in a lawsuit brought against Mr. Kiser on the basis that such
options were granted based upon mistaken or misrepresented information
provided to the Company by Mr. Kiser. See Item 3  Legal Proceedings 
Company Action against Former Officers.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes 11,920 shares held by Ms. Booher pursuant to trust arrangements.
Also includes options to purchase 45,000 shares. Does not include an
additional 3,230 shares held by her husband, Robert Booher, for which
shares she has disclaimed beneficial ownership.                                                                
|   
|(3) |  | Includes options to purchase 45,000 shares.                                                                                                                                                                                                                                                                                         
|   
|(4) |  | Includes options to purchase 38,500 shares.                                                                                                                                                                                                                                                                                         
|   
|(5) |  | Includes options to purchase 11,000 shares.                                                                                                                                                                                                                                                                                         
|   
|(6) |  | Includes options to purchase 4,500 shares.                                                                                                                                                                                                                                                                                          
|   
|(7) |  | Includes options to purchase 1,500 shares.                                                                                                                                                                                                                                                                                          

-46-



---



##### Table of Contents



|(8)  |  | Includes options to purchase 31,450 shares.    
|---- |  | -----------------------------------------------
|    
|(9)  |  | Includes options to purchase 13,000 shares.    
|    
|(10) |  | Consists of options to purchase 124,909 shares.
|    
|(11) |  | Includes options to purchase 314,859 shares.   




Item 13. Certain Relationships and Related Transactions

In the past, the Company has entered into various transactions with its
officers and major shareholders. Transactions with such individuals which
subject the Company to continuing obligations are described below.

Lease

We currently lease one of our manufacturing facilities under long-term
operating leases from J.C. Enterprises, a Colorado general partnership in which
Mr. Kiser, our former Chairman of the Board and former Chief Scientific Officer
is the general partner. The lease expires in 2005 and contains provisions which
would permit us to extend the terms of the lease. Total rent expense
associated with this lease for the year ended June 30, 2002 was $130,000. In
August 1998, the lease was amended to extend the lease period and the monthly
rental was increased from $4,000 to $10,801 beginning November 1, 1998. At the
time the Company entered into the amendment, the Companys Board of Directors
was advised by Mr. Kiser and Mr. Sherman that the increase was no greater than
would have been paid in an arms-length transaction and that the rent levels
were substantially similar to leases of similar terms on commercial properties
in the same area. The Company now believes that the lease rate for this
facility is approximately double the fair market value lease rates for
comparable facilities within the area. The Company is seeking to recover rent
paid in excess of market prices pursuant to the lease agreement in reliance on
misrepresented information provided by Mr. Kiser and Mr. Sherman. See Item 3 -
Legal Proceedings  Company Action against Former Officers.

Indemnification and Expense Advancement

Under our Articles of Incorporation, Bylaws and applicable Colorado corporate
law, we have certain obligations to indemnify our officers and directors for
expenses they incur in connection with the defense of litigation brought
against them on account of actions taken by them in those capacities if such
officers or directors are wholly successful, on the merits or otherwise, in
their defense in such proceedings.

In addition, we and certain of our former officers and employees, namely, Derek
L. Bailey, Jon L. Clark, Joseph Kiser, David G. Sherman and Sarah E. Hume have
entered into agreements (the Undertakings) relating to the advancement of
legal fees and other expenses incurred in connection with the SEC Investigation
with respect to Messrs. Clark, Kiser, Sherman and Ms. Hume and the ongoing
shareholder litigation with respect to Mr. Bailey. Those officers and
employees have agreed to repay any amounts advanced by us under the
Undertakings if (a) a determination is made by a committee of the Board of
Directors, composed entirely of outside directors, that the officer or employee
engaged in conduct which disqualifies him or her from indemnification by us
under applicable law, or (b) an express finding is made by a court of law or
tribunal with jurisdiction that the officer or employee is not entitled to
indemnification under applicable law (either (a) or (b) is referred to
hereinafter as an Adverse Determination).

In consideration of our advancement of legal fees and expenses, including the
payment of retainers in many cases, the officers and employees agreed to fully
cooperate with us in connection with our own internal investigation and in the
defense of any claims. The officers and employees affirmed in the Undertakings
that, in the course of providing services to us, they had at all times
conducted themselves in good faith and that their conduct had always been in
our best interests.

-47-



---



##### Table of Contents



In the absence of an Adverse Determination, we agreed in the Undertakings to
pay reasonable legal fees and expenses incurred by the officers and employees
in connection with the claims. In the event of an Adverse Determination, no
further advances are to be made and the affected officer or employee would be
required to repay prior advances. As a result of determinations made by the
Companys Audit Committee or Special Litigation Committee, the Company has
stopped making advances to Mr. Sherman, Mr. Clark and Ms. Hume. The Company
had made voluntary advances to Mr. Kiser in connection with the shareholder
class action, but discontinued those advances in March 2002.

During the year ended June 30, 2002, the Company paid or accrued the following
amounts for legal fees and expenses, including retainers: $12,040 for Mr.
Bailey, $95,910 for Mr. Kiser and $35,371 for Mr. Clark. No amounts were paid
or accrued for legal fees and expenses for Ms. Hume or Mr. Sherman during the
year ended June 30, 2002. See Item 3  Legal Proceedings  Securities and
Exchange Commission Investigation, Private Securities Class Action, and
Shareholder Derivative Suit.

During Mr. Shermans tenure as President and Chief Executive Officer, he
traveled extensively on our behalf, visiting suppliers and customers and
recruiting sales and other personnel. Mr. Sherman received cash advances from
us to pay for some of his expenses on these trips. Our Audit Committee
determined that Mr. Sherman failed to adequately document the business purpose
for which he had utilized some of the amounts advanced. Due to Mr. Shermans
inability to provide additional information and documentation to the Audit
Committee, the Audit Committee suspended payment of the consulting fees payable
to Mr. Sherman pursuant to his Termination and Consulting Agreement with us and
suspended further advances to him for the legal fees and expenses he has
incurred in connection with the claims. See Item 3  Legal Proceedings -
Company Action against Former Officers.

The Company has entered into indemnity agreements with certain of its current
directors (the Directors Indemnity Agreements).

The Directors Indemnity Agreements provide that the Company shall indemnify
each director to the fullest extent permitted by law if a director was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending, or
completed action, suit, or other proceeding of any sort by reason of any event
or occurrence related to the directors service to the Company. The Companys
obligation to indemnify its directors does not apply where a determination has
been made that the director is not entitled to indemnification under applicable
law, in which case the director agrees to reimburse the Company for any amounts
previously paid or advanced to the director. Additionally, the Company shall
not be required to indemnify a director for any claims for which
indemnification is not lawful, for claims based on a directors intentional
acts or transactions in violation of the Companys policies, for claims
initiated by a director and not by way of defense (except in certain limited
circumstances), for claims in which a court of competent jurisdiction has
determined that each of the material assertions made by a director was not made
in good faith or was frivolous, or for claims under Section 16(b) of the
Securities Exchange Act of 1934.

The Directors Indemnity Agreements also provide a contractual period of
limitations for any claims brought by the Company against a director of two
years from the date of accrual of any such claim.

On October 4, 2002, the Company entered into indemnity agreements with Charles
R. Bland and Richard P. Dutkiewicz (the Indemnity Agreements). The Indemnity
Agreements provide that the Company will indemnify each indemnitee to the
fullest extent authorized by the Companys Bylaws and the Colorado Business
Corporation Act, including against any and all reasonable expenses, witness
fees, damages, judgments, fines and amounts paid because of any claim made
against or by him in connection with any threatened, pending or completed
action, suit or proceeding of any sort to which the director is, was or at any
time becomes a party, or is threatened to be made a party, by reason of the
fact that the indemnitee is, was or at any time becomes a director, officer,
employee or other agent of the Company. The Companys obligation to indemnify
the indemnitees, however, does not apply in certain enumerated circumstances,
including for claims under Section 16(b) of the Securities Exchange Act of
1934, for claims on account

-48-



---



##### Table of Contents



of an indemnitees deliberately dishonest or willful misconduct, for claims
based on a breach of the indemnitees fiduciary duty of loyalty to the Company,
for expenses which are actually paid to an indemnitee under a valid and
collectible insurance policy or indemnity clause, for claims in which
indemnification is not lawful, and in connection with any proceeding initiated
by the indemnitee against the Company (except in certain limited
circumstances).

The indemnification obligation of the Company under the Indemnity Agreements
extends throughout an indemnitees term of service to the Company and for so
long thereafter as an indemnitee shall be subject to any possible claim or
action of any sort by reason of the fact that the indemnitee was serving the
Company. The Company is also obligated to advance reasonable expenses incurred
by an indemnitee in connection with a covered claim or action if it receives
any affirmation by the indemnitee required by the Companys Bylaws or the
Colorado Business Corporation Act and an undertaking by the indemnitee to repay
any amounts advanced if it shall be determined ultimately that the indemnitee
is not entitled to be indemnified under the Indemnity Agreements.

The Directors Indemnity Agreements and the Indemnity Agreements provide
additional indemnification to certain of the Companys directors and to Messrs.
Bland and Dutkiewicz. As a result of this additional indemnification, the
liability exposure of the Company is increased. The assets and equity of the
Company will be subject to risk if any of the indemnitees incur liability for
which they are entitled to indemnification under the agreements. At the
present time, Mr. Kiser has asserted certain counterclaims against Messrs.
Bland and Dutkiewicz with respect to the Companys litigation against Mr.
Kiser. See Item 3  Legal Proceedings  Company Action Against Former
Officers.

Joseph Kiser Employment Agreement and Related Litigation

Mr. Kisers employment contract requires him to perform any directive of the
Companys Board of Directors. Subsequent to March 19, 2002, Mr. Kiser has not
performed any services for the Company. We believe that our claim to rescind
Mr. Kisers employment contract based upon mistaken or misrepresented
information regarding the Companys true financial performance is based upon a
valid principle of law. Since March 19, 2002, we have suspended all payments
required by Mr. Kisers employment contract. We have recorded approximately
$203,000 of liabilities representing the present value of post-employment
health care obligations and a one time separation bonus to be paid to Mr. Kiser
upon termination of contract payments.

In the event that Mr. Kiser prevails in requiring us to comply with the terms
of the employment contract, we could be obligated to total future payments of
approximately $1,400,000 payable over ten years. If we are successful in our
claims against Mr. Kiser, we could be awarded as much as $5,600,000 plus
attorneys fees. Additionally, we would reverse all previously recorded
liabilities associated with this matter. See Item 3  Legal Proceedings 
Company Action against Former Officers.

Promissory Notes

Pursuant to an agreement dated December 31, 1991, between us and certain of our
current and former officers, we guaranteed a series of promissory notes payable
by such officers, including Messrs. Sherman and Kiser, to a former officer in
connection with her separation from us. Two of those notes, as subsequently
amended, remain outstanding. The principal of Mr. Shermans note is $57,000
and Mr. Kisers is $37,000. Both notes mature on March 1, 2003.

-49-



---



##### Table of Contents






Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

|            |  |                                                                                                                                                                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                       
|3.1a        |  | Restated Articles of Incorporation, as Amended, filed as Exhibit 4.1 to
the Form S-8 Registration Statement (No. 33-88666) and incorporated
herein by reference.                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                       
|3.1b        |  | Articles of Amendment to the Articles of Incorporation filed as Exhibit
3.1b to the Form 10-KSB for the year ended December 31, 1996 and
incorporated herein by reference.                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                       
|3.2         |  | Amended and Restated Bylaws adopted September 26, 2002.                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                       
|4.1         |  | Specimen Certificate for $.01 par value Common Stock filed as Exhibit
4.3 to the Form SB-2 Registration Statement (No. 33-74704-D) and
incorporated herein by reference.                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                       
|4.2         |  | Rights Agreement with American Securities Transfer, Inc. dated March
15, 1996 filed as Exhibit 4.2 to the Form 8-A/A Registration Statement
(No. 0-23866) and incorporated herein by reference.                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                       
|4.3         |  | Specimen Certificate for Right to Purchase $.01 par value Common Stock
filed as Exhibit 4.3 to the Form 8-A/A Registration Statement (No.
0-23866) and incorporated herein by reference.                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                       
|4.4         |  | Securities Purchase Agreement with the Purchasers dated March 4, 1997
filed as Exhibit 4.5 to the Form S-3 Registration Statement (No.
333-25173) and incorporated herein by reference.                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                       
|4.6         |  | Form of Warrant to Purchase Common Stock issued to the Purchasers under
the Securities Purchase Agreement dated March 4, 1997 filed as Exhibit
4.7 to the Form S-3 Registration Statement (No. 333-25173) and
incorporated herein by reference.                                                       
|            |  |                                                                                                                                                                                                                                                                                                       
|4.7         |  | Amendment No. 1 to Rights Agreement with American Securities Transfer,
Inc. dated October 7, 2002.                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                       
|10.1        |  | Executive Employment Agreement with Joseph H. Kiser, dated effective
June 1, 1997, filed as Exhibit 10.1 to the Form 10-QSB for the quarter
ended September 30, 1998 and incorporated herein by reference.                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                       
|10.2        |  | Lease Agreement dated January 1, 1987 with J.C. Enterprises for the
facility located at 5165 Peoria Street, Denver, Colorado, as amended on
December 6, 1990 and March 23, 1993, filed as Exhibit 10.15 to the Form
SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by
reference.
|            |  |                                                                                                                                                                                                                                                                                                       
|10.3        |  | Settlement Agreement with Joseph H. Kiser, David G. Sherman, Alwin E.
Branson and Carolyn Y. Kiser dated January 31, 1992, as amended March
23, 1993, filed as Exhibit 10.18 to the Form SB-2 Registration
Statement (No. 33-74704-D) and incorporated herein by reference.                           
|            |  |                                                                                                                                                                                                                                                                                                       
|10.4        |  | Profit Sharing Plan and Trust Agreement, as amended and restated
effective April 19, 1994 filed as Exhibit 10.16 to the Form 10-KSB for
the year ended December 31, 1994 and incorporated herein by reference.                                                                                        

-50-



---



##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                                                           
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                           
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.5        |  | Lease Agreement dated March 12, 1997 with Five K Investments for the
facility located at 4895 Peoria Street, Denver, Colorado filed as
Exhibit 10 to the Form 10-QSB for the quarter ended September 30, 1997
and incorporated herein by reference.                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.6        |  | Third Amendment to Lease Agreement dated January 1, 1987 with J.C.
Enterprises for the facility located at 5165 Peoria Street, Denver,
Colorado, as amended December 6, 1990, March 23, 1993, and October 30,
1998 filed as Exhibit 10.6 to the Form 10-QSB for the quarter ended
September 30, 1998 and incorporated herein by reference.
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.7        |  | Termination and Consulting Agreement with David G. Sherman dated August
1, 2000 filed as Exhibit 10.1 to the Form 8-K dated August 1, 2000 and
incorporated herein by reference.                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.8        |  | Employment Agreement with Timothy M. Micun dated March 2, 2001 filed as
Exhibit 10.26 to the Form 10-K for the fiscal year ended June 30, 2001
and incorporated herein by reference.                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.9        |  | Credit and Security Agreement with Wells Fargo Business Credit, Inc.
dated June 28, 2001 filed as Exhibit 99.2 to the Form 8-K dated June
28, 2001 and incorporated herein by reference.                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.10       |  | Patent and Trademark Security Agreement with Wells Fargo Business
Credit, Inc. dated June 28, 2001 filed as Exhibit 99.3 to the Form 8-K
dated June 28, 2001 and incorporated herein by reference.                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.11       |  | First Amendment to Credit and Security Agreement dated September 17,
2001 filed as Exhibit 10.1 to the Form 10-Q dated September 30, 2001
and incorporated herein by reference.                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.12       |  | Employee Stock Purchase Plan effective as of November 30, 2001 filed as
Exhibit 10.1 to the Form 10-Q for the quarter ended December 31, 2001
and incorporated herein by reference.                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.13       |  | Amended and Restated Tandem Stock Option and Stock Appreciation Rights
Plan, effective as of January 1, 2002 filed as Exhibit 10.1 to the Form
10-Q for the quarter ended March 31, 2002 and incorporated by reference
herein.                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.14       |  | Stock Grant Plan effective as of January 1, 2002 filed as Exhibit 10.2
to the Form 10-Q for the quarter ended March 31, 2002 and incorporated
herein by reference.                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.15       |  | Agreement between Vari-L Company, Inc. and Asvan Technology, LLC dated
January 25, 2002.                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.16       |  | Second Amendment to Credit and Security Agreement with Wells Fargo
Business Credit, Inc. dated February 8, 2002.                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.17       |  | Form of Indemnity Agreement by and among Vari-L Company, Inc. and each
of Gil J. Van Lunsen (dated June 1, 2001), Sarah L. Booher (dated July
5, 2001), David A. Lisowski (dated July 5, 2001), Anthony B. Petrelli
(dated July 5, 2001), David M. Risley (dated November 21, 2001) and
Robert C. Dixon (dated January 11, 2002)          
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.18       |  | Employment Agreement with Charles R. Bland dated August 1, 2002.                                                                                                                                                                                                                                                                          

