##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

|    |  |                                                                                   
|--- |  | ----------------------------------------------------------------------------------
|[X] |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|    |  |                                                                                   
|    |  | For the fiscal year ended: June 30, 2002                                          
|    |  |                                                                                   
|[ ] |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|    |  |                                                                                   
|    |  | For the transition period from  to                                                
|    |  |                                                                                   
|    |  | Commission file number: 000-12471                                                 

COLORADO MEDTECH, INC.

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|COLORADO                                                       |  | 84-0731006                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)

4801 North 63rd Street, Boulder, Colorado 80301
(Address of principal executive offices, including zip code)

(303) 530-2660
(Registrants telephone number, including area code)

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

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

Common Stock (no par value)
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

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

The aggregate market value of the voting and nonvoting common stock held
by non-affiliates computed by reference to the average bid and asked prices of
such stock as of August 31, 2002 was $22,716,151.

The number of shares outstanding of the issuers common stock as of August
31, 2002 was 13,168,783.

Documents Incorporated By Reference:The following documents (or portions
thereof) are incorporated by reference into the Parts of this Form 10-K noted:

Part III incorporates by reference from Registrants definitive Proxy Statement
for the Registrants 2002 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934 not later than 120 days after the end of the
fiscal year covered by this Form.





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TABLE OF CONTENTS



|                                                  |                                                                                                          |  |  |  |  |  |  | 
|------------------------------------------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                           
|                                                  | Item 1. Description of Business.                                                                        
|                                                  | Item 2. Description of Property.                                                                        
|                                                  | Item 3. Legal Proceedings.                                                                              
|                                                  | Item 4. Submission of Matters to a Vote of Security Holders.                                            
|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.                                                
|PART IV                                          
|                                                  | Item 14. Controls and Procedures.                                                                       
|                                                  | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.                               
|SIGNATURES                                       
|INDEX TO EXHIBITS                                
|EX-3.2 Bylaws, as Amended                        
|EX-9.1 Letter Agreement dated June 19, 2002      
|EX-10.45.1 Amended/Restated Employment Agreement 
|EX-10.46 Letter Agreement - Gregory Gould        
|EX-10.53 Stock Purchase Agreement                
|EX-10.54 Form of Employment Agreement/Schedule   
|EX-10.55 Non-Competition/Severance Agreement     
|EX-10.56 Third Amendment to Credit Agreement     
|EX-10.57 Officer Sale Bonus Description          
|EX-21.1 Subsidiaries                             
|EX-23.1 Consent of Independent Public Accountants
|EX-99.1 Certificate of Chief Executive Officer   
|EX-99.2 Certificate of Chief Financial Officer   



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PART I




Item 1. Description of Business.

Overview

Colorado MEDtech, Inc. is a provider of advanced medical products and
comprehensive design and manufacturing outsourcing services for healthcare
companies worldwide. Our products are system components that are sold to
medical imaging original equipment manufacturers (OEMs), and ultrasound
accessories that are sold to OEMs and end-users such as hospitals, clinics and
doctors. Our services include development and manufacturing of electronic and
electromechanical devices and instrumentation, product definition, rapid
prototyping, engineering, risk analysis, agency submissions, validation testing
and value engineering. Colorado MEDtech was incorporated in 1977 as a Colorado
corporation.

In fiscal 2002 we realigned our operating segments to more accurately
reflect our current business. We currently conduct our business through two
operating segments, our Colorado operations and our CIVCO operations. Through
our Colorado operations segment, we provide medical device outsourcing services
and manufacture and sell medical products. Through our CIVCO operations, we
design, develop, manufacture and distribute specialized medical accessories and
supplies for imaging equipment and minimally invasive surgical equipment.
Prior to the realignment, we operated through an outsourcing services segment
and a medical products segment. The current Colorado operations were operated
through both segments while the CIVCO operations were operated through the
medical products segment.

The last two fiscal years have been difficult for our Colorado operations
due to the effects of a slowing economy and the impact of a U.S. Food and Drug
Administration (FDA) warning letter we received in January 2001 that hindered
sales. In fiscal 2002, the Colorado operations had gross profit of $6.8
million, a decrease of 41% from the $11.5 million of gross profit for fiscal
2001. Colorado operations sales for fiscal year 2002 were $46.3 million, a
decrease of 22% from fiscal 2001 sales of $59.7 million. During this period of
declining sales and gross profits, the Colorado operations have had a
relatively high level of fixed expenses. Our Colorado operations currently are
experiencing a severe slowdown in booking new orders for services and products.

While the Colorado operations have experienced difficulties, the CIVCO
operations have expanded and produced increasing gross profits. In fiscal
2002, CIVCO had gross profits of $12.8 million, an increase of 38% from the
$9.3 million of gross profit for fiscal 2001. CIVCO sales for fiscal year
2002 were $24.4 million, an increase of 39% from fiscal 2001 sales of $17.5
million.

During the fiscal year ended June 30, 2002 and continuing through the
first quarter of fiscal 2003, we have undertaken several initiatives to become
more focused in our response to the difficult economic and market environments
and become better positioned to capitalize on market opportunities. These
initiatives include:



| |  |  |  The realignment of our operating segments as discussed above.                               
| |  |  | ----------------------------------------------------------------------------------------------
|
| |  |  |  A reduction in force at the Colorado operations of over 30% of the employees
in fiscal 2002.
|
| |  |  |  Additional strategic cost cutting measures.                                                 
|
| |  |  |  Commencement of consolidation of our Colorado operations into one facility.                 
|
| |  |  |  Commencement of a process of exploring strategic alternatives.                              

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Despite the deterioration of the Colorado operations, we have been able to
maintain what we believe is a relatively strong balance sheet, with $7.4
million of cash and short-term investments and working capital of $18.5 million
as of June 30, 2002. Our Board of Directors and management are actively
exploring a full range of strategic alternatives to maximize value for all
shareholders, including but not limited to the sale of some or all of our
operations, the discontinuation of certain operations, mergers, and
divestitures. We have retained an investment banking firm to assist us in this
evaluation. While we expect to undertake one or more of these alternatives
there can be no assurance as to the outcome.

Colorado Operations

Our Colorado operations segment provides medical device outsourcing
services and medical products.

The outsourcing services group provides custom product design, development
and manufacturing outsourcing services to customers ranging from large medical
device OEMs to emerging medical device companies. This group specializes in
contract design and development of diagnostic, biotechnology and therapeutic
medical devices, medical software systems and medical device connectivity. The
group also provides contract manufacturing services for electronic and
electromechanical medical devices and instrumentation systems assembly. Our
development and manufacturing outsourcing services generally involve complex
high-end devices, as opposed to commodity or high-volume products. In
providing outsourcing services, we develop and manufacture products for use in
blood analysis, womens health therapies, and cancer detection systems. We
also perform various forms of verification and validation testing for software
applications and medical devices. We maintain a technical staff of engineers
with backgrounds focused in the electrical, mechanical, software and
manufacturing disciplines.

The medical products group designs, develops and manufactures a broad
range of imaging power system hardware and software, including advanced
magnetic resonance imaging (MRI) systems, high-performance radio frequency
(RF) amplifiers for MRI systems, and services for high-voltage x-ray
generator subsystems for computed tomography (CT) scanners. Although they
are grouped under the medical products revenue item in our financial
statements, the products produced by our Colorado operations are not regulated
medical devices, but instead are imaging power system components.

CIVCO

CIVCO Medical Instruments Co., Inc. is a wholly-owned subsidiary of
Colorado MEDtech. CIVCO designs, develops, manufactures and distributes
specialized medical accessories and supplies for ultrasound imaging equipment
and for minimally invasive surgical equipment. CIVCO operations are considered
a separate segment for financial reporting purposes.

CIVCOs product line of accessories and supplies for ultrasound systems
includes sterile needle guides used in ultrasound biopsy and drainage
procedures, transducer covers, print and video media for recording ultrasound
images, and scanning procedure gel. CIVCO supplies
medical devices, supplies and accessories to the ultrasound and minimally
invasive OEM and end-user markets.

On February 8, 2002, CIVCO acquired 100% of the common stock of Barzell
Whitmore Maroon Bells, Inc. Barzell designs and manufactures positioning and
stabilizing devices and accessories

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used in ultrasound-guided minimally
invasive mens health surgical procedures such as prostate procedures and
brachytherapy for prostate cancer treatment. The acquisition of Barzell
expands and complements CIVCOs product lines. We anticipate that the
acquisition of Barzell will help us create new products in the future. As part
of the acquisition, Colorado MEDtech paid $2,000,000 in cash, issued 127,000
shares of its common stock to the selling shareholders of Barzell (valued at
approximately $337,000), assumed and repaid at closing approximately $230,000
of debt and incurred transaction costs of approximately $190,000. Under the
terms of the agreement, the former shareholders of Barzell could receive
additional cash payments, totaling up to an additional $2.2 million over
five-and-one-half years, based upon achievement of certain predetermined
cumulative gross profit targets. In addition, the former shareholders of
Barzell entered into employment agreements with CIVCO pursuant to which they
could receive additional incentive payments if other predetermined gross profit
targets are exceeded.

Products and Services

Colorado MEDtech is a full-service One Source OutSource® provider of
advanced medical technology outsourcing services, including device and
disposables development, software, medical device connectivity, manufacturing,
system components for medical imaging, and ultrasound accessories.

Colorado Operations

Outsourcing Services in Colorado

The Colorado operations outsourcing services consist of custom design,
development and manufacture of medical products and software development,
including medical device connectivity, for major medical device and
biotechnology companies.

Our principal outsourcing markets and services include:



| |  | Medical therapeutic and diagnostic devices  we design and develop
complex electronic and electromechanical instruments for the detection
and treatment of disease.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We perform our therapeutic projects for companies that sell patient
therapy products. These products are used in surgery, for the
treatment of medical conditions, and for monitoring patients. They
include devices such as infusion pumps, surgical devices, blood
oxygen monitors and devices for cardiovascular treatment.



| |                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We perform our diagnostic projects for companies involved in
selling in vitrodiagnostic products, biotechnology systems and
laboratory equipment. Typically, these instruments detect, measure
or monitor the concentration of a target chemical or biological
component in a fluid sample. Products in the diagnostic market can
be placed in two categories:



| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Clinical diagnostic instruments  devices that are located
in a laboratory and used for analyzing patient samples;                                                                     
|
| | Biotechnology  these devices include cellular and molecular
biology systems, automated DNA sample preparation, genetic
probe systems and DNA systems for isolation and
identification.

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| |  | Medical imaging systems  we design and develop advanced application
software and major subsystem hardware. Our work in this area includes
the development of leading-edge MRI software, cardiac and vascular
diagnostic application software and high-density RF amplifier systems.
Contracts in this business area are undertaken with major OEMs in the
imaging system market.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Medical software and medical device connectivity  we develop
software for electronic and electromechanical medical products and
provide medical software verification and validation services. We
perform our software and medical device connectivity projects for
customers that produce therapeutic, pharmaceutical or diagnostic
instruments. The projects are generally the development of software
for use in a device, and/or verification and validation services to
ensure the quality and reliability of software to be used in medical
devices. The Colorado operations medical device connectivity
technology platform permits our clients to develop devices that can
access clinical data from remote sites, remotely maintain and
troubleshoot devices, and to provide remote software upgrade
capabilities.
| 
| |  | Manufacturing  we manufacture complex electronic and
electromechanical medical devices. We are a registered device
manufacturer with the FDA and are required to meet the agencys
Quality System Regulation (QSR).The Colorado operations quality
system is certified to and meets ISO 9001:1994 and EN46001:1996
standards. Our manufacturing projects include pre-production
engineering and commercialization services, turnkey manufacturing of
FDA Class I, Class II and Class III devices and system test services.                                                                                                                                                                                                                                                                                               

Our design and development projects generally include product concept
definition, development of specifications for product features and functions,
product engineering specifications, instrument design, development, prototype
production and testing, and development of test specifications and procedures.

Our outsourcing services are performed by engineers, scientists,
technicians, manufacturing specialists and assembly workers. We believe our
experience in applying our proven methodologies and advanced technologies to
the development of innovative new products gives our clients an advantage in
their marketplace by providing them with state-of-the-art, quality products in
a timely and cost-effective manner.

Rapidly advancing technologies, heightened worldwide competition and the
demands of an increasingly sophisticated marketplace have created pressures on
companies, both domestic and international, to develop high quality,
cost-effective, world-class products in time to meet the narrowing windows of
opportunity in the marketplace. These conditions have produced opportunities
for companies that can react to those market needs. Such companies need to
have the technology, experience and ability to develop high quality,
state-of-the-art products. We believe we are positioned to provide our
clients, within a single integrated structure, the product development and
manufacturing resources they need to satisfy the requirements of a worldwide
marketplace.

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Medical Products in Colorado

Our current products are high performance power amplifiers and related
subsystems for use in medical imaging systems, such as MRI machines and service
for CT scanners. The medical imaging power system products feature the
following high-performance power delivery subsystems for medical applications:



| |  |  | Solid-state RF amplifiers for MRI systems  
| | - |  | -------------------------------------------
|
| |  |  | Solid-state RF amplifiers for laser systems
|
| |  |  | Tube RF amplifiers for MRI systems         
|
| |  |  | Shim power supplies                        
|
| |  |  | MRI guidance hardware                      
|
| |  |  | RF coil components                         

Our advanced power products combine direct current (DC), RF, digital and
system control technologies. Our solid state amplifier product line, recently
developed, provides state-of-the-art RF technology MRI applications. Other
products include an RF generator for an instrument used in a laser-based
surgical procedure that improves perfusion of the heart.

Our imaging power generation and amplification products are generally sold
to large, multi-national medical imaging companies that integrate the power
subsystems into their imaging systems.

CIVCO

CIVCO is a leading manufacturer and supplier of ultrasound accessories.
Ultrasound equipment OEMs compete fiercely and face constant pressure to expand
their installed base and speed new products to market. Within this competitive
environment, OEMs rely on accessories of the type sold by CIVCO to complement
their products and allow end-users to safely and cost-effectively perform
clinical procedures. CIVCO has relationships with the ultrasound industrys
leading OEMs, which affords it the ability to cost-effectively spread
development, manufacturing and distribution costs across product lines for
multiple OEMs.

CIVCOs product line contains four distinct groups of product categories
used to complement ultrasound imaging equipment and minimally invasive surgical
equipment: Image-guided biopsy systems, equipment covers, imaging equipment
positioning systems and ultrasound supplies:



| |  |  | Image-guided biopsy systems are composed of a
mechanical bracket attached to an ultrasound imaging transducer
and a guide for directing a biopsy needle or other invasive
instrument.                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Equipment covers, composed of latex or polyurethane
sheaths, provide a viral barrier between the ultrasound equipment
and the patient and operator, and are used in examinations and
surgical procedures.                                                        
|
| |  |  | Ultrasound supplies are consumable supplies used in
connection with ultrasound systems, including print media (paper
and film), acoustic gel, cleaning and disinfecting supplies,
transducer soaking systems, medical printers, and other
miscellaneous supplies.

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| |  |  | Imaging equipment positioning systems are composed of
positioning and stabilizing devices, electronic movers, template
needle guides and accessories. The products work with medical imaging technology such as
ultrasound equipment during minimally invasive surgical procedures
for diagnosis and treatment of urologic and gynecologic diseases.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

CIVCOs ultrasound imaging equipment accessories and supplies are sold to
large, multi-national medical ultrasound imaging companies, to international
distributors of imaging products, and to end users such as hospitals, clinics
and doctors. Our specialized positioning and stabilizing devices for
image-guided minimally invasive surgery are sold to OEMs, distributors and end
users such as hospitals, clinics and doctors.

Financial information about our business segments is contained in the
Consolidated Financial Statements and notes thereto contained in this report.

Marketing and Sales

Colorado Operations

We market our Colorado outsourcing services and medical products through a
direct sales force and independent representatives located throughout the
United States. The sales process typically involves a lengthy quotation
process whereby a potential customer will provide us a set of requirements to
be achieved through a development process. These range from help in providing
a proof a concept to the development and manufacture of a new medical device.
This process can take up to a year, and potentially longer, to have all of the
requirements addressed, funding for the project in place and a decision to be
made by the potential client. Typical contract terms can range from one month,
for a proof of concept research project, to a nine-month development project,
to three years for a manufacturing agreement. Our Colorado group promotes its
services through industry advertising and exhibition at industry trade shows.

CIVCO

We market our CIVCO imaging equipment accessories and supplies directly
to ultrasound imaging equipment manufacturers, through joint marketing
programs with such manufacturers, through an international distribution
partner network and through telephone sales to end users. CIVCOs
relationships with its OEM customers are the most important element of its
marketing and sales efforts. CIVCO does not have a direct sales force.
Instead, CIVCO has formed strategic partnerships with its OEM customers to
drive CIVCO sales through the OEMs direct sales and co-marketing activities.
CIVCO leverages OEM partnerships to:



| |  |  | Develop cost-effective products to OEM specifications;                                                               
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | Co-market and sell CIVCO products through all distribution channels;                                                 
|
| |  |  | Distribute the cost of product development and regulatory
compliance for products across the ultrasound industry; and
|
| |  |  | Strengthen CIVCOs brand and market presence.                                                                        

CIVCO has established relationships with seven ultrasound OEMs that sell
the majority of the worlds ultrasound equipment each year. The loss of an OEM
strategic partner could adversely

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affect CIVCOs ability to grow the portion of
its business dedicated to that OEMs imaging systems. CIVCO also promotes its
services and products through advertising, direct mail and exhibition at
industry trade shows.

Significant Customers

The following customers accounted for more than 10% of Colorado MEDtechs
consolidated revenues for the following years ended June 30:

|                   |  |  |              |   |      |  |      |   |  |  |    |   | 
|------------------ |  |  | ------------ | - | ---- |  | ---- | - |  |  | -- | - | 
|                   |  |  | Consolidated
|                   |  |  |             
|                   |  |  | 2002         |   | 2001 |  | 2000
|                   |  |  |              |   |      |  |     
|Customer           |  |  |              |   |      |  |      |   |  |  |    |  
|GE Medical Systems |  |  | 21           | % |      |  | 19   | % |  |  | 19 | %
|Johnson & Johnson  |  |  | 11           | % |      |  | 2    | % |  |  | 2  | %
|Hitachi            |  |  | 5            | % |      |  | 16   | % |  |  | 13 | %
|Gen-Probe          |  |  |             | % |      |  | 6    | % |  |  | 11 | %

Foreign sales accounted for 14%, 25% and 22% of our total sales in fiscal 2002,
2001, and 2000, respectively.

Colorado Operations

Outsourcing Services in Colorado

The following customers accounted for more than 10% of the total
outsourcing revenue for our Colorado operations for the following years ended
June 30:

|                  |  |                      |    |      |  |  |    |  
|----------------- |  | -------------------- | -- | ---- |  |  | -- | -
|                  |  | Colorado Operations 
|                  |  | Outsourcing Services
|                  |  |                     
|                  |  | 2002                 |    | 2001
|                  |  |                      |    |     
|Customer          |  |                      |    |      |  |  |    |  
|Johnson & Johnson |  |                      | 28 | %    |  |  | 5  | %
|Medtronic         |  |                      | 10 | %    |  |  | 7  | %
|Hitachi           |  |                      | 3  | %    |  |  | 16 | %
|Gen-Probe         |  |                      |   | %    |  |  | 12 | %

Due to the nature of our outsourcing business, Colorado typically receives
about 35% to 45% of its total revenues from three to four customers in any
given year. It is also typical that revenues from these customers account for
a very high percentage of our total revenues for a one to three year period.
The loss of a significant customer could have a material adverse impact on our
operations and financial condition.

Medical Products in Colorado

The following customers accounted for more than 10% of the total medical
products revenue for our Colorado operations for the following years ended June
30:

|                   |  |                     |    |      |  |  |    |  
|------------------ |  | ------------------- | -- | ---- |  |  | -- | -
|                   |  | Colorado Operations
|                   |  | Medical Products   
|                   |  |                    
|                   |  | 2002                |    | 2001
|                   |  |                     |    |     
|Customer           |  |                     |    |      |  |  |    |  
|GE Medical Systems |  |                     | 64 | %    |  |  | 55 | %
|Hitachi            |  |                     | 14 | %    |  |  | 29 | %
|Philips            |  |                     | 14 | %    |  |  | 15 | %

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The Colorado medical products business has historically been characterized
by sales of a limited number of products to a small number of customers, and GE
Medical Systems (GEMS) has been the largest customer of the medical products
group for many years. Colorado has generally supplied products to GEMS under
annual production contracts. Our current contract to supply
products to GEMS expires December 31, 2002, and we are currently negotiating
with GEMS the terms under which we expect to supply products to them after such
date, but there can be no assurance that we will sell products to GEMS after
the expiration of the current agreement. The loss of GEMS as a customer could
have a material adverse impact on our operations and financial condition. In
the summer of 2001, Hitachi Medical Corporation (a significant customer in
fiscal 2001 and 2000) cancelled the contract under which we manufactured x-ray
generator tubes. While we do service work for Hitachi, we expect that Hitachi
will not be a 10% customer of the Colorado medical products group in fiscal
2003. The cancellation had a material negative impact on our fiscal 2002
revenues and resulted in approximately $3,085,000 of inventory to
write off in fiscal 2001.

CIVCO

GEMS is the only customer that accounts for at least 10% of CIVCOs
revenue. In fiscal 2002 and 2001 GEMS accounted for 12% and 14%, respectively.
CIVCO typically has over 50% of its sales to end users and less than 50% to
OEMs.

Bookings and Backlog

Bookings are recorded as we receive signed orders and contracts for
products and services. Backlog is defined as signed contracts and/or purchase
orders that we expect to ship or bill out over the upcoming 12-month period.
Neither bookings nor backlog constitute recorded revenue. Because customers
have the ability to cancel orders in certain circumstances, there is no
guarantee that backlog will result in recorded revenue. Orders booked during
fiscal year 2002 were approximately $64 million (net $54 million after
cancellations and delays of approximately $10 million), compared to orders
booked of approximately $91 million (net $85 million after contract
cancellations and delays of approximately $6 million) in fiscal year 2001.

At June 30, 2002, our backlog of orders for services or shipment of
product in fiscal 2003 was approximately $20 million compared to approximately
$37 million at June 30, 2001. Bookings and backlog information for the years
ended June 30, by segment is as follows:

(in millions)

|                       |                      |              |      |             |      |      |      |      |      |      |      |      |      |   |      |      |      | 
|---------------------- | -------------------- | ------------ | ---- | ----------- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | - | ---- | ---- | ---- | 
|                       |                      |              |      | Backlog    
|                       |                      | Net Bookings |      | at June 30,
|                       |                      |              |      |             |      |     
|                       |                      |              |      | 2002        |      | 2001 |      | 2002 |      | 2001
|                       |                      |              |      |             |      |      |      |      |      |     
|Colorado               |                      |              |      |             |      |      |      |      |      |      |      |      |      |   |      |     
|                       | Outsourcing Services |              | $    | 16.0        |      |      | $    | 35.3 |      |      | $    | 8.6  |      |   | $    | 19.9 |     
|                       | Medical Products     |              |      | 14.2        |      |      |      | 33.0 |      |      |      | 10.6 |      |   |      | 15.8 |     
|                       |                      |              |      |             |      |      |      |      |      |      |      |      |      |   |      |      |     
|                       | Total Colorado       |              |      |             | 30.2 |      |      |      | 68.3 |      |      |      | 19.2 |   |      |      | 35.7 | 
|CIVCO                  |                      |              | 24.3 |             |      |      | 17.3 |      |      |      | 1.1  |      |      |   | .8   |     
|                       |                      |              |      |             |      |      |      |      |      |      |      |      |      |   |      |      |     
|Total Colorado MEDtech |                      | $            | 54.5 |             |      | $    | 85.6 |      |      | $    | 20.3 |      |      | $ | 36.5 |     
|                       |                      |              |      |             |      |      |      |      |      |      |      |      |      |   |      |      |     

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Colorado Operations

Outsourcing Services

Due to the long sales cycle for the Colorado outsourcing services
mentioned under Marketing and Sales above, we believe that backlog is a
reasonably good indicator of near term sales. Our Colorado outsourcing
services operations are experiencing a severe slowdown in booking new orders
for products and services. The decrease in bookings and backlog for
outsourcing services was due to the effect the FDA warning letter had on our
ability to obtain new sales, the completion of some significant research and
development projects, customer delays of deliveries on manufacturing
projects, cancellation of significant manufacturing projects and the general slowdown
of the economy. In January 2001, we received a warning letter from the FDA
regarding certain areas in which our Longmont, Colorado contract medical device
manufacturing facility was not in conformance with the FDAs Quality System
Regulation. We took actions to strengthen our quality systems and address the
areas of non-conformance presented by the FDA, and in October 2001 received a
letter from the FDA resolving the issues identified in the letter. Even after
its resolution, the FDA warning letter and its effect on customers has
continued to adversely impact our ability to book new sales for the medical
device development and manufacturing portions of the Colorado operations
segment of our business. We expect the factors mentioned above, including the
effect of the general slowdown of the economy on our customers and their end
markets, to continue to negatively impact our ability to increase Colorado
outsourcing service bookings in the near future. Should certain of the
strategic alternatives under consideration occur, such as the discontinuation
of or sale of an operating unit, a significant portion of our backlog may not
be realized as revenue.

Medical Products

There are two primary sales booking processes for Colorados medical
products. The majority of the business activity is based upon a supply
agreement with GEMS for various MRI components. Orders are also placed for
additional units, spares and service on a continual basis for OEMs (including
GEMS), hospitals and other customers. We record bookings as these orders are
received. Colorado medical products bookings in fiscal 2002 were lower than
those in fiscal 2001 primarily due to timing issues regarding the dates on
which we received GEMS orders  the orders for fiscal 2002 and 2001 production
were both booked in fiscal 2001. We are currently negotiating with GEMS the
terms under which we expect to supply imaging power supply products to them
after December 31, 2002.

CIVCO

Because the CIVCO business largely consists of the sale of a large volume
of low-price disposable products, the CIVCO sales process for existing products
is typically much shorter than Colorados. Orders are taken on a daily basis
and usually processed for shipment the same day. Backlog at any given date for
CIVCO is generally approximately one-half of the upcoming months sales. The
increase in bookings in fiscal 2002 compared to fiscal 2001 was primarily due
to the internal growth of CIVCOs business, and growth of the business through
our acquisitions of Barzell in February 2002 and ATL in December 2000.

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Research and Product Development

For fiscal years 2002, 2001 and 2000, we incurred approximately
$3,357,000, $5,077,000 and $4,026,000, respectively, for research and
development activities. The decrease in fiscal 2002 compared to fiscal 2001
was due to the progress that we had made on our RF solid state amplifier
system, which did not require as many resources during fiscal 2002, as in
fiscal 2001. We also stopped development work on generators for CT scanners
after the cancellation of the Hitachi contract in the summer of 2001. We
anticipate research and development expenditures for fiscal year 2003 to be
less than those of fiscal year 2002, as work required in development on the
solid state amplifier approaches completion.

Consistent with our operating plans, we are continuously pursuing
alliances and the acquisition and development of new or improved technologies
or products. If we identify any opportunities that we believe are commercially
viable and are in line with our strategies and our current process to explore
strategic alternatives, we may acquire such technologies and increase the
amount of future research and development expenditures. The acquisition of
Barzell is an example of an acquisition made to strengthen our product
development capabilities.

Colorado Operations

We intend to continue to develop new products and services for a broad
range of customers. In addition to internal development efforts, we may
license or acquire related technologies and/or products from external
resources.

While we employ approximately 127 engineers, scientists and technicians in
research and development activities, these employees efforts are primarily
devoted to contract work for customers and in such cases their expenses are
included in the cost of sales and services. During fiscal year 2002, research
and development expenses were attributable to RF solid state amplifier systems,
medical device connectivity, and other medical imaging systems.

CIVCO

CIVCOs research efforts include development of new technologies targeted
to identify and solve clinical needs relating to its core product lines. In
coordination with product development, CIVCOs manufacturing team has been
developing new molding, machining and assembly processes to improve
manufacturing performance and reduce manufacturing cost.

CIVCO manufactures cost-effective molded parts by utilizing low-cost
tooling technologies. New manufacturing techniques have enabled CIVCO to
introduce a line of latex/polyisoprene and poly-bonded equipment covers which
contribute to sales in the surgical market. Automated material processing
equipment is being incorporated into the cover manufacturing areas to reduce
labor and material costs.

Competition

Colorado Operations

Outsourcing Services in Colorado

The market for medical outsourcing and products is highly competitive.
The principal competitive factors are reputation, price, quality and schedule.
Our present and future competition comes from a variety of sources. These
sources include consulting, commercial

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product development and manufacturing companies. There are a number of firms that provide services similar to ours and vary from small consulting operations offering a
small subset of our services to integrated service companies. Competitors for
Colorados outsourcing services include Plexus Corporation, MedSource, Inc.,
KMC Systems, Inc., Pemstar, Inc., Nova Biomedical, UMM Electronics, Inc.,
Sanmina-SCI Corp., UTI Corporation and Sparton Corporation. On a lesser scale,
we also compete with commercial and university research laboratories. There
are both for-profit and not-for-profit organizations nationwide that perform
services similar to the product development aspect of our business. These
include Battelle, Inc., Stanford Research Institute, Arthur D. Little Center
for Product Development, Southwest Research Institute and the research
capabilities within the nations leading universities.

As we develop and manufacture other proprietary products and as we expand
our services in medical device connectivity, we can expect to encounter
additional competitors, many of which may be larger than Colorado MEDtech and
in a stronger financial position. As cost containment efforts continue in the
healthcare marketplace, competition will continue to be intense.

Medical Products in Colorado

The principal competitors for our imaging power generation products are
Analogic Corporation and MKS Instruments, Inc. The principal competitive
factors are technology and price.

CIVCO

The principal competitors for CIVCOs image-guided biopsy systems are B-K
Medical and Amedic. While there are many competitors with our equipment cover
business, the two primary competitors are Microtek Medical and Sheathes. Both
market ultrasound transducer covers similar to CIVCOs product offerings. Our
main competition for imaging equipment positioning systems comes from Tayman in
Europe and RTP in the United States. Imaging supplies are sold by many
distributors across the U.S. Imaging Associates is a major supplier of print
media and hardware. GE Diagnostic Imaging Accessories and Cone Instruments
sell print media, print hardware, gel, and other consumables directly to end
users. The principal competitive factors are quality, technology, price and
customer service.

Manufacturing

Most of the materials and components we use are available from a number of
different suppliers. We generally maintain multiple sources for most items,
but some components are single sourced. We are dependent upon our suppliers
for timely delivery of quality components. To date, we have not experienced
significant delays in the delivery of such components.

Colorado Operations

Colorado manufactures its proprietary products and customer products at
facilities in Boulder and Longmont, Colorado. In addition, certain of our
proprietary imaging products sold through our Colorado operations segment are
manufactured for us by other contract manufacturing firms. Colorado is in the
process of consolidating all of its operations into one leased facility in
Boulder, Colorado. Most products are built in response to specific customer
purchase orders, while others are fabricated as standard products. The
manufacturing process consists primarily of assembly

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and test of custom and commercially available components from outside sources. In addition, we
machine certain parts in our Boulder, Colorado facility.

CIVCO

CIVCO manufactures, machines and molds many of its proprietary products in
its Kalona, Iowa facility. In addition, other contract manufacturing firms
provide CIVCO with components and services, primarily molding, machining, latex
dipping, and sterilization. The manufacturing process consists primarily of
fabrication, assembly, test and packaging of custom and commercially available
components from outside sources.

Product Warranties and Service

Warranty periods for our products range from 90 days to 12 months, but in
limited cases for up to 24 months, we provide warranties against defects in
materials and workmanship. At the time the sale is recorded, we establish a
provision for estimated expenses of providing service under these warranties.
Non-warranty service is billed to the customer as performed. As of June 30,
2002 and 2001, accrued warranty was $377,000 and $424,000, respectively. The
assumptions we use to estimate warranty accruals are re-evaluated periodically
in light of actual experience and, when appropriate, the accruals are adjusted.
Our determination of the appropriate level of warranty accrual is subjective,
and based on estimates and actual experience that can be different than our
expectations.

Government Regulation

We are a registered device manufacturer with the FDA. The Medical Device
Amendments of 1976 to the Food, Drug and Cosmetic Act (the Act) and
regulations issued or proposed thereunder, including the Safe Medical Devices
Act of 1990, provide for regulation by the FDA of the marketing, design,
manufacturing, labeling, packaging and distribution of medical devices. These
regulations apply to products that are outsourced to us for manufacture, which
includes many of our customers products, but not to our imaging and power
generation products. The Act and the regulations include requirements that
manufacturers of medical products and devices register with and furnish lists
of products and devices manufactured by them to the FDA. Prior to marketing a
medical product or device, the company selling the product or device must
obtain FDA clearance. Tests to be performed for approval range from bench-test
data and engineering analysis to potentially expensive and time-consuming
clinical trials. The types of tasks for a particular product submission are
indicated by the classification of the device and previous approvals for
similar devices. There are also certain requirements of other federal laws and
of state, local and foreign governments, which may apply to the manufacture and
marketing of our products.

