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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

VL DISSOLUTION CORPORATION

(Exact name of Registrant as specified in its charter.)

4895 Peoria Street
Denver, Colorado 80239

(303) 371-1560

     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.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     The number of shares outstanding of the issuer’s class of common stock, as of May 2, 2003:

VL DISSOLUTION CORPORATION

March 31, 2003

Index

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VL DISSOLUTION CORPORATION

Balance Sheets

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

See accompanying notes to financial statements.

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VL DISSOLUTION CORPORATION

Statements of Operations

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

See accompanying notes to financial statements.

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VL DISSOLUTION CORPORATION

Statements of Operations

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

See accompanying notes to financial statements.

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VL DISSOLUTION CORPORATION

Statement of Stockholders’ Equity

Nine Months Ended March 31, 2003 (unaudited)

(in thousands of dollars, except share data)

See accompanying notes to financial statements.

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VL DISSOLUTION CORPORATION

Statements of Cash Flows

(in thousands of dollars)

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VL DISSOLUTION CORPORATION

Notes to Financial Statements (Unaudited)

Three and nine months ended March 31, 2003

(1)		Basis of Presentation and Liquidity
		The accompanying financial statements have been prepared in conformity with generally accepted accounting principles on a going concern basis which assumes the realization of assets and payments of liabilities in the ordinary course of business. The accompanying financial statements do not include adjustments to reflect the effects of the asset sale or subsequent dissolution and liquidation of the Company, except as disclosed.
		The accompanying financial statements of the Company have been prepared without audit (except for the balance sheet information as of June 30, 2002, which is derived from the Company’s audited financial statements). Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2002. In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for the periods presented. Interim results of operations for the three and nine months ended March 31, 2003 are not necessarily indicative of operating results that can be expected for the full year.
		Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Significant assumptions inherent in the preparation of the accompanying financial statements include, but are not limited to, revenue recognition and allowances for doubtful accounts, the provision for excess and obsolete inventories, and commitments and contingencies. Actual results could differ from those estimates.
		Certain reclassifications have been made to prior period amounts to conform to the current period’s presentation.
		On December 2, 2002, the Company entered into a definitive asset purchase agreement (the “Asset Purchase Agreement”) to sell substantially all of the operating assets to a wholly owned subsidiary of Sirenza Microdevices, Inc. (“Sirenza”). On May 5, 2003, the asset sale contemplated by the Asset Purchase Agreement was consummated. The Company received $3.972 million in cash, 3.371 million shares of Sirenza’s common stock with a market value of $5.158 million as of May 2, 2003, forgiveness of $1.354 million and assumption of $4.594 million in secured loans and accrued interest payable to Sirenza. The final consideration to be received is subject to adjustments based upon finalization of the closing balance sheet. Under the terms of the Asset Purchase Agreement, the Company is required to set aside $1.510 million in cash and 1.281 million shares of Sirenza’s common stock to satisfy any indemnification claims from Sirenza that may arise prior to March 31, 2004. See Notes 11 and 12 for additional information regarding the closing of the asset sale.

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VL DISSOLUTION CORPORATION

Notes to Financial Statements (Unaudited)

Three and nine months ended March 31, 2003

(2)		Inventories
		Inventories consist of the following (in thousands of dollars):

(3)		Notes Payable and Long-term Obligations
		Notes payable and long-term obligations consist of the following (in thousands of dollars):

		On October 7, 2002, the Company entered into a loan agreement with Sirenza which provides for a $5.3 million senior secured loan facility (the “Loan Facility”). As a condition to the Loan Facility, the Company entered into an Exclusivity and Right of First Refusal Agreement (the “Exclusivity Agreement”) with Sirenza to evaluate a potential acquisition of all or substantially all of the Company’s assets.
		The Loan Facility matures on September 25, 2003, is secured by substantially all of the Company’s assets and has an annual interest rate of 25% on outstanding amounts. Additionally, the Loan Facility is subject to covenants that among other things, impose limitations on capital expenditures and investments, restrict certain payments and