-51-



---



##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.19       |  | Employment Agreement with Russell M. Crouch dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.20       |  | Employment Agreement with Richard P. Dutkiewicz dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.21       |  | Employment Agreement with Ernest C. Hafersat dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.22       |  | Employment Agreement with Janice E. Hyland dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.23       |  | Employment Agreement with Matthew D. Pope dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.24       |  | Employment Agreement with Larry M. Romero dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.25       |  | Employment Agreement with Timothy G. Schamberger dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.26       |  | Employment Agreement with Daniel J. Wilmot dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.27       |  | Engagement letter with Green, Manning & Bunch, Ltd. dated September 9,
2002.                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.28       |  | Forbearance Agreement and Third Amendment to Credit and Security
Agreement with Wells Fargo Business Credit, Inc. dated September 26,
2002 filed as Exhibit 99.1 to the Form 8-K dated October 1, 2002 and
incorporated herein by reference.                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.29       |  | Indemnity Agreement, dated October 2, 2002, by and among Vari-L Company
with Charles R. Bland.                                                                                                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.30       |  | Indemnity Agreement, dated October 2, 2002, by and among Vari-L
Company, Inc. with Richard P. Dutkiewicz.                                                                                                                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.31       |  | Memorandum of Understanding dated October 3, 2002 between Vari-L
Company, Inc. and the plaintiffs in Civil Action No. 00-S-1198 between
plaintiffs Michael Rasner, et al., on behalf of themselves and other
similarly situated and defendants Vari-L Company, Inc., Derek Bailey,
Joseph Kiser, David G. Sherman and Jon Clark in the United States
District Court, District of Colorado, by and through their respective
attorneys, for settlement of litigation against Vari-L Company, Inc.
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.32       |  | Loan Agreement with Sirenza Microdevices, Inc. dated October 7, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.33       |  | Security Agreement with Sirenza Microdevices, Inc. dated October 7,
2002.                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.34       |  | Exclusivity and Right of First Refusal Agreement with Sirenza
Microdevices, Inc. dated October 7, 2002.                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.35       |  | Resale Registration Rights Agreement with Sirenza Microdevices, Inc.
dated October 7, 2002.                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|23          |  | Consent of KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Financial Statement Schedule

Schedule II, Valuation and Qualifying Accounts, for the years ended June 30,
2002 and 2001 and six months ended June 30, 2000 (Unaudited)

-52-



---



##### Table of Contents



Reports on Form 8-K

A report on Form 8-K dated May 13, 2002 under Item 7 and 9 was filed with the
Commission on May 15, 2002. A report on Form 8-K dated May 13, 2002 under Item
5 and 7 was filed with the Commission on May 14, 2002. A report on Form 8-K
dated April 18, 2002 under Item 5 was filed with the Commission on April 18,
2002. No financial statements were filed with any of the foregoing reports.

-53-



---



##### Table of Contents






SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

| |  |                      |  |                                                        
| |  | -------------------- |  | -------------------------------------------------------
| |  | VARI-L COMPANY, INC.
| |  |                      |  |                                                        
| |  | By:                  |  | /s/ Charles R. Bland                                   
| |  |                      |  |                                                        
| |  |                      |  | Charles R. Bland, President and
Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.

|                                                                                                                                                   |  |                      
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------
|/s/ Charles R. Bland
Charles R. Bland, President, Chief Executive
Officer and Director, Principal Executive
Officer                                |  | Date: October 7, 2002
|                                                                                                                                                   |  |                      
|/s/ Richard P. Dutkiewicz
Richard P. Dutkiewicz, Vice President of
Finance and Chief Financial Officer,
Principal Financial and Accounting Officer |  | Date: October 7, 2002
|                                                                                                                                                   |  |                      
|/s/ Sarah L. Booher
Sarah L. Booher, Director                                                                                                      |  | Date: October 7, 2002
|                                                                                                                                                   |  |                      
|/s/ Robert C. Dixon
Robert C. Dixon, Director                                                                                                      |  | Date: October 7, 2002
|                                                                                                                                                   |  |                      
|/s/ David A. Lisowski
David A. Lisowski, Director                                                                                                  |  | Date: October 7, 2002
|                                                                                                                                                   |  |                      
|/s/ Anthony B. Petrelli
Anthony B. Petrelli, Director                                                                                              |  | Date: October 7, 2002
|                                                                                                                                                   |  |                      
|/s/ David M. Risley
David M. Risley, Director                                                                                                      |  | Date: October 7, 2002
|                                                                                                                                                   |  |                      
|/s/ Gil J. Van Lunsen
Gil J. Van Lunsen, Director                                                                                                  |  | Date: October 7, 2002

-54-



---



##### Table of Contents



CERTIFICATIONS

I, Charles R. Bland, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Vari-L
Company, Inc.                                                                                                                                                                                                                                                              
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which statements were made, not misleading with
respect to the period to the period covered by this annual report;
and
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.                                

Date: October 7, 2002

| |                                                        
| | -------------------------------------------------------
| | /s/ Charles R. Bland                                   
| | Charles R. Bland, President and
Chief Executive Officer

I, Richard P. Dutkiewicz, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Vari-L
Company, Inc.                                                                                                                                                                                                                                                              
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which statements were made, not misleading with
respect to the period to the period covered by this annual report;
and
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.                                

Date: October 7, 2002

| |                                                                             
| | ----------------------------------------------------------------------------
| | /s/ Richard P.
Dutkiewicz                                                   
| | Richard P. Dutkiewicz, Vice President
of Finance and Chief Financial Officer

-55-



---



##### Table of Contents



VARI-L COMPANY, INC.




Financial Statements

June 30, 2002 and 2001

(With Independent Auditors Report Thereon)





---



##### Table of Contents



VARI-L COMPANY, INC.

Financial Statements

June 30, 2002

Index

|                                                                                                                                              |                                                                                                                               |  |      |     | 
|--------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|Financial Statements:                                                                                                                         |                                                                                                                               |  |      |    
|                                                                                                                                              |                                                                                                                               |  |      |    
|                                                                                                                                              | Independent Auditors Report                                                                                                  |  |      | F-1 | 
|                                                                                                                                              |                                                                                                                               |  |      |    
|                                                                                                                                              | Balance Sheets, June 30, 2002 and June 30, 2001                                                                               |  |      | F-2 | 
|                                                                                                                                              |                                                                                                                               |  |      |    
|                                                                                                                                              | Statements of Operations, for the years ended June 30, 2002 and 2001
and six months ended June 30, 2000 (unaudited)           |  |      | F-3 | 
|                                                                                                                                              |                                                                                                                               |  |      |    
|                                                                                                                                              | Statements of Stockholders Equity, for the years ended June 30, 2002 and 2001
and six months ended June 30, 2000 (unaudited) |  |      | F-4 | 
|                                                                                                                                              |                                                                                                                               |  |      |    
|                                                                                                                                              | Statements of Cash Flows, for the years ended June 30, 2002 and 2001
and six months ended June 30, 2000 (unaudited)           |  |      | F-5 | 
|                                                                                                                                              |                                                                                                                               |  |      |    
|                                                                                                                                              | Notes to Financial Statements                                                                                                 |  |      | F-6 | 
|                                                                                                                                              |                                                                                                                               |  |      |    
|Schedule:                                                                                                                                     |                                                                                                                               |  |      |    
|                                                                                                                                              |                                                                                                                               |  |      |    
|Schedule II  Valuation and Qualifying Accounts for the years ended
June 30, 2002 and 2001 and the six months ended June 30, 2000 (unaudited) |                                                                                                                               |  | F-33 |    





---



##### Table of Contents



Independent Auditors Report

To the Board of Directors
Vari-L Company, Inc.:

We have audited the accompanying balance sheets of Vari-L Company, Inc. as of
June 30, 2002 and 2001 and the related statements of operations, stockholders
equity and cash flows for the years ended June 30, 2002 and 2001. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vari-L Company, Inc. as of
June 30, 2002 and 2001, and the results of its operations and cash flows for
the years ended June 30, 2002 and 2001, in conformity with accounting
principles generally accepted in the United States of America.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included
in Schedule IIValuation and Qualifying Accounts as of and for the years ended
June 30, 2002 and 2001 is presented for purposes of additional analysis and is
not a required part of the basic financial statements. Such information has
been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.

The accompanying statements of operations, stockholders equity, and cash flows
for the six months ended June 30, 2000 and the supplementary information
included in related Schedule IIValuation and Qualifying Accounts as of and for
the six months ended June 30, 2000 were not audited by us and, accordingly, we
do not express an opinion on them.

/s/ KPMG LLP

Denver, Colorado
August 23, 2002, except for notes 3, 13 and 14 as to which the date is October 7, 2002.

F-1



---



##### Table of Contents



VARI-L COMPANY, INC.

Balance Sheets

(in thousands of dollars)

|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |         |        |  | 
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | -------- |  | -------- | ------- | ------ |  | 
|                                                                          |                                                                                                                                 |                                            |        |         | June 30, |  | June 30,
|Assets                                                                    |                                                                                                                                 | 2002                                       |        | 2001   
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|Current assets:                                                           |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          | Cash and cash equivalents                                                                                                       |                                            | $      | 553     |          |  |          | 2,013   |       
|                                                                          | Trade accounts receivable, less allowance for doubtful
accounts of $132 and $279, respectively (note 3)                         |                                            |        | 2,589   |          |  |          | 5,942   |       
|                                                                          | Inventories (notes 2 and 3)                                                                                                     |                                            |        | 2,491   |          |  |          | 3,640   |       
|                                                                          | Prepaid expenses and other current assets                                                                                       |                                            |        | 617     |          |  |          | 645     |       
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          |                                                                                                                                 | Total current assets                       |        |         | 6,250    |  |          |         | 12,240 | 
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|Property and equipment (note 3):                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          | Machinery and equipment                                                                                                         |                                            |        | 12,263  |          |  |          | 11,616  |       
|                                                                          | Furniture and fixtures                                                                                                          |                                            |        | 839     |          |  |          | 822     |       
|                                                                          | Leasehold improvements                                                                                                          |                                            |        | 1,509   |          |  |          | 1,500   |       
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          |                                                                                                                                 |                                            | 14,611 |         |          |  | 13,938   |        
|                                                                          | Less accumulated depreciation and amortization                                                                                  |                                            |        | 8,211   |          |  |          | 6,362   |       
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          |                                                                                                                                 | Net property and equipment                 |        |         | 6,400    |  |          |         | 7,576  | 
|Intangible and other assets, net of accumulated amortization              |                                                                                                                                 |                                            | 744    |         |          |  | 638      |        
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          |                                                                                                                                 | Total assets                               |        | $       | 13,394   |  |          |         | 20,454 | 
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|Liabilities and Stockholders Equity                                      |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|Current liabilities:                                                      |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          | Trade accounts payable                                                                                                          |                                            | $      | 1,392   |          |  |          | 1,669   |       
|                                                                          | Accrued compensation                                                                                                            |                                            |        | 756     |          |  |          | 1,286   |       
|                                                                          | Other accrued expenses                                                                                                          |                                            |        | 492     |          |  |          | 428     |       
|                                                                          | Notes payable and current installments of long-term
obligations (note 3)                                                        |                                            |        | 1,611   |          |  |          | 1,764   |       
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          |                                                                                                                                 | Total current liabilities                  |        |         | 4,251    |  |          |         | 5,147  | 
|Long-term obligations (note 3)                                            |                                                                                                                                 |                                            | 55     |         |          |  | 1,321    |        
|Other liabilities (note 8)                                                |                                                                                                                                 |                                            | 149    |         |          |  | 157      |        
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          |                                                                                                                                 | Total liabilities                          |        |         | 4,455    |  |          |         | 6,625  | 
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|Settlement obligation to issue 2,000,000 shares
of common stock (note 13) |                                                                                                                                 |                                            | 1,200  |         |          |  |         |        
|Stockholders equity (note 6):                                            |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          | Common stock, $.01 par value, 50,000,000 shares authorized; 7,179,832 and
7,107,161 shares issued and outstanding, respectively |                                            |        | 72      |          |  |          | 71      |       
|                                                                          | Additional paid-in capital                                                                                                      |                                            |        | 36,945  |          |  |          | 36,829  |       
|                                                                          | Unamortized stock compensation cost                                                                                             |                                            |        | (31     | )        |  |          | (79     | )     
|                                                                          | Accumulated deficit                                                                                                             |                                            |        | (29,247 | )        |  |          | (22,992 | )     
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          |                                                                                                                                 | Total stockholders equity                 |        |         | 7,739    |  |          |         | 13,829 | 
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        
|Commitments and contingencies (notes 3, 6, 7, 8 and 12)                   |                                                                                                                                 |                                            |        |         |          |  |          |        
|                                                                          |                                                                                                                                 | Total liabilities and stockholders equity |        | $       | 13,394   |  |          |         | 20,454 | 
|                                                                          |                                                                                                                                 |                                            |        |         |          |  |          |        

See accompanying notes to financial statements.

F-2



---



##### Table of Contents



VARI-L COMPANY, INC.