The FDAs Quality System Regulation (QSR) for medical devices sets forth
standards for the design and manufacturing processes that require the
maintenance of certain records and provide for unscheduled inspections of our
facilities. Our procedures and records were reviewed by the FDA during routine
general inspections in 1995 and each year from 1997 to 2001.

In January 2001, we received a warning letter from the FDA regarding
certain areas in which our Longmont, Colorado contract medical device
manufacturing facility was not in conformance with the QSR. The warning letter
stemmed from shortcomings in the quality system and from previous FDA audit
findings that had not been adequately resolved. We took

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actions to strengthen our quality systems and address the areas of non-conformance presented by the
FDA, and in October 2001 received a letter from the FDA resolving the issues
identified in the letter. The FDA warning letter has had a significant adverse
effect on the medical device development and manufacturing portions of the
Colorado operations segment of our business. Prior to its resolution, the
warning letter adversely affected our ability to ship certain medical
devices we manufactured. Even after its resolution, the FDA warning letter has
continued to adversely impact our operating performance and our ability to book
new sales for the medical device development and manufacturing portions of the
Colorado operations segment of our business. During the year ended June 30,
2002, we spent approximately $376,000 in consulting fees to address the issues
raised in the warning letter and to improve our quality system generally.
While we believe that we are currently in substantial compliance with QSR,
there can be no guarantee that future inspections by the FDA will not result in
similar adverse circumstances.

The ISO 9000 series of quality management and quality assurance standards
has been adopted by over 90 countries. ISO standards require that a quality
system be used to guide work to assure quality and to produce quality products
and services. ISO 9001, the most comprehensive of the standards, covers 20
elements. These elements include management responsibility, design control,
training, process control and servicing. ISO 9001 is the quality systems
standard used by companies providing design, development, manufacturing,
installation and servicing. Our quality systems are ISO 9001 and EN 46001
certified.

There are no material costs or expenses associated with our compliance
with federal, state and local environmental laws.

Intellectual Property

While the CIVCO business and the medical products group of our Colorado
operation have maintained the practice, where possible, of obtaining patent
protection on our products, we believe that any legal protection afforded by
patent, copyright, and trade secret laws are of secondary importance as a
factor in our ability to compete in the imaging accessories, minimally invasive
products and power systems markets. Our future prospects in those markets are
more a function of our ability to develop products which satisfy customer
needs, and the ability of our personnel in selling those products.

From time to time we file patent applications and continuations to cover
new and improved methods, apparatus, processes, designs and products. We plan
to make additional patent applications, trademark, service mark, and
certification mark applications as appropriate.

In addition to the patents, we try to protect our proprietary technology
and know-how through established security practices and confidentiality
agreements with each of our employees, consultants, suppliers and technical
advisors. There can be no assurance that these agreements or procedures will
provide meaningful protection for our trade secrets in the event of
unauthorized use or disclosure of such information. The patents we hold provide
barriers to competition in applicable portions of the imaging accessories and
power systems portion of our medical product business. The loss of some or all
of the protection of the patents could make it easier for other companies to
enter our markets and compete against us by eroding our ability to
differentiate ourselves on the basis of technical superiority. While we
believe the protection afforded by the patents is strong, there can be no
assurance that other companies will not be able to design and build competing
products in a manner that does not infringe the patents.

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Colorado Operations

We have one United States patent that applies to a portion of our Colorado
power system products. At present, we have seven United States patent
applications and office actions pending relating to imaging technology and
information technology systems.

We have one registered mark with the United States Patent and Trademark
Office and one U.S. trademark pending, which relate to the Colorado operations.

CIVCO

CIVCO holds 14 United States patents of varying duration that cover the
design and manufacture of a portion of our imaging accessories and minimally
invasive products. At present, we have 14 United States patent applications
and office actions pending relating to needle guides and sensor positioning
devices.

CIVCO has 14 registered marks with the United States Patent and Trademark
Office and has four U.S. trademarks or servicemarks pending.

Employees

As of August 31, 2002, we had 360 employees, of which 238 were employed at
our Colorado facilities and 122 were employed by CIVCO. Of the CIVCO
employees, 116 are in Kalona, Iowa and six are in Sarasota, Florida. No
employees are represented by labor organizations, and there are no collective
bargaining agreements.

|                           |  |          |     |       |  |           |     |       |  |  |   |  |  |  |     | 
|-------------------------- |  | -------- | --- | ----- |  | --------- | --- | ----- |  |  | - |  |  |  | --- | 
|                           |  | Colorado |     | CIVCO |  | Corporate |     | Total
|                           |  |          |     |       |  |           |     |      
|Manufacturing & R&D        |  |          | 189 |       |  |           | 97  |       |  |  |  |  |  |  | 286 | 
|Sales and marketing        |  |          | 10  |       |  |           | 13  |       |  |  |  |  |  |  | 23  | 
|General and administrative |  |          | 31  |       |  |           | 12  |       |  |  | 8 |  |  |  | 51  | 
|                           |  |          |     |       |  |           |     |       |  |  |   |  |  |  |     | 
|Total                      |  |          | 230 |       |  |           | 122 |       |  |  | 8 |  |  |  | 360 | 

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Item 2. Description of Property.

With the exception of the CIVCO facility, our operations are located in
leased facilities. The following table contains a summary of the significant
terms of the leases:

|                                            |  |                                            |  |             |         |         |  |              |  |         |        | 
|------------------------------------------- |  | ------------------------------------------ |  | ----------- | ------- | ------- |  | ------------ |  | ------- | ------ | 
|                                            |  |                                            |  |             |         |         |  | Lease        |  | Average
|                                            |  |                                            |  |             |         |         |  |              |  |        
|Facility                                    |  | Operations                                 |  | Square Feet |         | Expires |  | Monthly Rent
|                                            |  |                                            |  |             |         |         |  |             
|4801 North 63rd
Street,
Boulder, Colorado   |  | Colorado operations
Corporate
headquarters |  |             | 104,000 |         |  | 6/30/12      |  | $       | 81,900 | 
|410 South Sunset
Street,
Longmont, Colorado |  | Colorado operations                        |  |             | 18,000  |         |  | 12/31/02     |  | $       | 14,200 | 
|345 South Francis
Longmont, Colorado        |  | Colorado operations
CIVCO minimally        |  |             | 11,000  |         |  | 8/31/03      |  | $       | 5,400  | 
|1121 Lewis Avenue,
Sarasota, Florida        |  | invasive
technologies                      |  |             | 3,000   |         |  | 2/8/07       |  | $       | 1,600  | 

In addition to the rent set forth in the table above, we are responsible
for certain expenses associated with the properties, including property taxes,
insurance and maintenance. We also lease miscellaneous space on a month to
month basis in Boulder and Longmont of approximately 3,000 square feet.

In connection with the lease for the 4801 North 63rd Street property, we
entered into an agreement with the landlord of the property pursuant to which
the landlord agreed to build a 50,000 square foot addition adjacent and
connected to the leased property, and we agreed to lease the addition at an
average monthly rent rate of $57,400 per month for a ten year term. The letter
agreement provides that the 10-year term for the 104,000 square feet restarts
upon completion of the addition, resulting in a 10-year lease for the full
154,000 square feet. The addition is under construction and is expected to be
completed during fiscal year 2003. For more information on our contractual
obligations, see Note 11 of the Notes to the Consolidated Financial Statements
included in the Companys 2002 Form 10-K.

Future minimum lease
payments, under the lease for the 4801 N. 63rd Street facility for the fiscal years
ending June 30 are as follows:

|                             |  |        |            | 
|---------------------------- |  | ------ | ---------- | 
|Year                         |  | Amount
|                             |  |       
|2003                         |  | $      | 895,000    | 
|2004                         |  |        | 918,000    | 
|2005                         |  |        | 942,000    | 
|2006                         |  |        | 967,000    | 
|2007                         |  |        | 992,000    | 
|2008 - 2012                  |  |        | 5,364,000  | 
|                             |  |        |            | 
|Total minimum
lease payments |  | $      | 10,078,000 | 

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The space we lease for our Colorado operations is currently underutilized.
We are in the process of consolidating the operations currently housed in the
410 South Sunset and 345 South Francis facilities into the 4801 North 63rd
Street facility, and we expect the consolidation to be completed in fiscal
2003. After the consolidation, we expect that the 4801 North 63rd Street
facility and the addition will result in the Colorado operations having excess
capacity. If we have excess capacity, it will have an adverse effect on our
results of operations.

We own the land and building which houses the development and
manufacturing facilities of CIVCO, located at 102 First Street South, Kalona,
Iowa. To accommodate growth of the CIVCO business, we purchased a one-acre
plot of land adjacent to the CIVCO property and are completing a 23,000 square
foot addition to the CIVCO building on such property, bringing the total square
footage to 48,000 square feet. The building consists of office and light
manufacturing space. When completed, the cost of the land and the addition,
which includes a class 7 (10,000) clean room, is expected to be $2,030,000,
$1,257,000 of which was expended in the year ended June 30, 2002.

We own a 10.91-acre parcel of industrial-zoned vacant land in Louisville,
Colorado (the Louisville Parcel), originally acquired in the 1992 merger
between RELA and Cybermedic. At June 30, 2002, we are holding the land as
held-for-sale.




Item 3. Legal Proceedings.

We are not involved in any material pending legal proceedings




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

There were no matters submitted to a vote of shareholders during the last
quarter of the fiscal year ended June 30, 2002.




PART II




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

Colorado MEDtech common stock is traded on the Nasdaq Stock Market
National Market system. The following table sets forth the range of high and
low closing prices of our common stock as reported by Nasdaq during fiscal
years 2002 and 2001:

|                      |  |                            |      |      |  |      |      |     |  |   |       |  |  |   |      | 
|--------------------- |  | -------------------------- | ---- | ---- |  | ---- | ---- | --- |  | - | ----- |  |  | - | ---- | 
|                      |  | Fiscal Year Ended June 30,
|                      |  |                           
|                      |  | 2002                       |      | 2001
|                      |  |                            |      |     
|                      |  | High                       |      | Low  |  | High |      | Low
|                      |  |                            |      |      |  |      |      |    
|First Fiscal Quarter  |  | $                          | 4.91 |      |  | $    | 2.10 |     |  | $ | 10.00 |  |  | $ | 5.25 | 
|Second Fiscal Quarter |  | $                          | 3.60 |      |  | $    | 2.04 |     |  | $ | 9.06  |  |  | $ | 3.13 | 
|Third Fiscal Quarter  |  | $                          | 3.45 |      |  | $    | 2.56 |     |  | $ | 4.94  |  |  | $ | 3.03 | 
|Fourth Fiscal Quarter |  | $                          | 3.90 |      |  | $    | 2.25 |     |  | $ | 4.95  |  |  | $ | 3.38 | 

The foregoing quotations represent quotations between dealers without
adjustment for retail markups, markdowns or commissions and may not represent
actual transactions.

At June 30, 2002, we had approximately 1,165 shareholders of record. We
have never paid a dividend to our shareholders, and do not anticipate the
payment of dividends in the foreseeable future. Prior to the acquisition by
Colorado MEDtech, CIVCO distributed dividends to its shareholder. In fiscal
2000, CIVCO distributed dividends of approximately $373,000.

We did not sell any unregistered securities in the three-month period
ended June 30, 2002.

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Item 6. Selected Financial Data.

The selected, consolidated financial information presented below for each
of the five years in the period ended June 30, 2002 is derived from our
consolidated financial statements. This information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
Managements Discussion and Analysis of Financial Conditions and Results of
Operations contained in this report. Certain reclassifications have been made
to prior year financial statements to conform with the current presentation.
The acquisition of CIVCO on November 15, 1999 was accounted for as a pooling of
interests. Accordingly, we have restated all periods presented to account for
the acquisition as if CIVCO had always been consolidated.

(in thousands, except per share amounts)

|                               |                      |                         |         |        |         |   |         |        |         |   |         |        |   |   |        |        |   |   |        |        |  
|------------------------------ | -------------------- | ----------------------- | ------- | ------ | ------- | - | ------- | ------ | ------- | - | ------- | ------ | - | - | ------ | ------ | - | - | ------ | ------ | -
|                               |                      | Years Ended June 30(a),
|                               |                      |                         |        
|                               |                      |                         | 2002(b) |        | 2001(c) |   | 2000(d) |        | 1999(e) |   | 1998(f)
|                               |                      |                         |         |        |         |   |         |        |         |   |        
|Statement of Operations Data:  |                      |                         |         |        |         |   |         |        |         |   |         |        |   |   |        |        |   |   |        |       
|Net sales and service          |                      | $                       | 70,652  |        |         | $ | 77,175  |        |         | $ | 74,003  |        |   | $ | 75,723 |        |   | $ | 56,410 |       
|Gross profit                   |                      | $                       | 19,640  |        |         | $ | 20,802  |        |         | $ | 26,826  |        |   | $ | 30,508 |        |   | $ | 21,827 |       
|Net (loss) income              |                      | $                       | (3,099  | )      |         | $ | (2,707  | )      |         | $ | 2,991   |        |   | $ | 9,097  |        |   | $ | 5,477  |       
|(Loss) earnings per share      |                      |                         |         |        |         |   |         |        |         |   |         |        |   |   |        |        |   |   |        |       
|                               | Basic                |                         | $       | (.24   | )       |   | $       | (.21   | )       |   | $       | .25    |   |   | $      | .79    |   |   | $      | .49    |  
|                               | Diluted              |                         | $       | (.24   | )       |   | $       | (.21   | )       |   | $       | .22    |   |   | $      | .69    |   |   | $      | .42    |  
|Statement of Cash Flows Data:  |                      |                         |         |        |         |   |         |        |         |   |         |        |   |   |        |        |   |   |        |       
|Net cash provided by (used in) |                      |                         |         |        |         |   |         |        |         |   |         |        |   |   |        |        |   |   |        |       
|                               | Operating activities |                         | $       | 3,394  |         |   | $       | (3,201 | )       |   | $       | (2,354 | ) |   | $      | 13,149 |   |   | $      | 9,389  |  
|                               | Investing activities |                         | $       | (5,185 | )       |   | $       | 565    |         |   | $       | 3,151  |   |   | $      | (3,489 | ) |   | $      | (9,531 | )
|                               | Financing activities |                         | $       | 30     |         |   | $       | 2,204  |         |   | $       | (737   | ) |   | $      | (3,627 | ) |   | $      | 823    |  
|Balance Sheet Data:            |                      |                         |         |        |         |   |         |        |         |   |         |        |   |   |        |        |   |   |        |       
|Cash and cash equivalents      |                      | $                       | 6,366   |        |         | $ | 8,127   |        |         | $ | 8,560   |        |   | $ | 8,500  |        |   | $ | 2,467  |       
|Short-term investments         |                      | $                       | 993     |        |         | $ | 1,677   |        |         | $ | 8,191   |        |   | $ | 14,395 |        |   | $ | 12,144 |       
|Current assets                 |                      | $                       | 28,927  |        |         | $ | 40,033  |        |         | $ | 42,066  |        |   | $ | 42,693 |        |   | $ | 31,006 |       
|Total assets                   |                      | $                       | 42,534  |        |         | $ | 50,400  |        |         | $ | 48,292  |        |   | $ | 49,971 |        |   | $ | 37,933 |       
|Current liabilities            |                      | $                       | 10,448  |        |         | $ | 16,045  |        |         | $ | 12,869  |        |   | $ | 18,357 |        |   | $ | 13,610 |       
|Total long-term debt           |                      | $                       |        |        |         | $ | 34      |        |         | $ | 75      |        |   | $ | 1,164  |        |   | $ | 1,182  |       
|Total shareholders equity     |                      | $                       | 32,086  |        |         | $ | 34,322  |        |         | $ | 35,347  |        |   | $ | 30,450 |        |   | $ | 23,141 |       
|Cash dividends per share       |                      | $                       |        |        |         | $ |        |        |         | $ | .03     |        |   | $ | .08    |        |   | $ | .10    |       



---

|(a) |  | In November 1999, Colorado MEDtech acquired CIVCO Medical Instruments
Co., Inc. in a pooling
of interests transaction. Due to the nature of a pooling of interests
transaction, the selected
financial data are restated to reflect combined activities of Colorado
MEDtech and CIVCO prior to
the acquisition, including dividends paid by CIVCO prior to the
acquisition.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | In February of 2002, Colorado MEDtech acquired Barzell.                                                                                                                                                                                                                                                                                                                    
|   
|(c) |  | In December 2000, Colorado MEDtech acquired the operating assets of the
ultrasound supplies
group of ATL Ultrasound. In April 2001, the Company sold the outstanding
stock of CDT.                                                                                                                                                                                         
|   
|(d) |  | In August 1999, Colorado MEDtech acquired the assets of Creos
Technologies, LLC, and in
November 1999 Colorado MEDtech acquired CIVCO Medical Instruments Co.,
Inc.                                                                                                                                                                                                        
|   
|(e) |  | In February 1999, Colorado MEDtech acquired the operating assets of
Eclipse Automation
Corporation.                                                                                                                                                                                                                                                                        
|   
|(f) |  | In October 1997, Colorado MEDtech acquired the operating assets of Erbtec
Engineering, Inc.                                                                                                                                                                                                                                                                                

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

As an aid to understanding our operating results, the following table
indicates the percentage relationships of income and expense items to total
revenue for the line items included in the Consolidated Statements of
Operations for the three years ended June 30, 2002, 2001 and 2000, and the
percentage change in those items for the years ended June 30, 2002 and 2001,
from the prior year.

|                                  |     |      |       |      |  |            |                                   |      |  |                                  |                            |   |       |        |   |  |        |       |   |  | 
|--------------------------------- | --- | ---- | ----- | ---- |  | ---------- | --------------------------------- | ---- |  | -------------------------------- | -------------------------- | - | ----- | ------ | - |  | ------ | ----- | - |  | 
|As a Percentage of Total Revenues |     |      |       |      |  |            | Percentage Change From Prior Year
|For the Years Ended June 30,      |     |      |       |      |  |            | For the Years Ended June 30,     
|                                  |     |      |       |      |  |           
|2002                              |     | 2001 |       | 2000 |  | LINE ITEMS |                                   | 2002 |  | 2001                            
|                                  |     |      |       |      |  |            |                                   |      |  |                                 
|%                                 |     | %    |       | %    |  |            |                                   |      |  | %                                |                            | %
|                                  |     |      |       |      |  |            |                                   |      |  |                                  |                            |  
|39.0                              |     |      | 47.7  |      |  |            | 57.4                              |      |  | Net Sales, Outsourcing Services  |                            |   | (25.1 | )      |   |  | (13.3  | )    
|61.0                              |     |      | 52.3  |      |  |            | 42.6                              |      |  | Net Sales, Medical Products      |                            |   | 6.7   |        |   |  | 28.0   |      
|                                  |     |      |       |      |  |            |                                   |      |  |                                  |                            |   |       |        |   |  |        |       |   | 
|100.0                             |     |      | 100.0 |      |  |            | 100.0                             |      |  | Total Sales and Services         |                            |   | (8.5  | )      |   |  | 4.3    |      
|                                  |     |      |       |      |  |            |                                   |      |  |                                  |                            |   |       |        |   |  |        |       |   | 
|36.5                              |     |      | 34.1  |      |  |            | 38.6                              |      |  | Cost of Sales, Outsourcing       |                            |   | (2.0  | )      |   |  | (7.8   | )    
|                                  |     |      |       |      |  |            |                                   |      |  | Services                         |                            |   |       |        |   |  |        |      
|35.7                              |     |      | 39.0  |      |  |            | 25.2                              |      |  | Cost of Sales, Medical Products  |                            |   | (16.0 | )      |   |  | 61.2   |      
|                                  |     |      |       |      |  |            |                                   |      |  |                                  |                            |   |       |        |   |  |        |       |   | 
|72.2                              |     |      | 73.1  |      |  |            | 63.8                              |      |  | Total Cost of Sales and Services |                            |   | (9.5  | )      |   |  | 19.5   |      
|                                  |     |      |       |      |  |            |                                   |      |  |                                  |                            |   |       |        |   |  |        |       |   | 
|27.8                              |     |      | 26.9  |      |  |            | 36.2                              |      |  | Gross Profit                     |                            |   | (5.6  | )      |   |  | (22.5  | )    
|                                  |     |      |       |      |  |            |                                   |      |  |                                  |                            |   |       |        |   |  |        |       |   | 
|                                  | 4.8 |      |       | 6.6  |  |            |                                   | 5.4  |  |                                  | Research and Development   |   |       | (33.9  | ) |  |        | 26.1  |  
|                                  | 5.5 |      |       | 5.1  |  |            |                                   | 5.5  |  |                                  | Marketing and Selling      |   |       | (1.7   | ) |  |        | (2.6  | )
|21.2                              |     |      | 21.7  |      |  |            | 18.7                              |      |  | Operating, Gen'l and Admin       |                            |   | (10.6 | )      |   |  | 20.6   |      
|                                  | 3.7 |      |       | 2.4  |  |            |                                   | 0.3  |  |                                  | Other Operating Expenses   |   |       | 39.7   |   |  |        | 882.1 |  
|                                  |     |      |       |      |  |            |                                   |      |  |                                  |                            |   |       |        |   |  |        |       |   | 
|35.2                              |     |      | 35.8  |      |  |            | 29.9                              |      |  | Total Operating Expenses         |                            |   | (10.2 | )      |   |  | 24.8   |      
|                                  |     |      |       |      |  |            |                                   |      |  |                                  |                            |   |       |        |   |  |        |       |   | 
|(7.4)                             |     |      | (8.9  | )    |  |            | 6.3                               |      |  | (Loss) Earnings from Operations  |                            |   | 24.2  |        |   |  | (246.1 | )    
|                                  | .3  |      |       | 1.1  |  |            |                                   | 1.0  |  |                                  | Other Income, Net          |   |       | (72.9  | ) |  |        | 14.9  |  
|                                  | 0.0 |      |       | 1.2  |  |            |                                   | 0.0  |  |                                  | Gain on Sale of Subsidiary |   |       | (100.0 | ) |  |        | 100.0 |  
|                                  |     |      |       |      |  |            |                                   |      |  |                                  |                            |   |       |        |   |  |        |       |   | 
|(7.1)                             |     |      | (6.6  | )    |  |            | 7.3                               |      |  | (Loss) Earnings Before Income    |                            |   | 2.4   |        |   |  | (193.8 | )    
|                                  |     |      |       |      |  |            |                                   |      |  | Taxes                            |                            |   |       |        |   |  |        |      
|(2.6)                             |     |      | (3.1  | )    |  |            | 3.3                               |      |  | Income Taxes (Benefit) Provision |                            |   | (21.8 | )      |   |  | (197.8 | )    
|                                  |     |      |       |      |  |            |                                   |      |  |                                  |                            |   |       |        |   |  |        |       |   | 
|(4.5)                             |     |      | (3.5  | )    |  |            | 4.0                               |      |  | Net (Loss) Income                |                            |   | (14.5 | )      |   |  | (190.5 | )    
|                                  |     |      |       |      |  |            |                                   |      |  |                                  |                            |   |       |        |   |  |        |       |   | 

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RESULTS OF OPERATIONS

Fiscal Year 2002 Compared to Fiscal Year 2001

The following discussion relates to our consolidated results, and is
followed by sections discussing the results for our Colorado and CIVCO
operations.

During the year ended June 30, 2002, sales were down by 9% compared to the
year ended June 30, 2001. The reduction in sales was comprised of a 25%
reduction in outsourcing services revenue, offset by an increase in medical
products revenue of 7%. The overall decrease in sales is due to the to the
effect that the FDA warning letter had on our ability to obtain new sales in
our Colorado operations, the completion of some significant research and
development projects, the delay or cancellation of significant manufacturing
projects and the general slowdown of the economy. The increase in medical
products sales was due to the increase in CIVCO sales, primarily related to
internal growth of the business, the acquisition of Barzell in February 2002
and the December 2000 acquisition of the operating assets of ATLs ultrasound
and accessories business. The acquisition of Barzell added approximately $1.0
million of medical product sales during the year ended June 30, 2002.

Medical products were approximately 61% of total revenues in fiscal year
2002 and 52% of total revenues in fiscal year 2001. Outsourcing services were
approximately 39% of total revenues in fiscal year 2002 and 48% of total
revenues in fiscal year 2001. The increase in the percentage of medical
product revenue to outsourcing services revenue is due to the acquisitions and
growth of our CIVCO operating segment and the declining sales in our Colorado
operations. CIVCO accounted for approximately 35% of total sales during fiscal
2002 compared to 23% during fiscal 2001. The decrease in outsourcing services
is due primarily to the difficulty we have had signing additional contracts to
replace those that were completed during fiscal years 2000 and 2001, and the
slowdown in the general economy.

Gross profit was 28% in fiscal 2002 compared to 27% in fiscal 2001.
Included in gross profit in fiscal 2001 was a specific write-down of inventory
of approximately $3.1 million, related to the cancellation of the Hitachi
contract in summer 2001. Excluding the inventory write-down, pro forma gross
profit in fiscal 2001 was 31%. Actual gross profit in fiscal 2002 was lower
than pro forma gross profit in fiscal 2001 as the fixed overhead costs
associated with our Colorado medical manufacturing and development business
were spread over a smaller amount of sales from our Colorado operations. In
fiscal years 2002 and 2001 we significantly upgraded our quality systems,
processes and procedures, which have increased costs to the business, while
also allowing us to stay in compliance with FDA regulations and increase the
quality of the products manufactured for our customers.

Research and development expenses for the year ended June 30, 2002
decreased by 34% compared to the prior year. During fiscal year 2002, research
and development expenses were attributable to RF solid state amplifier systems,
medical imaging systems, and ultrasound guidance systems. We expect research
and development expense to decrease during fiscal 2003. However, consistent
with our ongoing operating plans, we continue to pursue the development or
acquisition of new or improved technology or products. If we identify any such
opportunities in connection with our current process to explore strategic
alternatives, the amount of future research and development expenditures may
increase.

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Marketing and selling expenses decreased by 2% for the year ended June 30,
2002, compared to the prior year. The decrease was attributable to the reduced
marketing and selling related to the discontinued operations of our CMED
Automation and CDT divisions. As we look to improve sales, customer
relationships and name recognition, we expect to increase sales and marketing
expenditures in fiscal 2003. Marketing and selling expenses as a percentage of
total revenue were 6% and 5% for the fiscal years ended June 30, 2002 and 2001,
respectively.

Operating, general and administrative expenses decreased by 11% for the
year ended June 30, 2002, compared to the prior year. The decrease was
attributable to strategic cost cutting measures we have undertaken to reduce
expenses. The expense reductions include employee reductions, consolidation of
operations and other actions to scale expenses to expected revenue. We
continue to look for areas of process and procedure improvement to help reduce
cost, and expect the operating, general and administrative expenses to continue
to decrease during fiscal 2003. As a percentage of revenues, operating,
general and administrative expenses decreased to 21% from 22% in the prior
year.

Other operating expenses relate to the legal fees we have incurred related
to disputes and other activities deemed to be incremental to the normal course
of our operations, severance charges, expenses related to consolidating our
Colorado operations and consulting costs associated with the general
improvement of our quality systems. Other operating expenses for the year
ended June 30, 2002 increased 40% compared to the prior year as shown below:

|                          |  |                     |       |      |  |   |       | 
|------------------------- |  | ------------------- | ----- | ---- |  | - | ----- | 
|                          |  | Year Ended June 30,
|                          |  |                    
|                          |  | 2002                |       | 2001
|                          |  |                     |       |     
|Legal fees                |  | $                   | 359   |      |  | $ | 496   | 
|Litigation settlement     |  |                     | 1,080 |      |  |   |      | 
|Severance charges         |  |                     | 413   |      |  |   | 208   | 
|Financial advisor fees    |  |                     | 247   |      |  |   | 742   | 
|Moving charges            |  |                     | 154   |      |  |   |      | 
|Quality system consulting |  |                     | 376   |      |  |   | 436   | 
|                          |  |                     |       |      |  |   |       | 
|Total                     |  | $                   | 2,629 |      |  | $ | 1,882 | 
|                          |  |                     |       |      |  |   |       | 

Litigation settlement consists of expenses incurred in the settlement of
the Gen-Probe dispute (see the Notes to the Consolidated Financial Statements -
Note 11 Commitments and Contingencies). The financial advisor fees incurred
during fiscal 2001 relate to our response to the unsolicited acquisition
proposal by HEI, Inc.

Net other income and expense decreased 73% for the year ended June 30,
2002, compared to the prior year. This decrease was due to average cash and
investment balances being lower in fiscal 2002 compared to fiscal 2001, and
interest rates earned on those balances were lower during fiscal 2002. During
fiscal 2001, we had a gain on the sale of our CDT subsidiary of approximately
$921,000, which was a non-recurring item.

In fiscal year 2002 the consolidated statements of operations contain a
net tax benefit of $1.9 million compared to a net tax benefit of $2.4 million
in fiscal 2001, a decrease of 22%. The effective tax rate during fiscal year
2002 was 37%, compared to 47% during fiscal year 2001. This decrease was the
result of the non-taxable gain for financial reporting purposes on the sale of
our CDT subsidiary of $345,000 during fiscal 2001 and a larger research and
development credit earned in fiscal 2001.

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During the year ended June 30, 2002 compared to the year ended June 30,
2001, our net income, earnings per share and diluted weighted average common
equivalent shares outstanding used to calculate earnings per share were as
follows:

(in thousands, except per share data)

|                                                              |  |                     |        |      |  |   |        |  
|------------------------------------------------------------- |  | ------------------- | ------ | ---- |  | - | ------ | -
|                                                              |  | Year Ended June 30,
|                                                              |  |                    
|                                                              |  | 2002                |        | 2001
|                                                              |  |                     |        |     
|Loss from operations                                          |  | $                   | (5,181 | )    |  | $ | (6,839 | )
|Pre-tax loss                                                  |  |                     | (4,953 | )    |  |   | (5,077 | )
|Net loss                                                      |  |                     | (3,099 | )    |  |   | (2,707 | )
|Basic and diluted loss per share                              |  | $                   | (.24   | )    |  | $ | (.21   | )
|Diluted weighted average common
equivalent shares outstanding |  |                     | 13,054 |      |  |   | 12,718 |  

During fiscal 2002, our loss from operations was 24% less than in fiscal
2001. Included in the loss during fiscal 2002 were expenses of $1.1 million
($684,000 net of tax) related to settlement of the dispute with Gen-Probe
Incorporated. Included in the fiscal 2001 results was a specific inventory
write down of approximately $3,085,000 ($1,880,000 net of tax) due to the
sudden and unplanned cancellation of the Hitachi contract. Also included in
fiscal 2001 were non-recurring charges related to the unsolicited acquisition
proposal by HEI, Inc. of approximately $560,000 ($336,000 net of tax). We had
a one-time gain on the sale of our CDT subsidiary of $921,000 (gross and net of
tax) during fiscal 2001.

The following table presents pro forma financial information. If we had
not incurred the specific items discussed in the preceding paragraph, net
income and earnings per share figures would have been as follows:

(in thousands, except per share data)

|                                    |  |      |                     |      |  |   |        |   | 
|----------------------------------- |  | ---- | ------------------- | ---- |  | - | ------ | - | 
|                                    |  |      | Year Ended June 30,
|                                    |  |      |                    
|                                    |  | 2002 |                     | 2001
|                                    |  |      |                     |     
|Net loss                            |  | $    | (3,099              | )    |  | $ | (2,707 | )
|Pro forma items net of tax          |  |      | 684                 |      |  |   | 1,295  |  
|Pro forma net (loss) income         |  |      | (2,415              | )    |  |   | (1,412 | )
|Pro forma (loss) earnings per share |  | $    | (.19                | )    |  | $ | (.11   | )

Colorado Operations

The following section discusses the results of operations of our Colorado
operations. The following table provides detail of the elements of sales, net
of reconciling items, and gross profit of the Colorado operations for the
periods ended June 30:

(in thousands)

|          |  |                           |                 |   |        |        |      |   |          |        |  |  |        |       |   
|--------- |  | ------------------------- | --------------- | - | ------ | ------ | ---- | - | -------- | ------ |  |  | ------ | ----- | --
|          |  |                           |                 |   | 2002   |        | 2001 |   | % Change
|          |  |                           |                 |   |        |        |      |   |         
|Net sales |  |                           |                 |   |        |        |      |   |          |        |  | 
|          |  | Outsourcing services      |                 | $ | 27,574 |        |      | $ | 34,791   |        |  |  | (20.7  | )%   
|          |  | Medical products          |                 |   | 18,698 |        |      |   | 22,754   |        |  |  | (17.8  | )%   
|          |  | Sold and other operations |                 |   |       |        |      |   | 2,109    |        |  |  | (100.0 | )%   
|          |  |                           |                 |   |        |        |      |   |          |        |  | 
|          |  |                           | Total net sales |   |        | 46,272 |      |   |          | 59,654 |  |  |        | (22.4 | )%

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(in thousands)

|               |  |                           |                     |   |        |        |      |   |          |        |  |  |        |       |   
|-------------- |  | ------------------------- | ------------------- | - | ------ | ------ | ---- | - | -------- | ------ |  |  | ------ | ----- | --
|               |  |                           |                     |   | 2002   |        | 2001 |   | % Change
|               |  |                           |                     |   |        |        |      |   |         
|Cost of sales  |  |                           |                     |   |        |        |      |   |          |        |  | 
|               |  | Outsourcing services      |                     |   | 25,764 |        |      |   | 24,981   |        |  |  | 3.1    | %    
|               |  | Medical products          |                     |   | 13,706 |        |      |   | 21,827   |        |  |  | (37.2  | )%   
|               |  | Sold and other operations |                     |   |       |        |      |   | 1,325    |        |  |  | (100.0 | )%   
|               |  |                           |                     |   |        |        |      |   |          |        |  | 
|               |  |                           | Total cost of sales |   |        | 39,470 |      |   |          | 48,133 |  |  |        | (18.0 | )%
|Gross profit   |  |                           |                     |   |        |        |      |   |          |        |  | 
|               |  | Outsourcing services      |                     |   | 1,810  |        |      |   | 9,810    |        |  |  | (81.6  | )%   
|               |  | Medical products          |                     |   | 4,992  |        |      |   | 927      |        |  |  | 438.5  | %    
|               |  | Sold and other operations |                     |   |       |        |      |   | 784      |        |  |  | (100.0 | )%   
|               |  |                           |                     |   |        |        |      |   |          |        |  | 
|               |  |                           | Total gross profit  |   | $      | 6,802  |      |   | $        | 11,521 |  |  |        | (41.0 | )%
|               |  |                           |                     |   |        |        |      |   |          |        |  | 
|Gross profit % |  |                           | 14.7                | % |        |        | 19.3 | % |          |        |  | 

Revenues for our Colorado operations, which consist of outsourcing
services and medical products, were $46.3 million during the year ended June
30, 2002 compared to $59.7 million in the prior year, a decrease of 22%. The
Colorado operations outsourcing service revenues were $27.6 million in fiscal
2002 compared to $34.8 million in the prior year, a decrease of 21%. This
decrease reflects the fact that during fiscal year 2002 we completed
significant outsource research and development projects and did not book
sufficient new business to replace the completed projects with new programs.
The FDA warning letter we received in January 2001 has made it more difficult
to obtain new customers for outsource research and development projects. We
also have seen a slowdown in the decision making process for prospective
customers looking to develop new technologies, due to the uncertainty of the
worldwide economy.