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VL DISSOLUTION CORPORATION

Notes to Financial Statements (Unaudited)

Three and nine months ended March 31, 2003

		distributions and require the Company to maintain certain financial ratios based on a rolling three-month calculation.
		Under the terms of the Loan Facility, Sirenza has provided for funding in two tranches. The first tranche (“Tranche A”) consists of an initial term loan of approximately $1.4 million and was used to repay amounts then outstanding under the credit facility at Wells Fargo. The second tranche (“Tranche B”) consists of additional term loans which were drawn down in accordance with an agreed upon schedule. The Company used advances under Tranche B to fund its working capital requirements.
		The Company’s ability to draw down amounts under Tranche B was conditioned upon, among other things, the absence of an event of default and its representations and warranties being true and correct at the time of such draw down request. For the three month period ended December 31, 2002, the Company was in default of the Net Operating Loss covenant of the Loan Facility. For the three month period ended February 28, 2003, the Company also was in default of the Cash Used in Operations covenant. For the three month period ended March 31, 2003, the Company met the minimum requirements of the financial covenants, however the Loan Facility does not provide for the cure of an existing breach of its covenants. Under the terms of the Loan Facility, the default interest rate increased 5 percentage points from 25% to 30% effective January 1, 2003. Furthermore, Sirenza has the right to declare all amounts due on the loan immediately due and payable. At March 31, 2003, Sirenza had not taken any action to accelerate the loan, but reserved the right to do so. Upon closing of the asset sale, Sirenza’s subsidiary assumed all outstanding indebtedness under the Loan Facility, including accrued interest. See Note 12 for additional information regarding the closing of the asset sale.
(4)		Income Taxes
		A valuation allowance was provided for the income tax benefit of the net operating losses incurred during the three and nine months ended March 31, 2003 and 2002.
(5)		Stockholders’ Equity
		On April 25, 2002, the Company filed a Tender Offer (the “Offer”) with the Securities and Exchange Commission which offered employees the right to exchange all outstanding options to purchase shares of Company common stock with an exercise price equal to $34.50 per share for replacement options to be granted no earlier than six months and one day from the expiration of the Offer at an exercise price equal to no less than the fair market value of the common stock on that date. Under the terms and subject to the conditions set forth in the Offer, options to purchase 180,579 shares were surrendered by eligible employees and cancelled on May 23, 2002. On November 25, 2002, the Company issued replacement options to purchase an aggregate of up to 160,079 shares of common stock at an exercise price of $0.25 per share in exchange for the options surrendered pursuant to the Offer.
		As a result of the signing of the Asset Purchase Agreement with Sirenza as described in Note 11 and in accordance with the Company’s Tandem Stock Option and Stock Appreciation Rights Plan (the “Plan”), all options outstanding under the Plan became immediately exercisable on December 2, 2002.

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VL DISSOLUTION CORPORATION

Notes to Financial Statements (Unaudited)

Three and nine months ended March 31, 2003

		Pursuant to the Company’s Tandem Stock Option and Stock Appreciation Rights Plan, during the nine months ended March 31, 2003, the Company had two employees exercise their right to purchase 23,000 shares of the Company’s common stock at an exercise price of $0.25 per share.
		As further discussed in Note 10, the Company signed a mutual general release with David Sherman, which among other things, released the Company from all claims related to his employment and separation agreements and any rights he may have had regarding advancement or indemnification of attorney’s fees and other costs of defense. In consideration of the mutual release, Mr. Sherman agreed to transfer 100,813 shares of the Company’s common stock to the Company and the Company repaid Mr. Sherman’s promissory note to Carolyn Kiser in the principal amount of $55,030. Mr. Sherman and Carolyn Kiser are former officers of the Company. On the date of execution of the mutual general release, the fair market value of the shares was approximately $76,000. On December 31, 2002, the Board of Directors authorized the retirement of the transferred shares.
		Pursuant to the Company’s Employee Stock Purchase Plan, during the nine months ended March 31, 2003, the Company sold 169,874 shares of its common stock to its employees at a weighted average exercise price of $0.69 per share.