Statements of Operations

(in thousands of dollars, except share and per share data)

|                                                       |                                                                                                     |                              |           |            |        |            |           |                |        |   |           |             |        |  
|------------------------------------------------------ | --------------------------------------------------------------------------------------------------- | ---------------------------- | --------- | ---------- | ------ | ---------- | --------- | -------------- | ------ | - | --------- | ----------- | ------ | -
|                                                       |                                                                                                     |                              |           | Year ended |        | Year ended |           | Six months    
|                                                       |                                                                                                     |                              |           | June 30,   |        | June 30,   |           | ended June 30,
|                                                       |                                                                                                     |                              |           | 2002       |        | 2001       |           | 2000          
|                                                       |                                                                                                     |                              |           |            |        |            |           |               
|                                                       |                                                                                                     |                              |           |            |        |            |           |                |        |   |           | (unaudited)
|Net sales                                              |                                                                                                     | $                            | 21,348    |            |        |            | 41,377    |                |        |   | 17,158    |            
|Cost of goods sold                                     |                                                                                                     |                              | 13,647    |            |        |            | 21,747    |                |        |   | 10,311    |            
|                                                       |                                                                                                     |                              |           |            |        |            |           |                |        |   |           |            
|                                                       |                                                                                                     | Gross profit                 |           |            | 7,701  |            |           |                | 19,630 |   |           |             | 6,847  |  
|                                                       |                                                                                                     |                              |           |            |        |            |           |                |        |   |           |            
|Operating expenses:                                    |                                                                                                     |                              |           |            |        |            |           |                |        |   |           |            
|                                                       | Selling                                                                                             |                              |           | 2,925      |        |            |           | 4,268          |        |   |           | 1,948       |       
|                                                       | General and administrative                                                                          |                              |           | 6,418      |        |            |           | 9,664          |        |   |           | 2,440       |       
|                                                       | Research and development                                                                            |                              |           | 2,669      |        |            |           | 4,021          |        |   |           | 3,003       |       
|                                                       | Expenses relating to accounting restatements and
related legal matters, net of recoveries (note 12) |                              |           | 1,805      |        |            |           | 2,387          |        |   |           | 469         |       
|                                                       |                                                                                                     |                              |           |            |        |            |           |                |        |   |           |            
|                                                       |                                                                                                     | Total operating expenses     |           |            | 13,817 |            |           |                | 20,340 |   |           |             | 7,860  |  
|                                                       |                                                                                                     |                              |           |            |        |            |           |                |        |   |           |            
|                                                       |                                                                                                     | Operating loss               |           |            | (6,116 | )          |           |                | (710   | ) |           |             | (1,013 | )
|Other income (expense):                                |                                                                                                     |                              |           |            |        |            |           |                |        |   |           |            
|                                                       | Interest income                                                                                     |                              |           | 48         |        |            |           | 416            |        |   |           | 315         |       
|                                                       | Interest expense                                                                                    |                              |           | (199       | )      |            |           | (1,062         | )      |   |           | (453        | )     
|                                                       | Other, net                                                                                          |                              |           | 12         |        |            |           | (43            | )      |   |           | (28         | )     
|                                                       |                                                                                                     |                              |           |            |        |            |           |                |        |   |           |            
|                                                       |                                                                                                     | Total other income (expense) |           |            | (139   | )          |           |                | (689   | ) |           |             | (166   | )
|                                                       |                                                                                                     |                              |           |            |        |            |           |                |        |   |           |            
|                                                       |                                                                                                     | Net loss                     |           | $          | (6,255 | )          |           |                | (1,399 | ) |           |             | (1,179 | )
|                                                       |                                                                                                     |                              |           |            |        |            |           |                |        |   |           |            
|Loss per share, basic and diluted                      |                                                                                                     | $                            | (0.87     | )          |        |            | (0.20     | )              |        |   | (0.17     | )          
|                                                       |                                                                                                     |                              |           |            |        |            |           |                |        |   |           |            
|Weighted average shares outstanding, basic and diluted |                                                                                                     |                              | 7,152,342 |            |        |            | 7,083,866 |                |        |   | 7,042,247 |            
|                                                       |                                                                                                     |                              |           |            |        |            |           |                |        |   |           |            

See accompanying notes to financial statements.

F-3



---



##### Table of Contents



VARI-L COMPANY, INC.

Statements of Stockholders Equity

Year ended June 30, 2002 and 2001 and six months ended June 30, 2000

(in thousands of dollars, except share data)

|                                                                   |  |              |           |            |  |              |    |             |  |               |        |        |  |             |        |   |  |  |         |   |  |  |        |  
|------------------------------------------------------------------ |  | ------------ | --------- | ---------- |  | ------------ | -- | ----------- |  | ------------- | ------ | ------ |  | ----------- | ------ | - |  |  | ------- | - |  |  | ------ | -
|                                                                   |  |              |           |            |  |              |    |             |  |               |        |        |  | Unamortized |        |   |  |  |         |   |  | 
|                                                                   |  | Common stock |           | Additional |  | stock        |    |             |  |               |        | Total 
|                                                                   |  |              |           | paid-in    |  | compensation |    | Accumulated |  | stockholders'
|                                                                   |  | Shares       |           | Amount     |  | capital      |    | cost        |  | deficit       |        | equity
|                                                                   |  |              |           |            |  |              |    |             |  |               |        |       
|Balance, December 31, 1999 (unaudited)                             |  |              | 6,945,483 |            |  | $            | 70 |             |  |               | 40,449 |        |  |             | (5,733 | ) |  |  | (20,414 | ) |  |  | 14,372 |  
|Stock options exercised (unaudited)                                |  |              | 116,569   |            |  |              | 1  |             |  |               | 931    |        |  |             |       |   |  |  |        |   |  |  | 932    |  
|Common stock issued under employee stock purchase plan (unaudited) |  |              | 7,471     |            |  |              |   |             |  |               | 50     |        |  |             |       |   |  |  |        |   |  |  | 50     |  
|Common stock issued under stock award plan (unaudited)             |  |              | 900       |            |  |              |   |             |  |               | 17     |        |  |             |       |   |  |  |        |   |  |  | 17     |  
|Stock options forfeited (unaudited)                                |  |              |          |            |  |              |   |             |  |               | (922   | )      |  |             | 922    |   |  |  |        |   |  |  |       |  
|Amortization of stock compensation cost (unaudited)                |  |              |          |            |  |              |   |             |  |               |       |        |  |             | 493    |   |  |  |        |   |  |  | 493    |  
|Net loss (unaudited)                                               |  |              |          |            |  |              |   |             |  |               |       |        |  |             |       |   |  |  | (1,179  | ) |  |  | (1,179 | )
|                                                                   |  |              |           |            |  |              |    |             |  |               |        |        |  |             |        |   |  |  |         |   |  |  |        |  
|Balance, June 30, 2000                                             |  |              | 7,070,423 |            |  |              | 71 |             |  |               | 40,525 |        |  |             | (4,318 | ) |  |  | (21,593 | ) |  |  | 14,685 |  
|Common stock issued under employee stock purchase plan             |  |              | 35,388    |            |  |              |   |             |  |               | 45     |        |  |             |       |   |  |  |        |   |  |  | 45     |  
|Common stock issued under stock award plan                         |  |              | 1,350     |            |  |              |   |             |  |               | 11     |        |  |             |       |   |  |  |        |   |  |  | 11     |  
|Stock options forfeited                                            |  |              |          |            |  |              |   |             |  |               | (219   | )      |  |             | 219    |   |  |  |        |   |  |  |       |  
|Amortization of stock compensation cost                            |  |              |          |            |  |              |   |             |  |               |       |        |  |             | 487    |   |  |  |        |   |  |  | 487    |  
|Reversal of stock compensation due to reformation (note 5)         |  |              |          |            |  |              |   |             |  |               | (3,533 | )      |  |             | 3,533  |   |  |  |        |   |  |  |       |  
|Net loss                                                           |  |              |          |            |  |              |   |             |  |               |       |        |  |             |       |   |  |  | (1,399  | ) |  |  | (1,399 | )
|                                                                   |  |              |           |            |  |              |    |             |  |               |        |        |  |             |        |   |  |  |         |   |  |  |        |  
|Balance June 30, 2001                                              |  |              | 7,107,161 |            |  |              | 71 |             |  |               | 36,829 |        |  |             | (79    | ) |  |  | (22,992 | ) |  |  | 13,829 |  
|Common stock issued under employee stock purchase plan             |  |              | 76,011    |            |  |              | 1  |             |  |               | 123    |        |  |             |       |   |  |  |        |   |  |  | 124    |  
|Common stock issued under stock award plan                         |  |              | 2,900     |            |  |              |   |             |  |               | 4      |        |  |             |       |   |  |  |        |   |  |  | 4      |  
|Common stock repurchased and retired                               |  |              | (6,240    | )          |  |              |   |             |  |               | (7     | )      |  |             |       |   |  |  |        |   |  |  | (7     | )
|Stock options forfeited                                            |  |              |          |            |  |              |   |             |  |               | (4     | )      |  |             | 4      |   |  |  |        |   |  |  |       |  
|Amortization of stock compensation cost                            |  |              |          |            |  |              |   |             |  |               |       |        |  |             | 44     |   |  |  |        |   |  |  | 44     |  
|Net loss                                                           |  |              |          |            |  |              |   |             |  |               |       |        |  |             |       |   |  |  | (6,255  | ) |  |  | (6,255 | )
|                                                                   |  |              |           |            |  |              |    |             |  |               |        |        |  |             |        |   |  |  |         |   |  |  |        |  
|Balance June 30, 2002                                              |  |              | 7,179,832 |            |  | $            | 72 |             |  |               | 36,945 |        |  |             | (31    | ) |  |  | (29,247 | ) |  |  | 7,739  |  
|                                                                   |  |              |           |            |  |              |    |             |  |               |        |        |  |             |        |   |  |  |         |   |  |  |        |  

See accompanying notes to financial statements.

F-4



---



##### Table of Contents



VARI-L COMPANY, INC.

Statements of Cash Flows

(in thousands of dollars)

|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |         |             |        |  
|------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------ | ------ | ---------- | ------ | ---------- | ------- | -------------- | ------ | ------ | ------- | ----------- | ------ | -
|                                                                                      |                                                                 |                                           |                                                  |        | Year ended |        | Year ended |         | Six months    
|                                                                                      |                                                                 |                                           |                                                  |        | June 30,   |        | June 30,   |         | ended June 30,
|                                                                                      |                                                                 |                                           |                                                  |        | 2002       |        | 2001       |         | 2000          
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |               
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |         | (unaudited)
|Net loss                                                                              |                                                                 | $                                         | (6,255                                           | )      |            |        | (1,399     | )       |                |        | (1,179 | )      
|Adjustments to reconcile net loss to cash provided by (used in)
operating activities: |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|                                                                                      | Depreciation and amortization                                   |                                           |                                                  | 2,095  |            |        |            | 1,756   |                |        |        | 732     |            
|                                                                                      | Loss on disposal of assets                                      |                                           |                                                  | 30     |            |        |            | 47      |                |        |        |        |            
|                                                                                      | Common stock issued under profit sharing and stock award plans  |                                           |                                                  | 4      |            |        |            | 11      |                |        |        | 17      |            
|                                                                                      | Amortization of stock compensation                              |                                           |                                                  | 44     |            |        |            | 487     |                |        |        | 493     |            
|                                                                                      | Settlement obligation to issue 2,000,000 shares of common stock |                                           |                                                  | 1,200  |            |        |            |        |                |        |        |        |            
|                                                                                      | Changes in operating assets and liabilities:                    |                                           |                                                  |        |            |        |            |         |                |        |        |         |            
|                                                                                      |                                                                 | Trade accounts receivable, net            |                                                  |        | 3,353      |        |            |         | (61            | )      |        |         | (1,805      | )     
|                                                                                      |                                                                 | Inventories, net                          |                                                  |        | 1,149      |        |            |         | 3,795          |        |        |         | (2,970      | )     
|                                                                                      |                                                                 | Prepaid expenses and other current assets |                                                  |        | 28         |        |            |         | (454           | )      |        |         | (168        | )     
|                                                                                      |                                                                 | Trade accounts payable                    |                                                  |        | (277       | )      |            |         | (2,513         | )      |        |         | 1,797       |       
|                                                                                      |                                                                 | Accrued compensation                      |                                                  |        | (530       | )      |            |         | (214           | )      |        |         | (665        | )     
|                                                                                      |                                                                 | Other accrued expenses and liabilities    |                                                  |        | 56         |        |            |         | 360            |        |        |         | 169         |       
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|                                                                                      |                                                                 |                                           | Total adjustments                                |        |            | 7,152  |            |         |                | 3,214  |        |         |             | (2,400 | )
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|                                                                                      |                                                                 |                                           | Cash provided by (used in) operating activities  |        |            | 897    |            |         |                | 1,815  |        |         |             | (3,579 | )
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|Cash flows from investing activities:                                                 |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|                                                                                      | Purchases of property and equipment                             |                                           |                                                  | (953   | )          |        |            | (2,034  | )              |        |        | (1,699  | )          
|                                                                                      | Proceeds from sale of equipment                                 |                                           |                                                  | 59     |            |        |            | 25      |                |        |        |        |            
|                                                                                      | Increase (decrease) in other assets                             |                                           |                                                  | (102   | )          |        |            | 27      |                |        |        | (85     | )          
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|                                                                                      |                                                                 |                                           | Cash used in investing activities                |        |            | (996   | )          |         |                | (1,982 | )      |         |             | (1,784 | )
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|Cash flows from financing activities:                                                 |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|                                                                                      | Increase (decrease) in bank overdraft                           |                                           |                                                  |       |            |        |            | (321    | )              |        |        | 321     |            
|                                                                                      | Proceeds from notes payable                                     |                                           |                                                  | 7,257  |            |        |            | 1,480   |                |        |        | 11,500  |            
|                                                                                      | Payments of notes payable                                       |                                           |                                                  | (8,738 | )          |        |            | (11,500 | )              |        |        | (11,107 | )          
|                                                                                      | Proceeds from long-term obligations                             |                                           |                                                  | 484    |            |        |            | 1,500   |                |        |        |        |            
|                                                                                      | Payments of long-term obligations                               |                                           |                                                  | (422   | )          |        |            | (54     | )              |        |        | (24     | )          
|                                                                                      | Payment of debt issue costs                                     |                                           |                                                  | (59    | )          |        |            |        |                |        |        |        |            
|                                                                                      | Proceeds from stock options exercised                           |                                           |                                                  |       |            |        |            |        |                |        |        | 932     |            
|                                                                                      | Proceeds from common stock issued under stock purchase plan     |                                           |                                                  | 124    |            |        |            | 45      |                |        |        | 50      |            
|                                                                                      | Common stock repurchased and retired                            |                                           |                                                  | (7     | )          |        |            |        |                |        |        |        |            
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|                                                                                      |                                                                 |                                           | Cash provided by (used in) financing activities  |        |            | (1,361 | )          |         |                | (8,850 | )      |         |             | 1,672  |  
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|                                                                                      |                                                                 |                                           | Increase (decrease) in cash and cash equivalents |        |            | (1,460 | )          |         |                | (9,017 | )      |         |             | (3,691 | )
|Cash and cash equivalents at beginning of period                                      |                                                                 |                                           | 2,013                                            |        |            |        | 11,030     |         |                |        | 14,721 |        
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|Cash and cash equivalents at end of period                                            |                                                                 | $                                         | 553                                              |        |            |        | 2,013      |         |                |        | 11,030 |        
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|Supplemental disclosure of cash flow information:                                     |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|                                                                                      | Cash paid for interest                                          |                                           | $                                                | 159    |            |        |            | 1,217   |                |        |        | 315     |            
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        
|                                                                                      | Cash paid for income taxes                                      |                                           | $                                                |       |            |        |            |        |                |        |        |        |            
|                                                                                      |                                                                 |                                           |                                                  |        |            |        |            |         |                |        |        |        

See accompanying notes to financial statements.