The Colorado operations medical products revenues were $18.7 million in
fiscal 2002 compared to $22.8 million in the prior year, a decrease of 18%. The
decrease in medical products revenue is primarily due to the sharp reduction in
sales of x-ray tube generators for Hitachi. Prior to Hitachis cancellation in
the summer of 2001 of its contract to buy x-ray tube generators, this product
line provided significant medical products revenues for the Colorado operations
segment.

In the normal course of the Colorado operations segment, it is common for
a significant amount of revenue to come from a few customers, as shown below:

|                  |  |                            |    |      |  |  |    |  
|----------------- |  | -------------------------- | -- | ---- |  |  | -- | -
|                  |  | Percent of Revenue for the
|                  |  | Year Ended June 30,       
|                  |  |                           
|                  |  | 2002                       |    | 2001
|                  |  |                            |    |     
|GEMS              |  |                            | 26 | %    |  |  | 21 | %
|Johnson & Johnson |  |                            | 17 | %    |  |  | 3  | %
|Hitachi           |  |                            | 7  | %    |  |  | 21 | %

This concentration can cause sales and profitability in the Colorado
operations segment to fluctuate, based on gaining or losing a significant
customer.

Gross margin for Colorado operations was 15% for the year ended June 30,
2002 and 19% for the year ended June 30, 2001 (24% in fiscal 2001 prior to a
specific inventory write down of approximately $3.1 million related to the
discontinuation of the Hitachi manufacturing contract). The decrease was due
to the reduction of revenue in our outsource research and development sales,
causing the under absorption of overhead costs, as a percentage of
revenue.

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We continue to scale down our staff and
operating expenses to better match the current business environment and help offset some of the reduction in sales,
although we find it necessary to carry a certain level of personnel to maintain
the expertise required to take on additional projects when and if sales
increase.Carrying these additional personnel has resulted in lower
utilization of employees and has had a negative impact on gross margin. The
Colorado operations segment also had some delays in fixed price contracts
during fiscal 2002, which caused delays in the recognition of revenue and
required the absorption of additional costs. Because research and development
outsource revenue decreased, a larger percentage of revenue came from outsource
manufacturing, which typically has a lower gross margin. As we continue to
consolidate the Colorado operations into one building, we believe we will
realize certain additional cost savings. However, due to the slowdown in the
Colorado operations segment, after such consolidation we will have excess
capacity that may adversely affect this segments financial performance. We
believe that additional sales will be needed to cover the costs of the
engineering group and overhead of the operations during fiscal 2003.

CIVCO Operations

The following section discusses the results of operations of our CIVCO
segment. The following table provides detail of the elements of sales and
gross profit of CIVCO for the periods ended June 30.

(in thousands)

|               |                  |  |      |        |      |  |          |        |  |  |  |      |  
|-------------- | ---------------- |  | ---- | ------ | ---- |  | -------- | ------ |  |  |  | ---- | -
|               |                  |  | 2002 |        | 2001 |  | % Change
|               |                  |  |      |        |      |  |         
|Net sales,     |                  |  |      |        |      |  |          |        |  |  |  |     
|               | Medical products |  | $    | 24,381 |      |  | $        | 17,521 |  |  |  | 39.2 | %
|Cost of sales, |                  |  |      |        |      |  |          |        |  |  |  |     
|               | Medical products |  |      | 11,543 |      |  |          | 8,239  |  |  |  | 40.0 | %
|               |                  |  |      |        |      |  |          |        |  |  |  |     
|Gross profit,  |                  |  |      |        |      |  |          |        |  |  |  |     
|               | Medical products |  | $    | 12,838 |      |  | $        | 9,282  |  |  |  | 38.3 | %
|               |                  |  |      |        |      |  |          |        |  |  |  |     
|Gross
profit % |                  |  | 52.7 | %      |      |  | 53.0     | %      |  |  |  |     

The increase in CIVCO revenues was primarily due to the internal growth of
its products business, the acquisition of the operating assets of the
ultrasound supplies group of ATL Ultrasound in December 2000 and the
acquisition of Barzell in February 2002. Since the acquisition of ATL, CIVCO
sales increased approximately 60% with similar product lines that existed at
the time of the purchase. The operations acquired in the Barzell purchase have
produced approximately $1.0 million in revenue since the acquisition in
February 2002. Without the post-acquisition revenue of Barzell, sales for
CIVCO increased 33% over the 2001 revenue.

In fiscal year 2002 and 2001, CIVCO had one customer (GEMS) that accounted
for 12% and 14%, respectively, of revenue, and no other customer accounted for
more than 10% of revenue. CIVCO does not rely on a few customers for a
majority of its business.

CIVCOs gross margins were 53% for each of the years ended June 30, 2002
and 2001. CIVCO has scaled up its operations over the last two years and has
been able to rely on a significant customer base. Therefore, gross margins in
this segment are more stable than in the Colorado operations. CIVCO has added
an additional 23,000 square feet of building space, which is expected to be
ready for full occupancy in the second half of fiscal 2003. The addition will
give

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CIVCO additional opportunities to grow its business, but will require
CIVCO to incur additional expenses related to the validation of a new, larger clean room, additional
quality enhancements to its facilities and additional overhead costs.

Fiscal Year 2001 Compared to Fiscal Year 2000

The following discussion relates to our consolidated results, and is
followed by sections discussing the results for our Colorado and CIVCO
operations.

Revenues were $77.2 million for the year ended June 30, 2001, compared to
$74.0 million for the prior year, an increase of 4%. Outsourcing services were
approximately 48% of total revenues in fiscal year 2001 and 57% of total
revenues in fiscal year 2000. Medical products were approximately 52% of total
revenues in fiscal year 2001 and 43% of total revenues in fiscal year 2000.
Outsourcing services contributed approximately $36.8 million of revenue during
the year ended June 30, 2001 compared to $42.5 million in fiscal 2000. Until
the deficiencies cited by the FDA in the warning letter were resolved, we were
not permitted to manufacture or ship certain types of medical devices. This
had, and continues to have, an ongoing negative impact on product development
and manufacturing outsourcing service revenue. Medical products and components
contributed approximately $40.4 million of revenue during the year ended June
30, 2001, compared to $31.5 million in fiscal 2000. The increase in medical
products revenues was due to the acquisition of the operating assets of the
ultrasound supplies group of ATL Ultrasound in December 2000 and an increase in
medical product and component shipments from our Colorado operations.

Gross margins decreased to 27% (31%, prior to a specific write down of
inventory of approximately $3,100,000 related to the discontinuation of our
Hitachi manufacturing contract) for the year ended June 30, 2001, compared to
36% for the year ended June 30, 2000. Gross margins in our outsourcing
services decreased to 29% in fiscal 2001 from 33% in fiscal 2000. This
decrease was due to the increase in direct costs of quality system improvements
on our projects, discounts extended on outsource engineering projects, higher
than normal write downs of inventory and our inability to sustain a consistent
manufacturing process. Gross margins in the Medical Products decreased to 25%
(33% prior to specific charges from the write down of inventory) in fiscal 2001
from 41% in fiscal 2000. This decrease was due to an increase in sales of some
of our lower margin products.

Research and development expenses for the year ended June 30, 2001
increased by 26% compared to the prior year. During fiscal year 2001, research
and development expenses were attributable to RF solid state amplifier systems,
medical device connectivity, ultrasound guidance systems and covers, and high
voltage x-ray generators for CT scanners.

Marketing and selling expenses decreased by 3% for the year ended June 30,
2001, compared to the prior year. The decrease was attributable to the reduced
marketing and selling expenses related to the discontinued operations of our
CMED Automation, BioMed, and CDT divisions. Marketing and selling expenses as
a percentage of total revenue were 5% and 6% for the fiscal years ended June
30, 2001 and 2000, respectively.

Operating, general and administrative expenses increased by 21% for the
year ended June 30, 2001, compared to the prior year. The increase was
attributable to the recruiting and hiring of experienced personnel, an increase
in the number of personnel and the actions we had taken to

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improve our quality systems, tools and processes. As a percentage of revenues, operating, general
and administrative expenses increased to 22% from 19% in the prior year. We
took expense reduction actions to bring down operating, general and administrative costs,
but we continued to invest in our quality systems, resulting in an overall
increase in expense.

Other operating expenses relate to the Companys legal fees, severance
charges, costs related to the unsolicited acquisition proposal and costs
associated with the general improvement of the Companys quality systems.
Other operating expenses for the year ended June 30, 2001 increased 882%
compared to the prior year due to the Companys response to the unsolicited
acquisition proposal by HEI, Inc. (including non-recurring charges of
$560,000), increased legal fees due to the Wedel litigation, and expenses
associated with our response to the FDA warning letter.

Net other income and expenses increased to $1,763,000 (included in other
income and expenses was the non-recurring gain on the sale of the CDT
subsidiary of $921,000) for the year ended June 30, 2001, compared to $733,000
for the year ended June 30, 2000. The increase, excluding the non-recurring
gain, was attributable to lower interest expense during fiscal year 2001
compared to fiscal year 2000.

In fiscal year 2001 the consolidated statements of operations contain a
net tax benefit of $2.4 million compared to a net tax provision of $2.4 million
in fiscal 2000. The effective tax rate during fiscal year 2001 was 47%,
compared to 44% during fiscal year 2000. The increase was the result of the
non-taxable book gain on the sale of our CDT subsidiary of $345,000 and for
credits related to our research and development activities.

During the year ended June 30, 2001 compared to the year ended June 30,
2000, our net income, earnings per share and diluted weighted average common
equivalent shares outstanding used to calculate earnings per share were as
follows:

(in thousands, except per share data)

|                                                              |  |                     |        |      |  |   |        | 
|------------------------------------------------------------- |  | ------------------- | ------ | ---- |  | - | ------ | 
|                                                              |  | Year Ended June 30,
|                                                              |  |                    
|                                                              |  | 2001                |        | 2000
|                                                              |  |                     |        |     
|Net (loss) income                                             |  | $                   | (2,707 | )    |  | $ | 2,991  | 
|Diluted (loss) earnings per share                             |  | $                   | (.21   | )    |  | $ | .22    | 
|Diluted weighted average common
equivalent shares outstanding |  |                     | 12,718 |      |  |   | 13,355 | 

The decrease in net income and earnings per share was attributable to the
specific write down of approximately $3,085,000 ($1,880,000 net of tax) in
inventory due to the sudden and unplanned cancellation of the Hitachi x-ray
tube generator contract, a slowdown in outsource manufacturing caused by the
FDA warning letter and the resulting production delays and stoppages, the
specific charges of approximately $560,000 ($336,000 net of tax) for our
response to the unsolicited acquisition proposal by HEI, and the increase in
costs related to improving our quality systems and infrastructure. We had a
one-time gain on the sale of our CDT subsidiary of $921,000 (gross and net of
tax) during fiscal 2001.

During fiscal 2000, we had non-recurring charges related to the
non-taxable write down of goodwill related to our CDT subsidiary of $1,322,000,
acquisition costs related to the purchase of CIVCO of $776,000 ($481,000 net
of tax), and charges associated with relocating a portion of our Colorado
operations manufacturing of $282,000 ($175,000 net of tax).

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The following table presents pro forma financial information. If we had
not incurred the specific and non-recurring items discussed above, the net
income and earnings per share figures for the year ended June 30, 2001, would
have been as follows:

(in thousands, except per share data)

|                                    |  |                     |        |      |  |   |       | 
|----------------------------------- |  | ------------------- | ------ | ---- |  | - | ----- | 
|                                    |  | Year Ended June 30,
|                                    |  |                    
|                                    |  | 2001                |        | 2000
|                                    |  |                     |        |     
|Net loss                            |  | $                   | (2,707 | )    |  | $ | 2,991 | 
|Pro forma items net of tax          |  |                     | 1,295  |      |  |   | 1,978 | 
|Pro forma net (loss) income         |  |                     | (1,412 | )    |  |   | 4,969 | 
|Pro forma (loss) earnings per share |  | $                   | (.11   | )    |  | $ | .37   | 

Colorado Operations

The following section discusses the results of operations of our Colorado
operations. The following table provides detail of the elements of sales, net
of reconciling items, and gross profit of the Colorado operations for the
periods ended June 30.

(in thousands)

|               |                           |                     |      |        |        |      |      |          |        |  |  |       |       |   
|-------------- | ------------------------- | ------------------- | ---- | ------ | ------ | ---- | ---- | -------- | ------ |  |  | ----- | ----- | --
|               |                           |                     |      | 2001   |        | 2000 |      | % Change
|               |                           |                     |      |        |        |     
|Net sales      |                           |                     |      |        |        |      |      |          |        |  |  |      
|               | Outsourcing services      |                     | $    | 34,791 |        |      | $    | 40,186   |        |  |  | (13.4 | )%   
|               | Medical products          |                     |      | 22,754 |        |      |      | 17,365   |        |  |  | 31.0  | %    
|               | Sold and other operations |                     |      | 2,109  |        |      |      | 4,939    |        |  |  | (57.3 | )%   
|               |                           |                     |      |        |        |      |      |          |        |  |  |      
|               |                           | Total net sales     |      |        | 59,654 |      |      |          | 62,490 |  |  |       | (4.3  | )%
|Cost of sales  |                           |                     |      |        |        |      |      |          |        |  |  |      
|               | Outsourcing services      |                     |      | 24,981 |        |      |      | 26,640   |        |  |  | (6.2  | )%   
|               | Medical products          |                     |      | 21,827 |        |      |      | 11,434   |        |  |  | 90.9  | %    
|               | Sold and other operations |                     |      | 1,325  |        |      |      | 3,865    |        |  |  | (65.7 | )%   
|               |                           |                     |      |        |        |      |      |          |        |  |  |      
|               |                           | Total cost of sales |      |        | 48,133 |      |      |          | 41,939 |  |  |       | 14.8  | % 
|Gross profit   |                           |                     |      |        |        |      |      |          |        |  |  |      
|               | Outsourcing services      |                     |      | 9,810  |        |      |      | 13,546   |        |  |  | (27.6 | )%   
|               | Medical products          |                     |      | 927    |        |      |      | 5,931    |        |  |  | (84.4 | )%   
|               | Sold and other operations |                     |      | 784    |        |      |      | 1,074    |        |  |  | (27.1 | )%   
|               |                           |                     |      |        |        |      |      |          |        |  |  |      
|               |                           | Total gross profit  |      | $      | 11,521 |      |      | $        | 20,551 |  |  |       | (43.9 | )%
|               |                           |                     |      |        |        |      |      |          |        |  |  |      
|Gross
profit % |                           |                     | 19.3 | %      |        |      | 32.9 | %        |        |  |  |      

Sales during fiscal 2001 were 4% lower than in fiscal 2000 due to our
inability to ship certain products in outsource manufacturing related to the
FDA warning letter. This decrease was offset by an increase in sales in our
medical products related to increased sales of CT generators to Hitachi. Sold
and other operations decreased due to a slowdown in our CDT and BioMed
businesses.

Gross profit was down 44% during fiscal 2001 compared to fiscal 2000.
This decrease was primarily due to the inventory write down of approximately
$3,085,000 related to the cancellation of the Hitachi contract in the summer of
2001, and, prior to the cancellation, increased sales in the CT generators
which had a lower gross margin than our other medical products.

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CIVCO Operations

The following section discusses the results of operations of our CIVCO
segment. The following table provides detail of the elements of sales and
gross profit of CIVCO for the periods ended June 30.

(in thousands)

|               |                  |  |      |        |      |  |          |        |  |  |      |      |  
|-------------- | ---------------- |  | ---- | ------ | ---- |  | -------- | ------ |  |  | ---- | ---- | -
|               |                  |  | 2001 |        | 2000 |  | % Change
|               |                  |  |      |        |      |  |         
|Net sales,     |                  |  |      |        |      |  |          |        |  |  |      |     
|               | Medical products |  | $    | 17,521 |      |  | $        | 11,513 |  |  |      | 52.2 | %
|Cost of sales, |                  |  |      |        |      |  |          |        |  |  |      |     
|               | Medical products |  |      | 8,239  |      |  |          | 5,238  |  |  |      | 57.3 | %
|               |                  |  |      |        |      |  |          |        |  |  |      |     
|Gross profit,  |                  |  |      |        |      |  |          |        |  |  |      |     
|               | Medical products |  | $    | 9,282  |      |  | $        | 6,275  |  |  |      | 47.9 | %
|               |                  |  |      |        |      |  |          |        |  |  |      |     
|Gross
profit % |                  |  | 53.0 | %      |      |  | 54.5     | %      |  |  | (2.7 | )%  

The increase in sales for our CIVCO operations in fiscal 2001 compared to
fiscal 2000 was due to the internal growth of the business and the acquisition
of the operating assets of the ultrasound supplies group of ATL Ultrasound in
December 2000. Gross profit increased 57% due to the reasons mentioned in the
prior sentence, but as a percent of revenue gross profit was down 2.7%. The
decrease on a percentage basis was due to the supplies business acquired in the
ATL transaction having lower margins than CIVCOs proprietary products.

FINANCIAL CONDITION

Working capital decreased to $18.5 million at June 30, 2002 from $24.0
million at June 30, 2001. The ratio of current assets to current liabilities
increased to 2.8 to 1 at June 30, 2002 from 2.5 to 1 at June 30, 2001. As of
June 30, 2002, current assets were $28.9 million compared to $40.0 million at
June 30, 2001.

Inventory was $5.8 million at June 30, 2002, compared to $11.7 million at
June 30, 2001, due to the following:



| |  |  | resolution of the FDA warning letter during fiscal year
2002, which permitted the Colorado operations to ship its Class
III medical device backlog,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a reduction in sales projections for customer orders, and                                                                                          
|
| |  |  | improved process and procedures in materials management.                                                                                           

Accounts receivable were $9.6 million at June 30, 2002 compared to $13.0
million at June 30, 2001, a decrease of 26%, primarily due to the following:



| |  |  | improvement of the average days sales outstanding in
accounts receivable to 49 days from 61 days, largely due to
improved payment terms with GEMS, our largest customer; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | decrease in sales of $2.2 million in the quarter ended
June 30, 2002 compared to June 30, 2001.                                                                             

Income taxes receivable at June 30, 2002 were $3.6 million compared to
approximately $1.0 million at June 30, 2001. The increase was due to the
current year loss and the expected use of certain

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deferred tax assets generated in previous years. We expect to receive the
income tax refund from the federal and state governments during fiscal 2003.

Cash and short-term investments were $7.4 million at June 30, 2002
compared to $9.8 million at June 30, 2001, a decrease of approximately $2.4
million, due to the following:



| |  |  | net loss during fiscal 2002 of $3.1 million, offset by
working capital changes (primarily reductions in inventory and
accounts receivable, resulting in cash of $3.4 million being
generated from operations),
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | purchase of Barzell for $2.1 million, and                                                                                                                                                                     
|
| |  |  | capital expenditures during fiscal 2002 of $3.5 million,
which included approximately $1.3 million for the CIVCO building
expansion.                                                                          

Accounts payable were $4.9 million at June 30, 2002 compared to $7.2
million at June 30, 2001, a decrease of $2.3 million. This
decrease was due to
the reduction in projected manufacturing revenue and the related inventory
purchases.

LIQUIDITY AND CAPITAL RESOURCES

Despite the deterioration of the Colorado operations, we have been able to
maintain what we believe is a relatively strong balance sheet, with $7.4
million of cash and short-term investments and working capital of $18.5 million as of June 30, 2002. Our
Board of Directors and management are actively exploring a full range of
strategic alternatives to maximize value for all shareholders, including but
not limited to the sale of some or all of our operations, the discontinuation
of certain operations, mergers, and divestitures. We have retained an
investment banking firm assist us in this evaluation. While we expect to
undertake one or more of these alternatives there can be no assurance as to the
outcome.

Our primary sources of liquidity have consisted of cash flows from
operations, cash and investments on hand and issuance of stock. We also have a
credit facility that provides for a revolving line of credit of $5 million.
The credit facility expires January 1, 2003, and the interest rate is 2% over
the higher of (a) the banks prime rate (4.75% at June 30, 2002) or (b) the
federal funds effective rate (1.75% at June 30, 2002) plus 0.5%. All accounts
receivable and inventory secure outstanding balances, but no amounts had been
advanced under the facility as of June 30, 2002. At June 30, 2002, the
applicable interest rate on borrowings was 6.75%. We are currently in
negotiations to extend the credit facility.

We have a capital lease agreement with an interest rate of 7.9% that
terminates in April 2003. A capital lease with an interest rate of 6.5%
expired in January 2001. As of June 30, 2002 and 2001, amounts outstanding
under these obligations were $34,000 and $75,000, respectively.

We expect costs to exit our currently leased facilities and consolidate
our Colorado operations to be approximately $250,000, in addition to
approximately $600,000 in capital expenditures. These costs were incurred in
the fourth quarter of fiscal 2002 and we expect them to continue through the
first half of fiscal 2003. Through June 30, 2002, we had spent approximately
$154,000 related to direct costs associated with the move.

We have entered into a 10-year lease for our new facilities in Colorado,
which calls for rent payments of approximately $10.1 million over the life of
the lease. In connection with this lease,

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we entered into an agreement with the landlord
under which the landlord will construct a building adjacent and connected to the leased property and we will lease the
addition. The lease for the addition is expected cost an additional $6.9
million over a 10-year period. The addition is under construction and is
expected to be completed during fiscal year 2003.

Fiscal 2002 cash flows from operating activities provided $3.4 million,
compared to cash used in operations of $3.2 million in fiscal 2001. In fiscal
2002, cash provided by operating activities was primarily due to the reduction
in our inventory ($6.3 million) and accounts receivable ($3.7 million). The
reduction of inventory was due to shipment of Class III medical devices upon
resolution of the FDA warning letter and the cancellation of the Hitachi
contract, which was a material intensive project. The decrease in accounts
receivable was due to our reduction of the average number of days outstanding
to 49 days at June 30, 2002 compared to 61 days at June 30, 2001, and is also
due to the reduction of sales to $70.7 million in fiscal 2002 compared to $77.2
million in fiscal 2001. The reduction in average days sales outstanding was
primarily due to favorable payment terms negotiated with our largest customer.
Depreciation and amortization for the years ended June 30, 2002 and 2001 was
$2.8 million and $2.6 million, respectively. Offsetting these additions to
operating cash inflows were outflows due to the reduction in accounts payable
and accrued expenses ($3.6 million), the net operating loss for the year ($3.1
million), the increase in prepaid expenses and other assets ($2.9 million) and
the decrease in customer deposits ($1.7 million). The reduction in accounts
payable and accrued expenses was primarily related to lower inventory levels at
June 30, 2002, and the reduction of accrued salaries and wages. Accrued
salaries and wages were lower at June 30, 2002, compared to 2001, due to the
reduction in workforce that occurred during fiscal 2002, and a reduction in the
hours accrued for paid time off. The increase in prepaid expenses and other
assets was primarily due to the increase in our income tax receivable of $2.6
million. We expect to receive an income tax refund of $3.5 million during
fiscal 2003. The decrease in customer deposits was related to the completion
of Colorado operations contracts during fiscal 2002, and the Hitachi
manufacturing cancellation. Customer deposits are either returned to the
customers at the end of the project or applied to related outstanding invoices.

Cash flows used in investing activities were $5.2 million during fiscal
2002, compared to cash provided from investing activities of $565,000 during
fiscal year 2001. This change was due to capital expenditures during the year
of $3.5 million and cash used for the purchase of Barzell. Expenditures for
capital assets were higher than normal in fiscal 2002 due to the investments of
approximately $1.3 million made in the expansion of the CIVCO building. The
other primary use of cash for investing activities related to the purchase of
Barzell in February 2002 ($2.1 million). After the acquisition, the operations
of Barzell produced approximately $1.0 million of revenue and $.3 million of
net income during the year ended June 30, 2002.

Cash flows provided by financing activities were $30,000 for the year
ended June 30, 2002 compared to $2.2 million provided during fiscal 2001. The
decrease in fiscal 2002 was attributable to lower receipts from employee
purchases of common stock under the Stock Option Plan and the 1996 Employee
Stock Purchase Plan, which were $.3 million in fiscal 2002 compared to $2.4
million during fiscal 2001.

We believe that our cash, investments, credit facilities and cash
projected from operations will be sufficient to meet our working capital needs
through the end of fiscal 2003 and the

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foreseeable future. However, our projected cash needs may change as a result of acquisitions, unforeseen
operational difficulties or other factors.

In the normal course of our business, we investigate, evaluate and discuss
acquisition, joint venture, minority investment, strategic relationship and
other business combination opportunities. In the event of any future
investment, acquisition or joint venture opportunities, we may consider using
then-available liquidity, issuing equity securities or incurring additional
indebtedness. Some of these alternatives could result in dilution to existing
shareholders, additional interest expense or other charges to our current
capital structure and / or results of operations.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of
operations is based upon the consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
U.S. (GAAP). The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the financial statements, and the reported
amounts of revenue and expenses during the periods. Estimates have been made
by management in several areas, including, but not limited to, the percentage
of completion on certain long-term, fixed price projects, the allowance for
estimated bad debts, the net realizable value of inventory, income tax
valuation allowances, warranty costs to be incurred, and bad debt exposure.
These estimates are based on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Actual
results may differ materially from these estimates under different assumptions
or conditions.

In addition to making estimates and assumptions, we must also select and
apply accounting policies that are appropriate for our business operations, and
that are in compliance with generally accepted accounting principles. Those
accounting policies that we believe to be critical in understanding our
financial position and results of operations are as follows:

Revenue Recognition

We generally recognize revenue when persuasive evidence of an arrangement
exists, products are delivered or services rendered, the sales price is fixed
and determinable and collectibility is deemed to be probable. For all sales,
either a binding purchase order or a signed agreement is used as evidence of an
arrangement. Revenue from product sales is recognized when title and risk of
loss transfer to the customer, usually at the time of shipment. Revenue and
profit relating to product design and development contracts are generally
recognized at the time services are rendered. We have entered into a limited
number of fixed price development projects, which are accounted for using the
percentage of completion method. At June 30, 2002, these projects are
substantially complete. We are required to make estimates and judgments when
calculating the estimated total costs to be incurred upon completion of these
long-term development contracts, and in assessing our progress toward
completing these contracts. Inherent uncertainties in determining the costs
associated with the contracts may cause unexpected changes to revenue.

Inventories

We value inventory at the lower of cost or market using the first in -
first out method. We assess the recoverability of inventory based on types and
levels of inventory held, forecasted

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demand, changes in customer viability and changes in technology. These assessments require management judgments and
estimates, and valuation adjustments for excess and obsolete inventory are
recorded based on these assessments. Estimates of future product demand or
judgments related to changes in technology may prove to be inaccurate, in which
case the carrying value of inventory could be overstated or understated. In
the event of any such inaccuracies, an adjustment would be recognized in cost
of goods sold at the time of such determination. Unexpected changes in
customer relationships could also impact the valuation adjustment for
inventory.

Warranty

We warrant our outsourcing manufacturing and medical products against
defects in materials and workmanship, generally for three to 12 months, but in
limited cases for up to 24 months. Estimated costs of materials and labor for
product service are accrued at the time of sale. These estimates are based on
the unit sales volumes and review of past expenses incurred for warranty work
performed on specific products.

Bad Debt

We have established a reserve against our accounts receivable for amounts
billed that management estimates our customers will likely be unable to fulfill
their legal obligations to pay. The reserve is comprised of specific accounts
and a general amount based on our historical experience. We continuously
monitor the financial status of our customers and the status of our
relationship with our customers to minimize the exposure to uncollectible
receivables, but uncollectible receivables may exceed our reserves.

Long-Lived Assets, Goodwill and Intangibles

Long-lived assets, goodwill and intangibles are recorded at the lower of
historical net book value or fair value. This requires management to assess
the fair value of our long-lived assets, goodwill, intangibles and reporting
units. If we conclude that the fair value of the asset and/or reporting unit
has a fair value that is less than the recorded book value, we would be
required to estimate the value of each asset and liability within the reporting
unit to determine if they have been impaired. Should any significant event
occur that causes the value of long-lived assets, goodwill or intangibles to
decrease, it could have a material adverse affect on our results of operations.

We are exploring various strategic alternatives, which may include the
sale or other disposition of all or some of our business operations and related
assets. No decisions have been made as of the date of this Form 10-K regarding
any action we might take, if at all. Should we decide to sell a business
operation, it is reasonably possible that, at that time, the fair value of the
related assets could be less than their carrying amount, which would result in
a charge against our results of operations.

Deferred Taxes

Each reporting period requires that we estimate our ability to realize our
net deferred tax assets. The primary factor in this determination is our
ability to generate future taxable income, or carry back current losses to
previous years taxable income. As a result, we are required to assess and
estimate our ability to generate sufficient taxable income in the future, in
the

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appropriate taxing jurisdiction, to recover the recorded amount of net
deferred tax assets. To the extent that actual experience is different than
our estimates, the recorded valuation allowance may need to be revised.

New Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible Assets. These standards revised
the rules related to the accounting for business combinations, goodwill and
other intangible assets. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase accounting
method. In addition, intangible assets are separately recognized if the
benefit of the intangible asset is obtained through contractual or other legal
rights, or if the intangible asset can be sold, transferred, licensed, rented
or exchanged, regardless of the acquirers intent to do so. The amount and
timing of non-cash charges related to intangibles acquired in business
combinations will change significantly from prior practice. We adopted SFAS
141 during our fiscal year ended June 30, 2002, and therefore we recorded the
acquisition of Barzell and assessed the impairment of goodwill under these new
rules.

Under SFAS No. 142 goodwill is not amortized but is tested for impairment
on an annual basis. To test for impairment, the fair value of the reporting
unit that the goodwill is assigned to is compared to its carrying value. If
the fair value of the reporting unit is greater than the carrying value,
goodwill is not considered to be impaired. If the fair value of the reporting
unit is less than the carrying value, the difference between the implied fair
value of the reporting units goodwill and its carrying value will be recorded
as an impairment loss.

In June 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations, which is effective for fiscal
years beginning after June 15, 2002 (effective for the Company on July 1,
2003). The statement provides accounting and reporting standards for
recognizing obligations related to asset retirement costs associated with the
retirement of tangible long-lived assets. Under this statement, legal
obligations associated with the retirement of long-lived assets are to be
recognized at their fair value in the period in which they are incurred if a
reasonable estimate of fair value can be made. The fair value of the asset
retirement costs is capitalized as part of the carrying amount of the
long-lived asset and expensed using a systematic and rational method over the
assets useful life. Any subsequent changes to the fair value of the liability
will be expensed. We are currently assessing the impact of this statement on
our financial condition and results of operations.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective for fiscal
years beginning after December 15, 2001 (effective for the Company on July 1,
2002). This statement supersedes SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and replaces
the provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of Segments of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of segments of a business. SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 for the recognition and measurement of the
impairment of long-lived assets to be held and used and the measurement of
long-lived assets to be disposed of by sale. Under SFAS No. 144, long-lived
assets are measured at the lower of carrying amount or fair value less cost to
sell. Adoption of

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this standard may have a prospective effect on
the financial condition and results of operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, (effective January 1, 2003) which
replaces 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). SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred
and states that an entitys commitment to an exit plan, by itself, does not
create a present obligation that meets the definition of a liability. SFAS No.
146 also establishes that fair value is the objective for initial measurement
of the liability. We believe SFAS No. 146 may have a prospective
effect on our financial statements for costs associated with future
exit or disposal activities we may undertake.