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VL DISSOLUTION CORPORATION

Notes to Financial Statements (Unaudited)

Three and nine months ended March 31, 2003

(6)		Expenses Related to Workforce Reductions and the Proposed Transaction with Sirenza
		As a result of the continuing weakness in the wireless industry and the impact it has had upon the Company’s revenues, the Company reduced its workforce and incurred severance expenses. Additionally, the Company incurred certain transaction costs in connection with the transaction with Sirenza as further discussed in Notes 11 and 12. Such costs are defined under the Loan Facility with Sirenza and include restructuring, severance benefits, legal and accounting fees and other related costs incurred. Expenses related to workforce reductions and the transaction with Sirenza were as follows:

		The Company continued to incur costs related to workforce reductions and the transaction with Sirenza until the closing of the asset sale. See Notes 11 and 12 for additional information regarding the closing of the asset sale.
(7)		Expenses of Accounting Restatements, Shareholder Litigation and Related Matters
		In early 2000, management of the Company commenced efforts to restate its previously issued financial statements after being notified by the Securities and Exchange Commission (the Commission) that the Commission was investigating its accounting and reporting practices. Certain costs incurred in conjunction with these efforts have been separately classified in the Company’s Statements of Operations as “Expenses relating to accounting restatements and related legal matters, net of recoveries.” Expenses included in this classification include the cost of external counsel for services provided in connection with shareholder lawsuits, the Commission’s investigation of the Company, legal fees and expenses of the Special Litigation Committee of the Board of Directors (the “SLC”), the costs incurred to settle the private securities action and the Company action against former officers (net of recoveries), the cost of certain consultants and temporary labor hired to assist in the accounting restatements, and reimbursements to current and former employees of the Company for their legal fees and expenses.
		The accounting restatements were completed in February 2001. Additionally, during October 2002 and December 2002, the Company, the individual defendants in the private securities class action, the Agricultural Excess and Surplus Insurance Company, and the individual defendants in the action against former officers attended global settlement conferences. All parties involved reached an agreement in principle for the global settlement of all litigation. On January 22, 2003, the Company, the class action

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VL DISSOLUTION CORPORATION

Notes to Financial Statements (Unaudited)

Three and nine months ended March 31, 2003

		representatives and the individual defendants in the private securities class action executed and filed a Stipulation of Settlement (the “Stipulation”) with the United States District Court for the District of Colorado (the “Court”). On January 29, 2003, the Court issued its order preliminarily approving the settlement of the private securities class action, certification of the class, and the provision of notice to members of the class (the “Preliminary Approval”). On March 28, 2003, the Court held a fairness hearing regarding the settlement of the private securities class action. At the hearing, the Court approved the settlement of the private securities class action as fair and reasonable to the members of the class. Following the hearing, the Court entered its final judgment and order of dismissal of the actions with prejudice. See Note 10 for additional information.
		Expenses relating to accounting restatements and related legal matters, net of recoveries, were as follows:

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VL DISSOLUTION CORPORATION

Notes to Financial Statements (Unaudited)

Three and nine months ended March 31, 2003

(8)		Net Loss Per Share
		The Company computes net loss per share by dividing the net loss for the period by the weighted average number of shares of Common Stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of Common Stock and potential Common Stock equivalents outstanding during the period, if dilutive. Potential Common Stock equivalents include incremental shares of Common Stock issuable upon the exercise of stock options. The effects of potential common stock equivalents have not been included in the computation of diluted net loss per share as their effect is anti-dilutive.
		The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share data):