F-5



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)

(1) Summary of Significant Accounting Policies



| | (a) |  | Description of Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Vari-L Company, Inc. (the Company) was founded in 1953 and is a
manufacturer of electronic components. The Company designs,
manufactures, and markets radio frequency and microwave signal source
and processing components and other electronic devices used in the
communications industry. The Company operates as a single business
segment, and its products are sold to original equipment manufacturers
of communication equipment who market their products in both
commercial and military markets in the United States and
internationally. See note 14 for a discussion regarding liquidity and
subsequent events.                          
|
| | (b) |  | Change in Fiscal Year End                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |     |  | The Companys Board of Directors approved a change in the Companys
year end to June 30, effective in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (c) |  | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |     |  | Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with accounting principles
generally accepted in the United States of America. Significant
assumptions inherent in the preparation of the accompanying financial
statements include, but are not limited to, revenue recognition and
allowances for doubtful accounts, the provision for excess and
obsolete inventories, and commitments and contingencies. Actual
results could differ from those estimates.
|
| | (d) |  | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |     |  | Certain reclassifications have been made to prior year amounts to
conform to the current years presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (d) |  | Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |     |  | For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with maturities of three months or less
at the date of purchase to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (e) |  | Marketable Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |     |  | Marketable securities, consisting of an investment in Stancorp
Financial Group Common Stock, is classified as held for trading and is
carried at a fair market value of $35,000 as of June 30, 2002.
Unrealized gains and losses are reported as other income (expense) in
the                                                                                                                                                                                                                                                                                                                                                                         

F-6



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |     |  | statements of operations. The balance sheet classification of the
Companys marketable securities is included in other current assets.                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (f) |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |     |  | Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. A provision is
recorded to reduce excess and obsolete inventories to their estimated
net realizable value. The provision for excess and obsolete inventory
included in cost of goods sold was $564,000 and $1,362,000 for the
years ended June 30, 2002 and 2001, respectively and $444,000 for the
six months ended June 30, 2000.                                                                                                 
|
| | (g) |  | Property and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |     |  | Property and equipment are stated at cost. Plant and equipment under
capital leases are recorded initially at the present value of the
minimum lease payments. Depreciation and amortization of property and
equipment is computed using the straight-line method over estimated
useful lives of the respective assets, which range from 3 to 10 years.                                                                                                                                                                                             
|
| |     |  | Included in property and equipment are assets under capital leases of
$165,000 at June 30, 2002 and 2001. Accumulated amortization of assets
under capital leases was $137,000 and $85,000 at June 30, 2002 and
2001, respectively. Amortization of assets under capital leases is
included in depreciation expense.                                                                                                                                                                                                                                
|
| |     |  | During the years ended June 30, 2002 and 2001 and six months ended
June 30, 2000, equipment was acquired under capital lease financing
transactions in the amounts of $0, $35,000, and $34,000 respectively.                                                                                                                                                                                                                                                                                                                                        
|
| | (h) |  | Goodwill and Other Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |     |  | In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets. Under SFAS No. 142, goodwill and
intangible assets with indefinite useful lives will no longer be
amortized, but will instead be tested periodically for impairment.
SFAS No. 142 also requires that intangible assets with definite lives
be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed periodically for impairment.
|
| |     |  | Goodwill of $112,000 resulting from the acquisition of certain assets
of Asvan Technologies, LLC, is recorded at cost and is included in
other assets. In accordance with SFAS No. 142, the Company does not
amortize goodwill.                                                                                                                                                                                                                                                                                                                     
|
| |     |  | Intangible assets, consisting of patents and trademarks, are recorded
at cost and are included in other assets. Intangible assets of
$338,000 and $368,000, net of accumulated amortization of $141,000 and
$109,000 at June 30, 2002 and 2001, respectively, are being amortized
on a straight-line basis over an estimated useful life of 10 years.                                                                                                                                                                                               

F-7



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |     |  | The Company reviews goodwill and intangible assets for impairment at
least annually. For the year ended June 30, 2002, the Company
evaluated the recoverability of goodwill and intangible assets and
recorded impairment charges of $30,000 related to patents no longer in
use.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (i) |  | Stock Compensation Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |     |  | The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations,
in accounting for its fixed award stock options. As such,
compensation expense is recorded only if the current market price of
the underlying common stock exceeds the exercise price of the option
on the date of grant. SFAS No. 123, Accounting for Stock-Based
Compensation, established accounting and disclosure requirements using
a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has
elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure
requirements of SFAS No. 123.
|
| | (j) |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |     |  | Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and net operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.                                                                                                                        
|
| |     |  | Deferred tax assets are reduced by a valuation allowance for the
portion of such assets for which it is more likely than not the amount
will not be realized. Deferred tax assets and liabilities are
classified as current or noncurrent based on the classification of the
underlying asset or liability giving rise to the temporary difference
or the expected date of utilization of the carryforwards.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (k) |  | Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | The Company computes earnings (loss) per share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128,
Earnings Per Share(SFAS 128). SFAS 128 requires the disclosure of
basic earnings per share and diluted earnings per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing
income available to common stockholders by the weighted average number
of common shares outstanding increased for potentially dilutive common
shares outstanding. The effect of potentially dilutive common shares
represented by stock options                                                                                                                                                                                                                                                                                                                                                                                      

F-8



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |     |  | outstanding (see note 5) was anti-dilutive for the years ended June
30, 2002 and 2001 and six months ended June 30, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (l) |  | Research and Development and Advertising Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | Research and development and advertising costs are expensed when
incurred. Research and development expense for the years ended June
30, 2002 and 2001 and six months ended June 30, 2000 totaled
$2,669,000, $4,286,000 and $3,003,000, respectively. This amount is
comprised of product development expenses of $1,856,000, $2,252,000
and $1,046,000, respectively, which are the design costs associated
with customized products for customers and research expenses of
$813,000, $2,034,000 and $1,957,000, respectively, which are costs
associated with the development of new product lines. Advertising
costs were $220,000, $230,000 and $164,000 for the years ended June
30, 2002 and 2001 and six months ended June 30, 2000, respectively.
|
| | (m) |  | Long-Lived Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |     |  | The Company reviews long-lived assets and identifiable intangibles for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the undiscounted
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.                                                       
|
| | (n) |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |     |  | Revenues are recognized at the time of shipment. Provisions are made
for sales discounts and allowances at the time product sales are
recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | (o) |  | Product Warranties and Returns                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | Product warranties and returns are provided for in the period the
products are sold. The Company provides a one-year warranty on most
of its products. As the majority of its products are built to
customer specifications, the Company generally does not accept product
returns. Historically, warranty expense and product returns have been
insignificant.                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (p) |  | Unaudited Financial Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |     |  | The accompanying financial statements of the Company for the six
months ended June 30, 2000 have been prepared without audit. In the
opinion of management, the accompanying unaudited financial statements
include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial position and
results of operations for the periods presented.                                                                                                                                                                                                                                                                                                                                                            

F-9



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)

(2) Inventories

Inventories, net of allowances for excess and obsolete items, consist of
the following:

|                |  |                           |       |          |  |  |       | 
|--------------- |  | ------------------------- | ----- | -------- |  |  | ----- | 
|                |  | June 30,                  |       | June 30,
|                |  | 2002                      |       | 2001    
|                |  |                           |       |         
|                |  | (in thousands of dollars)
|Finished goods  |  | $                         | 658   |          |  |  | 463   | 
|Work-in-process |  |                           | 394   |          |  |  | 623   | 
|Raw materials   |  |                           | 1,439 |          |  |  | 2,554 | 
|                |  |                           |       |          |  |  |       | 
|                |  | $                         | 2,491 |          |  |  | 3,640 | 
|                |  |                           |       |          |  |  |       | 

(3) Notes Payable and Long-term Obligations

Notes payable and long-term obligations consist of the following:

|                                         |                |                       |       |                           |    |          |       |       |       | 
|---------------------------------------- | -------------- | --------------------- | ----- | ------------------------- | -- | -------- | ----- | ----- | ----- | 
|                                         |                |                       |       | June 30,                  |    | June 30,
|                                         |                |                       |       | 2002                      |    | 2001    
|                                         |                |                       |       |                           |    |         
|                                         |                |                       |       | (in thousands of dollars)
|Notes payable under Credit Facility (a): |                |                       |       |                           |    |          |       |      
|                                         | Revolving loan |                       | $     |                          |    |          |       | 1,481 |      
|                                         | Term loan      |                       |       | 1,498                     |    |          |       | 1,500 |      
|Promissory notes (b)                     |                |                       | 139   |                           |    |          | 21    |      
|Capital lease obligations (c)            |                |                       | 29    |                           |    |          | 83    |      
|                                         |                |                       |       |                           |    |          |       |       |       | 
|                                         |                |                       | 1,666 |                           |    |          | 3,085 |      
|Less current installments                |                |                       | 1,611 |                           |    |          | 1,764 |      
|                                         |                |                       |       |                           |    |          |       |       |       | 
|                                         |                | Long-term obligations |       | $                         | 55 |          |       |       | 1,321 | 
|                                         |                |                       |       |                           |    |          |       |       |       | 

Future maturities of notes payable and long-term obligations as of June 30,
2002 are as follows (in thousands of dollars):

|                     |      |   |       |       | 
|-------------------- | ---- | - | ----- | ----- | 
|Year ending June 30: |      |   |       |      
|                     | 2003 |   | $     | 1,611 | 
|                     | 2004 |   |       | 55    | 
|                     | 2005 |   |       |      | 
|                     |      |   |       |       | 
|                     |      | $ | 1,666 |      
|                     |      |   |       |       | 

F-10



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| | (a) |  | Bank Credit Facilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On June 28, 2001, the Company entered into a credit agreement with
Wells Fargo Business Credit, Inc. (Wells Fargo) (the Credit
Facility), consisting of, among other things, a revolving loan
(Revolving Loan) and a term loan (Term Loan). During fiscal 2002,
the Company was required to negotiate amendments to avoid potential
default under the Credit Facility due to the continuing softness of
demand for the Companys products and within the wireless industry.                                                                                                                                                             
|
| |     |  | In late May 2002, the Company determined that it was not in compliance
with the minimum tangible net worth of the loan agreement with Wells
Fargo, which constitutes an event of default. In early July 2002, the
Company received notice from Wells Fargo confirming that an event of
default had occurred. Accordingly, the amounts outstanding as of June
30, 2002 have been classified as current. A default interest rate of
3% over the floating rate is currently being charged against amounts
outstanding under the loan agreement. No other default remedies were
sought by the lender.                                               
|
| |     |  | On September 26, 2002, the Company entered into a forbearance
agreement with Wells Fargo that is in effect until November 15, 2002.
The forbearance agreement allows the Company to borrow amounts on the
Revolving Loan up to the lesser of the amount available under a
borrowing base formula or $2,500,000. The Credit facility is secured
by substantially all of the Companys accounts receivable,
inventories, intellectual property and equipment. The forbearance
agreement also imposes certain financial covenants along with
limitations on capital expenditures and investments, and restricts
certain payments and distributions.
|
| |     |  | The Company is required to pay an unused credit line fee of 0.25% per
annum on the average daily unused amount. The unused line fee is
payable monthly in arrears. Additionally, the Company is required to
pay a minimum interest charge on the Credit Facility of $30,000 per
calendar quarter.                                                                                                                                                                                                                                                                                                                                               
|
| |     |  | At June 30, 2002, the interest rates on the Revolving Loan and the
Term Loan were 8.75% and 10.25%, respectively. The Company had
additional borrowing availability of $1.8 million under the Revolving
Loan.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |     |  | Debt issuance costs are being amortized using the straight-line method
over the term of the Revolving Loan. Amortization expense of $23,000
and $0 related to issuance costs for the Credit Facility has been
recorded for the years ended June 30, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                
|
| |     |  | As explained in note 14, on October 7, 2002, the Company entered into
a loan agreement with Sirenza Microdevices, Inc. (Sirenza). The loan
agreement provides for a $5.3 million secured bridge loan (the Loan
Facility). The Loan Facility is secured by substantially all of the
Companys assets, matures on September 25, 2003 and has an annual
interest rate of 25.0%. Proceeds from the Loan Facility will be used
to pay amounts outstanding to Wells Fargo and to fund the Companys
operations over the next twelve months.                                                                                                       

F-11



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| | (b) |  | Promissory Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company has a two year promissory note payable to Asvan
Technologies, LLC., a related party, in the amount of $175,000 secured
by a letter of credit. The note matures on January 30, 2004 and has
principal and interest payable in equal monthly installments of $7,300
at an annual rate of 10%.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (c) |  | Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | The Company is obligated under various capital leases for certain
machinery and equipment that expire at various dates during the next
two years. The Company also has noncancelable operating leases
primarily for corporate office and manufacturing facilities. Rent
expense was $802,000 and $835,000 for the years ended June 30, 2002
and 2001, respectively and $389,000 for the six months ended June 30,
2000.                                                                                                                                                                                                                                                                                                                                    
|
| |     |  | The Company currently leases a manufacturing facility under a
long-term operating lease. Additionally, the Company leased a separate
facility under a long-term operating lease that expired in July 2002.
Both of these facilities were leased from our former Chief Scientific
Officer and from a partnership in which he is a partner. As described
in Note 13, the Company is currently engaged in litigation with the
landlord of the facilities. The manufacturing facility lease expires
in 2005 and contains options to extend the terms of the lease. Total
rent expense associated with both of the leases was $133,000 and
$169,000 for the years ended June 30, 2002 and 2001, respectively and
$84,000 for the six months ended June 30, 2000.

F-12



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



|
|
|

|                                                              |            |                                                                  |    |                           |    |           |     |       |       | 
|------------------------------------------------------------- | ---------- | ---------------------------------------------------------------- | -- | ------------------------- | -- | --------- | --- | ----- | ----- | 
|                                                              |            |                                                                  |    | Capital                   |    | Operating
|                                                              |            |                                                                  |    | leases                    |    | leases   
|                                                              |            |                                                                  |    |                           |    |          
|                                                              |            |                                                                  |    | (in thousands of dollars)
|Year ending June 30,                                          |            | $                                                                | 27 |                           |    |           | 794 |      
|                                                              | 2003       | $                                                                | 27 |                           |    |           | 794 |      
|                                                              | 2004       |                                                                  | 4  |                           |    |           | 624 |      
|                                                              | 2005       |                                                                  |   |                           |    |           | 624 |      
|                                                              | 2006       |                                                                  |   |                           |    |           | 537 |      
|                                                              | 2007       |                                                                  |   |                           |    |           | 494 |      
|                                                              | Thereafter |                                                                  |    |                          |    |           |     | 3,049 |      
|                                                              |            |                                                                  |    |                           |    |           |     |       |       | 
|                                                              |            | Total minimum lease payments                                     |    |                           | 31 |           |     | $     | 6,122 | 
|                                                              |            |                                                                  |    |                           |    |           |     |       |       | 
|Less amount representing interest                             |            |                                                                  | 2  |                           |    |           |     |      
|                                                              |            |                                                                  |    |                           |    |           |    
|                                                              |            | Present value of net minimum capital
lease payments              |    |                           | 29 |           |     |       |       | 
|Less current installments of obligations under
capital leases |            |                                                                  | 25 |                           |    |           |     |      
|                                                              |            |                                                                  |    |                           |    |           |    
|                                                              |            | Obligations under capital leases,
excluding current installments |    | $                         | 4  |           |     |       |       | 
|                                                              |            |                                                                  |    |                           |    |           |    



| | (4) |  | Acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On January 25, 2002, the Company acquired certain assets of Asvan
Technologies, LLC (Asvan) for approximately $313,000. The purchase price
included $100,000 in cash, a two year promissory note in the amount of
$175,000 secured by a letter of credit and approximately $38,000 in direct
costs of acquisition. The note has principal and interest payable in equal
monthly installments of $7,300 at an annual rate of 10%. The fair value of
assets acquired was approximately $201,000, resulting in goodwill of
approximately $112,000. The goodwill is expected to be fully deductible for
tax purposes.
|
| | (5) |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |     |  | For the years ended June 30, 2002 and 2001 and six months ended June 30,
2000, the Company recorded no provision for federal or state income taxes
since a valuation allowance was provided for the income tax benefit of the
net operating losses incurred during those periods.                                                                                                                                                                                                                                                                                                                                  

F-13



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)

Income tax benefit attributable to net loss differed from the amounts
computed by applying the U.S. federal income tax rate of 35% to pretax loss
as a result of the following:

|                                                                                                                 |  |  |                           |        |            |  |                |      |   |  |  |      |   |  |  | 
|---------------------------------------------------------------------------------------------------------------- |  |  | ------------------------- | ------ | ---------- |  | -------------- | ---- | - |  |  | ---- | - |  |  | 
|                                                                                                                 |  |  | Year ended                |        | Year ended |  | Six months     |      |   |  | 
|                                                                                                                 |  |  | June 30,                  |        | June 30,   |  | ended June 30, |      |   |  | 
|                                                                                                                 |  |  | 2002                      |        | 2001       |  | 2000           |      |   |  | 
|                                                                                                                 |  |  |                           |        |            |  |                |      |   |  | 
|                                                                                                                 |  |  | (in thousands of dollars) |        |            |  |               
|Income tax benefit at federal
statutory tax rate                                                                 |  |  | $                         | (2,189 | )          |  |                | (490 | ) |  |  | (413 | )
|State income taxes, net of federal
tax effect                                                                    |  |  |                           | (188   | )          |  |                | (43  | ) |  |  | (36  | )
|Change in the beginning of year
balance of the valuation for
deferred tax assets allocated to
income tax expense |  |  |                           | (225   | )          |  |                |     |   |  |  |     |  
|Officers life insurance                                                                                         |  |  |                           | 46     |            |  |                | 53   |   |  |  | 18   |  
|Non-deductible meals and
entertainment expenses                                                                  |  |  |                           | 8      |            |  |                | 11   |   |  |  | 2    |  
|Other                                                                                                            |  |  |                           |       |            |  |                | 5    |   |  |  | (15  | )
|Increase in valuation allowance
for net deferred tax assets                                                      |  |  |                           | 2,548  |            |  |                | 464  |   |  |  | 444  |  
|                                                                                                                 |  |  |                           |        |            |  |                |      |   |  |  |      |   |  |  | 
|Actual income tax expense (benefit)                                                                              |  |  | $                         |       |            |  |                |     |   |  |  |     |  
|                                                                                                                 |  |  |                           |        |            |  |                |      |   |  |  |      |   |  |  | 