FORWARD  LOOKING STATEMENTS AND RISK FACTORS

The statements in this report that are not historical facts are
forward-looking statements that represent managements beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as believes, intends, estimates,
may, will, should, anticipated, expected or comparable terminology
or by discussions of strategy. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, we cannot assure
you that these expectations will prove to be correct. Such statements involve
risks and uncertainties including, but not limited to, the risk that our
existing level of orders may not be indicative of the level or trend of future
orders, the risk that we may not successfully complete the work encompassed by
current or future orders, the risk that unforeseen technical or production
difficulties may adversely impact project timing and financial performance, the
risk of potential litigation and the risk that acquired companies cannot be
successfully integrated with our existing operations. Should one or more of
these risks, as well as others not known to us or not considered to be material
at this time, materialize (or the consequences of such a development worsen),
or should the underlying assumptions prove incorrect, actual results could
differ materially from those forecasted or expected. These factors are more
fully described below and in our documents filed from time to time with the
Securities and Exchange Commission. We disclaim any intention or obligation to
update publicly or revise such statements whether as a result of new
information, future events or otherwise.

Our Announcement That We Are Exploring Strategic Alternatives May Have an
Adverse Impact On Our Business.

We have announced that our Board of Directors is exploring strategic
alternatives to maximize value for all shareholders, including but not limited
to the sale of all or a part of Colorado MEDtech, the discontinuation of
certain operations, mergers, and divestitures. We have retained an investment
banking firm to assist the Board of Directors in its strategic review process.
The announcement and the exploration of strategic alternatives process may
cause uncertainty for our customers, which could have several adverse effects,
including without limitation, that existing customers may terminate their
product development or manufacturing projects. In addition, although sales and
bookings for the Colorado operations segment of our business have been well
below past levels for reasons discussed in this report, the

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announcement and the process may create more difficulties than we already have generating new
product development or manufacturing sales. The announcement and the
exploration of strategic alternatives process may create uncertainty for our
employees, which may make it more difficult or expensive to retain them. If
the announcement or the strategic alternatives process create any of these
effects, or other unforeseen effects, it may have an adverse impact on our
business, it may impair our ability to recover the carrying values of some of
our long-lived assets and deferred taxes, and may adversely affect our stock
price.

Our Financial Results Can Fluctuate From Quarter To Quarter And Year To Year,
Which Can Affect Our Stock Price.

Our quarterly and annual operating results are affected by a number of
factors, primarily the volume and timing of revenue from customer orders. The
volume and timing of our revenue from customer orders varies due to:



| |  |  | variation in demand for the customers products as a result
of, among other things, product life cycles, competitive conditions
and general economic conditions;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | suspension or cancellation of a customers development
project for reasons that may or may not be related to project
performance;                               
|
| |  |  | suspension or cancellation of a customers research and
development budget for reasons that may or may not be related to the
project;                           
|
| |  |  | a change in a customers research and development strategy as
a result of sale or merger of the customer to another company;                                    
|
| |  |  | delays in projects associated with the approval process for
changes to a project; and,                                                                          
|
| |  |  | discounts extended to customers for reasons related to
project size, performance or schedule.                                                                   

Our outsourcing services business organization and its related cost
structure is designed to support a certain minimum level of revenues. As such,
if we experience a temporary decrease in project revenues, our ability to
adjust our short-term cost structure is limited. This limitation may compound
the adverse effect of any significant revenue reduction we may experience. Any
one of the factors listed above or a combination of them could result in a
material adverse effect on our business, results of operations and financial
condition. Due to the foregoing factors, it is possible that our operating
results may from time to time be below the expectations of public market
analysts and investors. In such event, the price of our stock would likely be
adversely affected.

Our Sales Cycles Are Long.

The sales cycle for our Colorado products and services is lengthy and
unpredictable. As a result, the time it takes our business to recover from a
slow sales period may be lengthy. Our sales cycle varies from customer to
customer, but it often ranges from six to nine months or more for outsourcing
services projects. And while the sales cycle for our medical products can be
shorter, to the extent it involves a relationship with a large original
equipment manufacturer, the sales cycle can also be quite lengthy. Our pursuit
of sales leads typically involves an analysis of our prospective customers
needs, preparation of a written proposal, one or more presentations, and

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contract negotiations. Our sales cycle may also be affected by a prospective
customers budgetary constraints and internal acceptance reviews, over which we
have little or no control. During fiscal year 2002 we experienced decreased
bookings of medical device development services, and if such decreased bookings
continue it could have a material adverse effect on our outsourcing services.

Our Customers May Cancel Their Orders, Change Production Quantities, Delay
Production Or Terminate Their Contracts; We May Have Inventory Risk.

Medical device development and manufacturing service providers must
provide product output that matches the needs of their customers, which can
change from time to time. We generally do not obtain long-term commitments
from our customers and we continue to experience reduced lead times in customer
orders. Customers may cancel their orders, change production quantities, delay
production, or terminate their contracts for a number of reasons. In certain
situations, cancellations, reductions in quantities, delays or terminations by
a significant customer could adversely affect our operating results. Such
cancellations, reductions or delays have occurred and may continue to occur in
response to slowdowns in our customers businesses or for other reasons. In
addition, we make significant decisions, including determining the levels of
business that we will seek and accept, production schedules, parts procurement
commitments, and personnel needs based on our estimates of customer
requirements. Because many of our costs and operating expenses are relatively
fixed, a reduction in customer demand or a termination of a contract by a
customer could adversely affect our gross margins and operating results.

Most of our contract manufacturing services are provided on a turnkey
basis, where we purchase some or all of the materials required for product
assembling and manufacturing. We bear varying amounts of inventory risk in
providing services in this manner. In manufacturing operations, we need to
order parts and supplies based on customer forecasts, which may be for a larger
quantity of product than is included in the firm orders ultimately received
from those customers. While many of our customer agreements include provisions
that require customers to reimburse us for excess inventory which we
specifically order to meet their forecasts, we may not actually be reimbursed
or be able to collect on these obligations. In that case, we could have excess
inventory and/or cancellation or return charges from our suppliers. Our
imaging and medical device manufacturing customers continue to experience
fluctuating demand for their products, and in response they may ask us to
reduce or delay production. If we delay production, our financial performance
may be adversely affected.

A Significant Portion Of Our Revenue Comes From A Small Number Of Major
Customers.

We have historically obtained a significant share of our revenue from a
small number of customers, but the identity of those major customers tends to
change from year to year. In the year ended June 30, 2002, three customers
accounted for approximately 37% of our consolidated revenues. This
concentration is much more pronounced in our Colorado operations segment, where
the top three customers accounted for 50% of our revenue. The concentration of
business in such a small number of customers means that such a customer may be
in a position to exert significant leverage over us and force us to grant to
such customer commercial terms that we would not otherwise provide. The
concentration of business in such a small number of customers also means that
the loss of any one of these customers or a significant reduction or

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delay in orders or payments from any of these customers could have a material adverse
effect on our business and results of operations.

Risks That Affect Our Customers Can Directly Impact Our Business.

Our success is dependent on the success of our customers and the products
that we develop or manufacture for them. Any unfavorable developments or
adverse effects on the sales of those products or on our customers businesses
could have a corresponding adverse effect on our business. We believe that our
customers and their products are generally subject to the risks listed below.
To the extent the factors set forth below affect our customers, there may be a
corresponding impact on our business.



| |                                                   
| | --------------------------------------------------
| | Our Customers Operate In A Competitive Environment



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The medical products industry is highly competitive and is subject
to significant and rapid technological change. It requires ongoing
investment to keep pace with technological developments and quality and
regulatory requirements. The medical products industry consists of
numerous companies, ranging from start-up to well-established companies.
Our customers competitors may succeed in developing or marketing
technologies and products that will be better accepted in the marketplace
than the products we design and manufacture for our customers or that
would render our customers technology and products obsolete or
noncompetitive. Some of our customers are emerging medical technology
companies that have competitors and potential competitors with
substantially greater capital resources, research and development staffs
and facilities, and substantially greater experience in developing and
commercializing new products. Our customers may not be successful in
marketing or distributing their products, or may not respond to pricing,
marketing or other competitive pressures or the rapid technological
innovation demanded by the marketplace. As a result, they may experience
a drop in product sales, which would have an adverse effect on our
business, results of operations and financial condition.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Our Customers Business Success Depends On Market Acceptance Of New
Products.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We design and manufacture medical devices for other companies. We
also sell proprietary products to other companies and end-user customers.
For products we manufacture (manufactured for others, or those we sell
directly), our success is dependent on the acceptance of those products
in their markets. Market acceptance may depend on a variety of factors,
including educating the target market regarding the use of a new
procedure and convincing healthcare payers that the benefits of the
product and its related treatment regimen outweigh its costs. Market
acceptance and market share are also affected by the timing of market
introduction of competitive products. Some of our customers, especially
emerging medical technology companies, have limited or no experience in
marketing their products and may be unable to establish effective sales
and marketing and distribution channels to rapidly and successfully
commercialize their products. If our customers are unable to gain any
significant market acceptance for the products we develop or manufacture
for them, our business will be affected.

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| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | If Our Customers Dont Promptly Obtain Regulatory Approval For The
Products We Design And Manufacture For Them, Our Projects And Revenue Can Be
Affected.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The FDA regulates many of the products we develop and manufacture,
and requires certain clearances or approvals before new medical devices
can be marketed. As a prerequisite to any introduction of a new device
into the medical marketplace, our customers or we must obtain necessary
product clearances or approvals from the FDA or other regulatory
agencies. This can be a slow and uncertain process and there can be no
assurance that such clearances or approvals will be obtained on a timely
basis, if at all.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain medical devices we manufacture may be subject to the need to
obtain premarket approval from the FDA, which requires substantial
preclinical and clinical testing, and may cause delays and prevent
introduction of such instruments. Other instruments can be marketed only by establishing substantial
equivalence to a pre-existing device in a procedure called a 510(k)
premarket notification. In addition, products intended for use in
foreign countries must comply with similar requirements and be certified
for sale in those countries. A customers failure to comply with the
FDAs requirements can result in the delay or denial of approval to
proceed with the device. Delays in obtaining regulatory approval are
frequent and, in turn, can result in delaying or canceling customer
orders. There can be no assurance that we or our customers will obtain
or be able to maintain all required clearances or approvals for domestic
or exported products on a timely basis, if at all. The delays and
potential product cancellations inherent in the regulatory approval and
ongoing regulatory compliance of products we develop or manufacture may
have a material adverse effect on our business, reputation, results of
operations and financial condition.



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Our Customers Financial Condition May Adversely Affect Their Ability To
Continue Or Pay For A Project.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Some of our customers, especially the smaller and newer emerging
medical technology companies, are not profitable, may have little or no
revenues or may have limited working capital available to fund a
development project. Adequate funds for their operations or for a
development project may not be available when needed. A customers
financial difficulties may require a customer to suspend its research and
development spending, delay development of a product, clinical trials (if
required) or the commercial introduction of a product. Depending on the
significance of a customers product to our revenues or profitability,
any adverse effect on a customer resulting from insufficient funds could
result in an adverse effect on our business, results of operations and
financial condition.



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Government Or Insurance Company Reimbursement For Our Customers Products
Or Services May Change And Cause A Reduced Demand For The Product We
Provide To The Customer.



| |                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Governmental and insurance industry efforts to reform the healthcare
industry and reduce healthcare spending have affected, and will continue
to affect, the market for medical devices. There have been several
instances of changes in governmental or commercial insurance
reimbursement policies that have significantly impacted the

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | markets for certain types of products or services or which have impacted entire
industries, such as recent policies affecting payment for nursing home
and home care services. Adverse governmental regulation relating to our
products or our customers products that might arise from future
legislative, administrative or insurance industry policy cannot be
predicted and the ultimate effect on private insurer and governmental
healthcare reimbursement is unknown. Government and commercial insurance
companies are increasingly vigorous in their attempts to contain
healthcare costs by limiting both coverage and the level of reimbursement
for new therapeutic products even if approved for marketing by the FDA.
If government and commercial payers do not provide adequate coverage and
reimbursement levels for uses of our products and our customers
products, the market acceptance of these products and our revenues and
profitability would be adversely affected.

Our Business Success Depends On Hiring And Retaining Key Personnel.

Our success depends to a significant extent on the continued service of
certain of our key managerial, technical and engineering personnel. Our future
success will be dependent on our continuing ability to attract, train,
assimilate and retain highly qualified engineering, technical and managerial
personnel experienced in commercializing medical products. The competition for
these individuals is intense, and the loss of key employees, generally none of
whom is subject to an employment agreement for a specified term or a
post-employment non-competition agreement, could harm our business. Periods of
contraction such as we are currently experiencing in our Colorado operations
segment create tensions and challenges related to retaining important technical
and engineering personnel. Our decisions on how to reduce costs and capacity
can affect our results in the short- and long-term. The loss of any of our key
personnel or our inability to hire, train, assimilate or retain qualified
personnel could have a material adverse effect on our business, results of
operations and financial condition.

We Operate In a Regulated Industry, and Our Projects And Revenue Are Subject to
Regulatory Risk.

We are subject to a variety of regulatory agency requirements in the
United States and foreign countries relating to many of the products that we
develop and manufacture. The process of obtaining and maintaining required
regulatory approvals and otherwise remaining in regulatory compliance can be
lengthy, expensive and uncertain.

The FDA inspects manufacturers of certain types of devices before
providing a clearance to manufacture and sell such device, and the failure to
pass such an inspection could result in delay in moving ahead with a product or
project. We are required to comply with the FDAs QSR for the development and
manufacture of medical products. In addition, in order for devices we design or
manufacture to be exported and for us and our customers to be qualified to use
the CE mark in the European Union, we maintain ISO 9001/EN 46001
certification which, like the QSR, subjects our operations to periodic
surveillance audits. To ensure compliance with various regulatory and quality
requirements, we expend significant time, resources and effort in the areas of
training, production and quality assurance. If we fail to comply with
regulatory or quality regulations or other FDA or applicable legal
requirements, the governing agencies can issue warning letters, impose
government sanctions and levy serious penalties.

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Noncompliance or regulatory action could have a negative impact on our
business, including the increased cost of coming into compliance, and an
adverse effect on the willingness of customers and prospective customers to do
business with us. Such noncompliance, as well as any increased cost of
compliance, could have a material adverse effect on our business, results of
operations and financial condition.

We Are Subject to an Internal Revenue Service Audit and We Cannot Predict the
Outcome.

We are currently under audit by the IRS for certain items in our fiscal
year 1998 and 1999 tax returns. While we believe we have responded fully to
the requests of the IRS and while we believe we do not have material exposure,
it is reasonably possible that the IRS could deliver an assessment to us that
could have an adverse impact on our results of operations.

A Shift In Market Demand May Decrease Demand For Our Products and Services.

The markets for our services are characterized by rapidly changing
technology and evolving changes in the needs of the medical device market. The
continued success of our business depends on our ability to recognize and quickly react to changes in the medical device
market and our ability to hire, retain, and expand our qualified engineering
and technical personnel, and maintain and enhance our technological
capabilities in a timely and cost-effective manner. Although we believe that
our operations currently utilize the technology, processes and equipment
required by our customers, we cannot be certain that we will develop the
capabilities required by our customers in the future. The emergence of new
technology, industry standards or customer requirements may render our
capabilities and services obsolete or noncompetitive. We may have to acquire
new technologies and personnel in order to remain competitive. This
acquisition and implementation of these new technologies and personnel may
require significant capital investment, which could reduce our operating
margins and operating results. Our failure to anticipate our customers
changing needs could have an adverse effect on our business.

Consolidation Of Customers Can Eliminate Customers Or Need For Product.

Due to the nature of the medical device business, especially in the
imaging field, the possibility exists that any of our customers may merge with,
or be acquired by, other companies that may also be our customers or customers
of our competitors. Such consolidation of our customers operations could
eliminate the customer or, alternatively, the customers need for our products.
We cannot predict how many (if any) of our customers may merge, or how many of
our customers may no longer require certain of our products, due to such
mergers and acquisitions. Such elimination of customers or their need for our
products may negatively impact our business.

We Are Moving Our Operations, Which May Negatively Impact Our Business.

We are currently moving our Colorado operations from their six former
locations (four current) to one central location and expect to complete the
move in fiscal 2003. The move involves numerous business risks, including the
risk associated with integrating the operations at our separate locations into
one facility; decreased utilization and efficiency of revenue-generating
personnel during the move period; the risk of delays in the implementation of
the move to the new facility; diversion of managements attention from other
business areas during the planning and implementation of the move; strain
placed on our operational, financial, management, technical and information
systems and resources; disruption in manufacturing operations; and incurrence
of

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significant costs and expenses associated with moving the facilities. After
the move we expect to have excess capacity in our Colorado operations, which
will likely produce downward pressure on our gross profit from these
operations. Any of these could have a negative impact on our operations,
financial results or stock price.

An Unsolicited Acquisition Proposal May Adversely Affect Our Performance.

We have been the subject of an unsolicited acquisition proposal in the
past. This was expensive and disruptive to our business. The possibility
exists that we may be the subject of such an action in the future. If so, we
may incur significant expenses in responding to any such action and any such
increased expenses would divert resources otherwise available for our
operations and could have a negative effect on our reported earnings. Such
activities could also distract our management and employees from carrying out
the day-to-day operations of the business, and may create uncertainties about
our future in the minds of our customers, employees and vendors. Any of these
could have a negative impact on our operations, financial results or stock
price.

The Products We Design And Manufacture May Be Subject To Product Recalls And
May Subject Us To Product Liability Claims.

Most of the products we design or manufacture are medical devices, many of
which may be used in life-sustaining or life-supporting roles. The tolerance
for error in the design, manufacture or use of these products may be small or
nonexistent. If a product we designed or manufactured is found to be
defective, whether due to design or manufacturing defects, to improper use of
the product or to other reasons, the product may need to be recalled, possibly
at our expense. Furthermore, the adverse effect of a product recall on our
business might not be limited to the cost of the recall. Recalls, especially
if accompanied by unfavorable publicity or termination of customer contracts,
could result in substantial costs, loss of revenues and damage to our
reputation, each of which would have a material adverse effect on our business,
results of operations and financial condition.

The manufacture and sale of the medical devices we develop and manufacture
involves the risk of product liability claims. Although we generally obtain
indemnification from our customers for products we manufacture to the
customers specifications and we maintain product liability insurance, there
can be no assurance that the indemnities will be honored or the coverage of our
insurance policies will be adequate. In addition, although we carry product
liability insurance, we are not indemnified with respect to our products which
are sold directly to end-users. Further, we generally provide a design defect
warranty and indemnify our customers for failure of a product to conform to
design specifications and against defects in materials and workmanship.
Product liability insurance is expensive and in the future may not be available
on acceptable terms, in sufficient amounts, or at all. A successful product
liability claim in excess of our insurance coverage or any material claim for
which insurance coverage was denied or limited and for which indemnification
was not available could have a material adverse effect on our business, results
of operations and financial condition.

Our Markets Are Competitive.

Our competition with respect to outsourcing services comes from a variety
of sources, including consulting, commercial product development and
manufacturing companies. Competition also comes from commercial and university
research laboratories and from current

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and prospective customers who evaluate our capabilities and costs against the merits of designing, engineering or
manufacturing products internally. Many of our competitors are larger and have
substantially greater financial, research and development and manufacturing
resources. Competition from any of the foregoing sources could place pressure
on us to accept lower margins on our contracts or lose existing or potential
business, which could result in a material adverse effect on our business,
results of operations and financial condition.

We sell our medical products principally in the markets of the United
States, Japan and Europe. Our competition with respect to medical products
comes from two principal sources: original equipment manufacturers who may have
in-house capabilities similar to ours, and other medical outsourcing and
products companies that sell to original equipment manufacturers or directly to
customers. Many of our competitors are larger and have substantially greater
financial, research and development and manufacturing resources. Price and
quality are the primary competitive factors in the markets in which we compete.
As competition in the market for medical products continues to increase, we
may experience pricing pressure, which could result in a material adverse
effect on our business, results of operation and financial condition.

Sales Of Shares Issuable Upon Exercise Of Stock Options and Warrants May
Adversely Affect Stock Price.

As of June 30, 2002, there were a total of approximately 13.2 million
shares of our common stock outstanding. In addition, there were outstanding
warrants and stock options to purchase approximately 2.7 million shares of
common stock, approximately 1.3 million of which are currently exercisable or
become exercisable by August 31, 2002. Shares issued upon the exercise of
warrants and options to purchase our stock generally are available for sale in
the open market. The future issuance or sale of the shares of common stock
referred to above could adversely affect the market price of our common stock.

Competitive Issues Between Our Customers May Limit Our Ability To Pursue New
Business In Attractive Areas.

There is a great deal of competition in the medical technology industry,
especially with respect to new product introductions. Our outsourcing services
customers invest heavily in the development of new products and it is important
to them to protect their new technology and to hold a technology edge over
their competitors as long as possible. Although we generally do not enter into
non-competition agreements, on occasion our development contracts prohibit us
from working for certain competitors of our customers. When and if we do this,
our growth may be adversely affected because such contracts would prevent us
from developing or manufacturing instruments for our customers competitors.
Any conflicts among our customers could prevent or deter us from obtaining
contracts to develop or manufacture instruments, which could result in a
material adverse effect on our business, results of operations and financial
condition.

Potential Or Pending Litigation May Affect Our Business.

During fiscal year 2002 we were involved in two material pieces of
litigation. We incurred significant costs and liabilities related to the
defense and settlement of the litigation, including legal and expert fees, and
settlement payments. The defense or resolution of any future litigation could
have a negative impact on our financial position and results of operations.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

As part of our cash management strategy, we had short-term investments at
June 30, 2002 consisting of approximately $990,000 in investment grade
securities. We classify these investments as available-for-sale assets, which
are stated at Fair Market Value on the accompanying balance sheets. All of the
short-term investments mature in less than one year. We have completed a
market risk sensitivity analysis of these short-term investments based upon an
assumed 1% increase in interest rates at July 1, 2002. Based on amounts
invested in high grade commercial paper, if markets were to experience an
increase in rates of 1% on July 1, 2002, we would have had an approximate
$6,000 realized loss on these short-term investments. Because this is only an
estimate, any actual loss due to an increase in interest rates could differ
from this estimate.

We have a line of credit that bears interest on outstanding balances at
the higher of the lenders prime rate or the federal funds effective rate plus
0.5%. Because we have yet to draw upon our line of credit, an increase in
interest rates would not have had an effect on our financial condition or
results of operations as of July 1, 2002. We have a capital lease agreement
with an interest rate of 7.9% that terminates in April 2003. As of June 30,
2002, $34,000 remains outstanding under this obligation.

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Item 8. Financial Statements

Index to Financial Statements and Schedules:

|                                                |  |        |      | 
|----------------------------------------------- |  | ------ | ---- | 
|                                                |  | Page  
|                                                |  | Number
|                                                |  |       
|Independent Auditors Report                    |  |        | F-1  | 
|Consolidated Balance Sheets                     |  |        | F-3  | 
|Consolidated Statements of Operations           |  |        | F-5  | 
|Consolidated Statements of Shareholders Equity |  |        | F-6  | 
|Consolidated Statements of Cash Flows           |  |        | F-9  | 
|Notes to Consolidated Financial Statements      |  |        | F-11 | 

All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable as the information required by
such schedules is provided herein, and therefore have been omitted.

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Independent Auditors Report

To the Board of Directors and Stockholders of Colorado MEDtech, Inc.:

We have audited the accompanying consolidated balance sheet of Colorado
MEDtech, Inc. (a Colorado corporation) and subsidiaries as of June 30, 2002 and
the related consolidated statements of operations, shareholders equity and
comprehensive income (loss) and cash flows for the year then ended. 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 audit. The financial statements of Colorado MEDtech, Inc. and subsidiaries
as of June 30, 2001 and for the two years in the period ended June 30, 2001
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those financial statements, before the
restatements described in Note 2 to the financial statements, in their report
dated September 6, 2001.

We conducted our audit 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 audit provides a
reasonable basis for our opinion.

In our opinion, the June 30, 2002 financial statements referred to above
present fairly, in all material respects, the financial position of Colorado
MEDtech, Inc. and subsidiaries as of June 30, 2002, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.

As discussed above, the consolidated balance sheet of Colorado MEDtech Inc. and
subsidiaries as of June 30, 2001, and the related consolidated statements of
operations, shareholders equity and comprehensive income (loss), and cash
flows for the years ended June 30, 2001 and 2000, were audited by other
auditors who have ceased operations. As described in Note 2, the consolidated
balance sheet as of June 30, 2001 and the consolidated statement of
shareholders equity and comprehensive income (loss) for the year then ended
have been restated to reclassify notes receivablerelated parties from a
non-current asset to a reduction of shareholders equity. We audited the
reclassification adjustment that was applied to restate this balance sheet and
statement of shareholders equity and comprehensive income (loss). In our
opinion, such adjustment is appropriate and has been properly applied.
Additionally, as described in Note 2, the consolidated financial statements as
of June 30, 2001 and for each of the fiscal years ended June 30, 2001 and 2000
have been revised to include the transitional disclosures required by Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, which was adopted by the Company as of July 1, 2001. In our opinion,
the disclosures for 2001 and 2000 in Note 2 are appropriate. Additionally, as
described in Note 2, the Company changed the composition of its reportable
segments during the year ended June 30, 2002, and the amounts in the 2001 and
2000 financial statements relating to reportable segments have been restated to
conform to the 2002 composition of reportable segments. We audited the
adjustments that were applied to restate the disclosures for reportable
segments reflected in the 2001 and 2000 financial statements. In our opinion,
such adjustments are appropriate and have been properly applied. However, we
were not engaged to audit, review, or apply any procedures to the 2001 and 2000
financial statements of the Company other than with respect to such
reclassification adjustment and such disclosures and, accordingly, we do not
express an opinion or any other form of assurance on the 2001 and 2000
consolidated financial statements taken as a whole.

KPMG LLP

Denver, Colorado,       August 14,
2002

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To Colorado MEDtech, Inc.:

We have audited the accompanying consolidated balance sheets of COLORADO
MEDTECH, INC.
(a Colorado corporation) and subsidiaries as of June 30, 2001 and 2000, and the
related consolidated statements of operations, shareholders equity and cash
flows for each of the three years in the period ended June 30, 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. 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 Colorado MEDtech, Inc. and
subsidiaries as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001, in conformity with accounting principles generally accepted in the United
States.



| | ARTHUR ANDERSEN LLP
| | -------------------

Denver, Colorado,     September 6,
2001

The report of Arthur Andersen LLP (Andersen) is a copy of a report
previously issued by Andersen on September 6, 2001. We have not been able to
obtain a re-issued report from Andersen. Andersen has not consented to the
inclusion of its report in this Annual Report on Form 10-K. The report of
Andersen refers to consolidated balance sheets as of June 30, 2000 and
statements of operation, shareholders equity and cash flows for the year ended
June 30, 1999 not included herein. Because Andersen has not consented to the
inclusion of its report in this Annual Report, it may be more difficult for you
to seek remedies against Andersen and your ability to seek relief against
Andersen may be impaired. Further, the financial statements herein have been
restated from those reported on by Andersen. The balance sheet as of June 30,
2001 and statement of shareholders equity and comprehensive income (loss) for
the year then ended presented herein have been restated from those reported on
by Andersen to reflect the reclassification of notes receivablerelated parties
from non-current assets to a reduction of shareholders equity. Additionally,
the financial statements have been revised to include the transitional
disclosure required by Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, which was adopted by the Company as of
July 1, 2001 and to reflect the changed composition of the Companys reportable
segments for the years ended June 30, 2001 and 2000 to conform to the 2002
composition of reportable segments.

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Page 1 of 2

COLORADO MEDTECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND 2001

ASSETS

|                    |                                     |                                                                                                        |                             |            |           |            |            |            |            |            | 
|------------------- | ----------------------------------- | ------------------------------------------------------------------------------------------------------ | --------------------------- | ---------- | --------- | ---------- | ---------- | ---------- | ---------- | ---------- | 
|                    |                                     |                                                                                                        |                             |            | 2002      |            | 2001      
|                    |                                     |                                                                                                        |                             |            |           |            |           
|CURRENT ASSETS:     |                                     |                                                                                                        |                             |            |           |            |            |           
|                    | Cash and cash equivalents           |                                                                                                        | $                           | 6,366,303  |           |            | $          | 8,127,076  |           
|                    | Short-term investments              |                                                                                                        |                             | 993,319    |           |            |            | 1,677,290  |           
|                    | Accounts receivable-                |                                                                                                        |                             |            |           |            |            |            |           
|                    |                                     | Trade  less allowance for uncollectible accounts
of approximately $519,000 and $481,000, respectively |                             |            | 9,644,164 |            |            |            | 12,964,383 |           
|                    |                                     | Unbilled                                                                                               |                             |            | 169,438   |            |            |            | 540,818    |           
|                    | Inventories                         |                                                                                                        |                             | 5,781,665  |           |            |            | 11,720,505 |           
|                    | Income taxes receivable             |                                                                                                        |                             | 3,589,907  |           |            |            | 976,507    |           
|                    | Deferred income taxes               |                                                                                                        |                             | 1,557,803  |           |            |            | 3,234,201  |           
|                    | Prepaid expenses and other          |                                                                                                        |                             | 824,563    |           |            |            | 791,848    |           
|                    |                                     |                                                                                                        |                             |            |           |            |            |           
|                    |                                     |                                                                                                        | Total current assets        |            |           | 28,927,162 |            |            |            | 40,032,628 | 
|                    |                                     |                                                                                                        |                             |            |           |            |            |           
|NON-CURRENT ASSETS: |                                     |                                                                                                        |                             |            |           |            |            |           
|                    | Property and equipment              |                                                                                                        |                             | 11,750,284 |           |            |            | 14,538,179 |           
|                    | Less  Accumulated depreciation     |                                                                                                        |                             | (6,050,241 | )         |            |            | (9,900,897 | )         
|                    |                                     |                                                                                                        |                             |            |           |            |            |           
|                    |                                     |                                                                                                        | Property and equipment, net |            |           | 5,700,043  |            |            |            | 4,637,282  | 
|                    | Goodwill and other intangibles, net |                                                                                                        |                             | 5,876,785  |           |            |            | 3,585,772  |           
|                    | Land held for sale                  |                                                                                                        |                             | 500,000    |           |            |            | 500,000    |           
|                    | Deferred income taxes               |                                                                                                        |                             | 1,227,143  |           |            |            | 1,514,880  |           
|                    | Other assets                        |                                                                                                        |                             | 302,726    |           |            |            | 129,575    |           
|                    |                                     |                                                                                                        |                             |            |           |            |            |           
|                    |                                     |                                                                                                        | Total non-current assets    |            |           | 13,606,697 |            |            |            | 10,367,509 | 
|                    |                                     |                                                                                                        |                             |            |           |            |            |           
|TOTAL ASSETS        |                                     | $                                                                                                      | 42,533,859                  |            |           | $          | 50,400,137 |           
|                    |                                     |                                                                                                        |                             |            |           |            |            |           

The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.