(9)		Principal Executive Office Lease Amendment
		On November 12, 2002, the Company negotiated the right to terminate the lease for its principal executive office located in Denver, Colorado on June 30, 2003 (the “Termination Date”) for a payment of $594,000 and forfeiture of an existing security deposit of $81,000. The original termination date of the lease is August 31, 2013. In consideration of the option to terminate the lease early, the Company paid an additional security deposit of $50,000 to cover any damages associated with vacating the premises. In the event that the Company closed a sale of all or substantially all of its assets to Sirenza prior to the Termination Date, the Company would exercise its right to terminate the lease and pay the early termination fee within two business days of closing. On May 5, 2003 in connection with the closing of the asset sale as described in Notes 11 and 12, the Company exercised its right to terminate the lease and will pay the early termination fee on May 7, 2003. The total costs to terminate the lease including leasehold improvements that will be written off are approximately $905,000.
(10)		Litigation, Commitments and Contingencies
		Securities and Exchange Commission Investigation
		In December 1999, the Company learned that the SEC was conducting an investigation to determine whether there were violations of the federal securities laws by the Company or any of its officers, directors or employees. The SEC’s investigation was focused primarily

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VL DISSOLUTION CORPORATION

Notes to Financial Statements (Unaudited)

Three and nine months ended March 31, 2003

		on the Company’s financial reporting and accounting practices and procedures during the fiscal years 1996 through 1999.
		In September 2001, the Company agreed to a settlement with the SEC under which the Company, without admitting or denying that it violated any laws, consented to the entry of an injunction prohibiting future violations by the Company of certain periodic reporting, record keeping, internal controls, proxy solicitation and antifraud provisions of the Exchange Act. On November 9, 2001, the Company’s settlement with the SEC was approved by the United States District Court for the District of Colorado pursuant to its judgment order Final Judgment as to Vari-L, Civil Action No. 01-WM-1903, Securities and Exchange Commission v. Vari-L, David G. Sherman, Jon L. Clark and Sarah E. Hume, United States District Court, District of Colorado.
		Private Securities Class Action
		A number of private shareholder class actions alleging violations of federal securities laws were filed against the Company and certain of its former officers in the United States District Court for the District of Colorado beginning in June 2000. Those actions have since been consolidated and an amended consolidated complaint has been filed by the class representatives.
		On January 22, 2003, the Company, the class action representatives and the individual defendants executed and filed a stipulation of settlement (“the Stipulation”) with the United States District Court for the District of Colorado (the “Court”). The terms under the Stipulation provide that the Company will pay $250,000 in cash and issue 2.0 million shares of its common stock to settle that action. On January 29, 2003, the Court issued its order preliminarily approving the settlement of the private securities class action, certification of the class, and the provision of notice to members of the class (the “Preliminary Approval”). On March 28, 2003, the Court held a fairness hearing regarding the settlement of the private securities class action. At the hearing, the Court approved the settlement of the private securities class action as fair and reasonable to the members of the class. Following the hearing, the Court entered its final judgment and order of dismissal of the actions with prejudice. The Company anticipates that the 2.0 million shares to be issued under the Stipulation will be issued on or around May 30, 2003.
		Shareholder Derivative Suit
		On August 21, 2002, the District Court, City and County of Denver dismissed the shareholder derivative action filed, purportedly on behalf of the Company against Joseph Kiser, David Sherman, Jon Clark, Derek Bailey, Sarah Booher, David Lisowski, Anthony Petrelli, Jae Shim and the Company. The derivative plaintiff appealed the Court’s ruling to the Colorado Court of Appeals. On November 12, 2002, the parties filed a stipulated voluntary dismissal of the appeal. On November 14, 2002, the Colorado Court of Appeals granted the stipulated dismissal and issued its mandate ordering that the appeal be dismissed.

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VL DISSOLUTION CORPORATION

Notes to Financial Statements (Unaudited)