F-14



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)

Significant components of deferred tax balances were as follows:

|                          |                                                                             |                                       |        |                           |      |          |        |         |      |  
|------------------------- | --------------------------------------------------------------------------- | ------------------------------------- | ------ | ------------------------- | ---- | -------- | ------ | ------- | ---- | -
|                          |                                                                             |                                       |        | June 30,                  |      | June 30,
|                          |                                                                             |                                       |        | 2002                      |      | 2001    
|                          |                                                                             |                                       |        |                           |      |         
|                          |                                                                             |                                       |        | (in thousands of dollars)
|Deferred tax assets:      |                                                                             |                                       |        |                           |      |          |        |        
|                          | Allowance for doubtful accounts recognized for
financial reporting purposes |                                       | $      | 50                        |      |          |        | 106     |     
|                          | Inventory reserve recognized for financial
reporting purposes               |                                       |        | 959                       |      |          |        | 923     |     
|                          | Intangible assets, due to differences in
amortization methods               |                                       |        | 21                        |      |          |        | 16      |     
|                          | Other accounts and reserves accrued for financial
reporting purposes        |                                       |        | 435                       |      |          |        | 412     |     
|                          | Stock compensation expense recognized for
financial reporting purposes      |                                       |        | 361                       |      |          |        | 373     |     
|                          | Accrual for shareholder lawsuit                                             |                                       |        | 551                       |      |          |        |        |     
|                          |                                                                             |                                       |        |                           |      |          |        |         |      |  
|                          | Net operating loss carryforwards                                            |                                       |        | 13,010                    |      |          |        | 11,067  |     
|                          |                                                                             |                                       |        |                           |      |          |        |         |      |  
|                          |                                                                             |                                       | 15,387 |                           |      |          | 12,897 |        
|                          | Less valuation allowance                                                    |                                       |        | (15,082                   | )    |          |        | (12,534 | )   
|                          |                                                                             |                                       |        |                           |      |          |        |         |      |  
|                          |                                                                             | Total deferred tax assets             |        | $                         | 305  |          |        |         | 363  |  
|                          |                                                                             |                                       |        |                           |      |          |        |         |      |  
|Deferred tax liabilities: |                                                                             |                                       |        |                           |      |          |        |        
|                          | Property and equipment, due to differences in
depreciation methods          |                                       | $      | (305                      | )    |          |        | (363    | )   
|                          |                                                                             |                                       |        |                           |      |          |        |         |      |  
|                          |                                                                             | Total deferred tax liabilities        |        |                           | (305 | )        |        |         | (363 | )
|                          |                                                                             |                                       |        |                           |      |          |        |         |      |  
|                          |                                                                             | Net deferred tax assets (liabilities) |        | $                         |     |          |        |         |     |  
|                          |                                                                             |                                       |        |                           |      |          |        |         |      |  



| |  |  | In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in
making this assessment. Based upon managements projections of future
taxable income and future taxable income generated from the reversal of
deferred tax liabilities over the periods in which the deferred tax assets
are deductible, management does not believe that it is more likely than not
that the Company will realize the benefits of these deductible differences.
Accordingly, a valuation allowance equal to the balance of net deferred
tax assets has been recognized as of June 30, 2002 and 2001. The increase
in the valuation allowance for net deferred tax assets was $2,548,000 and
$464,000 for the years ended June 30, 2002 and 2001, respectively.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-15



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |     |  | The Company has net operating loss carryforwards for federal income tax
purposes of approximately $34,228,000 at June 30, 2002, expiring through
2020. A portion of the net operating loss carryforwards relate to excess
stock option deductions for tax purposes. The valuation allowance at June
30, 2002 includes approximately $361,000 attributable to excess stock
option deductions. If realized, the benefit will be recorded as an
increase in additional paid-in capital.                                                                                 
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (6) |  | Stock Compensation Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |     |  | The Company has three stock-based compensation plans. The Company applies
the intrinsic value method in accounting for its stock compensation plans.
For the years ended June 30, 2002 and 2001 and six months ended June 30,
2000, the Company recognized employee stock compensation expense under
these plans of $48,000, $498,000 and $510,000 respectively. Had
compensation cost been determined on the basis of fair value as computed
using the assumptions herein, net loss and loss per share would have been
increased to the following pro forma amounts:

|                |             |  |            |        |            |                           |                  |        |   |  |  |        |  
|--------------- | ----------- |  | ---------- | ------ | ---------- | ------------------------- | ---------------- | ------ | - |  |  | ------ | -
|                |             |  | Year ended |        | Year ended |                           | Six months ended
|                |             |  | June 30,   |        | June 30,   |                           | June 30,        
|                |             |  | 2002       |        | 2001       |                           | 2000            
|                |             |  |            |        |            |                           |                 
|                |             |  |            |        |            | (in thousands of dollars)
|Net loss:       |             |  |            |        |            |                           |                  |        |   |  |  |       
|                | As Reported |  | $          | (6,255 | )          |                           |                  | (1,399 | ) |  |  | (1,179 | )
|                | Pro Forma   |  | $          | (8,470 | )          |                           |                  | (3,871 | ) |  |  | (2,235 | )
|Loss Per Share: |             |  |            |        |            |                           |                  |        |   |  |  |       
|                | As Reported |  | $          | (0.87  | )          |                           |                  | (0.20  | ) |  |  | (0.17  | )
|                | Pro Forma   |  | $          | (1.18  | )          |                           |                  | (0.55  | ) |  |  | (0.32  | )



| | (a) |  | Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company has a stock option plan which provides for the grant of
incentive stock options, nonqualified stock options and stock
appreciation rights to officers, directors or employees of, as well as
advisers and consultants to, the Company.                                                                                                                                                                                                                                                                                                                                                                                               
|
| |     |  | The Company has reserved 3,624,000 shares of its common stock for
issuance upon exercise of options and rights granted under the plan.
Typically, rights and options have been granted which vest over three
to five years, become fully vested upon a change in control of the
Company, and expire 10 years from the date of issuance. Certain
options granted to former senior management were vested upon issuance
or over a shorter vesting period. The exercise price was equal to the
market value of the Companys common stock on the grant date or the
average of the market value over a stated period of time prior to the
grant date.

F-16



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |  |  | For stock options granted at an exercise price less than the market
value of the common stock at the date of grant, stock compensation
cost is recorded based on the difference between the market value of
the common stock at the date of grant and the exercise price of the
option. For options that are vested on the date of grant, the related
stock compensation cost is expensed immediately. Unamortized employee
stock compensation cost is recorded as a separate component of
stockholders equity and amortized to expense over the vesting period
of the related options.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The plan provides that each non-executive member of the Board of
Directors receive options to purchase 500 shares of common stock for
attending each meeting of the Board of Directors, a committee of the
Board, or a meeting with management of the Company or other directors
for Company business or affairs.                                                                                                                                                                                                                                                                       
|
| |  |  | Following is a summary of stock option activity during the six months
ended June 30, 2000 and the years ended June 30, 2002 and 2001:                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                     |                         |  |           |          |          |   |          |       | 
|------------------------------------ | ----------------------- |  | --------- | -------- | -------- | - | -------- | ----- | 
|                                     |                         |  |           |          |          |   | Weighted
|                                     |                         |  |           |          |          |   | average 
|                                     |                         |  | Number of |          | exercise
|                                     |                         |  | options   |          | price   
|                                     |                         |  |           |          |          |  
|Outstanding at December 31, 1999     |                         |  | 1,527,323 |          |          | $ | 10.73    |      
|                                     | Granted at market price |  |           | 32,000   |          |   |          | 16.35 | 
|                                     | Exercised               |  |           | (116,569 | )        |   |          | 7.99  | 
|                                     | Canceled                |  |           | (115,169 | )        |   |          | 13.75 | 
|                                     |                         |  |           |          |          |   |         
|Outstanding at June 30, 2000         |                         |  | 1,327,585 |          |          |   | 10.84    |      
|                                     | Granted at market price |  |           | 224,500  |          |   |          | 2.68  | 
|                                     | Exercised               |  |           |         |          |   |          |      | 
|                                     | Canceled                |  |           | (32,535  | )        |   |          | 19.62 | 
|                                     |                         |  |           |          |          |   |         
|Outstanding at June 30, 2001         |                         |  | 1,519,550 |          |          |   | 12.30    |      
|                                     | Granted at market price |  |           | 848,700  |          |   |          | 1.92  | 
|                                     | Exercised               |  |           |         |          |   |          |      | 
|                                     | Canceled                |  |           | 630,416  |          |   |          | 16.87 | 
|                                     |                         |  |           |          |          |   |         
|Outstanding at June 30, 2002         |                         |  | 1,737,834 |          |          |   | 5.58     |      
|                                     |                         |  |           |          |          |   |         
|Options exercisable at June 30, 2000 |                         |  | 667,062   |          |          |   | 8.90     |      
|                                     |                         |  |           |          |          |   |         
|Options exercisable at June 30, 2001 |                         |  | 956,569   |          |          |   | 9.95     |      
|                                     |                         |  |           |          |          |   |         
|Options exercisable at June 30, 2002 |                         |  | 764,653   |          |          |   | 8.43     |      
|                                     |                         |  |           |          |          |   |         

F-17



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)

Following is a summary of the status of stock options outstanding at
June 30, 2002:

|              |  |        |           |      |  |                     |     |          |  |       |       |                     |  |          |         |  |  |   |       | 
|------------- |  | ------ | --------- | ---- |  | ------------------- | --- | -------- |  | ----- | ----- | ------------------- |  | -------- | ------- |  |  | - | ----- | 
|              |  |        |           |      |  | Outstanding options |     |          |  |       |       | Exercisable options
|              |  |        |           |      |  |                    
|              |  |        |           |      |  | Weighted            |     |          |  |       |       |                     |  |          |         |  |  |  
|              |  |        |           |      |  | average             |     | Weighted |  |       |       |                     |  | Weighted
|              |  |        |           |      |  | remaining           |     | average  |  |       |       |                     |  | average 
|Exercise      |  |        |           |      |  | contractual         |     | exercise |  |       |       |                     |  | exercise
|price range   |  | Number |           | life |  | price               |     | Number   |  | price
|              |  |        |           |      |  |                     |     |          |  |       |       |                     |  |          |        
|$0.00   3.45 |  |        | 998,150   |      |  |                     | 9.0 |          |  | $     | 1.98  |                     |  |          | 118,700 |  |  | $ | 2.05  | 
|3.46   6.90  |  |        | 102,500   |      |  |                     | 7.3 |          |  |       | 5.51  |                     |  |          | 87,500  |  |  |   | 5.86  | 
|6.91   10.35 |  |        | 545,424   |      |  |                     | 5.0 |          |  |       | 8.68  |                     |  |          | 497,449 |  |  |   | 8.71  | 
|10.36  13.80 |  |        | 20,500    |      |  |                     | 6.7 |          |  |       | 11.89 |                     |  |          | 20,500  |  |  |   | 11.89 | 
|13.81  17.25 |  |        | 11,500    |      |  |                     | 7.3 |          |  |       | 15.53 |                     |  |          | 11,500  |  |  |   | 15.53 | 
|17.26  24.15 |  |        | 1,500     |      |  |                     | 7.8 |          |  |       | 18.56 |                     |  |          | 1,500   |  |  |   | 18.56 | 
|24.16  27.60 |  |        | 3,000     |      |  |                     | 7.6 |          |  |       | 26.75 |                     |  |          | 3,000   |  |  |   | 26.75 | 
|27.61  31.05 |  |        | 2,000     |      |  |                     | 7.6 |          |  |       | 28.50 |                     |  |          | 2,000   |  |  |   | 28.50 | 
|31.06  34.50 |  |        | 53,260    |      |  |                     | 7.5 |          |  |       | 34.48 |                     |  |          | 22,504  |  |  |   | 34.46 | 
|              |  |        |           |      |  |                     |     |          |  |       |       |                     |  |          |         |  |  |   |       | 
|              |  |        | 1,737,834 |      |  |                     | 7.5 |          |  | $     | 5.58  |                     |  |          | 764,653 |  |  | $ | 8.43  | 
|              |  |        |           |      |  |                     |     |          |  |       |       |                     |  |          |         |  |  |   |       | 



| |  |  | Included in options outstanding as of June 30, 2002 are 265,000
options granted to the Companys former Chief Scientific Officer. Of
the 265,000 options outstanding, 250,000 options are exercisable at a
weighted average exercise price of $8.59. As described in Note 13, the
Company is currently engaged in litigation against this former
officer.                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In December 2000, the Companys Compensation Committee reformed the
terms of stock options to purchase 350,397 shares which had been
granted by the Committee on December 27, 1999 to change the option
exercise price from a 60-day average price of $18.76 to $34.50, the
market price of the Companys common stock on the date of grant.
After the reformation, the Company informed the holders of the
affected options of the change. All of the option holders expressly
acknowledged and accepted the change in the option exercise price. As
a result of the change, the Company recorded an adjustment in December
2000 of $3,533,000 to reverse unamortized compensation cost relating
to these options.                                        
|
| |  |  | On April 25, 2002, the Company filed a Tender Offer (the Offer) with
the Securities and Exchange Commission which offered employees the
right to exchange all outstanding options to purchase shares of
Company common stock with an exercise price equal to $34.50 per share
for replacement options to be granted no earlier than six months and
one day from the expiration of the Offer at an exercise price equal to
no less than the fair market value of the common stock on that date.
Under the terms and subject to the conditions set forth in the Offer,
180,579 options were surrendered by eligible employees and cancelled
on May 23, 2002. The Company will issue replacement options to
purchase an aggregate of up to 180,579 shares of

F-18



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |  |  | common stock in exchange for the options surrendered pursuant to
the Offer on or around November 24, 2002.                                                     
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Compensation cost for the SFAS 123 pro forma amounts disclosed above
was estimated using the Black-Scholes option-pricing model with the
following assumptions:

|                                            |  |            |       |            |  |           |       |   |  |            |      |  
|------------------------------------------- |  | ---------- | ----- | ---------- |  | --------- | ----- | - |  | ---------- | ---- | -
|                                            |  |            |       |            |  |           |       |   |  | Six Months
|                                            |  | Year ended |       | Year ended |  | ended    
|                                            |  | June 30,   |       | June 30,   |  | June 30, 
|                                            |  | 2002       |       | 2001       |  | 2000     
|                                            |  |            |       |            |  |          
|Expected life of options from
date of grant |  | 5.9 years  |       | 6.3 years  |  | 5.8 years
|Risk-free interest rate                     |  |            | 3.4   | %          |  |           | 5.7   | % |  |            | 5.7  | %
|Volatility                                  |  |            | 145.0 | %          |  |           | 212.0 | % |  |            | 72.0 | %
|Assumed dividend yield                      |  |            | 0.0   | %          |  |           | 0.0   | % |  |            | 0.0  | %



| |     |  | The weighted average fair value of options granted at market price
during the years ended June 30, 2002 and 2001 and the six months ended
June 30, 2000 was $1.79, $2.66 and $10.95, respectively. No options
were granted at less than or greater than market for the years ended
June 30, 2002 and 2001 and during the six months ended June 30, 2000.                                                                                                                                                                                                                                                                               
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Employee Stock Purchase Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |     |  | In 1995, the Company adopted an employee stock purchase plan.
Eligible employees may designate up to ten percent of their earnings,
through payroll deductions, to purchase shares of the Companys common
stock. The purchase price is equal to 85 percent of the fair market
value of the common stock on specified dates. A total of 800,000
common shares have been reserved for issuance under the plan, and the
maximum number of shares to be issued in any annual period is 200,000.
The plan is considered non-compensatory under APB No. 25, and
therefore no expense was reported in the Companys statements of
operations.
|
| |     |  | The plan is considered compensatory under SFAS No. 123, and therefore,
compensation cost for the SFAS No. 123 pro forma amounts disclosed
above was estimated using the Black-Scholes option-pricing model with
the following assumptions:                                                                                                                                                                                                                                                                                                                                                                                             

|                                            |  |            |       |            |  |           |       |   |  |            |      |  
|------------------------------------------- |  | ---------- | ----- | ---------- |  | --------- | ----- | - |  | ---------- | ---- | -
|                                            |  |            |       |            |  |           |       |   |  | Six Months
|                                            |  | Year ended |       | Year ended |  | ended    
|                                            |  | June 30,   |       | June 30,   |  | June 30, 
|                                            |  | 2002       |       | 2001       |  | 2000     
|                                            |  |            |       |            |  |          
|Expected life of options from
date of grant |  | 1.0 years  |       | 1.0 years  |  | 1.0 years
|Risk-free interest rate                     |  |            | 3.4   | %          |  |           | 5.7   | % |  |            | 5.3  | %
|Volatility                                  |  |            | 145.0 | %          |  |           | 212.0 | % |  |            | 72.0 | %
|Assumed dividend yield                      |  |            | 0.0   | %          |  |           | 0.0   | % |  |            | 0.0  | %