F-3



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Page 2 of 2

COLORADO MEDTECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND 2001

LIABILITIES AND SHAREHOLDERS EQUITY

|                                                 |                                                                                                                                                    |                                             |                            |            |           |            |            |            |           |            | 
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | -------------------------- | ---------- | --------- | ---------- | ---------- | ---------- | --------- | ---------- | 
|                                                 |                                                                                                                                                    |                                             |                            |            | 2002      |            | 2001      
|                                                 |                                                                                                                                                    |                                             |                            |            |           |            |           
|CURRENT LIABILITIES:                             |                                                                                                                                                    |                                             |                            |            |           |            |            |           
|                                                 |                                                                                                                                                    | Accounts payable                            |                            | $          | 4,878,784 |            |            | $          | 7,168,168 |           
|                                                 |                                                                                                                                                    | Accrued product service costs               |                            |            | 376,907   |            |            |            | 424,163   |           
|                                                 |                                                                                                                                                    | Accrued salaries and wages                  |                            |            | 1,989,815 |            |            |            | 3,054,307 |           
|                                                 |                                                                                                                                                    | Other accrued expenses                      |                            |            | 1,435,222 |            |            |            | 1,905,229 |           
|                                                 |                                                                                                                                                    | Customer deposits and deferred revenue      |                            |            | 1,733,746 |            |            |            | 3,451,332 |           
|                                                 |                                                                                                                                                    | Current portion of capital lease obligation |                            |            | 33,503    |            |            |            | 41,715    |           
|                                                 |                                                                                                                                                    |                                             |                            |            |           |            |            |           
|                                                 |                                                                                                                                                    |                                             | Total current liabilities  |            |           | 10,447,977 |            |            |           | 16,044,914 | 
|CAPITAL LEASE OBLIGATION, net of current portion |                                                                                                                                                    |                                             |                           |            |           |            | 33,503     |           
|                                                 |                                                                                                                                                    |                                             |                            |            |           |            |            |           
|                                                 |                                                                                                                                                    |                                             | Total liabilities          |            |           | 10,447,977 |            |            |           | 16,078,417 | 
|                                                 |                                                                                                                                                    |                                             |                            |            |           |            |            |           
|COMMITMENTS AND CONTINGENCIES                    |                                                                                                                                                    |                                             |                            |            |           |            |            |           
|SHAREHOLDERS EQUITY:                            |                                                                                                                                                    |                                             |                            |            |           |            |            |           
|                                                 | Preferred stock, no par value; 5,000,000 shares authorized;
none issued                                                                            |                                             |                            |           |           |            |            |           |          
|                                                 | Common stock, no par value; 25,000,000 shares authorized;
13,168,783 and 12,967,319 issued and outstanding
at June 30, 2002 and 2001, respectively |                                             |                            | 16,718,092 |           |            |            | 16,161,004 |          
|                                                 | Accumulated other comprehensive loss                                                                                                               |                                             |                            | (7,432     | )         |            |            | (13,952    | )        
|                                                 | Notes receivable  related parties                                                                                                                 |                                             |                            | (699,799   | )         |            |            | (999,796   | )        
|                                                 | Retained earnings                                                                                                                                  |                                             |                            | 16,075,021 |           |            |            | 19,174,464 |          
|                                                 |                                                                                                                                                    |                                             |                            |            |           |            |            |           
|                                                 |                                                                                                                                                    |                                             | Total shareholders equity |            |           | 32,085,882 |            |            |           | 34,321,720 | 
|                                                 |                                                                                                                                                    |                                             |                            |            |           |            |            |           
|TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY       |                                                                                                                                                    | $                                           | 42,533,859                 |            |           | $          | 50,400,137 |           
|                                                 |                                                                                                                                                    |                                             |                            |            |           |            |            |           

The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.

F-4



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COLORADO MEDTECH, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000

|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |            |            | 
|----------------------------------------------------------------- | ------------------------------------- | ----------------------------------- | ---------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                                  |                                       |                                     |            | 2002       |            | 2001 |            | 2000      
|                                                                  |                                       |                                     |            |            |            |      |            |           
|NET REVENUE:                                                      |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|                                                                  | Outsourcing Services                  |                                     | $          | 27,573,829 |            |      | $          | 36,815,289 |            |   | $          | 42,467,159 |           
|                                                                  | Medical Products                      |                                     |            | 43,078,508 |            |      |            | 40,359,964 |            |   |            | 31,535,944 |           
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|                                                                  |                                       | Total net revenue                   |            |            | 70,652,337 |      |            |            | 77,175,253 |   |            |            | 74,003,103 | 
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|COST OF PRODUCTS AND SERVICES:                                    |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|                                                                  | Outsourcing Services                  |                                     |            | 25,763,706 |            |      |            | 26,302,639 |            |   |            | 28,527,446 |           
|                                                                  | Medical Products                      |                                     |            | 25,248,959 |            |      |            | 30,070,134 |            |   |            | 18,649,757 |           
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|                                                                  |                                       | Total cost of products and services |            |            | 51,012,665 |      |            |            | 56,372,773 |   |            |            | 47,177,203 | 
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|GROSS PROFIT                                                      |                                       |                                     | 19,639,672 |            |            |      | 20,802,480 |            |            |   | 26,825,900 |           
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|OPERATING EXPENSES:                                               |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|                                                                  | Research and development              |                                     |            | 3,356,522  |            |      |            | 5,076,781  |            |   |            | 4,025,567  |           
|                                                                  | Marketing and selling                 |                                     |            | 3,889,126  |            |      |            | 3,958,235  |            |   |            | 4,065,466  |           
|                                                                  | Operating, general and administrative |                                     |            | 14,946,561 |            |      |            | 16,724,778 |            |   |            | 13,862,686 |           
|                                                                  | Other operating expenses (Note 2)     |                                     |            | 2,628,924  |            |      |            | 1,882,038  |            |   |            | 191,635    |           
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|                                                                  |                                       | Total operating expenses            |            |            | 24,821,133 |      |            |            | 27,641,832 |   |            |            | 22,145,354 | 
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|(LOSS) EARNINGS FROM OPERATIONS                                   |                                       |                                     | (5,181,461 | )          |            |      | (6,839,352 | )          |            |   | 4,680,546  |           
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|OTHER INCOME (EXPENSE):                                           |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|                                                                  | Interest expense                      |                                     |            | (28,207    | )          |      |            | (33,025    | )          |   |            | (98,391    | )         
|                                                                  | Interest income and other             |                                     |            | 256,225    |            |      |            | 874,894    |            |   |            | 831,399    |           
|                                                                  | Gain on sale of subsidiary            |                                     |            |           |            |      |            | 920,658    |            |   |            |           |           
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|                                                                  |                                       | Total other income                  |            |            | 228,018    |      |            |            | 1,762,527  |   |            |            | 733,008    | 
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES                   |                                       |                                     | (4,953,443 | )          |            |      | (5,076,825 | )          |            |   | 5,413,554  |           
|(BENEFIT) PROVISION FOR INCOME TAXES                              |                                       |                                     | (1,854,000 | )          |            |      | (2,370,000 | )          |            |   | 2,423,000  |           
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|NET (LOSS) INCOME                                                 |                                       | $                                   | (3,099,443 | )          |            | $    | (2,706,825 | )          |            | $ | 2,990,554  |           
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|NET (LOSS) INCOME PER SHARE:                                      |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|                                                                  | Basic                                 |                                     | $          | (.24       | )          |      | $          | (.21       | )          |   | $          | .25        |           
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|                                                                  | Diluted                               |                                     | $          | (.24       | )          |      | $          | (.21       | )          |   | $          | .22        |           
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING: |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|                                                                  | Basic                                 |                                     |            | 13,053,966 |            |      |            | 12,717,529 |            |   |            | 12,076,421 |           
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           
|                                                                  | Diluted                               |                                     |            | 13,053,966 |            |      |            | 12,717,529 |            |   |            | 13,354,808 |           
|                                                                  |                                       |                                     |            |            |            |      |            |            |            |   |            |           

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

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Page 1 of 3

COLORADO MEDTECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000

|                        |                                                                 |  |              |         |               |   |               |           |                   |  |                 |           |          |   |        |         |   |   |   |   |  |   |            |           |  
|----------------------- | --------------------------------------------------------------- |  | ------------ | ------- | ------------- | - | ------------- | --------- | ----------------- |  | --------------- | --------- | -------- | - | ------ | ------- | - | - | - | - |  | - | ---------- | --------- | -
|                        |                                                                 |  | Common Stock |         |               |   |               |           | Accumulated Other |  | Notes           |           |          |   |       
|                        |                                                                 |  |              |         | Comprehensive |   | Comprehensive |           | Receivable -      |  | Retained       
|                        |                                                                 |  | Shares       |         | Amount        |   | Income (Loss) |           | Income (Loss)     |  | Related Parties |           | Earnings
|                        |                                                                 |  |              |         |               |   |               |           |                   |  |                 |           |         
|BALANCES, June 30, 1999 |                                                                 |  | 11,831,449   |         |               | $ | 11,158,446    |           |                   |  |                 |           |          | $ | 28,380 |         |   | $ |  |   |  | $ | 19,263,269 |          
|                        | Exercise of stock options
and warrants                          |  |              | 424,595 |               |   |               | 921,064   |                   |  |                 |           |          |   |        |        |   |   |   |  |  |   |            |          |  
|                        | Issuance of stock under ESPP                                    |  |              | 51,491  |               |   |               | 347,564   |                   |  |                 |           |          |   |        |        |   |   |   |  |  |   |            |          |  
|                        | Dividends                                                       |  |              |        |               |   |               |          |                   |  |                 |           |          |   |        |        |   |   |   |  |  |   |            | (372,534  | )
|                        | Income tax benefit from
exercise of stock options               |  |              |        |               |   |               | 1,041,412 |                   |  |                 |           |          |   |        |        |   |   |   |  |  |   |            |          |  
|                        | Change in unrealized gain on
available for sale investment, net |  |              |        |               |   |               |          |                   |  | $               | (30,865   | )        |   |        | (30,865 | ) |   |   |  |  |   |            |          |  
|                        | Net
income                                                      |  |              |        |               |   |               |          |                   |  |                 | 2,990,554 |          |   |        |        |   |   |   |  |  |   |            | 2,990,554 |  
|                        |                                                                 |  |              |         |               |   |               |           |                   |  |                 |           |          |   |        |         |   |   |   |   |  |   |            |          
|                        | Comprehensive income                                            |  |              |        |               |   |               |          |                   |  | $               | 2,959,689 |          |   |        |        |   |   |   |  |  |   |            |          |  
|                        |                                                                 |  |              |         |               |   |               |           |                   |  |                 |           |          |   |        |         |   |   |   |   |  |   |            |          
|BALANCES, June 30, 2000 |                                                                 |  | 12,307,535   |         |               | $ | 13,468,486    |           |                   |  |                 |           |          | $ | (2,485 | )       |   | $ |  |   |  | $ | 21,881,289 |          
|                        |                                                                 |  |              |         |               |   |               |           |                   |  |                 |           |          |   |        |         |   |   |   |   |  |   |            |          

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

F-6



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Page 2 of 3

COLORADO MEDTECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000

|                        |                                                                 |  |              |         |               |   |               |           |                   |  |                 |            |          |   |         |         |   |   |          |          |   |   |            |            |  
|----------------------- | --------------------------------------------------------------- |  | ------------ | ------- | ------------- | - | ------------- | --------- | ----------------- |  | --------------- | ---------- | -------- | - | ------- | ------- | - | - | -------- | -------- | - | - | ---------- | ---------- | -
|                        |                                                                 |  | Common Stock |         |               |   |               |           | Accumulated Other |  | Notes           |            |          |   |        
|                        |                                                                 |  |              |         | Comprehensive |   | Comprehensive |           | Receivable -      |  | Retained       
|                        |                                                                 |  | Shares       |         | Amount        |   | Income (Loss) |           | Income (Loss)     |  | Related Parties |            | Earnings
|                        |                                                                 |  |              |         |               |   |               |           |                   |  |                 |            |         
|BALANCES, June 30, 2000 |                                                                 |  | 12,307,535   |         |               | $ | 13,468,486    |           |                   |  |                 |            |          | $ | (2,485  | )       |   | $ |         |          |   | $ | 21,881,289 |           
|                        | Exercise of stock options
and warrants                          |  |              | 581,453 |               |   |               | 2,083,629 |                   |  |                 |            |          |   |         |        |   |   |          |         |   |   |            |           |  
|                        | Issuance of stock under ESPP                                    |  |              | 100,031 |               |   |               | 274,907   |                   |  |                 |            |          |   |         |        |   |   |          |         |   |   |            |           |  
|                        | Income tax benefit from
exercise of stock options               |  |              |        |               |   |               | 442,732   |                   |  |                 |            |          |   |         |        |   |   |          |         |   |   |            |           |  
|                        | Purchase of common stock                                        |  |              | (21,700 | )             |   |               | (108,750  | )                 |  |                 |            |          |   |         |        |   |   |          |         |   |   |            |           |  
|                        | Loans to officers                                               |  |              |        |               |   |               |          |                   |  |                 |            |          |   |         |        |   |   |          | (999,796 | ) |   |            |           |  
|                        | Change in unrealized gain on
available for sale investment, net |  |              |        |               |   |               |          |                   |  | $               | (11,467    | )        |   |         | (11,467 | ) |   |          |         |   |   |            |           |  
|                        | Net loss                                                        |  |              |        |               |   |               |          |                   |  |                 | (2,706,825 | )        |   |         |        |   |   |          |         |   |   |            | (2,706,825 | )
|                        |                                                                 |  |              |         |               |   |               |           |                   |  |                 |            |          |   |         |         |   |   |          |          |   |   |            |           
|                        | Comprehensive loss                                              |  |              |        |               |   |               |          |                   |  | $               | (2,718,292 | )        |   |         |        |   |   |          |         |   |   |            |           |  
|                        |                                                                 |  |              |         |               |   |               |           |                   |  |                 |            |          |   |         |         |   |   |          |          |   |   |            |           
|BALANCES, June 30, 2001 |                                                                 |  | 12,967,319   |         |               | $ | 16,161,004    |           |                   |  |                 |            |          | $ | (13,952 | )       |   | $ | (999,796 | )        |   | $ | 19,174,464 |           
|                        |                                                                 |  |              |         |               |   |               |           |                   |  |                 |            |          |   |         |         |   |   |          |          |   |   |            |           

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

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Page 3 of 3

COLORADO MEDTECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000

|                                                                             |                                                                 |  |              |         |               |   |               |         |                   |  |                 |            |          |   |         |       |  |   |          |         |  |   |            |            |  
|---------------------------------------------------------------------------- | --------------------------------------------------------------- |  | ------------ | ------- | ------------- | - | ------------- | ------- | ----------------- |  | --------------- | ---------- | -------- | - | ------- | ----- |  | - | -------- | ------- |  | - | ---------- | ---------- | -
|                                                                             |                                                                 |  | Common Stock |         |               |   |               |         | Accumulated Other |  | Notes           |            |          |   |        
|                                                                             |                                                                 |  |              |         | Comprehensive |   | Comprehensive |         | Receivable -      |  | Retained       
|                                                                             |                                                                 |  | Shares       |         | Amount        |   | Income (Loss) |         | Income (Loss)     |  | Related Parties |            | Earnings
|                                                                             |                                                                 |  |              |         |               |   |               |         |                   |  |                 |            |         
|BALANCES, June 30, 2001                                                      |                                                                 |  | 12,967,319   |         |               | $ | 16,161,004    |         |                   |  |                 |            |          | $ | (13,952 | )     |  | $ | (999,796 | )       |  | $ | 19,174,464 |           
|                                                                             | Exercise of stock options
and warrants                          |  |              | 20,628  |               |   |               | 64,138  |                   |  |                 |            |          |   |         |      |  |   |          |        |  |   |            |           |  
|                                                                             | Issuance of stock under ESPP                                    |  |              | 95,502  |               |   |               | 237,486 |                   |  |                 |            |          |   |         |      |  |   |          |        |  |   |            |           |  
|                                                                             | Issuance of options for services                                |  |              |        |               |   |               | 67,563  |                   |  |                 |            |          |   |         |      |  |   |          |        |  |   |            |           |  
|                                                                             | Income tax benefit from
exercise of stock options               |  |              |        |               |   |               | 1,349   |                   |  |                 |            |          |   |         |      |  |   |          |        |  |   |            |           |  
|Acquisition of common stock by reduction
of notes receivable  related party |                                                                 |  | (41,666      | )       |               |   | (149,998      | )       |                   |  |                 |            |          |   |        |       |  |   | 149,998  |         |  |   |           |           
|                                                                             | Proceeds from collection on
officer loan                        |  |              |        |               |   |               |        |                   |  |                 |            |          |   |         |      |  |   |          | 149,999 |  |   |            |            |  
|                                                                             | Stock issued in Barzell acquisition                             |  |              | 127,000 |               |   |               | 336,550 |                   |  |                 |            |          |   |         |      |  |   |          |        |  |   |            |           |  
|                                                                             | Change in unrealized gain on
available for sale investment, net |  |              |        |               |   |               |        |                   |  | $               | 6,520      |          |   |         | 6,520 |  |   |          |        |  |   |            |           |  
|                                                                             | Net loss                                                        |  |              |        |               |   |               |        |                   |  |                 | (3,099,443 | )        |   |         |      |  |   |          |        |  |   |            | (3,099,443 | )
|                                                                             |                                                                 |  |              |         |               |   |               |         |                   |  |                 |            |          |   |         |       |  |   |          |         |  |   |            |           
|                                                                             | Comprehensive loss                                              |  |              |        |               |   |               |        |                   |  | $               | (3,092,923 | )        |   |         |      |  |   |          |        |  |   |            |           |  
|                                                                             |                                                                 |  |              |         |               |   |               |         |                   |  |                 |            |          |   |         |       |  |   |          |         |  |   |            |           
|BALANCES, June 30, 2002                                                      |                                                                 |  | 13,168,783   |         |               | $ | 16,718,092    |         |                   |  |                 |            |          | $ | (7,432  | )     |  | $ | (699,799 | )       |  | $ | 16,075,021 |           
|                                                                             |                                                                 |  |              |         |               |   |               |         |                   |  |                 |            |          |   |         |       |  |   |          |         |  |   |            |           

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

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Page 1 of 2

COLORADO MEDTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000

|                                      |                                                                                                          |                                                 |                                       |                                                     |           |            |            |            |            |            |            |             |           |            |            |  
|------------------------------------- | -------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------- | --------------------------------------------------- | --------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ----------- | --------- | ---------- | ---------- | -
|                                      |                                                                                                          |                                                 |                                       |                                                     |           | 2002       |            | 2001       |            | 2000      
|                                      |                                                                                                          |                                                 |                                       |                                                     |           |            |            |            |            |           
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                                                          |                                                 |                                       |                                                     |           |            |            |            |            |            |            |            
|                                      | Net (loss) income                                                                                        |                                                 | $                                     | (3,099,443                                          | )         |            | $          | (2,706,825 | )          |            | $          | 2,990,554   |          
|                                      | Adjustments to reconcile net (loss) income to net
cash flows provided by (used in) operating activities- |                                                 |                                       |                                                     |           |            |            |            |            |            |            |             |          
|                                      |                                                                                                          | Gain on sale of subsidiary                      |                                       |                                                     |          |            |            |            | (920,658   | )          |            |             |          |           
|                                      |                                                                                                          | Deferred tax provision (benefit)                |                                       |                                                     | 1,964,135 |            |            |            | (2,275,666 | )          |            |             | (31,000   | )         
|                                      |                                                                                                          | Write down of goodwill                          |                                       |                                                     |          |            |            |            | 138,161    |            |            |             | 1,321,657 |           
|                                      |                                                                                                          | Allowance for uncollectible accounts receivable |                                       |                                                     | 38,230    |            |            |            | 2,576      |            |            |             | 131,492   |           
|                                      |                                                                                                          | Write down of inventory                         |                                       |                                                     | 741,791   |            |            |            | 3,970,697  |            |            |             | 187,785   |           
|                                      |                                                                                                          | Depreciation and amortization                   |                                       |                                                     | 2,763,314 |            |            |            | 2,460,642  |            |            |             | 2,123,394 |           
|                                      |                                                                                                          | Stock-based compensation                        |                                       |                                                     | 67,563    |            |            |            |           |            |            |             |          |           
|                                      |                                                                                                          | Accretion of short-term investments             |                                       |                                                     | (9,940    | )          |            |            | 97,936     |            |            |             |          |           
|                                      |                                                                                                          | Changes in operating assets and liabilities-    |                                       |                                                     |           |            |            |            |            |            |            |             |           |           
|                                      |                                                                                                          |                                                 | Accounts receivable                   |                                                     |           | 3,653,369  |            |            |            | (535,333   | )          |             |           | (1,761,459 | )         
|                                      |                                                                                                          |                                                 | Inventories                           |                                                     |           | 5,589,236  |            |            |            | (6,740,254 | )          |             |           | (2,669,312 | )         
|                                      |                                                                                                          |                                                 | Prepaid expenses and other assets     |                                                     |           | (2,949,210 | )          |            |            | (292,570   | )          |             |           | 175,848    |           
|                                      |                                                                                                          |                                                 | Accounts payable and accrued expenses |                                                     |           | (3,647,168 | )          |            |            | 2,570,417  |            |             |           | (3,987,344 | )         
|                                      |                                                                                                          |                                                 | Customer deposits                     |                                                     |           | (1,717,586 | )          |            |            | 1,029,385  |            |             |           | (835,709   | )         
|                                      |                                                                                                          |                                                 |                                       |                                                     |           |            |            |            |            |            |            |            
|                                      |                                                                                                          |                                                 |                                       | Net cash provided by (used in)
operating activities |           |            | 3,394,291  |            |            |            | (3,201,492 | )           |           |            | (2,354,094 | )
|                                      |                                                                                                          |                                                 |                                       |                                                     |           |            |            |            |            |            |            |            
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                                                          |                                                 |                                       |                                                     |           |            |            |            |            |            |            |            
|                                      | Cash paid for purchase of Barzell assets                                                                 |                                                 |                                       | (2,125,238                                          | )         |            |            |           |            |            |            |            |          
|                                      | Cash paid for purchase of ATL assets                                                                     |                                                 |                                       | (500,000                                            | )         |            |            | (3,884,123 | )          |            |            |            |          
|                                      | Cash paid for purchase of Creos assets                                                                   |                                                 |                                       |                                                    |           |            |            |           |            |            |            | (1,651,295  | )        
|                                      | Capital expenditures                                                                                     |                                                 |                                       | (3,534,983                                          | )         |            |            | (2,146,224 | )          |            |            | (1,373,129  | )        
|                                      | Funding of related party notes receivable                                                                |                                                 |                                       |                                                    |           |            |            | (999,796   | )          |            |            |            |          
|                                      | Proceeds from collection of notes receivable 
related party                                             |                                                 |                                       | 149,999                                             |           |            |            |           |            |            |            |            |          
|                                      | Proceeds from sale of CDT                                                                                |                                                 |                                       | 129,999                                             |           |            |            | 1,170,000  |            |            |            |            |          
|                                      | Purchases of short-term investments                                                                      |                                                 |                                       | (995,230                                            | )         |            |            | (4,074,915 | )          |            |            | (11,756,473 | )        
|                                      | Sales of short-term investments                                                                          |                                                 |                                       | 1,690,020                                           |           |            |            | 10,499,895 |            |            |            | 17,932,235  |          
|                                      |                                                                                                          |                                                 |                                       |                                                     |           |            |            |            |            |            |            |            
|                                      |                                                                                                          |                                                 |                                       | Net cash (used in) provided by
investing activities |           |            | (5,185,433 | )          |            |            | 564,837    |             |           |            | 3,151,338  |  
|                                      |                                                                                                          |                                                 |                                       |                                                     |           |            |            |            |            |            |            |            

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

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Page 2 of 2

COLORADO MEDTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000

|                                                     |                               |                                                     |            |          |        |      |           |           |           |   |           |            |          |  
|---------------------------------------------------- | ----------------------------- | --------------------------------------------------- | ---------- | -------- | ------ | ---- | --------- | --------- | --------- | - | --------- | ---------- | -------- | -
|                                                     |                               |                                                     |            | 2002     |        | 2001 |           | 2000     
|                                                     |                               |                                                     |            |          |        |      |           |          
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                               |                                                     |            |          |        |      |           |           |           |   |           |           
|                                                     | Issuance of common stock      |                                                     | $          | 301,624  |        |      | $         | 2,358,536 |           |   | $         | 1,268,628  |         
|                                                     | Purchase of common stock      |                                                     |            |         |        |      |           | (108,750  | )         |   |           |           |         
|                                                     | Dividends paid to shareholder |                                                     |            |         |        |      |           |          |           |   |           | (372,534   | )       
|                                                     | Repayment of borrowings       |                                                     |            | (271,255 | )      |      |           | (46,120   | )         |   |           | (1,632,987 | )       
|                                                     |                               |                                                     |            |          |        |      |           |           |           |   |           |           
|                                                     |                               | Net cash provided by (used in)
financing activities |            |          | 30,369 |      |           |           | 2,203,666 |   |           |            | (736,893 | )
|                                                     |                               |                                                     |            |          |        |      |           |           |           |   |           |           
|NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS |                               |                                                     | (1,760,773 | )        |        |      | (432,989  | )         |           |   | 60,351    |           
|CASH AND CASH EQUIVALENTS, at beginning of period    |                               |                                                     | 8,127,076  |          |        |      | 8,560,065 |           |           |   | 8,499,714 |           
|                                                     |                               |                                                     |            |          |        |      |           |           |           |   |           |           
|CASH AND CASH EQUIVALENTS, at end of period          |                               | $                                                   | 6,366,303  |          |        | $    | 8,127,076 |           |           | $ | 8,560,065 |           
|                                                     |                               |                                                     |            |          |        |      |           |           |           |   |           |           
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:    |                               |                                                     |            |          |        |      |           |           |           |   |           |           
|                                                     | Cash paid for interest        |                                                     | $          | 26,715   |        |      | $         | 18,025    |           |   | $         | 108,013    |         
|                                                     |                               |                                                     |            |          |        |      |           |           |           |   |           |           
|                                                     | Cash paid for income taxes    |                                                     | $          | 511,000  |        |      | $         | 612,831   |           |   | $         | 1,823,377  |         
|                                                     |                               |                                                     |            |          |        |      |           |           |           |   |           |           

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

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COLORADO MEDTECH, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|(1) |  | ORGANIZATION AND OPERATIONS
|--- |  | ---------------------------

Overview

Colorado MEDtech, Inc. is a provider of advanced medical products and
comprehensive engineering and manufacturing outsourcing services for healthcare
companies worldwide. The Companys products are system components that are
sold to medical imaging original equipment manufacturers (OEMs), and
ultrasound accessories that are sold to OEMs and end-users such as hospitals,
clinics and doctors. The Companys services include development and
manufacturing of electronic and electromechanical devices and instrumentation,
product definition, rapid prototyping, engineering, risk analysis, agency
submissions, validation testing and value engineering. Colorado MEDtech was
incorporated in 1977 as a Colorado corporation.

In fiscal 2002 the Company realigned its operating segments to more
accurately reflect its current business. The Company currently manages its
operations through two operating segments, Colorado operations and CIVCO
operations. Through its Colorado operations segment, the Company provides
medical device outsourcing services and manufactures and sells medical
products. Through its CIVCO operations, the Company designs, develops,
manufactures and distributes specialized medical accessories and supplies for
imaging equipment and for minimally invasive surgical equipment. Prior to the
realignment, the Company operated through an outsourcing services segment and a
medical products segment. The current Colorado operations were operated
through both segments while the CIVCO operations were operated through the
medical products segment. The notes to the consolidated financial statements
for 2001 and 2000 have been restated to reflect this change in reportable
segments, see Note 2. Significant Accounting Policies.

Colorado Operations

The Colorado operations segment provides medical device outsourcing
services and medical products.

The outsourcing services group provides custom product development and
manufacturing outsourcing services to customers ranging from large medical
device OEMs to emerging medical device companies. The Companys Colorado
outsourcing services group specializes in the design and development of
diagnostic, biotechnology and therapeutic medical devices, medical software
systems and medical device connectivity. The group also provides contract
manufacturing services for electronic and electromechanical medical devices and
instrumentation systems assembly. The Companys development and manufacturing
outsourcing services generally involve complex high-end devices, as opposed to
commodity or high-volume products. In providing outsourcing services, the
Company may develop and / or manufacture products for use in blood analysis,
feminine therapies, and cancer detection systems. The Company also performs
various forms of verification and validation testing for software applications
and medical devices. The Company maintains a technical staff of engineers with
backgrounds focused in the electrical, mechanical, software and manufacturing
disciplines.

The medical products group designs, develops and manufactures a broad
range of imaging system hardware and software, including advanced magnetic
resonance imaging (MRI) systems,

F-11



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high-performance radio frequency (RF) amplifiers for MRI systems and
high-voltage x-ray generator subsystems for computed tomography (CT)
scanners. While grouped under the medical products revenue item in the
Companys financial statements, the products produced by the Colorado
operations segment are not regulated medical devices, but instead are imaging
power system components.

CIVCO

CIVCO Medical Instruments Co., Inc. is a wholly-owned subsidiary of
Colorado MEDtech, primarily located in Iowa. CIVCO designs, develops,
manufactures and distributes specialized medical accessories and supplies for
imaging equipment and for minimally invasive surgical equipment.

CIVCOs product line of accessories for ultrasound systems and supplies
includes sterile needle guides used in ultrasound biopsy and drainage
procedures, transducer covers, print and video media for recording ultrasound
images, and scanning procedure gel. CIVCO supplies medical devices, supplies,
and accessories to the ultrasound and minimally invasive OEM and end-user
markets. In February 2002, CIVCO acquired Barzell Whitmore Maroon Bells, Inc.
(Barzell), which enabled CIVCO to design and manufacture positioning and
stabilizing devices used in minimally-invasive mens health surgical
procedures.

Sold and Other Operations

During fiscal 2001, the Company restructured to focus on its core market
offerings of medical technology and software services (outsourcing) and medical
imaging products. As a part of this effort, the Company phased out two
business units, CMED Automation division (CMED Automation) and BioMed Y2K,
Inc. (BioMed). In addition, the Company sold the CMED Catheter and
Disposables Technology, Inc. (CDT) subsidiary in April 2001. The activities
of these business units were as follows:



| |  |  | CDT                                                                                                                                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   |  | designed, developed and manufactured unique disposable medical devices,
primarily catheters, used in angioplasty, minimally invasive surgery,
electrophysiology and infertility treatment;
|
| |  |  | CMED Automation                                                                                                                                                                           
|
| |   |  | designed, developed and manufactured automation systems for medical
device and associated businesses; and                                                                                 
|
| |  |  | BioMed                                                                                                                                                                                    
|
| |   |  | provided software tools and services to support healthcare
institutions efforts to establish Year 2000 compliance for their
biomedical devices.                                          



|(2) |  | SIGNIFICANT ACCOUNTING POLICIES
|--- |  | -------------------------------

Principles of Consolidation

The accompanying financial statements reflect the consolidated results of
Colorado MEDtech and its wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated.

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Managements Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates and assumptions made by the Company in the preparation
of these financial statements include, among other things, the allowance for
doubtful accounts, the ability to realize inventory and the related reserve for
excess and / or obsolete inventory, estimates on the percent of completion of
long-term, fixed price contracts, the impairment of long-lived assets, useful
lives of depreciable and intangible assets, the liability accrued for expected
warranty costs and the ability to realize deferred tax assets.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.

Investments

The Company accounts for investments in accordance with the provisions of
Statement of Financial Accounting Standards No. 115 Accounting for Certain
Investments in Debt and Equity Securities. The Companys short-term
investments are generally classified and accounted for as available-for-sale
and accordingly are carried at fair market value with unrealized gains and
losses reflected in other comprehensive income. The Company had realized gains
of $26,000, $411,000, and $639,000 for the years ended June 30, 2002, 2001 and
2000, respectively. There were no realized losses for these periods. During
the years ended June 30, 2002, 2001 and 2000, the Company realized previously
unrealized gains of $14,000, $34,000 and $33,000, respectively.

Short-term investments consisted of approximately $993,000 and $1,677,000
of investment grade commercial paper, U.S. Treasury and government agency
securities as of June 30, 2002 and 2001, respectively.

The Company also held approximately $72,000 and $130,000 of marketable
equity securities as of June 30, 2002 and 2001, respectively, which are
included in other assets. These securities are marked to market through other
comprehensive income in the accompanying consolidated balance sheets. The
realized and unrealized gains and losses on these marketable equity securities
were not significant as of and for the years ended June 30, 2002 and 2001.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents,
short-term investments and accounts receivable. The Company maintains its cash
and short-term investment balances in the form of bank demand deposits, money
market accounts, government securities and commercial paper with financial
institutions that management believes are creditworthy. Accounts receivable are
typically unsecured and are comprised of amounts due from numerous other
entities participating in the medical industry. Due to the significant
concentration of revenue among a few customers in the Colorado operations
segment, the Company has exposure should any of these significant customers
lose their credit-worthiness.

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Financial Instruments

The fair market values of cash equivalents, accounts receivable and
accounts payable approximate their carrying values due to the short-term nature
of these instruments.

Inventories

Inventories are stated at the lower of cost, using the first-in, first-out
method, or market. The cost of inventories includes material, labor and
manufacturing overhead. As of June 30, 2002 and 2001, inventories consisted
of:

(in thousands)

|                  |  |          |       |       |  |       |       |          |  |       |       |       |  |   |        |  |  |   |       |  |  |   |        | 
|----------------- |  | -------- | ----- | ----- |  | ----- | ----- | -------- |  | ----- | ----- | ----- |  | - | ------ |  |  | - | ----- |  |  | - | ------ | 
|                  |  | 2002     |       | 2001 
|                  |  |          |       |      
|                  |  | Colorado |       | CIVCO |  | Total |       | Colorado |  | CIVCO |       | Total
|                  |  |          |       |       |  |       |       |          |  |       |       |      
|Raw materials     |  | $        | 2,655 |       |  | $     | 454   |          |  | $     | 3,109 |       |  | $ | 6,690  |  |  | $ | 444   |  |  | $ | 7,134  | 
|Work in process   |  |          | 667   |       |  |       | 584   |          |  |       | 1,251 |       |  |   | 3,421  |  |  |   | 722   |  |  |   | 4,143  | 
|Finished goods    |  |          | 126   |       |  |       | 1,296 |          |  |       | 1,422 |       |  |   | 9      |  |  |   | 435   |  |  |   | 444    | 
|                  |  |          |       |       |  |       |       |          |  |       |       |       |  |   |        |  |  |   |       |  |  |   |        | 
|Total inventories |  | $        | 3,448 |       |  | $     | 2,334 |          |  | $     | 5,782 |       |  | $ | 10,120 |  |  | $ | 1,601 |  |  | $ | 11,721 | 
|                  |  |          |       |       |  |       |       |          |  |       |       |       |  |   |        |  |  |   |       |  |  |   |        | 

During the fourth quarter of fiscal 2001, one of the Companys customers
cancelled its contract to manufacture x-ray generators. This resulted in an
inventory write down of approximately $3,085,000. This charge, together with
$889,000 of other inventory write downs, is included in cost of sales and
service for the year ended June 30, 2001.

Certain of the Companys customer relationships and business practices
result in the Company ordering inventory in advance of firm commitments by the
customer to purchase the finished product. As such, the Company has assumed
the risk that the customer will not ultimately order and purchase the related
finished product, and the related inventory would be deemed to be excess and/or
obsolete, and written off.

Long-Lived Assets

In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company
periodically evaluates the carrying value of its long-lived assets, other than
goodwill, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable from anticipated
future undiscounted cash flows. Impairment losses are recorded for the
difference between the carrying value and the estimated fair market value of
the long-lived asset. Fair market value is determined by reference to quoted
market prices, if available, or the utilization of certain valuation techniques
such as anticipated cash flows discounted at a rate commensurate with the risk
involved. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs to sell.

The Company may, from time to time, consider certain strategic decisions
that could result in the sale or change in use of certain long-lived assets.
Such decisions may require a review of the related assets for impairment, and
it is reasonably possible that such review would result in an impairment
charge, which could be material.

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##### Table of Contents



Property and Equipment

Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation and amortization are provided principally on the
straight-line method over the estimated useful lives of the assets.

(in thousands)

|                                          |                              |            |              |   |       |  |                     |        |       |  |        |        | 
|----------------------------------------- | ---------------------------- | ---------- | ------------ | - | ----- |  | ------------------- | ------ | ----- |  | ------ | ------ | 
|                                          |                              |            |              |   |       |  | Year Ended June 30,
|                                          |                              |            | Estimated    |   |      
|                                          |                              |            | Useful Lives |   | 2002  |  | 2001               
|                                          |                              |            |              |   |       |  |                    
|Computer equipment                        |                              | 3 years    |              | $ | 4,403 |  |                     | $      | 6,822 | 
|Office furniture and fixtures             |                              | 5 years    |              |   | 1,549 |  |                     |        | 1,544 | 
|Building, land and leasehold improvements |                              | 1-28 years |              |   | 1,168 |  |                     |        | 2,463 | 
|Manufacturing equipment                   |                              | 7 years    |              |   | 3,424 |  |                     |        | 3,709 | 
|Construction in progress                  |                              |            | n/a          |   |       |  | 1,206               |        |       |  |       |       
|                                          |                              |            |              |   |       |  |                     |        |       |  |        |       
|                                          | Total property and equipment |            |              |   |       |  |                     | 11,750 |       |  |        | 14,538 | 
|Accumulated depreciation                  |                              |            |              |   |       |  | (6,050              | )      |       |  | (9,901 | )     
|                                          |                              |            |              |   |       |  |                     |        |       |  |        |       
|                                          | Net property and equipment   |            |              |   |       |  | $                   | 5,700  |       |  | $      | 4,637  | 
|                                          |                              |            |              |   |       |  |                     |        |       |  |        |       

Depreciation expense for the years ended June 30, 2002, 2001 and 2000 was
approximately $2,528,000, $2,092,000 and $1,729,000, respectively. Upon
retirement or sale, the cost of any asset disposed and the related accumulated
depreciation is removed from the accounts and any resulting gain or loss is
included in operations in the period realized. Approximately $6,378,000 of
fully depreciated property and equipment were removed from the books during the
year ended June 30, 2002.

Goodwill and Other Intangibles

Effective July 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets. As
a result of adopting SFAS 142, the Company stopped amortizing its goodwill.
However, the goodwill is now subject to an annual assessment for impairment, at
least annually and more frequently if circumstances warrant. In accordance
with SFAS No. 142, the Company completed its transitional impairment testing of
intangible assets during the first quarter of fiscal 2002. That effort, and
preliminary assessments of the Companys identifiable intangible assets,
indicated that little or no adjustment would be required upon adoption of this
statement. The impairment testing is performed in two steps: (i) the Company
determines impairment by comparing the fair value of a reporting unit with its
carrying value, and (ii) if there is an impairment, the Company measures the
amount of impairment loss by comparing the implied fair value of goodwill with
the carrying amount of that goodwill. Subsequent to the first quarter of fiscal
2002, the Company finalized the testing of goodwill, and concluded that no
impairment writedown was required. Intangible assets are separately recognized
if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the asset can be sold, rented,
transferred, licensed, or exchanged, regardless of the acquirers intent to do
so. Amortization expense and net income for the Company for the year of
initial application and prior two years follow:

(in thousands)

|                       |  |      |        |      |  |      |        |   |  |   |        |  
|---------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                       |  | 2002 |        | 2001 |  | 2000
|                       |  |      |        |      |  |     
|Goodwill amortization  |  | $    |       |      |  | $    | (93    | ) |  | $ | (391   | )
|Write down of goodwill |  | $    |       |      |  | $    | (138   | ) |  | $ | (1,322 | )
|Net (loss) income      |  | $    | (3,099 | )    |  | $    | (2,707 | ) |  | $ | 2,991  |  

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##### Table of Contents



The following table presents adjusted net income (loss) and earnings per
share data restated to include the retroactive impact of the adoption of SFAS
No. 142.

(in thousands, except per share amounts)

|                                                   |                            |   |                             |      |      |   |        |      |   |   |       |     | 
|-------------------------------------------------- | -------------------------- | - | --------------------------- | ---- | ---- | - | ------ | ---- | - | - | ----- | --- | 
|                                                   |                            |   | For the year ended June 30,
|                                                   |                            |   |                            
|                                                   |                            |   | 2002                        |      | 2001 |   | 2000  
|                                                   |                            |   |                             |      |      |   |       
|Reported net (loss) income                         |                            | $ | (3,099                      | )    |      | $ | (2,707 | )    |   | $ | 2,991 |    
|Add back: goodwill amortization,
net of tax effect |                            |   |                            |      |      |   | 56     |      |   |   | 215   |    
|                                                   |                            |   |                             |      |      |   |        |      |   |   |       |    
|Adjusted net (loss) income                         |                            | $ | (3,099                      | )    |      | $ | (2,651 | )    |   | $ | 3,206 |    
|                                                   |                            |   |                             |      |      |   |        |      |   |   |       |    
|Basic (loss) earnings per share                    |                            |   |                             |      |      |   |        |      |   |   |       |    
|                                                   | Reported net (loss) income |   | $                           | (.24 | )    |   | $      | (.21 | ) |   | $     | .25 | 
|                                                   | Goodwill amortization      |   |                             |     |      |   |        |     |   |   |       | .02 | 
|                                                   |                            |   |                             |      |      |   |        |      |   |   |       |    
|Adjusted net (loss) income                         |                            | $ | (.24                        | )    |      | $ | (.21   | )    |   | $ | .27   |    
|                                                   |                            |   |                             |      |      |   |        |      |   |   |       |    
|Diluted (loss) earnings per share                  |                            |   |                             |      |      |   |        |      |   |   |       |    
|                                                   | Reported net (loss) income |   | $                           | (.24 | )    |   | $      | (.21 | ) |   | $     | .22 | 
|                                                   | Goodwill amortization      |   |                             |     |      |   |        |     |   |   |       | .02 | 
|                                                   |                            |   |                             |      |      |   |        |      |   |   |       |    
|                                                   | Adjusted net (loss) income |   | $                           | (.24 | )    |   | $      | (.21 | ) |   | $     | .24 | 
|                                                   |                            |   |                             |      |      |   |        |      |   |   |       |    

Goodwill and other intangible assets consist of the following:

(in thousands)

|                               |                                                           |                                     |           |                     |       |        |   |              |        |            |   |        |        |     |   |       |       | 
|------------------------------ | --------------------------------------------------------- | ----------------------------------- | --------- | ------------------- | ----- | ------ | - | ------------ | ------ | ---------- | - | ------ | ------ | --- | - | ----- | ----- | 
|                               |                                                           |                                     |           | As of June 30, 2002
|                               |                                                           |                                     |           |                    
|                               |                                                           |                                     |           | Weighted Average    |       | Gross  |   | Accumulated  |        | Net       
|                               |                                                           |                                     |           | Amortization Period |       | Amount |   | Amortization |        | Book Value
|                               |                                                           |                                     |           |                     |       |        |   |              |        |           
|Unamortized
intangible assets  |                                                           |                                     |           |                     |       |        |   |              |        |            |   |        |        |     |   |      
|                               | Goodwill, CIVCO operations                                |                                     |           |                     |       |        | $ | 4,766        |        |            | $ | (93    | )      |     | $ | 4,673 |      
|                               | Goodwill, Colorado operations                             |                                     |           |                     |       |        |   | 1,128        |        |            |   | (1,128 | )      |     |   |      |      
|                               |                                                           |                                     |           |                     |       |        |   |              |        |            |   |        |        |     |   |      
|                               |                                                           | Total unamortized intangible assets |           |                     |       |        |   |              | 5,894  |            |   |        | (1,221 | )   |   |       | 4,673 | 
|Amortized
intangible assets    |                                                           |                                     |           |                     |       |        |   |              |        |            |   |        |        |    
|                               | Business development agreement
with ATL, CIVCO operations |                                     | 5 years   |                     |       | 1,000  |   |              |        | (300       | ) |        |        | 700 |  
|                               | Patents, CIVCO operations                                 |                                     | 7.5 years |                     |       | 268    |   |              |        | (13        | ) |        |        | 255 |  
|                               | Non-compete agreements,
CIVCO operations                  |                                     | 5 years   |                     |       | 269    |   |              |        | (20        | ) |        |        | 249 |  
|                               |                                                           |                                     |           |                     |       |        |   |              |        |            |   |        |        |     |   |      
|                               |                                                           | Total amortized intangible assets   |           |                     |       |        |   |              | 1,537  |            |   |        | (333   | )   |   |       | 1,204 | 
|Total goodwill and intangibles |                                                           | 6.7 years                           |           | $                   | 7,431 |        |   | $            | (1,554 | )          |   | $      | 5,877  |    
|                               |                                                           |                                     |           |                     |       |        |   |              |        |            |   |        |        |     |   |      

|                                                          |  |                     |  |        |       |              |  |            |        |   |  |   |       |  |  | 
|--------------------------------------------------------- |  | ------------------- |  | ------ | ----- | ------------ |  | ---------- | ------ | - |  | - | ----- |  |  | 
|                                                          |  | As of June 30, 2001
|                                                          |  |                    
|                                                          |  | Weighted Average    |  | Gross  |       | Accumulated  |  | Net       
|                                                          |  | Amortization Period |  | Amount |       | Amortization |  | Book Value
|                                                          |  |                     |  |        |       |              |  |           
|Goodwill, CIVCO operations                                |  | 15 years            |  | $      | 2,776 |              |  | $          | (93    | ) |  | $ | 2,683 | 
|Goodwill, Colorado operations                             |  | 2 years             |  |        | 1,128 |              |  |            | (1,125 | ) |  |   | 3     | 
|Business development agreement
with ATL, CIVCO operations |  | 5 years             |  |        | 1,000 |              |  |            | (100   | ) |  |   | 900   | 
|                                                          |  |                     |  |        |       |              |  |            |        |   |  |   |       |  |  | 
|Total goodwill and intangibles                            |  | 6.8 years           |  | $      | 4,904 |              |  | $          | (1,318 | ) |  | $ | 3,586 | 
|                                                          |  |                     |  |        |       |              |  |            |        |   |  |   |       |  |  | 

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##### Table of Contents



Amortization expense for goodwill and other intangibles for the last three
years and the expected amortization of other intangibles for the next five
years follows:

(in thousands)

Actual amortization expense          for
the years ended June 30,

|     |  |        |     | 
|---- |  | ------ | --- | 
|Year |  | Amount
|     |  |       
|2000 |  | $      | 394 | 
|2001 |  |        | 369 | 
|2002 |  |        | 235 | 

Estimated amortization expense          for
the years ended June 30,

|     |  |        |     | 
|---- |  | ------ | --- | 
|Year |  | Amount
|     |  |       
|2003 |  | $      | 289 | 
|2004 |  |        | 289 | 
|2005 |  |        | 289 | 
|2006 |  |        | 189 | 
|2007 |  |        | 89  | 

During fiscal 2002, CIVCO acquired 100% of the outstanding common stock of
Barzell Whitmore Maroon Bells, Inc. (Barzell) in a transaction accounted for
under the purchase method of accounting. In connection with the purchase of
Barzell, CIVCO recorded goodwill of approximately $1,990,000, patents acquired
of approximately $268,000, and non-compete agreements of $269,000. See Note
3. Acquisitions.

During fiscal 2001, the Company acquired certain operating assets of the
ultrasound accessories and supplies business of ATL Ultrasound (ATL) in a
transaction accounted for under the purchase method of accounting. In
connection with the purchase of the ATL assets, the Company recorded goodwill
of approximately $2,776,000 and a business development agreement of $1,000,000.
See Note 3. Acquisitions.

During fiscal 2000, the Company acquired the operating assets of Creos
Technologies, LLC, a developer and manufacturer of x-ray generator subsystems
for computed tomography (CT) scanners, and integrated the assets into the
Colorado operations. During fiscal 2001, the Company wrote off the remaining
goodwill relating to the purchase of Creos of $138,000 due to the reduction of
orders expected in the Companys CT business. This impairment was determined
by comparing the fair value of the goodwill, estimated using expected future
cash flows from the product line discounted using an appropriate discount rate,
to the carrying amount of the goodwill. The impairment expense is included in
operating, general and administrative expenses in the accompanying statement of
operations and relates to the Colorado operations segment. At June 30, 2001,
the net amount of recorded goodwill related to this transaction was $3,000, and
was written off at June 30, 2002.

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##### Table of Contents



Customer Deposits

Customer deposits result from cash received in advance of services
performed.

Revenue Recognition Policy

The Company generates its revenue through sale of products and by
providing contract engineering services. The Companys policy is to recognize
revenue when the applicable revenue recognition criteria have been met, which
generally include:



| |  |  | Persuasive evidence of an arrangement exists;        
| | - |  | -----------------------------------------------------
|
| |  |  | Delivery has occurred or services have been rendered;
|
| |  |  | Price is fixed or determinable; and                  
|
| |  |  | Collectibility is probable.                          

Revenue from the sale of products is generally recognized after both the
goods are shipped and title is transferred, with an appropriate provision for
estimated returns and allowances. The terms of the customer arrangements
generally pass title and risk of ownership to the customer at the time of
shipment. On rare occasion certain arrangements provide for acceptance
provisions. Revenue for these arrangements is not recognized until the
acceptance has been received or the acceptance period has elapsed. Estimated
returns and allowances are established based upon historical experience and
current circumstances.

Revenue from contract engineering services, which may include the
development of customized software, is recognized using either the
percentage-of-completion method or completed contract method. In addition the
majority of the Companys engineering contracts are billed on a time and
materials basis and, as a result, revenue is recognized as the work is
performed. On occasion, the Company will enter into long-term contracts with
fixed fee arrangements. The revenue from these fixed fee arrangements is
recognized on either the percentage-of-completion method or on the completed
contract method, depending on managements determination of its ability to make
reasonable estimates with regard to each specific contract. Under the
percentage-of-completion method, management considers contract costs to be the
best available measure of progress on uncompleted contracts. Contract costs
include all direct labor costs and any other direct costs related to contract
performance. Provisions for estimated losses on incomplete contracts are made
in the period in which such losses are determined. Changes in contract
performance and estimated profitability, including final contract settlements,
may result in revisions to costs and revenues and are recognized in the period
in which the revisions are determined. Unbilled receivables on contracts are
comprised of costs plus estimated earnings on certain contracts in excess of
billing on such contracts. Billings in excess of revenue earned are classified
as deferred revenue.

Costs and Estimated Earnings on Uncompleted Contracts

Included in unbilled receivables are costs and estimated earnings in
excess of billings on uncompleted contracts, which arise when revenues have
been recorded but the amounts cannot be billed under the terms of the
contracts. Such amounts are recoverable from customers upon various measures of
performance, including achievement of certain milestones, completion of
specified units or completion of the contract.

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Included in customer deposits and deferred revenue are billings in excess
of costs and estimated earnings on uncompleted contracts.

Costs and estimated earnings on uncompleted contracts and related amounts
billed as of June 30, were as follows:

(in thousands)

|                                                          |  |      |       |      |  |   |       |  
|--------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                          |  | 2002 |       | 2001
|                                                          |  |      |       |     
|Costs incurred on uncompleted
contracts                   |  | $    | 4,949 |      |  | $ | 1,742 |  
|Estimated earnings                                        |  |      | 554   |      |  |   | 926   |  
|                                                          |  |      |       |      |  |   |       |  
|Costs and estimated earnings on
uncompleted contracts     |  |      | 5,503 |      |  |   | 2,668 |  
|Less: billings to date                                    |  |      | 5,421 |      |  |   | 2,828 |  
|                                                          |  |      |       |      |  |   |       |  
|Difference between billings, costs
and estimated earnings |  | $    | 82    |      |  | $ | (160  | )
|                                                          |  |      |       |      |  |   |       |  

Such amounts were included in the accompanying Consolidated Balance Sheets
at June 30, under the following captions:

(in thousands)

|                                                                            |  |      |     |      |  |   |      |  
|--------------------------------------------------------------------------- |  | ---- | --- | ---- |  | - | ---- | -
|                                                                            |  | 2002 |     | 2001
|                                                                            |  |      |     |     
|Costs and estimated earnings
in excess of billings on
uncompleted contracts |  | $    | 108 |      |  | $ | 273  |  
|Billings in excess of costs
and estimated earnings
on uncompleted contracts |  |      | (26 | )    |  |   | (433 | )
|                                                                            |  |      |     |      |  |   |      |  
|Difference between billings, costs
and estimated earnings                   |  | $    | 82  |      |  | $ | (160 | )
|                                                                            |  |      |     |      |  |   |      |  

Advertising

The Company expenses all advertising costs as they are incurred.
Advertising expense for the years ended June 30, 2002, 2001 and 2000 was
$167,000, $107,000 and $115,000, respectively.

Other Operating Expenses

Other operating expenses relate to the legal fees the Company has incurred
related to disputes and other actions deemed to be incremental to the normal
course of the Companys operations, severance charges, expenses related to
consolidating our Colorado operations into one facility and costs associated
with the general improvement of the Companys quality systems in response to
the FDA warning letter, as shown below:

(in thousands)

|                          |  |                     |       |      |  |      |       |  |  |   |     | 
|------------------------- |  | ------------------- | ----- | ---- |  | ---- | ----- |  |  | - | --- | 
|                          |  | Year Ended June 30,
|                          |  |                    
|                          |  | 2002                |       | 2001 |  | 2000
|                          |  |                     |       |      |  |     
|Legal fees                |  | $                   | 359   |      |  | $    | 496   |  |  | $ | 72  | 
|Litigation settlement     |  |                     | 1,080 |      |  |      |      |  |  |   |    | 
|Severance charges         |  |                     | 413   |      |  |      | 208   |  |  |   | 120 | 
|Financial advisor fees    |  |                     | 247   |      |  |      | 742   |  |  |   |    | 
|Moving expenses           |  |                     | 154   |      |  |      |      |  |  |   |    | 
|Quality system consulting |  |                     | 376   |      |  |      | 436   |  |  |   |    | 
|                          |  |                     |       |      |  |      |       |  |  |   |     | 
|Total                     |  | $                   | 2,629 |      |  | $    | 1,882 |  |  | $ | 192 | 
|                          |  |                     |       |      |  |      |       |  |  |   |     | 

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##### Table of Contents



Stock-Based Compensation Plans

The Company accounts for its stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion Number
25 (APB 25) and related interpretations. Under APB 25, generally there is no
compensation expense for grants of options for the Companys common stock with
an exercise price equal to or greater than the current market price of the
underlying stock on the measurement date, which is generally the grant date.
Under SFAS No. 123, Accounting for Stock-Based Compensation, entities are
required to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB 25 and provide pro
forma net income (loss) disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB 25 and provide the pro
forma disclosures required by SFAS No. 123. All stock-based awards to
non-employees are accounted for at their fair value in accordance with SFAS No.
123 and related interpretations.

Income Taxes

The Company records a current provision for income taxes based on
estimated amounts payable or refundable on tax returns filed or to be filed
each year. Deferred tax assets and liabilities are recognized for the future
tax consequences of differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
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 the period that includes the enactment
date. The overall change in deferred tax assets and liabilities for the period
measures the deferred tax expense or benefit for the period. Based on
managements judgmental assessment of available evidence, net deferred tax
assets are reduced by a valuation allowance, if management determines that it
is more likely than not that some or all of the net deferred tax asset will not
be realized. The valuation allowance was $575,000 and $225,000 at June 30,
2002 and 2001, respectively.

Other Comprehensive Income

Other comprehensive income includes net income and all changes in equity
during a period that arise from non-owner sources, such as unrealized gains and
losses on certain investments in debt and equity securities.

Earnings Per Share

Basic earnings per share are computed on the basis of the weighted average
shares outstanding during each period. Diluted earnings per share are computed
on the basis of the weighted average shares outstanding during each period,
including dilutive common equivalent shares for stock options and warrants.
During the years ended June 30, 2002 and 2001, the Company reported a net loss.
Therefore, all outstanding warrants and options were anti-dilutive in nature
and were excluded in the calculation of fully diluted shares outstanding as of
June 30, 2002 and 2001. A reconciliation between the number of shares used to
calculate basic and diluted earnings per share is as follows:

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##### Table of Contents



(in thousands)

|                                                                                                           |  |      |        |      |  |      |        |   |  |   |        | 
|---------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                                                                                           |  | 2002 |        | 2001 |  | 2000
|                                                                                                           |  |      |        |      |  |     
|Net (loss) income (income available to
common shareholders)                                                |  | $    | (3,099 | )    |  | $    | (2,707 | ) |  | $ | 2,991  | 
|                                                                                                           |  |      |        |      |  |      |        |   |  |   |        | 
|Weighted average number of common shares
outstanding (shares used in basic earnings
per share computation) |  |      | 13,054 |      |  |      | 12,718 |   |  |   | 12,076 | 
|Effect of dilutive stock options and warrants
(treasury stock method)                                      |  |      |       |      |  |      |       |   |  |   | 1,279  | 
|                                                                                                           |  |      |        |      |  |      |        |   |  |   |        | 
|Shares used in diluted earnings per share
computation                                                      |  |      | 13,054 |      |  |      | 12,718 |   |  |   | 13,355 | 
|                                                                                                           |  |      |        |      |  |      |        |   |  |   |        | 

Options and warrants excluded from diluted earnings per share because they
were antidilutive for the years ended June 30, 2002, 2001 and 2000 totaled
approximately 2,709,000, 2,637,000 and 746,000, respectively.

Restatements

The consolidated balance sheet as of June 30, 2001 and the consolidated
statement of shareholders equity and comprehensive income (loss) for the year
then ended have been restated to reclassify notes receivablerelated parties
from a non-current asset to a reduction of shareholders equity. During the
year ended June 30, 2001 the Company loaned money to certain officers of the
Company to purchase shares of the Companys common stock. This transaction is
discussed further in Note 10. In connection with the preparation of the
Companys consolidated financial statements for the year ended June 30, 2002,
it was determined that the notes receivable from these individuals are properly
classified as a component of, and a reduction to, shareholders equity. The
June 30, 2001 consolidated balance sheet and the consolidated statement of
shareholders equity and comprehensive loss for the year then ended has been
restated to reflect this reclassification.

The consolidated financial statements as of June 30, 2001, and for each of
the years ended June 30, 2001 and 2000, have been revised to include the
transitional disclosures required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by
the Company as of July 1, 2001. These transitional disclosures previously
presented in this footnote include pro forma results from operations for the
years ended June 30, 2001 and 2000.

The Company changed the composition of its reportable segments during the
year ended June 30, 2002, and the amounts in the 2001 and 2000 financial
statements relating to reportable segments have been restated to conform to the
2002 composition of reportable segments. The segment disclosures are present
in Note 8.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement Obligations, which is effective
for fiscal years beginning after June 15, 2002 (effective for the Company on
July 1, 2003). The statement provides accounting and reporting standards for
recognizing obligations related to asset retirement costs associated with the
retirement of tangible long-lived assets. Under this statement, legal
obligations associated with the retirement of long-lived assets are to be
recognized at their fair value in the period in which they
are incurred if a reasonable estimate of fair value can be made. The fair value
of the asset retirement

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costs was capitalized as part of the carrying amount of
the long-lived asset and expensed using a systematic and rational method over
the assets useful life. Any subsequent changes to the fair value of the
liability will be expensed. Management is currently assessing the impact of
this statement on the Companys financial position and results of operations.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective for fiscal
years beginning after December 15, 2001 (effective for the Company on July 1,
2002). This statement supersedes SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and replaces
the provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of Segments of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of segments of a business. SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 for the recognition and measurement of the
impairment of long-lived assets to be held and used and the measurement of
long-lived assets to be disposed of by sale. Under SFAS No. 144, long-lived
assets are measured at the lower of carrying amount or fair value less cost to
sell. This statement may have a prospective effect on the financial condition and results of operations of the Company.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, (effective January 1, 2003) which
replaces 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). SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred and states that an
entitys commitment to an exit plan, by itself, does not create a present
obligation that meets the definition of a liability. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the
liability. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company believes
that SFAS 146 may have a prospective effect on its financial statements for
costs associated with future exit or disposal activities it may undertake after
December 31, 2002.



|(3) |  | ACQUISITIONS
|--- |  | ------------

On February 8, 2002, the Companys CIVCO subsidiary acquired 100% of the
common stock of Barzell in a transaction accounted for under the purchase
method of accounting. Barzell designed and manufactured positioning and
stabilizing devices used in minimally invasive mens health surgical
procedures, such as prostate diagnostics and brachytherapy procedures. The
acquisition of Barzell expands and complements CIVCOs product lines. The
Company anticipates that the acquisition of Barzell will help create new
products in the future. As part of the acquisition, the Company paid
$2,000,000 in cash, issued 127,000 shares of the Companys common stock to the
selling shareholders of Barzell (valued at approximately $337,000), assumed
approximately $230,000 of debt and incurred transaction costs of approximately
$190,000. Under the terms of the agreement, the former shareholders of Barzell
could receive additional cash payments, totaling up to an additional $2,200,000
over five-and-one-half years, based upon achievement of certain predetermined
cumulative gross profit targets. In addition, the former shareholders of
Barzell entered into employment agreements with CIVCO pursuant to which they
could receive additional incentive payments if other predetermined gross profit
targets are exceeded.

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Exclusive of future contingent consideration, the recorded purchase price
of the net assets acquired in the transaction was approximately $2,527,000.
The purchase price was allocated to the net assets acquired as follows:

(in thousands)

|                        |  |   |       |  
|----------------------- |  | - | ----- | -
|Inventory               |  | $ | 392   |  
|Fixed assets            |  |   | 55    |  
|Patents                 |  |   | 268   |  
|Non-compete agreements  |  |   | 269   |  
|Goodwill                |  |   | 1,990 |  
|AP and accrued expenses |  |   | (217  | )
|Notes payable           |  |   | (230  | )
|                        |  |   |       |  
|Total purchase price    |  | $ | 2,527 |  
|                        |  |   |       |  

The allocation of the purchase price to assets acquired and liabilities
assumed is based on preliminary estimates and certain assumptions that the
Company believes are reasonable under the circumstances. Based on the
estimated useful life of the patents and non-compete agreements, the weighted
average amortization periods are as follows:

|                       |  |                     |  | 
|---------------------- |  | ------------------- |  | 
|                       |  | Weighted Average   
|                       |  | Amortization Period
|                       |  |                    
|Non-compete agreements |  | 5 years            
|Patents                |  | 7.5 years          
|Total intangibles      |  | 7 years            

The Companys consolidated financial statements include Barzells results
of operations subsequent to its acquisition on February 8, 2002. During this
period, the operations of Barzell contributed approximately $1,037,000 of
revenue and $265,000 of net income.

On December 29, 2000, the Company acquired certain operating assets of the
ultrasound accessories and supplies business of ATL Ultrasound (ATL) for
$4,384,000 in cash, paid $3,884,000 in fiscal 2001 and $500,000 in fiscal 2002.
This acquisition was accounted for as a purchase and accordingly, the results
of ATL have been included subsequent to the date of acquisition. The purchase
price was allocated as follows:

(in thousands)

|                               |  |   |       | 
|------------------------------ |  | - | ----- | 
|Inventory                      |  | $ | 506   | 
|Fixed assets                   |  |   | 102   | 
|Business development agreement |  |   | 1,000 | 
|Goodwill                       |  |   | 2,776 | 
|                               |  |   |       | 
|Total purchase price           |  | $ | 4,384 | 
|                               |  |   |       | 

In connection with this acquisition, the Company and ATL entered into a
five-year Business Development Agreement under which ATL will work with the
Company to develop additional ultrasound accessory devices and participate in
co-marketing efforts for products. Further, ATL agreed to refrain from
competing with the Company in the area of ultrasound supplies. The Business
Development Agreement is included in Goodwill and Intangibles on the balance
sheet and will be amortized over a five-year period.

The Company acquired certain operating assets of Creos on August 19, 1999.
Creos developed and manufactured high-voltage x-ray generator systems for
computed tomography

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##### Table of Contents



(CT) scanners. The assets of this
operation were integrated into the Colorado operations. The acquisition resulted in goodwill of approximately
$448,000 that was being amortized over a three-year period. During the year
ended June 30, 2001, the contract to continue the manufacture of the product
associated with this purchase was canceled and the Company wrote off the
unamortized goodwill of $138,000.

The following unaudited pro forma results of operations of the Company for
the fiscal years ended June 30, 2002, 2001 and 2000 assume that the acquisition
of the operating assets of Creos, ATL and Barzell occurred on July 1, 1999.
These unaudited pro forma results are not necessarily indicative of the actual
results of operations that would have been achieved nor are they necessarily
indicative of future results of operations.

(in thousands, except per share data)

|                                      |  |                     |        |      |  |      |        |   |  |   |        | 
|------------------------------------- |  | ------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                      |  | Year Ended June 30,
|                                      |  |                    
|                                      |  | 2002                |        | 2001 |  | 2000
|                                      |  |                     |        |      |  |     
|                                      |  | (Unaudited)        
|Revenues                              |  | $                   | 71,768 |      |  | $    | 82,944 |   |  | $ | 83,493 | 
|Net (loss) income                     |  | $                   | (2,928 | )    |  | $    | (2,390 | ) |  | $ | 3,310  | 
|Net (loss) income per share (diluted) |  | $                   | (.22   | )    |  | $    | (.19   | ) |  | $ | .25    | 



|(4) |  | SALE OF STOCK OF SUBSIDIARY
|--- |  | ---------------------------

On April 30, 2001, the Company sold all of the outstanding stock of CDT to
an unrelated party for $1,300,000 in cash. Pursuant to indemnification
provisions of the sale agreement, 10% of the sale price was held in escrow,
with 5% released in six months and the remaining 5% released twelve months from
the date of sale. As of June 30, 2002, the Company had received all proceeds
related to this acquisition. The Company recorded a gain of approximately
$921,000 from the sale. Revenues and net income for CDT through the
disposition date were as follows:

(in thousands)

|                  |  |                     |       |      |  |   |       |  
|----------------- |  | ------------------- | ----- | ---- |  | - | ----- | -
|                  |  | Year Ended June 30,
|                  |  |                    
|                  |  | 2001                |       | 2000
|                  |  |                     |       |     
|                  |  | (Unaudited)        
|Revenues          |  | $                   | 2,023 |      |  | $ | 2,281 |  
|Net
income (loss) |  | $                   | 86    |      |  | $ | (489  | )



|(5) |  | BORROWINGS
|--- |  | ----------

Credit Facility

The Company is a party to a credit facility (the Credit Facility) that
provides for a revolving line of credit of $5 million. The Credit Facility
matures January 1, 2003 and the interest rate is 2% over the higher of (a) the
banks prime rate (4.75% at June 30, 2002) or (b) the federal funds effective
rate (1.75% at June 30, 2002) plus 0.5%. All of the Companys accounts
receivable and inventory secure outstanding balances, but no amounts had been
advanced under the facility as of June 30, 2002. At June 30, 2002, the
applicable interest rate on borrowings was 6.75%. Each quarter the Company is
required to pay a commitment fee equal to 50 basis points based upon the unused
credit facility balance. The Company is currently in negotiations to extend
the credit facility.

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##### Table of Contents



Capital Leases

The Company is obligated under capital lease agreements as follows:

(in thousands)

|                                    |             |   |    |    | 
|----------------------------------- | ----------- | - | -- | -- | 
|Minimum lease payments:             |             |   |    |   
|                                    | Fiscal 2003 |   | $  | 35 | 
|Amount representing interest (7.9%) |             |   | (1 | ) 
|                                    |             |   |    |   
|                                    |             | $ | 34 |   
|                                    |             |   |    |   



|(6) |  | SHAREHOLDERS EQUITY
|--- |  | --------------------

Preferred Stock

The Companys shareholders have authorized 5,000,000 shares of no par
value preferred stock, to be issuable from time to time in such series and to
have such rights and preferences as the Companys Board of Directors (the
Board) may designate. As of June 30, 2002, no shares of preferred stock had
been issued.