F-19



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |     |  | The weighted-average fair value of stock purchase rights granted
during the year ended June 30, 2002, 2001 and the six months ended
June 30, 2000 was $1.64, $1.11, and $0.38, respectively.                                                                                                                                                                                                                                                                                                                                                                                     
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (c) |  | Stock Award Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |     |  | In 1996, the Company adopted a stock award plan under which shares of
common stock can be awarded to the Companys officers, directors,
employees, consultants, and advisors. The Company reserved 100,000
shares of its common stock for issuance under the stock award plan.
Stock compensation cost is recognized based on the market value of the
common stock on the date of the award. For the years ended June 30,
2002 and 2001 and the six months ended June 30, 2000, there have been
no shares of common stock issued to officers, employees, consultants
or advisors.
|
| |     |  | The plan includes a provision for automatic awards of 50 shares per
month to non-management members of the Companys Board of Directors
who serve on the Companys audit or compensation committees. During
the years ended June 30, 2002 and 2001, 2,900 and 1,350 shares with a
fair market value of $4,000 and $11,000, respectively were issued
under this provision of the plan. During the six months ended June 30,
2000, 900 shares with a fair market value of $17,000 were issued under
this provision of the plan.                                                    

(7) Profit Sharing and Retirement Plans



| |  |  | During 1990, the Company adopted a qualified profit sharing plan for its
employees. Annual contributions to the plan, which may be in the form of
cash or shares of the Companys common stock, are determined by the Board
of Directors in its sole discretion. During the years ended June 30, 2002
and 2001, the Company made no contributions to the Plan. During the six
months ended June 30, 2000, the Company contributed $14,000 in cash to the
Plan.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Effective December 31, 2001, the Companys Board of Directors terminated
the Vari-L Company, Inc. Profit Sharing Plan and Trust (the Plan). Under
termination of the Plan, participants became fully vested in their
accounts. The assets of the Plan, which were primarily comprised of shares
of the Companys common stock, were distributed on March 15, 2002.                                                                                          
|
| |  |  | During 1998, the Company adopted a 401(k) plan to which employees may
contribute up to 15 percent of their pay. The Company may make
discretionary matching contributions to the plan. No matching
contributions were made during the years ended June 30, 2002 and 2001 or
during the six months ended June 30, 2000.                                                                                                                                        

(8) Employment Agreements



| |  |  | Effective June 1, 1997, the Company entered into four-year employment
agreements with two officers which provide for minimum annual base salaries
during the officers employment with the
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-20



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |  |  | Company, and severance pay in the event of termination. In the case of
involuntary termination by the Company, severance payments are equal to the
greater of the officers annual base salary multiplied by the remaining
term of the agreement or 2.99 times the officers average annual
compensation over the last five years. In the case of voluntary
termination or retirement, the officer will be entitled to (i) one-half of
his annual base salary as severance pay, (ii) be engaged as a consultant
for a period of up to five years for which he is paid a fee equal to 50
percent of his annual base salary upon termination of employment, and (iii)
an annual retirement benefit equal to 25 percent of his annual base salary
payable during the period he provides consulting services to the Company.
All unvested stock awards and options and stock appreciation rights
previously granted to the officers will fully vest in the event of a change
of control of the Company or an involuntary termination. In addition, the
officers have agreed they will not compete against the Company for a period
of one year after termination or expiration of their respective employment
agreements, or the period covered by any consulting arrangement or
retirement benefit, whichever is greater.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Effective August 1, 2000, one of the officers entered into a Termination
and Consulting Agreement, the terms of which supersede his employment
agreement. Under the agreement, the Company agreed to engage the officer as
a consultant for the period August 1, 2000 through July 31, 2001. As a
consultant he was to receive compensation of $195,000 along with certain
other benefits. Due to his failure to submit certain documentation for
travel expenses in which amounts were advanced, the Audit Committee
suspended payment of the consulting fees in October 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | In early March 2002, both former officers were informed of the Companys
intent to terminate certain employment and termination and consulting
agreements. As a result, neither is currently being paid compensation under
the agreements. As described in Note 13, on March 19, 2002, the Company
filed a lawsuit against these officers. In the lawsuit, the Company seeks
to rescind the employment and consulting agreements between the Company and
these officers, and to rescind certain stock option grants made to them, on
the basis that such agreements were entered into, and such option grants
were made, based upon mistaken or misrepresented information regarding the
Companys true financial performance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | Effective as of August 1, 2002, the Company is a party to employment
agreements with nine other officers which provide for employment terms of
one year automatically renewable for an additional year without any further
action on the part of the Company or the employee unless terminated under
certain clauses within the employment agreement. The agreements provide for
severance pay based on their annual salary for periods ranging from six
months to one year in the event of involuntary termination. In the event of
voluntary termination, severance pay is equal to one months salary for
every year of service completed up to a maximum of three months salary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

(9) Related Party Transactions



| |  |  | As described in notes 3 and 13, the Company leases one of its manufacturing
facilities from a partnership in which the Companys former Chief
Scientific Officer is a partner. The Company is currently engaged in
litigation with the landlord of the facility.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-21



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |  |  | The Company has a two year promissory note payable to Asvan Technology,
LLC, in which one of the shareholders is an employee of the Company.                                                                                    
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company is contingently liable for guarantees of indebtedness owed by
former senior officers of the Company to a former officer. The maximum
amount of this contingent liability at June 30, 2002 was approximately
$94,000.

(10) Financial Instruments



| |  |  | At June 30, 2002 and 2001, the Company had $0 and $610,000 respectively,
invested in a U.S. government securities money market fund. The money
market fund invests in United States government securities and is not
otherwise federally insured.                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Disclosures of fair value information about certain financial instruments
is presented in accordance with the requirements of Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of Financial
Instruments. The carrying amounts of cash and cash equivalents, accounts
receivable and accounts payable approximate fair value because of the short
maturities of these instruments. The carrying amounts of the Companys
notes payable and long-term obligations at June 30, 2002 and 2001
approximate their fair values since the instruments carry a variable rate
of interest or a rate that approximates current rates.

(11) Significant Customers



| |  |  | The Companys products are sold to original equipment manufacturers of
communications equipment, either in commercial or military markets. The
following table shows the percentage of total revenues contributed by
significant customers for the periods presented. A significant customer is
defined as one contributing 10% or more of total revenues:
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    |  |            |       |            |  |          |      |   |  |            |      |  
|----------------------------------- |  | ---------- | ----- | ---------- |  | -------- | ---- | - |  | ---------- | ---- | -
|                                    |  |            |       |            |  |          |      |   |  | Six Months
|                                    |  | Year ended |       | Year ended |  | ended   
|                                    |  | June 30,   |       | June 30,   |  | June 30,
|                                    |  | 2002       |       | 2001       |  | 2000    
|                                    |  |            |       |            |  |         
|Nokia                               |  |            | 17.49 | %          |  |          | 25.0 | % |  |            | 20.4 | %
|Motorola                            |  |            | 16.71 | %          |  |          | 14.6 | % |  |            | 14.3 | %
|ACAL Electronics (includes Siemens) |  |            | 12.99 | %          |  |          | 12.7 | % |  |            | 13.5 | %

F-22



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)

The following table shows the accounts receivable balance of the three most
significant customers for the periods presented:

|                                    |  |                           |     |            |  |          |       |  |  |            |       | 
|----------------------------------- |  | ------------------------- | --- | ---------- |  | -------- | ----- |  |  | ---------- | ----- | 
|                                    |  |                           |     |            |  |          |       |  |  | Six Months
|                                    |  | Year ended                |     | Year ended |  | ended   
|                                    |  | June 30,                  |     | June 30,   |  | June 30,
|                                    |  | 2002                      |     | 2001       |  | 2000    
|                                    |  |                           |     |            |  |         
|                                    |  | (in thousands of dollars)
|Nokia                               |  | $                         | 546 |            |  |          | 1,803 |  |  |            | 678   | 
|Motorola                            |  |                           | 255 |            |  |          | 225   |  |  |            | 1,451 | 
|ACAL Electronics (includes Siemens) |  |                           | 564 |            |  |          | 1,060 |  |  |            | 602   | 



| |  |  | The Company performs credit evaluations of its customers but generally does
not require collateral. Receivables due from foreign customers are
generally insured by a private indemnity company; otherwise, letters of
credit are required of foreign customers.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company produces and sells electronic components in four product lines.
Net sales for each of the product lines for the years ended June 30, 2002
and 2001 and six months ended June 30, 2000 were as follows:                                              

|                                      |  |                           |        |            |  |          |        |  |  |            |        | 
|------------------------------------- |  | ------------------------- | ------ | ---------- |  | -------- | ------ |  |  | ---------- | ------ | 
|                                      |  |                           |        |            |  |          |        |  |  | Six Months
|                                      |  | Year ended                |        | Year ended |  | ended   
|                                      |  | June 30,                  |        | June 30,   |  | June 30,
|                                      |  | 2002                      |        | 2001       |  | 2000    
|                                      |  |                           |        |            |  |         
|                                      |  | (in thousands of dollars)
|Commercial Signal Source
Components   |  | $                         | 15,615 |            |  |          | 34,898 |  |  |            | 14,608 | 
|Hi-Rel Signal Source Components       |  |                           | 3,651  |            |  |          | 2,809  |  |  |            | 1,238  | 
|Military Signal Processing
Components |  |                           | 1,848  |            |  |          | 1,318  |  |  |            | 668    | 
|Other Products                        |  |                           | 234    |            |  |          | 2,352  |  |  |            | 644    | 
|                                      |  |                           |        |            |  |          |        |  |  |            |       
|Net Sales                             |  | $                         | 21,348 |            |  |          | 41,377 |  |  |            | 17,158 | 
|                                      |  |                           |        |            |  |          |        |  |  |            |       

F-23



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)

The Company attributes sales to customers based on the country to which the
products are shipped. Net sales by country are as follows:

|              |  |                           |        |            |  |          |        |  |  |            |        | 
|------------- |  | ------------------------- | ------ | ---------- |  | -------- | ------ |  |  | ---------- | ------ | 
|              |  |                           |        |            |  |          |        |  |  | Six Months
|              |  | Year ended                |        | Year ended |  | ended   
|              |  | June 30,                  |        | June 30,   |  | June 30,
|              |  | 2002                      |        | 2001       |  | 2000    
|              |  |                           |        |            |  |         
|              |  | (in thousands of dollars)
|United States |  | $                         | 8,985  |            |  |          | 15,596 |  |  |            | 7,464  | 
|China         |  |                           | 3,800  |            |  |          | 1,532  |  |  |            |       | 
|Finland       |  |                           | 2,995  |            |  |          | 4,110  |  |  |            | 1,297  | 
|England       |  |                           | 1,349  |            |  |          | 5,393  |  |  |            | 3,938  | 
|Sweden        |  |                           | 1,321  |            |  |          | 1,527  |  |  |            | 481    | 
|Germany       |  |                           | 1,147  |            |  |          | 4,731  |  |  |            | 1,142  | 
|Italy         |  |                           | 462    |            |  |          | 4,788  |  |  |            | 1,143  | 
|Canada        |  |                           | 109    |            |  |          | 1,540  |  |  |            | 567    | 
|Other         |  |                           | 1,180  |            |  |          | 2,160  |  |  |            | 1,126  | 
|              |  |                           |        |            |  |          |        |  |  |            |        | 
|Net Sales     |  | $                         | 21,348 |            |  |          | 41,377 |  |  |            | 17,158 | 
|              |  |                           |        |            |  |          |        |  |  |            |        | 

(12) Expenses of Accounting Restatements and Related Matters



| |  |  | As discussed in note 13, in early 2000, management of the Company commenced
efforts to restate its previously issued financial statements after being
notified by the Securities and Exchange Commission (the Commission) that
the Commission was investigating its accounting and reporting practices.
Certain costs incurred in conjunction with these efforts have been
separately classified on the Companys statements of operations as
expenses relating to accounting restatements and related legal matters,
net of recoveries. Expenses included in this classification include the
cost of external counsel for services provided in connection with
shareholder lawsuits, the Commissions investigation of the Company, legal
fees and expenses of the Special Litigation Committee of the Board of
Directors, the cost of certain consultants and temporary labor hired to
assist in the accounting restatements, and reimbursements to former
employees of the Company for their legal fees and expenses. The accounting
restatements were completed in February 2001, however, the Company
continues to incur costs related to shareholder litigation and legal fees
and expenses of the Special Litigation Committee.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Included in these expenses for the year ended June 30, 2002 is $1.45
million representing the approximate cost to settle the Private Securities
Class Action as discussed in note 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-24



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



|
|
|
|
|
|
|
|



| |  |  | In December 1999, the Company learned that the SEC was conducting an
investigation to determine whether there were violations of the federal
securities laws by the Company or any of its officers, directors, or
employees. The Commissions investigation was focused primarily on the
Companys prior financial reporting and its accounting practices and
procedures. In September 2001, the Company agreed to a settlement with the
Securities and Exchange Commission under which the Company, without
admitting or denying that it violated any laws, consented to the entry of
an injunction prohibiting future violations by the Company of certain
periodic reporting, record keeping, internal controls, proxy solicitation
and antifraud provisions of the Securities Exchange Act of 1934. On
November 9, 2001, the Companys settlement with the Securities and Exchange
Commission was approved by the United States District Court for the
District of Colorado.                                                                                                                                                                                                         
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Private Securities Class Action                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | A number of private shareholder class actions alleging violations of
federal securities laws were filed against the Company and certain of its
former officers in the United States District Court for the District of
Colorado beginning in June 2000. Those actions have since been
consolidated and an amended consolidated complaint has been filed by the
class representatives. On November 21, 2001, the Company filed a motion to
dismiss all claims against the Company in the consolidated private
securities class action, Rasnerv. Vari-L Company, Inc., Civ. No.
00-S-1181, D. Colo. The Companys motion argues that the amended
consolidated complaint alleges wrongdoing by former corporate employees in
furtherance of their personal interests, as opposed to corporate interests,
which does not state a claim for securities fraud against the Company. The
class action representatives have filed their response to the Companys
motion to dismiss and the Company has filed a reply to that response but
the court has not yet ruled on the motion.                                                                                                             
|
| |  |  | On October 3, 2002, the Company and the class action representatives
reached an agreement in principle for the settlement of the litigation and
executed a memorandum of understanding (the MOU), subject to court
approval. The MOU outlines the general terms of the proposed settlement and
is intended to be used as a basis for drafting a Stipulation of Settlement.
The MOU requires the Company to pay $250,000 in cash and issue 2.0 million
shares of the Companys common stock. The number of shares issuable
pursuant to the MOU is subject to certain anti dilution adjustments in the
event the Company sells its common stock or securities convertible into its
common stock below certain threshold prices. The Company has calculated the
value of shares to be issued based upon the closing price of the Companys
common stock on the date in which all substantive aspects with respect to
the MOU were agreed upon. At June 30, 2002, the Company recorded $1.45
million representing the approximate cost to settle this litigation. This
amount has been included in expenses of accounting restatements and related
matters in the statements of operations.
|
| |  |  | The Company is also required to transfer its claims against Joseph H.
Kiser, David G. Sherman, Jon C. Clark and Derek L. Bailey to the
plaintiffs. However, the Company will retain the claims from the lawsuit
filed in the District Court for the City and County of Denver as a result
of the Special                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-25