Common Stock

The Companys shareholders have authorized 25,000,000 shares of no par
value common stock, of which 13,168,783 and 12,967,319 shares were issued and
outstanding as of June 30, 2002 and 2001, respectively.

During the year ended June 30, 2002, the Company accepted 41,666 shares of
its common stock for the repayment of an officer loan of approximately $150,000
(see Note 10. Note Receivable  Related Parties.) The stock was tendered at a
price of $3.60 per share, the fair market value of the shares at the time of
the transaction. These shares were retired by the Company at the time of exchange.

During the year ended June 30, 2001, the Company purchased and retired
21,700 shares of its own common stock for approximately $109,000, as part of a
stock repurchase program. The stock was purchased at prices ranging from $5.00
to $5.13 per share.

CIVCO Pooling

On November 15, 1999, the Company acquired CIVCO by exchanging 736,324 of
its common shares for all of the outstanding stock of CIVCO and related real
estate assets held by its owners. Prior to the merger, CIVCO paid dividends on
its common shares of approximately $373,000 in the year ended June 30, 2000.

2001 Stock Option Plan

On August 24, 2001, the Board approved the Colorado MEDtech 2001 Long-Term
Incentive Plan (the 2001 Plan). The shareholders of the Company approved the
2001 Plan on November 16, 2001. The 2001 Plan provides for the grant of
incentive and nonqualified stock options, as defined by the Internal Revenue
Code of 1986, stock appreciation rights, restricted stock, performance grants,
and other awards at the discretion of the Board. Under the terms of the 2001
Plan, the purchase price of the shares subject to an incentive stock option
will be at least the fair market value of the Companys common stock on the
date the option is granted. If the grantee of an incentive stock option owns
more than 10% of the total combined voting power of all classes of stock on the
date of grant, the purchase price shall be at least 110% of the fair market
value at the

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##### Table of Contents



date of grant and the exercise term shall be not more than five years from the
date of grant. All other options granted under the 2001 Plan are exercisable
up to ten years from the date of grant.

Under the 2001 Plan, 1,000,000 shares of common stock are reserved for
options. The 2001 Plan will terminate upon either the adoption of a resolution
of the Board terminating the 2001 Plan or on the tenth anniversary of the
effective date of the 2001 Plan (August 24, 2011). The Board may extend the
term of the 2001 Plan for an additional period of up to five years for the
grant of awards other than incentive stock options. As of June 30, 2002, no
awards had been made under the 2001 Plan.

1992 Stock Option Plan

On June 25, 1992, the Board approved a Stock Option Plan (the 1992
Plan). The shareholders of the Company approved the 1992 Plan on May 14,
1993. The 1992 Plan provided for the grant of incentive and nonstatutory stock
options as defined by the Internal Revenue Code of 1986, stock appreciation
rights and supplemental bonuses at the discretion of the Board. Options were
to be granted to employees of the Company and to non-employee directors of the
Company. Under the terms of the 1992 Plan, the purchase price of the shares
subject to an incentive stock option was the fair market value of the Companys
common stock on the date the option was granted. If the grantee of an
incentive stock option owned more than 10% of the total combined voting power
of all classes of stock on the date of grant, the purchase price was to be at
least 110% of the fair market value at the date of grant and the exercise term
was not more than five years from the date of grant. All other options granted
under the 1992 Plan were exercisable up to ten years from the date of grant.
Under the 1992 Plan, 4,500,000 shares of common stock were reserved for
options. Based upon the provisions of the 1992 Plan, no stock options may be
granted after June 25, 2002, ten years after the effective date of the 1992
Plan. Therefore, no shares were available for grant at June 30, 2002.
Outstanding stock options under the 1992 Plan will continue to be governed by
the provisions of the 1992 Plan. Vesting periods for options issued were
determined by the Board at the date of grant. Options generally vest
over two to four years, but in some cases as early as upon grant. A summary of the status of the 1992 Plan for the years ended June 30 follows:

|         |                                      |                                 |  |           |           |      |  |           |           |  |  |           |           | 
|-------- | ------------------------------------ | ------------------------------- |  | --------- | --------- | ---- |  | --------- | --------- |  |  | --------- | --------- | 
|         |                                      |                                 |  | 2002      |           | 2001 |  | 2000     
|         |                                      |                                 |  |           |           |      |  |          
|Options: |                                      |                                 |  |           |           |      |  |           |           |  |  |          
|         | Outstanding beginning of fiscal year |                                 |  | 2,567,286 |           |      |  | 2,563,449 |           |  |  | 2,260,318 |          
|         | Granted during period                |                                 |  | 757,250   |           |      |  | 1,291,450 |           |  |  | 1,009,775 |          
|         | Forfeited during period              |                                 |  | (646,541  | )         |      |  | (711,678  | )         |  |  | (424,566  | )        
|         | Exercised during period              |                                 |  | (10,500   | )         |      |  | (575,935  | )         |  |  | (282,078  | )        
|         |                                      |                                 |  |           |           |      |  |           |           |  |  |          
|         |                                      | Options outstanding at June 30, |  |           | 2,667,495 |      |  |           | 2,567,286 |  |  |           | 2,563,449 | 
|         |                                      |                                 |  |           |           |      |  |           |           |  |  |          
|         |                                      | Options exercisable at June 30, |  |           | 1,151,905 |      |  |           | 759,374   |  |  |           | 897,616   | 
|         |                                      |                                 |  |           |           |      |  |           |           |  |  |          

|                                                             |                              |   |      |      |      |   |      |      |  |   |      |       | 
|------------------------------------------------------------ | ---------------------------- | - | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ----- | 
|                                                             |                              |   | 2002 |      | 2001 |   | 2000
|                                                             |                              |   |      |      |      |   |     
|Weighted average exercise price:                             |                              |   |      |      |      |   |      |      |  |   |      |      
|                                                             | At beginning of period       |   | $    | 7.70 |      |   | $    | 7.42 |  |   | $    | 5.66  | 
|                                                             | At end of period             |   | $    | 6.23 |      |   | $    | 7.70 |  |   | $    | 7.42  | 
|                                                             | Exercisable at end of period |   | $    | 7.12 |      |   | $    | 7.78 |  |   | $    | 5.05  | 
|                                                             | Options granted              |   | $    | 3.25 |      |   | $    | 5.88 |  |   | $    | 11.09 | 
|                                                             | Options exercised            |   | $    | 3.22 |      |   | $    | 3.61 |  |   | $    | 3.88  | 
|                                                             | Options forfeited            |   | $    | 8.64 |      |   | $    | 6.70 |  |   | $    | 9.12  | 
|Weighted average fair value of options
granted during period |                              | $ | 2.03 |      |      | $ | 3.76 |      |  | $ | 5.64 |      

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##### Table of Contents



| |  |                 |                     |        |  |                     |           |                     |  |             |       |           |  |  |      |          |  |         |           |          |  |   |       | 
| |  | --------------- | ------------------- | ------ |  | ------------------- | --------- | ------------------- |  | ----------- | ----- | --------- |  |  | ---- | -------- |  | ------- | --------- | -------- |  | - | ----- | 
| |  |                 |                     |        |  | June 30, 2002      
| |  |                 |                     |        |  |                    
| |  |                 |                     |        |  | Options Outstanding |           | Options Exercisable
| |  |                 |                     |        |  |                     |           |                    
| |  |                 |                     |        |  |                     |           |                     |  | Weighted    |       |           |  |  |      |          |  |         |           | Weighted
| |  |                 |                     |        |  |                     |           |                     |  | Average     |       | Remaining |  |  |      |          |  | Average
| |  | Range of        |                     |        |  |                     |           | Exercise            |  | Contractual |       |           |  |  |      | Exercise
| |  | Exercise Prices |                     | Shares |  | Price               |           | Life (Years)        |  | Shares      |       | Price    
| |  |                 |                     |        |  |                     |           |                     |  |             |       |          
| |  |                 | $  2.22  -  $  3.40 |        |  |                     | 705,250   |                     |  | $           | 3.20  |           |  |  | 8.2  |          |  |         | 6,250     |          |  | $ | 2.65  | 
| |  |                 | $  3.41  -  $  5.13 |        |  |                     | 838,700   |                     |  | $           | 4.49  |           |  |  | 5.3  |          |  |         | 494,077   |          |  | $ | 4.41  | 
| |  |                 | $  5.14  -  $  7.94 |        |  |                     | 663,950   |                     |  | $           | 7.31  |           |  |  | 5.2  |          |  |         | 386,442   |          |  | $ | 7.03  | 
| |  |                 | $  7.95  -  $14.25  |        |  |                     | 359,595   |                     |  | $           | 11.62 |           |  |  | 2.1  |          |  |         | 202,636   |          |  | $ | 11.49 | 
| |  |                 | $14.26  -  $17.13   |        |  |                     | 100,000   |                     |  | $           | 15.69 |           |  |  | 1.9  |          |  |         | 62,500    |          |  | $ | 15.40 | 
| |  |                 |                     |        |  |                     |           |                     |  |             |       |           |  |  |      |          |  |         |           |          |  |   |       | 
| |  |                 |                     |        |  |                     | 2,667,495 |                     |  | $           | 6.23  |           |  |  | 5.48 |          |  |         | 1,151,905 |          |  | $ | 7.12  | 
| |  |                 |                     |        |  |                     |           |                     |  |             |       |           |  |  |      |          |  |         |           |          |  |   |       | 

CDT Non-Qualified Stock Options

In connection with the February 1997 acquisition of CDT, the Company
issued non-qualified stock options outside the 1992 Plan to purchase common
stock as additional consideration in that acquisition. The value of options
issued was determined at the time of issuance using the Black-Scholes option
pricing model and recorded in the accompanying consolidated financial
statements as goodwill. All non-qualified stock options issued to employees
were granted with an exercise price that was equal to the fair market value of
the Companys stock on the date of grant. A summary of the status of the
Companys non-qualified stock options outside the 1992 Plan follows for the
years ended June 30:

|         |                                      |  |      |         |      |  |      |         |   |  |  |          |  
|-------- | ------------------------------------ |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | -------- | -
|         |                                      |  | 2002 |         | 2001 |  | 2000
|         |                                      |  |      |         |      |  |     
|Options: |                                      |  |      |         |      |  |      |         |   |  |  |         
|         | Outstanding beginning of fiscal year |  |      | 54,753  |      |  |      | 83,683  |   |  |  | 198,070  |  
|         | Granted during period                |  |      |        |      |  |      |        |   |  |  |         |  
|         | Forfeited during period              |  |      | (54,753 | )    |  |      |        |   |  |  |         |  
|         | Exercised during period              |  |      |        |      |  |      | (28,930 | ) |  |  | (114,387 | )
|         |                                      |  |      |         |      |  |      |         |   |  |  |         
|         | Options outstanding at June 30,      |  |      |        |      |  |      | 54,753  |   |  |  | 83,683   |  
|         |                                      |  |      |         |      |  |      |         |   |  |  |         
|         | Options exercisable at June 30,      |  |      |        |      |  |      | 54,753  |   |  |  | 83,683   |  
|         |                                      |  |      |         |      |  |      |         |   |  |  |         

|                                 |                              |  |      |      |      |  |      |      |  |  |   |      | 
|-------------------------------- | ---------------------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                 |                              |  | 2002 |      | 2001 |  | 2000
|                                 |                              |  |      |      |      |  |     
|Weighted average exercise price: |                              |  |      |      |      |  |      |      |  |  |   |     
|                                 | At beginning of period       |  | $    | 2.97 |      |  | $    | 2.97 |  |  | $ | 2.97 | 
|                                 | At end of period             |  | $    |     |      |  | $    | 2.97 |  |  | $ | 2.97 | 
|                                 | Exercisable at end of period |  | $    |     |      |  | $    | 2.97 |  |  | $ | 2.97 | 
|                                 | Options granted              |  | $    |     |      |  | $    |     |  |  | $ |     | 
|                                 | Options exercised            |  | $    |     |      |  | $    | 2.97 |  |  | $ | 2.97 | 
|                                 | Options forfeited            |  | $    | 2.97 |      |  | $    |     |  |  | $ |     | 

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##### Table of Contents



Director, Consultant and Other Warrants

Prior to October 1997, the Company granted warrants outside the 1992 Plan
to its outside directors for serving on the Board. The warrants have a
five-year term, and have exercise prices equal to the fair market value of the
Companys stock on the date of grant. In addition, in fiscal year 2002 the
Company granted warrants outside the 1992 Plan to a Board member in
consideration for management consulting services provided to the Company in
connection with its Colorado operations.

A summary of the Companys warrants is as follows for the years ended June 30:

|          |                                      |  |      |         |      |  |      |        |  |  |  |         |  
|--------- | ------------------------------------ |  | ---- | ------- | ---- |  | ---- | ------ |  |  |  | ------- | -
|          |                                      |  | 2002 |         | 2001 |  | 2000
|          |                                      |  |      |         |      |  |     
|Warrants: |                                      |  |      |         |      |  |      |        |  |  |  |        
|          | Outstanding beginning of fiscal year |  |      | 15,000  |      |  |      | 15,000 |  |  |  | 105,000 |  
|          | Granted during period                |  |      | 41,250  |      |  |      |       |  |  |  |        |  
|          | Forfeited during period              |  |      |        |      |  |      |       |  |  |  |        |  
|          | Exercised during period              |  |      | (15,000 | )    |  |      |       |  |  |  | (90,000 | )
|          |                                      |  |      |         |      |  |      |        |  |  |  |        
|          | Warrants outstanding at June 30,     |  |      | 41,250  |      |  |      | 15,000 |  |  |  | 15,000  |  
|          |                                      |  |      |         |      |  |      |        |  |  |  |        
|          | Warrants exercisable at June 30,     |  |      | 36,250  |      |  |      | 15,000 |  |  |  | 15,000  |  
|          |                                      |  |      |         |      |  |      |        |  |  |  |        

|                                                              |                              |   |      |      |      |   |      |      |  |   |   |      | 
|------------------------------------------------------------- | ---------------------------- | - | ---- | ---- | ---- | - | ---- | ---- |  | - | - | ---- | 
|                                                              |                              |   | 2002 |      | 2001 |   | 2000
|                                                              |                              |   |      |      |      |   |     
|Weighted average exercise price:                              |                              |   |      |      |      |   |      |      |  |   |   |     
|                                                              | At beginning of period       |   | $    | 3.03 |      |   | $    | 3.03 |  |   | $ | 1.80 | 
|                                                              | At end of period             |   | $    | 2.83 |      |   | $    | 3.03 |  |   | $ | 3.03 | 
|                                                              | Exercisable at end of period |   | $    | 2.83 |      |   | $    | 3.03 |  |   | $ | 3.03 | 
|                                                              | Warrants granted             |   | $    | 2.83 |      |   | $    |     |  |   | $ |     | 
|                                                              | Warrants exercised           |   | $    | 3.03 |      |   | $    |     |  |   | $ | 1.59 | 
|                                                              | Warrants forfeited           |   | $    |     |      |   | $    |     |  |   | $ |     | 
|Weighted average fair value of warrants
granted during period |                              | $ | 1.81 |      |      | $ |     |      |  | $ |  |     

| |  |                 |                |        |  |                      |        |                      |  |             |      |           |  |  |      |          |  |         |        |          |  |   |      | 
| |  | --------------- | -------------- | ------ |  | -------------------- | ------ | -------------------- |  | ----------- | ---- | --------- |  |  | ---- | -------- |  | ------- | ------ | -------- |  | - | ---- | 
| |  |                 |                |        |  | June 30, 2002       
| |  |                 |                |        |  |                     
| |  |                 |                |        |  | Warrants Outstanding |        | Warrants Exercisable
| |  |                 |                |        |  |                      |        |                     
| |  |                 |                |        |  |                      |        |                      |  | Weighted    |      |           |  |  |      |          |  |         |        | Weighted
| |  |                 |                |        |  |                      |        |                      |  | Average     |      | Remaining |  |  |      |          |  | Average
| |  | Range of        |                |        |  |                      |        | Exercise             |  | Contractual |      |           |  |  |      | Exercise
| |  | Exercise Prices |                | Shares |  | Price                |        | Life (Years)         |  | Shares      |      | Price    
| |  |                 |                |        |  |                      |        |                      |  |             |      |          
| |  | $               | 2.79  -  $2.85 |        |  |                      | 41,250 |                      |  | $           | 2.83 |           |  |  | 4.33 |          |  |         | 36,250 |          |  | $ | 2.83 | 

Employee Stock Purchase Plan

In September 1996, the Board of Directors adopted an Employee Stock
Purchase Plan (the ESPP), effective for the plan year beginning January 1,
1997. Under the ESPP, as amended, the Company is authorized to issue up to
540,000 shares of common stock to its full time employees, nearly all of whom
are eligible to participate. Under terms of the ESPP, employees can have up to
10% of their salary withheld to purchase the Companys common stock. An
employee can enter the plan on the first day of each calendar quarter. The
purchase price of the stock is 85% of the lower of its

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beginning-of-the-period
or end-of-the-period market price. During the ESPP plan year ended
December 31, 2001, the Company issued 95,502 shares of stock to employees, at
prices ranging from $1.79 to $2.49 per share. The maximum number of shares
available during the 2002 ESPP plan year is limited to 164,085. As of June 30,
2002 and 2001, the Company had a liability of approximately $126,000 and
$199,000, respectively, recorded in accrued salaries and wages, related to the
ESPP contributions made by employees.

Pro Forma Fair Value Disclosures

If the Company had accounted for its stock-based compensation plans using
the fair value method, the Companys net (loss) income and pro forma diluted
(loss) earnings per common share would have been reported as follows:

(in thousands, except per share data)

|                                          |             |  |                     |        |      |  |      |        |   |  |   |       | 
|----------------------------------------- | ----------- |  | ------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ----- | 
|                                          |             |  | Year Ended June 30,
|                                          |             |  |                    
|                                          |             |  | 2002                |        | 2001 |  | 2000
|                                          |             |  |                     |        |      |  |     
|Net (loss) income:                        |             |  |                     |        |      |  |      |        |   |  |   |      
|                                          | As reported |  | $                   | (3,099 | )    |  | $    | (2,707 | ) |  | $ | 2,991 | 
|                                          | Pro forma   |  | $                   | (4,177 | )    |  | $    | (4,342 | ) |  | $ | 1,776 | 
|Diluted (loss) earnings per
common share: |             |  |                     |        |      |  |      |        |   |  |   |      
|                                          | As reported |  | $                   | (.24   | )    |  | $    | (.21   | ) |  | $ | .22   | 
|                                          | Pro forma   |  | $                   | (.32   | )    |  | $    | (.34   | ) |  | $ | .14   | 

The Company has computed the fair value of shares issuable under the ESPP
and all options and warrants granted during fiscal years 2002, 2001 and 2000,
for purposes of the pro forma disclosure, using the Black-Scholes pricing
model, and the following weighted average assumptions:

|                        |  |         |      |           |  |           |      |   |  |  |      |  
|----------------------- |  | ------- | ---- | --------- |  | --------- | ---- | - |  |  | ---- | -
|                        |  | 2002    |      | 2001      |  | 2000     
|                        |  |         |      |           |  |          
|Risk-free interest rate |  |         | 2.53 | %         |  |           | 5.60 | % |  |  | 6.23 | %
|Expected lives          |  | 4 years |      | 3.5 years |  | 3.2 years
|Expected volatility     |  |         | 85.6 | %         |  |           | 84.4 | % |  |  | 66.0 | %
|Expected dividend yield |  |         | 0    | %         |  |           | 0    | % |  |  | 0    | %



|(7) |  | INCOME TAXES
|--- |  | ------------

The (benefit) provision for income taxes includes the following:

(in thousands)

|                                     |                     |   |                     |        |      |   |        |        |   |   |       |       |  
|------------------------------------ | ------------------- | - | ------------------- | ------ | ---- | - | ------ | ------ | - | - | ----- | ----- | -
|                                     |                     |   | Year Ended June 30,
|                                     |                     |   |                    
|                                     |                     |   | 2002                |        | 2001 |   | 2000  
|                                     |                     |   |                     |        |      |   |       
|Current                             |                     |   |                     |        |      |   |        |        |   |   |       |      
|                                     | Federal             |   | $                   | (3,433 | )    |   | $      | (318   | ) |   | $     | 2,237 |  
|                                     | State               |   |                     | (374   | )    |   |        | 224    |   |   |       | 217   |  
|                                     |                     |   |                     |        |      |   |        |        |   |   |       |      
|Total current tax (benefit) expense  |                     |   | (3,807              | )      |      |   | (94    | )      |   |   | 2,454 |      
|Deferred                            |                     |   |                     |        |      |   |        |        |   |   |       |      
|                                     | Federal             |   |                     | 1,451  |      |   |        | (2,258 | ) |   |       | (28   | )
|                                     | State               |   |                     | 152    |      |   |        | (243   | ) |   |       | (3    | )
|                                     | Valuation allowance |   |                     | 350    |      |   |        | 225    |   |   |       |      |  
|                                     |                     |   |                     |        |      |   |        |        |   |   |       |      
|Total deferred tax expense (benefit) |                     |   | 1,953               |        |      |   | (2,276 | )      |   |   | (31   | )    
|                                     |                     |   |                     |        |      |   |        |        |   |   |       |      
|Total income tax (benefit) expense   |                     | $ | (1,854              | )      |      | $ | (2,370 | )      |   | $ | 2,423 |      
|                                     |                     |   |                     |        |      |   |        |        |   |   |       |      

The Company increased its valuation allowance due to its assessment that
it is more likely that certain net operating loss carry forwards
will not be realized prior to their expiration.

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The Companys effective income tax rate was different than the statutory
federal income tax rate as follows:

(in thousands)

|                                                                |               |   |                     |        |      |   |        |        |   |   |       |       | 
|--------------------------------------------------------------- | ------------- | - | ------------------- | ------ | ---- | - | ------ | ------ | - | - | ----- | ----- | 
|                                                                |               |   | Year Ended June 30,
|                                                                |               |   |                    
|                                                                |               |   | 2002                |        | 2001 |   | 2000  
|                                                                |               |   |                     |        |      |   |       
|Federal income tax (benefit) provision
at statutory rates       |               | $ | (1,734              | )      |      | $ | (1,777 | )      |   | $ | 1,895 |      
|State income tax (benefit) provision,
net of federal tax effect |               |   | (175                | )      |      |   | (12    | )      |   |   | 189   |      
|Permanent differences and other                                 |               |   | (550                | )      |      |   | (47    | )      |   |   | 396   |      
|Research and development credit expiration                      |               |   | 255                 |        |      |   | (189   | )      |   |   |      |      
|Tax effect of CIVCO Subchapter S income                         |               |   |                    |        |      |   |       |        |   |   | (57   | )    
|Non-taxable gain on sale of subsidiary                          |               |   |                    |        |      |   | (345   | )      |   |   |      |      
|Capital loss for tax purposes on
sale of subsidiary             |               |   |                    |        |      |   | (225   | )      |   |   |      |      
|Valuation allowance                                             |               |   | 350                 |        |      |   | 225    |        |   |   |      |      
|                                                                |               |   |                     |        |      |   |        |        |   |   |       |      
|                                                                | Effective tax |   | $                   | (1,854 | )    |   | $      | (2,370 | ) |   | $     | 2,423 | 
|                                                                |               |   |                     |        |      |   |        |        |   |   |       |      

Deferred taxes are determined based on estimated future tax effects of
differences between the amounts reflected in the financial statements and the
tax basis of assets and liabilities given the provisions of the enacted tax
laws. Deferred tax assets include the tax effect of a net operating loss
(NOL) and tax credit carryforwards. The net deferred tax assets and
liabilities as of June 30, 2002 and 2001 were comprised of the following:

(in thousands)

|                                  |                                                 |   |       |      |      |   |       |       |  
|--------------------------------- | ----------------------------------------------- | - | ----- | ---- | ---- | - | ----- | ----- | -
|                                  |                                                 |   | 2002  |      | 2001
|                                  |                                                 |   |       |      |     
|Current                          
|                                  | Tax effect of NOL carryforwards                 |   | $     | 403  |      |   | $     | 280   |  
|                                  | Allowance for doubtful accounts                 |   |       | 195  |      |   |       | 157   |  
|                                  | Inventory reserves                              |   |       | 650  |      |   |       | 1,759 |  
|                                  | Accrued vacation                                |   |       | 174  |      |   |       | 443   |  
|                                  | Other accruals                                  |   |       | 396  |      |   |       | 455   |  
|                                  | Tax credits                                     |   |       | 140  |      |   |       | 140   |  
|                                  | Valuation allowance                             |   |       | (400 | )    |   |       |      |  
|                                  |                                                 |   |       |      |      |   |       |      
|Net current deferred tax asset    |                                                 | $ | 1,558 |      |      | $ | 3,234 |      
|                                  |                                                 |   |       |      |      |   |       |      
|Noncurrent                       
|                                  | Depreciation for book in excess of tax          |   | $     | 775  |      |   | $     | 716   |  
|                                  | Goodwill amortization for book in excess of tax |   |       | 327  |      |   |       | 421   |  
|                                  | Tax credits                                     |   |       |     |      |   |       | 378   |  
|                                  | Capital loss carryforwards                      |   |       | 300  |      |   |       | 225   |  
|                                  | Valuation allowance                             |   |       | (175 | )    |   |       | (225  | )
|                                  |                                                 |   |       |      |      |   |       |      
|Net noncurrent deferred tax asset |                                                 | $ | 1,227 |      |      | $ | 1,515 |      
|                                  |                                                 |   |       |      |      |   |       |      

In accordance with certain provisions of the Internal Revenue Code, a
change in ownership of greater than 50% of a company within a three-year period
results in an annual limitation on the Companys ability to utilize its NOL
carryforwards from tax periods prior to the ownership change.

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Such a change in
ownership occurred with respect to the Company on October 19, 1992.
Accordingly, the NOL carryforwards at October 19, 1992 were restricted to
annual cumulative amounts of approximately $105,000 subject to the expiration
of these carryforwards, or approximately $1,575,000 over the 15-year available
life of the carry forwards. As of June 30, 2002, the Company had NOL
carryforwards available of approximately $198,000 related to the 1992 October
1992 transaction. If these NOLs are not applied against taxable income, they
will expire. These NOLs began to expire in 1999 and will continue to expire
through 2007. In order for these NOLs to be realized, the Company must have
taxable income in the appropriate taxing jurisdiction. As of June 30, 2002 the
Company has established a valuation allowance on these NOLs in order to reflect
the uncertainty of their realization. The Company also has research and
development and investment tax credit carryforwards totaling approximately
$330,000 that began expiring in 1999 and continue to expire through 2021.



|(8) |  | SEGMENT INFORMATION
|--- |  | -------------------

The Companys business is comprised of two reportable segments, Colorado
operations and CIVCO operations. During fiscal 2002, the Company began
consolidating its Colorado based operations into one physical location from
their previously separate locations. As a result of this consolidation, the
Company changed its organizational structure and management information
reporting to reflect the fact that the Colorado operations were managed
separately from the CIVCO operations, which are largely based in Iowa. Prior
to this consolidation, the Company operated through an outsourcing services
segment and a medical products segment. The current Colorado operations were
included in both segments while the CIVCO operations were included only in the
medical products segment. Certain of the outsourcing services and medical
product operations were sold during the Companys 2001 fiscal year. For
comparative purposes, the Companys segment information for the years ended
June 30, 2001 and 2000 has been restated to reflect the Companys current
reportable segments. However, the operations that were sold or abandoned are
reported separately from the Colorado operations and CIVCO operations.

Following is a breakout of the Companys segments for the years ended June 30:

(in thousands)

|             |                                    |                      |                    |        |            |        |            |        |                |        |             |   |              |   |  |   |        |        |   |        |        |        | 
|------------ | ---------------------------------- | -------------------- | ------------------ | ------ | ---------- | ------ | ---------- | ------ | -------------- | ------ | ----------- | - | ------------ | - |  | - | ------ | ------ | - | ------ | ------ | ------ | 
|             |                                    |                      |                    |        | Colorado   |        | CIVCO      |        | Sold and Other |        | Reconciling |   |              |   | 
|             |                                    |                      |                    |        | Operations |        | Operations |        | Operations     |        | Items       |   | Consolidated
|             |                                    |                      |                    |        |            |        |            |        |                |        |             |   |             
|Fiscal 2002: |                                    |                      |                    |        |            |        |            |        |                |        |             |   |              |   |  |   |        |        |   |       
|             | Revenue                            |                      |                    |        |            |        |            |        |                |        |             |   |              |   |  |   |        |        |   |        |       
|             |                                    | Outsourcing Services |                    | $      | 30,123     |        |            | $      |               |        |             | $ |             |   |  | $ | (2,549 | )      |   | $      | 27,574 |       
|             |                                    | Medical Products     |                    |        | 19,056     |        |            |        | 24,381         |        |             |   |             |   |  |   | (358   | )      |   |        | 43,079 |       
|             |                                    |                      |                    |        |            |        |            |        |                |        |             |   |              |   |  |   |        |        |   |       
|             |                                    |                      | Total revenue      |        |            | 49,179 |            |        |                | 24,381 |             |   |              |  |  |   |        | (2,907 | ) |        |        | 70,653 | 
|             | Gross profit                       |                      |                    |        |            |        |            |        |                |        |             |   |              |   |  |   |        |        |   |        |       
|             |                                    | Outsourcing Services |                    |        | 1,810      |        |            |        |               |        |             |   |             |   |  |   |       |        |   |        | 1,810  |       
|             |                                    | Medical Products     |                    |        | 4,992      |        |            |        | 12,838         |        |             |   |             |   |  |   |       |        |   |        | 17,830 |       
|             |                                    |                      |                    |        |            |        |            |        |                |        |             |   |              |   |  |   |        |        |   |       
|             |                                    |                      | Total gross profit |        |            | 6,802  |            |        |                | 12,838 |             |   |              |  |  |   |        |       |   |        |        | 19,640 | 
|             | Depreciation and amortization      |                      |                    | 1,876  |            |        |            | 887    |                |        |             |  |              |   |  |  |        |        |   | 2,763  |       
|             | Assets                             |                      |                    | 24,130 |            |        |            | 18,404 |                |        |             |  |              |   |  |  |        |        |   | 42,534 |       
|             | Expenditures for
long-lived assets |                      |                    | 1,368  |            |        |            | 4,792  |                |        |             |  |              |   |  |  |        |        |   | 6,160  |       

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|             |                                    |                      |                    |        |            |        |            |        |                |        |             |     |              |       |  |      |         |         |   |        |        |        | 
|------------ | ---------------------------------- | -------------------- | ------------------ | ------ | ---------- | ------ | ---------- | ------ | -------------- | ------ | ----------- | --- | ------------ | ----- |  | ---- | ------- | ------- | - | ------ | ------ | ------ | 
|             |                                    |                      |                    |        | Colorado   |        | CIVCO      |        | Sold and Other |        | Reconciling |     |              |       | 
|             |                                    |                      |                    |        | Operations |        | Operations |        | Operations     |        | Items       |     | Consolidated
|             |                                    |                      |                    |        |            |        |            |        |                |        |             |     |             
|Fiscal 2001: |                                    |                      |                    |        |            |        |            |        |                |        |             |     |              |       |  |      |         |         |   |       
|             | Revenue                            |                      |                    |        |            |        |            |        |                |        |             |     |              |       |  |      |         |         |   |        |       
|             |                                    | Outsourcing Services |                    | $      | 55,425     |        |            | $      |               |        |             | $   | 2,024        |       |  | $    | (20,634 | )       |   | $      | 36,815 |       
|             |                                    | Medical Products     |                    |        | 22,754     |        |            |        | 17,521         |        |             |     | 85           |       |  |      |        |         |   |        | 40,360 |       
|             |                                    |                      |                    |        |            |        |            |        |                |        |             |     |              |       |  |      |         |         |   |       
|             |                                    |                      | Total revenue      |        |            | 78,179 |            |        |                | 17,521 |             |     |              | 2,109 |  |      |         | (20,634 | ) |        |        | 77,175 | 
|             | Gross profit                       |                      |                    |        |            |        |            |        |                |        |             |     |              |       |  |      |         |         |   |        |       
|             |                                    | Outsourcing Services |                    |        | 9,811      |        |            |        |               |        |             |     | 702          |       |  |      |        |         |   |        | 10,513 |       
|             |                                    | Medical Products     |                    |        | 927        |        |            |        | 9,282          |        |             |     | 81           |       |  |      |        |         |   |        | 10,290 |       
|             |                                    |                      |                    |        |            |        |            |        |                |        |             |     |              |       |  |      |         |         |   |       
|             |                                    |                      | Total gross profit |        |            | 10,738 |            |        |                | 9,282  |             |     |              | 783   |  |      |         |        |   |        |        | 20,803 | 
|             | Depreciation and amortization      |                      |                    | 1,750  |            |        |            | 711    |                |        |             |    |              |       |  |     |         |         |   | 2,461  |       
|             | Assets                             |                      |                    | 37,477 |            |        |            | 12,806 |                |        |             | 117 |              |       |  |     |         |         |   | 50,400 |       
|             | Expenditures for
long-lived assets |                      |                    | 1,642  |            |        |            | 4,365  |                |        |             | 23  |              |       |  |     |         |         |   | 6,030  |       
|Fiscal 2000: |                                    |                      |                    |        |            |        |            |        |                |        |             |     |              |       |  |      |         |         |   |       
|             | Revenue                            |                      |                    |        |            |        |            |        |                |        |             |     |              |       |  |      |         |         |   |        |       
|             |                                    | Outsourcing Services |                    |        | 47,453     |        |            |        |               |        |             |     | 2,281        |       |  |      | (7,267  | )       |   |        | 42,467 |       
|             |                                    | Medical Products     |                    |        | 17,883     |        |            |        | 11,513         |        |             |     | 2,658        |       |  |      | (518    | )       |   |        | 31,536 |       
|             |                                    |                      |                    |        |            |        |            |        |                |        |             |     |              |       |  |      |         |         |   |       
|             |                                    |                      | Total revenue      |        |            | 65,336 |            |        |                | 11,513 |             |     |              | 4,939 |  |      |         | (7,785  | ) |        |        | 74,003 | 
|             | Gross profit                       |                      |                    |        |            |        |            |        |                |        |             |     |              |       |  |      |         |         |   |        |       
|             |                                    | Outsourcing Services |                    |        | 13,546     |        |            |        |               |        |             |     | 394          |       |  |      |        |         |   |        | 13,940 |       
|             |                                    | Medical Products     |                    |        | 5,931      |        |            |        | 6,275          |        |             |     | 680          |       |  |      |        |         |   |        | 12,886 |       
|             |                                    |                      |                    |        |            |        |            |        |                |        |             |     |              |       |  |      |         |         |   |       
|             |                                    |                      | Total gross profit |        |            | 19,477 |            |        |                | 6,275  |             |     |              | 1,074 |  |      |         |        |   |        |        | 26,826 | 
|             | Depreciation and amortization      |                      |                    | 1,660  |            |        |            | 463    |                |        |             |    |              |       |  |     |         |         |   | 2,123  |       
|             | Assets                             |                      |                    | 43,348 |            |        |            | 4,260  |                |        |             | 878 |              |       |  | (194 | )       |         |   | 48,292 |       
|             | Expenditures for
long-lived assets |                      |                    | 2,679  |            |        |            | 329    |                |        |             | 16  |              |       |  |     |         |         |   | 3,024  |       

Included in the operating revenues disclosed above are intersegment
operating revenues related to the exchange of engineering personnel between the
operating units of the Company. The assets reconciling item is the elimination
of the investment in CDT and CMED Automation for the years ended June 30, 2000.

The Company manages its operating segments through the gross margin
component of each segment. It is impractical to break out other operating
expenses on a segment basis.



|(9) |  | CUSTOMER CONCENTRATION
|--- |  | ----------------------

Based on the nature of the Companys business in its Colorado operations,
it is common for a small number of customers to represent a large portion of
this segments revenue, accounts receivable and inventories. The following
customers accounted for more than 10% of the total revenue for the Colorado and
CIVCO segments:

|                          |  |            |    |            |  |      |    |      |  |      |    |      |  |  |    |   |  |  |    |   |  |  |    |  
|------------------------- |  | ---------- | -- | ---------- |  | ---- | -- | ---- |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | - |  |  | -- | -
|                          |  | Colorado   |    | CIVCO     
|                          |  | Operations |    | Operations
|                          |  |            |    |           
|                          |  | 2002       |    | 2001       |  | 2000 |    | 2002 |  | 2001 |    | 2000
|                          |  |            |    |            |  |      |    |      |  |      |    |     
|Customer                  |  |            |    |            |  |      |    |      |  |      |    |      |  |  |    |   |  |  |    |   |  |  |    |  
|GE Medical Systems (GEMS) |  |            | 26 | %          |  |      | 21 | %    |  |      | 23 | %    |  |  | 12 | % |  |  | 14 | % |  |  | 18 | %
|Johnson & Johnson         |  |            | 17 | %          |  |      | 3  | %    |  |      | 2  | %    |  |  |   | % |  |  |   | % |  |  |   | %
|Hitachi                   |  |            | 7  | %          |  |      | 21 | %    |  |      | 15 | %    |  |  |   | % |  |  |   | % |  |  |   | %
|Gen-Probe                 |  |            |   | %          |  |      | 8  | %    |  |      | 13 | %    |  |  |   | % |  |  |   | % |  |  |   | %

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|                  |  |              |    |      |  |      |    |   |  |  |    |  
|----------------- |  | ------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                  |  | Consolidated
|                  |  |             
|                  |  | 2002         |    | 2001 |  | 2000
|                  |  |              |    |      |  |     
|Customer          |  |              |    |      |  |      |    |   |  |  |    |  
|GEMS              |  |              | 21 | %    |  |      | 19 | % |  |  | 19 | %
|Johnson & Johnson |  |              | 11 | %    |  |      | 2  | % |  |  | 2  | %
|Hitachi           |  |              | 5  | %    |  |      | 16 | % |  |  | 13 | %
|Gen-Probe         |  |              |   | %    |  |      | 6  | % |  |  | 11 | %

Such customer concentrations may indicate that the Companys results of
operations and financial position could be adversely impacted if the Company
were to lose any significant customer, or if such customer were to
substantially decrease its orders from the Company.

The percentage of net accounts receivable represented by amounts due from
major customers of the Colorado operations segment as of June 30, were as
follows:

|                  |  |            |  |      |  |  |    |   |  |  |    |  
|----------------- |  | ---------- |  | ---- |  |  | -- | - |  |  | -- | -
|                  |  | Colorado  
|                  |  | Operations
|                  |  |           
|                  |  | 2002       |  | 2001
|                  |  |            |  |     
|Customer          |  |            |  |      |  |  |    |   |  |  |    |  
|GEMS              |  |            |  |      |  |  | 17 | % |  |  | 39 | %
|Johnson & Johnson |  |            |  |      |  |  | 24 | % |  |  | 5  | %
|Hitachi           |  |            |  |      |  |  | 3  | % |  |  | 15 | %

The percentage of net inventory represented by amounts related to expected
product sales to major customers of the Colorado operations as of June 30, were
as follows:

|                  |  |            |  |      |  |  |    |   |  |  |    |  
|----------------- |  | ---------- |  | ---- |  |  | -- | - |  |  | -- | -
|                  |  | Colorado  
|                  |  | Operations
|                  |  |           
|                  |  | 2002       |  | 2001
|                  |  |            |  |     
|Customer          |  |            |  |      |  |  |    |   |  |  |    |  
|GEMS              |  |            |  |      |  |  | 21 | % |  |  | 34 | %
|Johnson & Johnson |  |            |  |      |  |  | 28 | % |  |  | 13 | %
|Dupont  Qualicon |  |            |  |      |  |  | 15 | % |  |  | 7  | %
|Hitachi           |  |            |  |      |  |  | 2  | % |  |  | 8  | %

While the Company believes that its policies regarding accounts receivable
and inventory related to major customers are appropriate given the current
status of the Companys relationship with these customers, should an adverse
event occur in the future in the Companys relationship with a major customer,
the related inventory and accounts receivable exposure could have an adverse
material effect on the Companys financial statements.

As a percentage of total revenues, foreign revenues accounted for the following as of June 30:

|                      |  |            |    |            |  |      |    |      |  |      |    |      |  |  |    |   |  |  |    |   |  |  |    |  
|--------------------- |  | ---------- | -- | ---------- |  | ---- | -- | ---- |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | - |  |  | -- | -
|                      |  | Colorado   |    | CIVCO     
|                      |  | Operations |    | Operations
|                      |  |            |    |           
|                      |  | 2002       |    | 2001       |  | 2000 |    | 2002 |  | 2001 |    | 2000
|                      |  |            |    |            |  |      |    |      |  |      |    |     
|Japan                 |  |            | 7  | %          |  |      | 22 | %    |  |      | 13 | %    |  |  | 6  | % |  |  | 6  | % |  |  | 8  | %
|Other foreign revenue |  |            | 5  | %          |  |      | 5  | %    |  |      | 9  | %    |  |  | 10 | % |  |  | 10 | % |  |  | 10 | %
|                      |  |            |    |            |  |      |    |      |  |      |    |      |  |  |    |   |  |  |    |   |  |  |    |  
|Total foreign revenue |  |            | 12 | %          |  |      | 27 | %    |  |      | 22 | %    |  |  | 16 | % |  |  | 16 | % |  |  | 18 | %

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|                      |  |              |    |      |  |      |    |   |  |  |    |  
|--------------------- |  | ------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                      |  | Consolidated
|                      |  |             
|                      |  | 2002         |    | 2001 |  | 2000
|                      |  |              |    |      |  |     
|Japan                 |  |              | 7  | %    |  |      | 17 | % |  |  | 13 | %
|Other foreign revenue |  |              | 7  | %    |  |      | 8  | % |  |  | 9  | %
|                      |  |              |    |      |  |      |    |   |  |  |    |  
|Total foreign revenue |  |              | 14 | %    |  |      | 25 | % |  |  | 22 | %



|(10) |  | NOTES RECEIVABLE  RELATED PARTIES
|---- |  | ----------------------------------

In January 2001, the Board of Directors approved a program to loan to
officers of the Company up to $1,000,000 in the aggregate to purchase common
stock of the Company from persons other than the Company. The loans are full
recourse to the borrower and bear interest at the prime rate plus 0.5%. The
principle balances were recorded as contra-equity on the face of the balance
sheet. Interest is payable annually on the anniversary date of each note. All
principal and remaining accrued interest is due five years from the date of the
respective note. As of June 30, 2002, accrued interest on the loans was
approximately $13,000 and is included in other current assets on the balance
sheet. Interest income of approximately $20,000 from the loans is included in
interest income and other for the year ended June 30, 2002. During the year
ended June 30, 2002, two of these loans were repaid. One of the notes
receivable for approximately $150,000 came due and was cancelled in exchange
for the transfer to the Company of 41,666 shares of the Companys common stock
tendered at $3.60 per share, the fair market value of the shares at the time of
the transaction. All accrued interest for that individual, approximately
$12,000, was forgiven. The other loan of $150,000 was repaid to the Company in
full, in cash along with all accrued interest.



|(11) |  | COMMITMENTS AND CONTINGENCIES
|---- |  | -----------------------------

Leases

The Company leases a majority of its operating facilities and certain
computer and test equipment pursuant to noncancellable operating lease
arrangements. The Company incurred rent expense of $1,318,000, $1,190,000 and
$1,303,000 for the years ended June 30, 2002, 2001 and 2000, respectively,
under the lease agreements.

At June 30,
2002, future minimum lease payments for facilities under leases
having an initial or remaining noncancellable term of one year or more are
approximately $67,000 in 2003, $12,000 in 2004, and none thereafter.

Building Lease

On January 27, 2002 the Company signed a lease for a 10-year term,
commencing April 1, 2002, with rental payments to begin July 1, 2002, for
office and building space in which to consolidate its Colorado operations. The
Company recognizes total rent expense to be paid on a straight-line basis over
the term of the lease in accordance with SFAS 13, Accounting for Leases.
Through June 30, 2002, the Company expensed approximately $246,000 of rent
expense related to this lease. Future minimum lease payments, under this
agreement for the fiscal years ending June 30 are as follows:

|                             |           |   |            |           | 
|---------------------------- | --------- | - | ---------- | --------- | 
|                             | Year      |   | Amount    
|                             |           |  
|                             | 2003      |   | $          | 895,000   | 
|                             | 2004      |   |            | 918,000   | 
|                             | 2005      |   |            | 942,000   | 
|                             | 2006      |   |            | 967,000   | 
|                             | 2007      |   |            | 992,000   | 
|                             | 2008-2012 |   |            | 5,364,000 | 
|                             |           |   |            |          
|Total minimum
lease payments |           | $ | 10,078,000 |          
|                             |           |   |            |          

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The Company expects its costs to exit currently leased facilities and
consolidate its Colorado operations will be approximately $250,000, in addition
to approximately $600,000 in capital expenditures. These costs are to be
incurred in the fourth quarter of fiscal 2002 and the first quarter of fiscal
2003. Through June 30, 2002, the Company had spent approximately $154,000
related to direct costs associated with the move.

The Company has signed a letter agreement to lease an additional 50,000
square feet in a building under construction adjacent to its headquarters
building. The letter agreement contemplates expected lease payments of
approximately $6.9 million over a 10-year period. The letter agreement also
states that the Company will amend the lease related to the 104,000 square foot
building to start a 10-year lease period on the congruent date at the start of
the 50,000 square foot occupancy. It is expected that the construction of the
additional facility will be complete by the beginning of fiscal 2004.

The Company owns the land and building which houses the development and
manufacturing facilities of CIVCO, located at 102 First Street South, Kalona,
Iowa. To accommodate growth of the CIVCO business, the Company purchased a one-acre
plot of land adjacent to the CIVCO property and are completing a 23,000 square
foot addition to the CIVCO building on such property, bringing the total square
footage to 48,000 square feet. The building consists of office and light
manufacturing space. When completed, the cost of the land and the addition,
which includes a class 7 (10,000) clean room, is expected to be $2,030,000,
$1,257,000 of which was expended in the year ended June 30, 2002.

Employment and Compensation Agreements

The Company has entered into employment agreements with certain officers
and key employees. The employment agreements establish compensation and
generally provide for severance benefits to the employees upon termination of
employment upon or after a change in control. In addition, the Company has
approved an arrangement pursuant to which certain officers and
employees will be compensated
upon the sale of part or all of the Company.

Legal Proceedings

Wedel Arbitration

On November 21, 2000, Victor J. Wedel and Sherrill Wedel filed a legal
proceeding against Colorado MEDtech and a former member of its management in
United States District Court for the Central District of California in
connection with the November 15, 1999 transaction in which Colorado MEDtech
acquired the outstanding stock of CIVCO Medical Instruments Co., Inc. and
related real estate from the Wedels in exchange for Colorado MEDtech stock.
The defendants moved to stay this suit so that the claims could be arbitrated
in accordance with an agreement between Mr. Wedel and the Company to submit all
disputes to binding arbitration. While the court granted the requested stay,
it also entered an order that imposed certain restrictions on CIVCO and the
Company during the pendency of the dispute. The order included a provision
that CIVCO not pay any dividends to the Company during the pendency of the
dispute.

On March 3, 2001, the Wedels submitted a statement of claim to an
arbitrator group. After binding arbitration, on December 5, 2001 the arbiter
found in favor of the Colorado MEDtech parties and against the claimant on all
of the counts in the matter and ruled that the Colorado MEDtech parties had no
liability in the matter. Following the arbiters resolution of the dispute, in
February 2002 the court vacated its earlier order and lifted the injunction.

Gen-Probe Dispute

In May 2001, a former customer, Gen-Probe, Incorporated, threatened
litigation against Colorado MEDtech in connection with a development and
manufacturing project. During the remainder of 2001, the Company and Gen-Probe
attempted to reach an amicable settlement. Gen-Probe stated that its damages
in connection with the dispute were $14 million. On February 27, 2002, the
Company filed against Gen-Probe a complaint for declaratory judgment in the
United

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States District Court for the District of Colorado, seeking a declaration that
Colorado MEDtech did not breach the agreements pursuant to which Colorado
MEDtech provided development and manufacturing services to Gen-Probe. On March
5, 2002, the Company settled the dispute with Gen-Probe, which included the
withdrawal of the litigation between the parties and with no admission of
liability by either party. Colorado MEDtechs expenses associated with the
dispute in the quarter ending March 31, 2002, including its contribution to the
settlement and its legal fees and costs, were approximately $1.1 million, which
are included in Other Operating Expenses on the face of the Statement of
Operations.

Other than mentioned above, the Company is involved in legal actions
arising in the ordinary course of business. Management does not believe the
outcome of such legal actions will have a material adverse effect on the
Companys consolidated financial position or results of operations.

Regulatory Actions

On January 26, 2001, the Company received a warning letter from the United
States Food and Drug Administration (FDA) regarding certain areas in which
the Companys Longmont, Colorado contract medical device manufacturing facility
was not in conformance with the FDAs Quality System Regulation (QSR).

On October 11, 2001, the Company received a letter from the FDA resolving
the issues identified in the warning letter, and allowing the Company to resume
production of devices affected by the warning letter. The FDA may inspect the
Companys facilities at any time, without notice, and if the FDA were to note
adverse conditions, it could require the Company to cease its operations until
it was satisfied that the Company was in compliance with FDA rules and
regulations.

IRS Audit

The Company is currently under audit by the Internal Revenue Service for
its 1998 and 1999 tax returns. Should the IRS assert and sustain an
unfavorable audit result, the Company may be required to record additional
liability, lose deferred tax assets, and/or make cash payments for additional
taxes, penalties and/or interest. Such amounts could be material, and could
have an adverse effect on the Companys financial condition, results of
operations and liquidity. While management believes at this time that no such
adverse result is forthcoming, it is not possible at this time to predict the
outcome of the audit with certainty.



|(12) |  | 401(k) RETIREMENT PLAN
|---- |  | ----------------------

The Company has established the Colorado MEDtech, Inc. 401(k) Retirement
Plan, which is governed by Section 401(k) of the Internal Revenue Code.
Employees are eligible to enroll in the plan on January 1 and July 1, any time
after they become full time employees of the Company. The Company makes
discretionary contributions that vest over a three-year period. During the
year ended June 30, 2002, the Company changed the plan year from June 30 to
December 31. This resulted in the Company making its contributions to the plan
during the third quarter of its fiscal year. In March 2002, the Company
contributed approximately $186,000 in matching contributions for the six months
ended December 31, 2001. Company contributions were approximately $407,000 and
$366,000 for the years ended June 30, 2001 and 2000, respectively.

F-36



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|(13) |  | SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|---- |  | ---------------------------------------------

The Companys quarterly results of operations are summarized as follows:

(in thousands except earnings per share data)

|                                |                            |         |   |         |      |         |   |         |      |         |   |        |      |   |   |        |      |  
|------------------------------- | -------------------------- | ------- | - | ------- | ---- | ------- | - | ------- | ---- | ------- | - | ------ | ---- | - | - | ------ | ---- | -
|                                |                            |         |   | 1st     |      | 2nd     |   | 3rd     |      | 4th    
|                                |                            |         |   | Quarter |      | Quarter |   | Quarter |      | Quarter
|                                |                            |         |   |         |      |         |   |         |      |        
|Fiscal Year Ended June 30, 2002 |                            |         |   |         |      |         |   |         |      |         |   |        |      |   |   |       
|                                | Net sales and service      |         | $ | 17,019  |      |         | $ | 17,688  |      |         | $ | 17,661 |      |   | $ | 18,283 |     
|                                | Gross profit               |         | $ | 4,831   |      |         | $ | 4,892   |      |         | $ | 4,618  |      |   | $ | 5,298  |     
|                                | Net (loss) income          |         | $ | (1,145  | )    |         | $ | (819    | )    |         | $ | (1,239 | )    |   | $ | 104    |     
|                                | Earnings (loss) per share: |         |   |         |      |         |   |         |      |         |   |        |      |   |   |        |     
|                                |                            | Basic   |   | $       | (.09 | )       |   | $       | (.06 | )       |   | $      | (.09 | ) |   | $      | .01  |  
|                                |                            | Diluted |   | $       | (.09 | )       |   | $       | (.06 | )       |   | $      | (.09 | ) |   | $      | .01  |  
|Fiscal Year Ended June 30, 2001 |                            |         |   |         |      |         |   |         |      |         |   |        |      |   |   |       
|                                | Net sales and service      |         | $ | 17,071  |      |         | $ | 18,687  |      |         | $ | 20,958 |      |   | $ | 20,459 |     
|                                | Gross profit               |         | $ | 5,760   |      |         | $ | 5,582   |      |         | $ | 6,517  |      |   | $ | 2,943  |     
|                                | Net (loss) income          |         | $ | 334     |      |         | $ | (676    | )    |         | $ | (635   | )    |   | $ | (1,730 | )   
|                                | Earnings (loss) per share: |         |   |         |      |         |   |         |      |         |   |        |      |   |   |        |     
|                                |                            | Basic   |   | $       | .03  |         |   | $       | (.05 | )       |   | $      | (.05 | ) |   | $      | (.13 | )
|                                |                            | Diluted |   | $       | .03  |         |   | $       | (.05 | )       |   | $      | (.05 | ) |   | $      | (.13 | )
|Fiscal Year Ended June 30, 2000 |                            |         |   |         |      |         |   |         |      |         |   |        |      |   |   |       
|                                | Net sales and service      |         | $ | 20,659  |      |         | $ | 17,999  |      |         | $ | 18,349 |      |   | $ | 16,996 |     
|                                | Gross profit               |         | $ | 8,408   |      |         | $ | 6,250   |      |         | $ | 6,373  |      |   | $ | 5,794  |     
|                                | Earnings (loss) per share: |         |   |         |      |         |   |         |      |         |   |        |      |   |   |        |     
|                                |                            | Basic   |   | $       | .19  |         |   | $       | .08  |         |   | $      | .06  |   |   | $      | (.08 | )
|                                |                            | Diluted |   | $       | .16  |         |   | $       | .07  |         |   | $      | .06  |   |   | $      | (.08 | )

F-37



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

On July 17, 2002, we dismissed Arthur Andersen LLP as our independent
auditors and engaged KPMG LLP as our new independent auditors for the fiscal
year ending June 30, 2002. Our dismissal of Andersen and appointment of KPMG
was at the direction of our Board of Directors, based on the recommendation of
our Audit Committee.

Andersens reports on our consolidated financial statements for each of
the years ended June 30, 2001 and June 30, 2000 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.

During the years ended June 30, 2001 and 2000 and the interim period
between June 30, 2001 and July 17, 2002, there were no disagreements between us
and Andersen on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
Andersens satisfaction, would have caused them to make reference to the
subject matter of the disagreement in connection with their report for such
years; and there were no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.

We provided Andersen with a copy of the foregoing disclosures. Andersen
has informed us that due to its current difficulties it will be unable to
respond to our filing stating its agreement or disagreement with such
statements.

During the years ended June 30, 2001 and 2000 and through July 17, 2002,
neither we nor anyone acting on our behalf consulted KPMG with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our consolidated financial statements, or any other matters or reportable
events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.




PART III




Item 10. Directors and Executive Officers of the Registrant.

The information required by this Item is incorporated herein by reference
to our definitive Proxy Statement for our Annual Meeting of Stockholders, to be
held on November 14, 2002, to be filed with the Securities and Exchange
Commission pursuant to Schedule 14A under the Securities Exchange Act of 1934.




Item 11. Executive Compensation.

The information required by this Item is incorporated herein by reference
to our definitive Proxy Statement for our Annual Meeting of Stockholders, to be
held on November 14, 2002,to be filed with the Securities and Exchange
Commission pursuant to Schedule 14A under the Securities Exchange Act of 1934.




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

The information required by this Item is incorporated herein by reference
to our definitive Proxy Statement for our Annual Meeting of Stockholders, to be
held on November 14, 2002, to be

-45-



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filed with the Securities and Exchange Commission pursuant to Schedule 14A under the Securities Exchange Act of 1934.




Item 13. Certain Relationships and Related Transactions.

The information required by this Item is incorporated herein by reference
to our definitive Proxy Statement for our Annual Meeting of Stockholders, to be
held on November 14, 2002, to be filed with the Securities and Exchange
Commission pursuant to Schedule 14A under the Securities Exchange Act of 1934.




PART IV




Item 14. Controls and Procedures.

Not required  this report relates to periods ending prior to August 29, 2002.




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

|    |  |                                                                                                                                                                                                                                                     |  |                                                                                                                
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------
|(a) |  | (1) and (2) The following financial statements and financial statement
schedules are filed as part of this report:                                                                                                                                 
|   
|    |  |                                                                                                                                                                                                                                                     |  | Report of Independent Public Accountants                                                                       
|   
|    |  |                                                                                                                                                                                                                                                     |  | Consolidated Balance Sheets as of June 30, 2002 and 2001                                                       
|   
|    |  |                                                                                                                                                                                                                                                     |  | Consolidated Statements of Operations for the Years Ended June 30, 2002, 2001 and 2000                         
|   
|    |  |                                                                                                                                                                                                                                                     |  | Consolidated Statements of Shareholders Equity for the Years Ended June 30, 2002, 2001 and 2000               
|   
|    |  |                                                                                                                                                                                                                                                     |  | Consolidated Statements of Cash Flows for the Years Ended June 30, 2002, 2001 and 2000                         
|   
|    |  |                                                                                                                                                                                                                                                     |  | Notes to Consolidated Financial Statements                                                                     
|   
|    |  | All other schedules have been omitted because they were not applicable,
not required or the required information is shown in the consolidated
financial statements or notes thereto.                                                               
|   
|    |  | (3)                                                                                                                                                                                                                                                 |  | Exhibits. See Exhibit Index included as the last page of this report,
which index is incorporated by reference.
|   
|(b) |  | Reports on Form 8-K. We filed the following reports on Form 8-K for the
three-month period ended June 30, 2002:                                                                                                                                    
|   
|    |  | 1. A current report on Form 8-K dated June 3, 2002 regarding investor and
analyst presentation materials of the President and Chief Executive Officer
and Chief Financial Officer used on June 3, 2002 and to be used from time to
time thereafter.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                           |  |     |  |                                          | 
|-------------------------- |  | --- |  | ---------------------------------------- | 
|Dated: September 30, 2002. |  |     |  | COLORADO MEDTECH, INC.                   | 
|                           |  |     |  |                                          | 
|                           |  | By: |  | /s/ Stephen K. Onody                     | 
|                           |  |     |  |                                          | 
|                           |  |     |  | Stephen K. Onody
Chief Executive Officer | 

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

|                                         |  |                                                                               |  |                   
|---------------------------------------- |  | ----------------------------------------------------------------------------- |  | ------------------
|Signature                                |  | Title                                                                         |  | Date              
|                                         |  |                                                                               |  |                   
|/s/ Stephen K. OnodyStephen K. Onody     |  | Chief Executive Officer,
President and Director
(Principal Executive Officer) |  | September 30, 2002
|                                        
|/s/ Gregory A. GouldGregory A. Gould     |  | Chief Financial Officer
(Principal Financial and
Accounting Officer)          |  | September 30, 2002
|                                        
|/s/ Anthony J. DimunAnthony J. Dimun     |  | Director                                                                      |  | September 30, 2002
|                                        
|/s/ John P. JenkinsJohn P. Jenkins       |  | Director                                                                      |  | September 25, 2002
|                                        
|/s/ Ira M. LangenthalIra M. Langenthal   |  | Director                                                                      |  | September 25, 2002
|                                        
|/s/ Clifford W. MezeyClifford W. Mezey   |  | Director                                                                      |  | September 30, 2002
|                                        
|/s/ Duncan SoukupDuncan Soukup           |  | Director                                                                      |  | September 30, 2002
|                                        
|/s/ Robert L. SullivanRobert L. Sullivan |  | Director                                                                      |  | September 30, 2002
|                                        
|/s/ John H. WheelerJohn H. Wheeler       |  | Director                                                                      |  | September 30, 2002
|                                        
|/s/ John E. WolfeJohn E. Wolfe           |  | Director                                                                      |  | September 27, 2002





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CERTIFICATIONS

I, Stephen K. Onody, certify that:

1.     I have reviewed this annual report on Form 10-K of Colorado MEDtech, Inc.
(the registrant).

2.     Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.

3.     Based on my knowledge, the financial statements, and other 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.

[Items 4-6 not required pursuant to SEC Rel. No. 34-46427]

Date: September 30, 2002

/s/ Stephen K. Onody
Name: Stephen K. Onody
Title: Chief Executive Officer and President





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##### Table of Contents



I, Gregory A. Gould, certify that:

1.     I have reviewed this annual report on Form 10-K of Colorado MEDtech, Inc.
(the registrant).

2.     Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.

3.     Based on my knowledge, the financial statements, and other 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.

[Items 4-6 not required pursuant to SEC Rel. No. 34-46427]

Date: September 30, 2002

/s/ Gregory A. Gould
Name: Gregory A. Gould
Title: Chief Financial Officer





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INDEX TO EXHIBITS

|              |  |                                                                                                                                                                                                             |  |                   
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                 |  | SequentialPage No.
|              |  |                                                                                                                                                                                                             |  |                   
|3.1           |  | Articles of Incorporation; Complete Copy, as Amended. (A)                                                                                                                                                  
|3.2           |  | Bylaws, as Amended.                                                                                                                                                                                        
|4.2           |  | Specimen of Common Stock Certificate. (B)                                                                                                                                                                  
|4.3           |  | Rights Agreement between Colorado MEDtech, Inc. and American
Securities Transfer & Trust, Inc. dated January 14, 1999, as amended. (C)                                                                     
|9.1           |  | Letter agreement dated June 19, 2002 by and between Colorado MEDtech, Inc.,
Acquisitor, plc. and Duncan Soukup.                                                                                            
|10.31         |  | Colorado MEDtech, Inc. Stock Option Plan. (D)                                                                                                                                                              
|10.42         |  | Colorado MEDtech, Inc. 1996 Employee Stock Purchase Plan. (E)                                                                                                                                              
|10.45         |  | Executive Employment Agreement between Colorado MEDtech, Inc.
and Stephen K. Onody. (D)                                                                                                                    
|10.45.1       |  | Amended and Restated Executive Employment Agreement between Colorado
MEDtech, Inc. and Stephen K. Onody.                                                                                                   
|10.46         |  | Letter agreement between Colorado MEDtech, Inc. and Gregory A. Gould,
as amended.                                                                                                                          
|10.47         |  | Credit Agreement, Security Agreement and Promissory Note dated December
21, 2000 between Colorado MEDtech, Inc. and KeyBank, National Association. (F)                                                     
|10.48         |  | First Amendment to Security Agreement dated February 28, 2001, and First
Amendment to Credit Agreement dated April 30, 2001, between Colorado
MEDtech, Inc. and KeyBank National Association. (G)          
|10.49         |  | Form of Officer Loan Agreement, Master Promissory Note, Master Escrow
Agreement, and Security Agreement for 2001 Officer Loans, and Schedule. (E)                                                          
|10.50         |  | Second Amendment to Credit Agreement dated November 13, 2001 between
Colorado MEDtech, Inc. and KeyBank National Association. (H)                                                                          
|10.51         |  | Colorado MEDtech, Inc. 2001 Long-Term Incentive Plan. (I)                                                                                                                                                  
|10.52         |  | Lease dated January 7, 2002, between Colorado MEDtech, Inc. and Eastside
Properties, LLC. (I)                                                                                                              
|10.52.1       |  | Letter Agreement dated January 17, 2002 between Colorado MEDtech, Inc. and
Eastside Properties, LLC. (I)                                                                                                   
|10.53         |  | Stock Purchase Agreement by and among CIVCO Medical Instruments Co., Inc.,
Colorado MEDtech, Inc. and stockholders of Barzell-Whitmore Maroon Bells, Inc.                                                  
|10.54         |  | Form of Employment Agreement and Schedule.                                                                                                                                                                 
|10.55         |  | Form of Non-Competition and Severance Agreement, as amended, and Schedule.                                                                                                                                 
|10.56         |  | Third Amendment to Credit Agreement, Amended and Restated Security
Agreement and Amended and Restated Promissory Note dated June 25, 2002
between Colorado MEDtech, Inc. and KeyBank, National Association.
|10.57         |  | Officer Sale Bonus Description (J)                                                                                                                                                                         
|21.1          |  | Subsidiaries of Colorado MEDtech, Inc.                                                                                                                                                                     
|23.1          |  | Consent of Independent Public Accountants                                                                                                                                                                  
|99.1          |  | Certificate of Chief Executive Officer                                                                                                                                                                     
|99.2          |  | Certificate of Chief Financial Officer                                                                                                                                                                     

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##### Table of Contents





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|(A) |  | Filed as an exhibit to the Companys Annual Report on Form 10-K for the
year ended June 30, 1999.                                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(B) |  | Filed with Registration Statement (No. 2-83841-D) on Form S-18 on May 17,
1983.                                                                                                
|   
|(C) |  | Filed with Registration Statement on Form 8-A/A dated June 27, 2000.                                                                                                           
|   
|(D) |  | Filed as an exhibit to the Companys Annual Report on Form 10-K for the
year ended June 30, 2000.                                                                              
|   
|(E) |  | Filed as an exhibit to the Companys Annual Report on Form 10-K for the
year ended June 30, 2001.                                                                              
|   
|(F) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for
the quarter ended
December 31, 2000.                                                                    
|   
|(G) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for
the quarter ended
March 31, 2001.                                                                       
|   
|(H) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for
the quarter ended
September 30, 2001.                                                                   
|   
|(I) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for
the quarter ended
December 31, 2001.                                                                    
|   
|(J) |  | Certain portions of this exhibit have been omitted pursuant to a request
for confidential treatment and have been filed separately with the
Securities and Exchange Commission.

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