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |  |  | Litigation Committee investigation, against David G. Sherman, Joseph H.
Kiser, Joan Sherman, the Kathryn Sherman Trust and J.C. Enterprises. The
Company will also assign to the Plaintiffs any right it might have to
proceeds or other damages from the Directors and Officers insurance
policies with Reliance Insurance Company and Agricultural Excess and
Surplus Insurance Company. There can be no assurance that the court will
accept our proposal. Moreover, irrespective of the outcome with respect to
the Company, the individual defendants may assert claims against the
Company for advancement or indemnification of their attorneys fees and
other costs of defense, which claims may be material.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Shareholder Derivative Suit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | On August 4, 2000, a shareholder derivative action was filed, purportedly
on behalf of the Company, in District Court, City and County of Denver
against the same officers named in the class action as well as the members
of the Companys board of directors at the time. The Company was also
named as a nominal defendant. The derivative complaint alleged many of the
same facts as in the federal securities class action, claiming that those
facts demonstrate that the individual defendants breached their fiduciary
duties to the Company and the shareholders. The action was dismissed
without prejudice in April 2001 but an amended complaint was filed by the
same plaintiff in September 2001.    
|
| |  |  | On October 9, 2001, the Company filed a motion to dismiss the amended
shareholder derivative action, on various grounds, including the failure to
make the required demands, the failure to commence a new action rather than
trying to revive the previously dismissed case, and the availability of new
management and a new independent Board member to evaluate the merits, and
the timing, of any claims which could be brought by the Company against the
individual defendants. Substantially all of the individually named
defendants subsequently joined in the Companys motion.                                                                                                                           
|
| |  |  | On April 4, 2002, the court granted the plaintiffs motion for a stay of
the shareholders derivative action against certain of the Companys former
officers and directors pending the results of the investigation by the
Companys Special Litigation Committee of the claims raised in that action.
On June 28, 2002, the Company filed a motion to dismiss or in the
alternative a motion for summary judgment based on the findings of the
Special Litigation Committee, which recommended dismissal of the action
without prejudice. On August 21, 2002, the court granted the Companys
motion and dismissed the amended action without prejudice.                                                            
|
| |  |  | Insurance Claims                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | Reliance Insurance Company (Reliance) is the issuer of the $5 million
primary directors and officers liability insurance policy in effect for
the period of time covered by the securities class action and the
derivative action. In January 2002, the Reliance liquidator notified
claimants concerning the procedures by which insureds and other claimants
may file claims against the Reliance estate. The Company intends to file a
claim against the Reliance estate, however all rights under the claim will
be assigned to the plaintiffs pursuant to the MOU.                                                                                                                                           

F-26



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |  |  | Declaratory Judgment Action by Excess Insurer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On June 5, 2001, Agricultural Excess and Surplus Insurance Company
(AESIC), which had issued to the Company a $2.5 million excess directors
and officers liability insurance policy for the period of time covered by
the shareholder and class action litigation referenced above, filed suit in
United States District Court for the District of Colorado asking the court
to find that it is not obligated to provide coverage, or in the
alternative, seeking permission to rescind its policy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | A settlement conference was held in February 2002 before the U.S.
Magistrate assigned to this declaratory judgment action brought by the
Companys excess liability directors and officers liability insurance
carrier. Representatives of the excess insurer, the Company, the
individual defendants in the securities class action, and the plaintiffs in
the securities class action attended the conference. While meaningful
discussions were held at that conference, no settlement was reached and no
further settlement conference has been scheduled.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | Company Action against Former Officers                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | On December 5, 2001, the Company formed a Special Litigation Committee (the
SLC) of the Board of Directors. The SLC is comprised of two outside
directors who joined the Companys Board subsequent to the time of certain
alleged wrongdoings as discussed below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | On December 20, 2001, the SLC retained independent counsel to advise the
Committee in its investigation of the allegations of wrongdoing during
prior periods by former employees, as well as current and former members of
the Companys Board of Directors. Additionally, the SLC suspended the
advancement of certain legal fees and expenses being paid on behalf of
former officers of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | On March 19, 2002, the Company filed a lawsuit in the District Court, City
and County of Denver, against Mr. David Sherman, Mr. Joseph Kiser,
individuals, and J.C. Enterprises, a Colorado general partnership. Mr.
Sherman is the former president of the Company and Mr. Kiser is the former
Chairman of the Companys Board of Directors and Chief Scientific Officer.
Additionally, Mr. Kiser is the General Partner of J.C. Enterprises. On
April 2, 2002, the Company filed an Amended Complaint and Jury Demand. On
May 17, 2002, the Company filed a Second Amended Complaint and Jury Demand
and added Ms. Joan Sherman, an individual, and the Kathryn Sherman Trust, a
Colorado trust, as defendants. In its lawsuit, the Company seeks to
rescind certain employment and consulting agreements between the Company
and Messrs. Kiser and Sherman, and to rescind certain stock and stock
option grants made to them, on the basis that such agreements were entered
into, and such stock option grants were made, based upon mistaken or
misrepresented information regarding the Companys true financial
performance. The Company also seeks to recover the compensation and
bonuses paid to them as a result of such mistaken or misrepresented
information. In addition, the Company seeks to recover excessive rent it
paid pursuant to a lease agreement between the Company and J.C. Enterprises
in reliance on misrepresented information provided by Messrs. Kiser and
Sherman. The Company added Ms. Sherman and the Kathryn Sherman Trust to
this action because they may possess assets from Mr. Sherman that Vari-L is
entitled to recover.

F-27



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |  |  | On April 30, 2002, Mr. Kiser filed a motion to dismiss the lawsuit in its
entirety. On June 13, 2002, the motion to dismiss was denied.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On May 30, 2002, David Sherman filed a counter-claim against the Company
alleging that the Company breached its obligation to him by suspending
payment of consulting fees under the Termination and Consulting Agreement.
On July 8, 2002, Joseph Kiser filed counter-claims against the Company,
Charles R. Bland, Richard P. Dutkiewicz, Gil J. Van Lunsen and David M.
Risley. Mr. Bland is our President and Chief Executive Officer. Mr.
Dutkiewicz is our Vice President of Finance and Chief Financial Officer.
Messrs. Risley and Van Lunsen are on our Board of Directors and are members
of the SLC. The counter-claim alleges claims for: (i) violation of the
Colorado Wage Act against all counter-claim defendants; (ii) breach of
contract relating to Mr. Kisers employment agreement with the Company
against the Company only; (iii) breach of contract relating to the
Companys promise to fulfill the obligations of Mr. Kisers employment
agreement against the Company only; (iv) breach of contract relating to the
indemnification agreements with the Company against the Company only; (v)
promissory estoppel relating to Mr. Kisers retirement from the Company
against the Company only; (vi) intentional interference with Mr. Kisers
employment agreement with the Company against Mr. Bland only; and (vii)
negligent misrepresentation relating to Mr. Kisers plans for retirement
against Mr. Bland only.
|
| |  |  | A trial date of February 24, 2003 has been set and the parties are about to
commence discovery.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | Mr. Kisers employment contract requires him to perform any directive of
the Companys Board of Directors. Subsequent to March 19, 2002, Mr. Kiser
has not performed any services for the Company. The Company believes that
its claim to rescind Mr. Kisers employment contract based upon mistaken or
misrepresented information regarding the Companys true financial
performance is based upon a valid principle of law. Since March 19, 2002,
the Company has suspended all payments required by Mr. Kisers employment
contract. The Company has recorded approximately $203,000 of liabilities
representing the present value of post-employment health care obligations
and a one time separation bonus to be paid to Mr. Kiser upon termination of
contract payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | In the event that Mr. Kiser prevails in requiring us to comply with the
terms of the employment contract, we could be obligated to total future
payments of approximately $1,400,000 payable over ten years. If we are
successful in our claims against Mr. Kiser, we could be awarded as much as
$5,600,000 plus attorneys fees. Additionally, we would reverse all
previously recorded liabilities associated with this matter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | If Mr. Kiser prevails on
his breach of contract action related to the indemnification agreements he had with the Company, the
Company could be liable for attorney fees and costs incurred in the various actions as well as for
future covered attorneys fees, the present amount of which is unknown.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Under Mr. Shermans termination and consulting agreement, the Company
agreed to engage Mr. Sherman as a consultant for the period August 1, 2000
through July 31, 2001. As a consultant he was                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-28



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| | to receive compensation of $195,000 as consulting fees along with certain
other benefits. Due to his failure to submit certain documentation for
travel expenses in which amounts were advanced, the Audit Committee
suspended payment of the consulting fees in October 2000 and elected to
terminate the agreement due to misappropriation of funds. During the
quarter ended December 31, 2002, the Company recognized a $145,000 benefit
from an insurance recovery for Mr. Shermans undocumented travel advances.
If Mr. Sherman prevails on his breach of contract action, the Company could
be liable for amounts under his termination and consulting agreement,
attorney fees and costs incurred in the various actions as well as for
future covered attorneys fees, the present amount of which is unknown.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |  |  | 
| |  |  | 
| |  |  | 
| | 

| | Patent Litigation
| | -----------------
| |                  



| |                                                                                                                                                                                                                                                                                                                                 |  | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| | On August 8, 2002, Anaren Microwave, Inc. (Anaren) sued the Company for
infringement of U.S. Patent No. 4,821,007. The Company has not been served
with the complaint. The Company has been advised that a license may be
available under the patent, and the Company and its counsel are
investigating Anarens allegations.

Financial Impact of Litigation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All of these legal actions have the potential of a possible loss to the
Company. The Company Action against Former Officers is a potential gain
contingency for the Company. At this time, we are unable to reasonably
estimate the possible future cost or net loss or gain, if any, associated
with certain of these matters. Accordingly, we have not recorded any loss
or gain contingencies associated with certain of these matters as of June
30, 2002. It is reasonably possible that such amounts could be material to
our financial condition, results of operations or liquidity.

(14) Subsequent Event  Sirenza Loan Facility



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The continuing weakness in the wireless telecommunications industry has
caused the Companys customers to continually revise their estimates of
demand for products downward. These downward adjustments have required the
Company to provide revised financial projections to Wells Fargo as
described in note 3. In early May 2002, the Company determined that
additional equity capital or subordinated debt would be necessary to
provide sufficient liquidity through this period of weakened sales. At that
time, the Company commenced efforts to identify potential investors and
solicit their interest in a financing transaction.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 7, 2002, the Company entered into a Loan Agreement with Sirenza
Microdevices, Inc. (Sirenza) which provides for a $5.3 million senior
secured bridge loan facility (the Loan Facility). As a condition to the
Loan Facility, the Company entered into an Exclusivity and Right of First
Refusal Agreement (the Exclusivity Agreement) with Sirenza to evaluate a
potential acquisition of all or substantially all of the Companys assets.



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Loan Facility is effective for the period October 7, 2002 to September
25, 2003, is secured by substantially all of our assets and has an annual
interest rate of 25%. Additionally, the Loan Facility

F-29



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |  |  | is subject to covenants that among other things impose limitations on
capital expenditures and investments, restrict certain payments and
distributions and require the Company to maintain certain financial ratios.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Under the terms of the Loan Facility, Sirenza has provided for funding in
two tranches. The first tranche (Tranche A ) consists of an initial term
loan of $1.4 million to repay amounts outstanding under the Credit Facility
at Wells Fargo. The second tranche (Tranche B) consists of additional
term loans of up to $3.9 million which may be drawn down in accordance with
an agreed schedule. The Company expects to use the proceeds from any
advances under Tranche B to fund its working capital requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | In the event of a change of control or execution of a definitive
acquisition agreement with any party other than Sirenza, amounts
outstanding under the Loan Facility are due in full within five business
days. Additionally, the Company must pay a prepayment fee in the amount of
$1,000,000 (the Prepayment Fee). The Company may voluntarily prepay the
Tranche A and Tranche B loan provided that in the event of a change of
control or execution of a definitive acquisition agreement with any party
other than Sirenza within 180 days of such prepayment, the Company must pay
the Prepayment Fee.                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Under the terms of the Loan Facility, at Sirenzas option, the Tranche A
loan is convertible into 19.9% of the Companys Common Stock on a fully
diluted basis at the following times: Five business days prior to the
maturity date of the Tranche A loan, the date Sirenza receives written
notice of the Companys intent to to prepay the Tranche A loan, the date of
the commencement of a tender offer by a party other than Sirenza, or the
date the Company executes a definitive acquisition agreement with another
party. The shares of common stock issuable upon conversion of the Tranche A
Note are subject to certain registration rights as set forth in the Resale
Registration Rights Agreement between the parties. The Company has amended
its Rights Agreement with American Securities Transfer, Inc. to make the
rights thereunder inapplicable to certain transactions with Sirenza that
are approved by the Companys board of directors, including the conversion
of the Tranche A Note.
|
| |  |  | The Companys ability to draw down amounts under Tranche B is conditioned
upon, among other things, the absence of an event of default and our
representations and warranties being true and correct at the time of such
draw down request. In the event the Company is unable to draw down amounts
under Tranche B, the Company may be required to seek additional capital
through other sources, which the Companys ability is limited by the terms
of the Exclusivity Agreement described below. There can be no assurance
that the Company would be able to procure adequate funds in such an event.
If such funds are not available, the Company may be forced to curtail or
suspend our operations.                                                                                                                                                                                                                                                                                                        
|
| |  |  | Pursuant to the terms of the Exclusivity Agreement, the Company has agreed,
subject to certain exceptions, not to solicit acquisition proposals from
other parties or otherwise negotiate with such parties with respect to an
acquisition proposal. Such exclusivity period terminates upon the earlier
of March 31, 2003 or the occurrence of certain other events. Under the
Exclusivity Agreement the Company has granted Sirenza a right of first
refusal in the event that the Company receives any                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-30



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)



| |  |  | future offer to acquire it or substantially all of its assets. Such
right of first refusal terminates upon the earlier of: the date that
Sirenza advises us the Company in writing that they are terminating all
negotiations with the Company regarding a transaction or that they are no
longer interested in pursuing a transaction with the Company, such time as
the Loan Facility has terminated and no loans remain outstanding
thereunder, or such time as they default on their obligations to make loans
to the Company pursuant to the Loan Facility.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(15) Fourth Quarter Transactions



| |  |  | During the quarter ended June 30, 2002, the Company sold inventories with a
net book value of approximately $250,000 for $75,000. As a result, the
Company recorded a charge to cost of goods sold for $175,000. Additionally,
due to the continuing decline in the industry and weak demand of the
commercial signal source products, the Company offered certain of their
preferred customers price decreases which resulted in a $152,000 decrement
in gross margin for the quarter ended June 30, 2002.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | As discussed in notes 12 and 13, the Company recorded $1.45 million
representing the approximate cost to settle the Private Securities Class
Action during the quarter ended June 30, 2002. This amount has been
included in expenses of accounting restatements and related matters in the
statements of operations.                                                                                                                                                                                       

F-31



---



##### Table of Contents



VARI-L COMPANY, INC.

Notes to Financial Statements

June 30, 2002 and June 30, 2001

(Information for the six months ended June 30, 2000 is unaudited)

(16) Quarterly Financial Information (Unaudited)

The following is a summary of the unaudited quarterly financial information:

|                                     |  |                                                     |        |              |  |           |       |          |  |  |        |   |  |  |        |  
|------------------------------------ |  | --------------------------------------------------- | ------ | ------------ |  | --------- | ----- | -------- |  |  | ------ | - |  |  | ------ | -
|                                     |  | Quarters Ended                                     
|                                     |  |                                                    
|                                     |  | September 30,                                       |        | December 31, |  | March 31, |       | June 30,
|                                     |  | 2001                                                |        | 2001         |  | 2002      |       | 2002    
|                                     |  |                                                     |        |              |  |           |       |         
|                                     |  | (in thousands of dollars, except per share amounts)
|Net sales                            |  | $                                                   | 5,676  |              |  |           | 5,607 |          |  |  | 5,163  |   |  |  | 4,902  |  
|                                     |  |                                                     |        |              |  |           |       |          |  |  |        |   |  |  |        |  
|Gross profit                         |  |                                                     | 2,146  |              |  |           | 2,322 |          |  |  | 1,928  |   |  |  | 1,305  |  
|                                     |  |                                                     |        |              |  |           |       |          |  |  |        |   |  |  |        |  
|Operating loss                       |  |                                                     | (1,079 | )            |  |           | (493  | )        |  |  | (1,160 | ) |  |  | (6,116 | )
|                                     |  |                                                     |        |              |  |           |       |          |  |  |        |   |  |  |        |  
|Net loss                             |  |                                                     | (1,120 | )            |  |           | (528  | )        |  |  | (1,211 | ) |  |  | (6,255 | )
|                                     |  |                                                     |        |              |  |           |       |          |  |  |        |   |  |  |        |  
|Basic and diluted earnings per share |  |                                                     | (0.16  | )            |  |           | (0.07 | )        |  |  | (0.17  | ) |  |  | (0.47  | )
|                                     |  |                                                     |        |              |  |           |       |          |  |  |        |   |  |  |        |  

|                                     |                |                                                     |        |              |  |           |        |          |  |  |        |  |  |  |        |  
|------------------------------------ | -------------- | --------------------------------------------------- | ------ | ------------ |  | --------- | ------ | -------- |  |  | ------ |  |  |  | ------ | -
|                                     | Quarters Ended
|                                     |                |                                                    
|                                     |                | September 30,                                       |        | December 31, |  | March 31, |        | June 30,
|                                     |                | 2000                                                |        | 2000         |  | 2001      |        | 2001    
|                                     |                |                                                     |        |              |  |           |        |         
|                                     |                | (in thousands of dollars, except per share amounts)
|Net sales                            |                | $                                                   | 11,495 |              |  |           | 10,894 |          |  |  | 10,000 |  |  |  | 8,988  |  
|                                     |                |                                                     |        |              |  |           |        |          |  |  |        |  |  |  |        |  
|Gross profit                         |                |                                                     | 5,357  |              |  |           | 5,189  |          |  |  | 5,561  |  |  |  | 3,523  |  
|                                     |                |                                                     |        |              |  |           |        |          |  |  |        |  |  |  |        |  
|Operating income (loss)              |                |                                                     | (50    | )            |  |           | 220    |          |  |  | 215    |  |  |  | (1,095 | )
|                                     |                |                                                     |        |              |  |           |        |          |  |  |        |  |  |  |        |  
|Net income (loss)                    |                |                                                     | (201   | )            |  |           | (10    | )        |  |  | 43     |  |  |  | (1,231 | )
|                                     |                |                                                     |        |              |  |           |        |          |  |  |        |  |  |  |        |  
|Basic and diluted earnings per share |                |                                                     | (0.03  | )            |  |           | *      |          |  |  | 0.01   |  |  |  | (0.17  | )
|                                     |                |                                                     |        |              |  |           |        |          |  |  |        |  |  |  |        |  



---

|* |  | Loss per share is less than $.01
|- |  | --------------------------------

F-32



---



##### Table of Contents



VARI-L COMPANY, INC.

Schedule II  Valuation and Qualifying Accounts

(in thousands of dollars)

|                                            |                                               |           |   |               |       |                |  |           |       |  |  |         |         |            |  |       |       | 
|------------------------------------------- | --------------------------------------------- | --------- | - | ------------- | ----- | -------------- |  | --------- | ----- |  |  | ------- | ------- | ---------- |  | ----- | ----- | 
|                                            |                                               |           |   | Balance at    |       |                |  |           |       |  |  |         |         | Balance at
|                                            |                                               |           |   | beginning     |       |                |  |           |       |  |  |         |         | end       
|Description                                 |                                               | of period |   | Additions (a) |       | Deductions (b) |  | of period
|                                            |                                               |           |   |               |       |                |  |          
|Year ended June 30, 2002:                   |                                               |           |   |               |       |                |  |           |       |  |  |         |         |            |  |      
|                                            | Allowance for doubtful accounts               |           | $ | 279           |       |                |  | 104       |       |  |  | (251)   |         |            |  | 132   |      
|                                            | Allowance for excess and obsolete
inventories |           |   | 2,423         |       |                |  | 564       |       |  |  | (465)   |         |            |  | 2,522 |      
|                                            | Reserve for product warranties
and returns    |           |   | 31            |       |                |  | 10        |       |  |  | (21)    |         |            |  | 20    |      
|                                            |                                               |           |   |               |       |                |  |           |       |  |  |         |         |            |  |      
|                                            |                                               | Total     |   | $             | 2,733 |                |  |           | 678   |  |  |         | (737)   |            |  |       | 2,674 | 
|                                            |                                               |           |   |               |       |                |  |           |       |  |  |         |         |            |  |      
|Year ended June 30, 2001:                   |                                               |           |   |               |       |                |  |           |       |  |  |         |         |            |  |      
|                                            | Allowance for doubtful accounts               |           | $ | 175           |       |                |  | 155       |       |  |  | (51)    |         |            |  | 279   |      
|                                            | Allowance for excess and obsolete
inventories |           |   | 2,659         |       |                |  | 1,362     |       |  |  | (1,598) |         |            |  | 2,423 |      
|                                            | Reserve for product warranties
and returns    |           |   | 42            |       |                |  | 12        |       |  |  | (23)    |         |            |  | 31    |      
|                                            |                                               |           |   |               |       |                |  |           |       |  |  |         |         |            |  |      
|                                            |                                               | Total     |   | $             | 2,876 |                |  |           | 1,529 |  |  |         | (1,672) |            |  |       | 2,733 | 
|                                            |                                               |           |   |               |       |                |  |           |       |  |  |         |         |            |  |      
|Six months ended June 30, 2000 (unaudited): |                                               |           |   |               |       |                |  |           |       |  |  |         |         |            |  |      
|                                            | Allowance for doubtful accounts               |           | $ | 208           |       |                |  | 78        |       |  |  | (111)   |         |            |  | 175   |      
|                                            | Allowance for excess and obsolete
inventories |           |   | 2,215         |       |                |  | 444       |       |  |  |        |         |            |  | 2,659 |      
|                                            | Reserve for product warranties
and returns    |           |   | 7             |       |                |  | 35        |       |  |  |        |         |            |  | 42    |      
|                                            |                                               |           |   |               |       |                |  |           |       |  |  |         |         |            |  |      
|                                            |                                               | Total     |   | $             | 2,430 |                |  |           | 557   |  |  |         | (111)   |            |  |       | 2,876 | 
|                                            |                                               |           |   |               |       |                |  |           |       |  |  |         |         |            |  |      



---

Notes:

|(a) |  | Amounts charged to costs and expenses.      
|--- |  | --------------------------------------------
|   
|(b) |  | Bad debt write-offs and charges to reserves.

See accompanying auditors report

F-33



---



##### Table of Contents






EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                       
|3.1a        |  | Restated Articles of Incorporation, as Amended, filed as Exhibit 4.1 to
the Form S-8 Registration Statement (No. 33-88666) and incorporated
herein by reference.                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                       
|3.1b        |  | Articles of Amendment to the Articles of Incorporation filed as Exhibit
3.1b to the Form 10-KSB for the year ended December 31, 1996 and
incorporated herein by reference.                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                       
|3.2         |  | Amended and Restated Bylaws adopted September 26, 2002.                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                       
|4.1         |  | Specimen Certificate for $.01 par value Common Stock filed as Exhibit
4.3 to the Form SB-2 Registration Statement (No. 33-74704-D) and
incorporated herein by reference.                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                       
|4.2         |  | Rights Agreement with American Securities Transfer, Inc. dated March
15, 1996 filed as Exhibit 4.2 to the Form 8-A/A Registration Statement
(No. 0-23866) and incorporated herein by reference.                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                       
|4.3         |  | Specimen Certificate for Right to Purchase $.01 par value Common Stock
filed as Exhibit 4.3 to the Form 8-A/A Registration Statement (No.
0-23866) and incorporated herein by reference.                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                       
|4.4         |  | Securities Purchase Agreement with the Purchasers dated March 4, 1997
filed as Exhibit 4.5 to the Form S-3 Registration Statement (No.
333-25173) and incorporated herein by reference.                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                       
|4.6         |  | Form of Warrant to Purchase Common Stock issued to the Purchasers under
the Securities Purchase Agreement dated March 4, 1997 filed as Exhibit
4.7 to the Form S-3 Registration Statement (No. 333-25173) and
incorporated herein by reference.                                                       
|            |  |                                                                                                                                                                                                                                                                                                       
|4.7         |  | Amendment No. 1 to Rights Agreement with American Securities Transfer,
Inc. dated October 7, 2002.                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                       
|10.1        |  | Executive Employment Agreement with Joseph H. Kiser, dated effective
June 1, 1997, filed as Exhibit 10.1 to the Form 10-QSB for the quarter
ended September 30, 1998 and incorporated herein by reference.                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                       
|10.2        |  | Lease Agreement dated January 1, 1987 with J.C. Enterprises for the
facility located at 5165 Peoria Street, Denver, Colorado, as amended on
December 6, 1990 and March 23, 1993, filed as Exhibit 10.15 to the Form
SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by
reference.
|            |  |                                                                                                                                                                                                                                                                                                       
|10.3        |  | Settlement Agreement with Joseph H. Kiser, David G. Sherman, Alwin E.
Branson and Carolyn Y. Kiser dated January 31, 1992, as amended March
23, 1993, filed as Exhibit 10.18 to the Form SB-2 Registration
Statement (No. 33-74704-D) and incorporated herein by reference.                           
|            |  |                                                                                                                                                                                                                                                                                                       
|10.4        |  | Profit Sharing Plan and Trust Agreement, as amended and restated
effective April 19, 1994 filed as Exhibit 10.16 to the Form 10-KSB for
the year ended December 31, 1994 and incorporated herein by reference.                                                                                        



---



##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                                                           
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                           
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.5        |  | Lease Agreement dated March 12, 1997 with Five K Investments for the
facility located at 4895 Peoria Street, Denver, Colorado filed as
Exhibit 10 to the Form 10-QSB for the quarter ended September 30, 1997
and incorporated herein by reference.                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.6        |  | Third Amendment to Lease Agreement dated January 1, 1987 with J.C.
Enterprises for the facility located at 5165 Peoria Street, Denver,
Colorado, as amended December 6, 1990, March 23, 1993, and October 30,
1998 filed as Exhibit 10.6 to the Form 10-QSB for the quarter ended
September 30, 1998 and incorporated herein by reference.
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.7        |  | Termination and Consulting Agreement with David G. Sherman dated August
1, 2000 filed as Exhibit 10.1 to the Form 8-K dated August 1, 2000 and
incorporated herein by reference.                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.8        |  | Employment Agreement with Timothy M. Micun dated March 2, 2001 filed as
Exhibit 10.26 to the Form 10-K for the fiscal year ended June 30, 2001
and incorporated herein by reference.                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.9        |  | Credit and Security Agreement with Wells Fargo Business Credit, Inc.
dated June 28, 2001 filed as Exhibit 99.2 to the Form 8-K dated June
28, 2001 and incorporated herein by reference.                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.10       |  | Patent and Trademark Security Agreement with Wells Fargo Business
Credit, Inc. dated June 28, 2001 filed as Exhibit 99.3 to the Form 8-K
dated June 28, 2001 and incorporated herein by reference.                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.11       |  | First Amendment to Credit and Security Agreement dated September 17,
2001 filed as Exhibit 10.1 to the Form 10-Q dated September 30, 2001
and incorporated herein by reference.                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.12       |  | Employee Stock Purchase Plan effective as of November 30, 2001 filed as
Exhibit 10.1 to the Form 10-Q for the quarter ended December 31, 2001
and incorporated herein by reference.                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.13       |  | Amended and Restated Tandem Stock Option and Stock Appreciation Rights
Plan, effective as of January 1, 2002 filed as Exhibit 10.1 to the Form
10-Q for the quarter ended March 31, 2002 and incorporated by reference
herein.                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.14       |  | Stock Grant Plan effective as of January 1, 2002 filed as Exhibit 10.2
to the Form 10-Q for the quarter ended March 31, 2002 and incorporated
herein by reference.                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.15       |  | Agreement between Vari-L Company, Inc. and Asvan Technology, LLC dated
January 25, 2002.                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.16       |  | Second Amendment to Credit and Security Agreement with Wells Fargo
Business Credit, Inc. dated February 8, 2002.                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.17       |  | Form of Indemnity Agreement by and among Vari-L Company, Inc. and each
of Gil J. Van Lunsen (dated June 1, 2001), Sarah L. Booher (dated July
5, 2001), David A. Lisowski (dated July 5, 2001), Anthony B. Petrelli
(dated July 5, 2001), David M. Risley (dated November 21, 2001) and
Robert C. Dixon (dated January 11, 2002).         
|            |  |                                                                                                                                                                                                                                                                                                                                           
|10.18       |  | Employment Agreement with Charles R. Bland dated August 1, 2002.                                                                                                                                                                                                                                                                          



---



##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.19       |  | Employment Agreement with Russell M. Crouch dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.20       |  | Employment Agreement with Richard P. Dutkiewicz dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.21       |  | Employment Agreement with Ernest C. Hafersat dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.22       |  | Employment Agreement with Janice E. Hyland dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.23       |  | Employment Agreement with Matthew D. Pope dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.24       |  | Employment Agreement with Larry M. Romero dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.25       |  | Employment Agreement with Timothy G. Schamberger dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.26       |  | Employment Agreement with Daniel J. Wilmot dated August 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.27       |  | Engagement letter with Green, Manning & Bunch, Ltd. dated September 9,
2002.                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.28       |  | Forbearance Agreement and Third Amendment to Credit and Security
Agreement with Wells Fargo Business Credit, Inc. dated September 26,
2002 filed as Exhibit 99.1 to the Form 8-K dated October 1, 2002 and
incorporated herein by reference.                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.29       |  | Indemnity Agreement, dated October 2, 2002, by and among Vari-L Company
with Charles R. Bland.                                                                                                                                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.30       |  | Indemnity Agreement, dated October 2, 2002, by and among Vari-L
Company, Inc. with Richard P. Dutkiewicz.                                                                                                                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.31       |  | Memorandum of Understanding dated October 3, 2002 between Vari-L
Company, Inc. and the plaintiffs in Civil Action No. 00-S-1198 between
plaintiffs Michael Rasner, et al., on behalf of themselves and other
similarly situated and defendants Vari-L Company, Inc., Derek Bailey,
Joseph Kiser, David G. Sherman and Jon Clark in the United States
District Court, District of Colorado, by and through their respective
attorneys, for settlement of litigation against Vari-L Company, Inc.
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.32       |  | Loan Agreement with Sirenza Microdevices, Inc. dated October 7, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.33       |  | Security Agreement with Sirenza Microdevices, Inc. dated October 7,
2002.                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.34       |  | Exclusivity and Right of First Refusal Agreement with Sirenza
Microdevices, Inc. dated October 7, 2002.                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.35       |  | Resale Registration Rights Agreement with Sirenza Microdevices, Inc.
dated October 7, 2002.                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|23          |  | Consent of KPMG LLP