Three and nine months ended March 31, 2003

		Insurance Claims
		Reliance Insurance Company is the issuer of the $5 million primary directors and officers’ liability insurance policy in effect for the period of time covered by the securities class action and the derivative action. In January 2002, the Reliance liquidator notified claimants concerning the procedures by which insureds and other claimants may file claims against the Reliance estate. During March 2003, the Company filed its claim against the Reliance estate; however, all rights under the claim have been assigned to the private securities class action plaintiffs pursuant to the Stipulation.
		Declaratory Judgment Action by Excess Insurer
		On June 5, 2001, Agricultural Excess and Surplus Insurance Company (“AESIC”), which had issued to the Company a $2.5 million excess directors and officers liability insurance policy for the period of time covered by the shareholder and class action litigation referenced above, filed suit in United States District Court for the District of Colorado asking the court to find that it is not obligated to provide coverage, or in the alternative, seeking permission to rescind its policy. In connection with the execution of the Stipulation, the Company executed a settlement agreement with AESIC in which the Company and AESIC executed mutual releases. The parties to this action have executed a stipulation of dismissal, which will dismiss the action with prejudice. The Company anticipates that such stipulation of dismissal will be filed once the Stipulation has become a final order of the court hearing the private securities class action.
		Company Action against Former Officers
		On March 19, 2002, the Company filed a lawsuit in the District Court, City and County of Denver, against Mr. David Sherman, Mr. Joseph Kiser, individuals, and J.C. Enterprises, a Colorado general partnership. Mr. Sherman is the former President of the Company and Mr. Kiser is the former Chairman of the Company’s Board of Directors and Chief Scientific Officer. Additionally, Mr. Kiser is the General Partner of J.C. Enterprises. The Company subsequently amended the complaint to add Ms. Joan Sherman and the Kaythern Sherman Trust as defendants. In its lawsuit, the Company sought to rescind certain employment and consulting agreements between the Company and Messrs. Kiser and Sherman, and to rescind certain stock and stock option grants made to them, on the basis that such agreements were entered into, and such stock option grants were made, based upon mistaken or misrepresented information regarding the Company’s true financial performance. The Company also sought to recover the compensation and bonuses paid to them as a result of such mistaken or misrepresented information. In addition, the Company sought to recover excessive rent it paid pursuant to a lease agreement between the Company and J.C. Enterprises in reliance on misrepresented information provided by Messrs. Kiser and Sherman. The Company added Ms. Sherman and the Kaythern Sherman Trust to this action because they may have received assets from Mr. Sherman that the Company may have been entitled to recover.
		On May 30, 2002, David Sherman filed a counter-claim against the Company alleging that the Company breached its obligation to him by suspending payment of consulting fees under the termination and consulting agreement between him and the Company.

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VL DISSOLUTION CORPORATION

Notes to Financial Statements (Unaudited)

Three and nine months ended March 31, 2003

		On July 8, 2002, Joseph Kiser filed counter-claims against the Company, Charles R. Bland, Richard P. Dutkiewicz, Gil J. Van Lunsen and David M. Risley alleging a variety of claims. Mr. Bland is the Company’s President and Chief Executive Officer. Mr. Dutkiewicz is the Company’s Vice President of Finance and Chief Financial Officer. Messrs. Risley and Van Lunsen are on the Company’s Board of Directors and are members of the SLC.
		During the latter half of 2002, the Company executed settlement agreements and/or mutual releases with all parties to the Company action against the former officers. Under the terms of the settlement agreement with Mr. Kiser and J.C. Enterprises, the Company agreed to pay $245,000 in total consideration; $230,000 to Mr. Kiser as well as $15,000 to his former attorneys to cover certain legal expenses. In return, Mr. Kiser agreed to a mutual general release including, but not limited to, releasing the Company, Messrs. Bland, Dutkiewicz, Risley and Van Lunsen from all claims related to his employment agreement and the advancement or indemnification of attorneys’ fees and other costs of defense, subject to the settlement of the private securities class action. Under the terms of this settlement agreement, the Company agreed to pay the current required rental amount under the existing lease with J.C. Enterprises, but the Company has the option to terminate the lease, after sufficient notice, in the event J.C. Enterprises contracts to sell the property during the remaining lease term.
		Additionally, the Company signed a mutual general release with Mr. Sherman, which, among other things, released the Company from all claims related to his employment and separation agreements and any rights he may have had regarding advancement or indemnification of attorneys’ fees and other costs of defense. In consideration of the mutual release with Mr. Sherman, Mr. Sherman agreed to transfer 100,813 shares of the Company’s common stock to the Company and the Company repaid Mr. Sherman’s promissory note to Carolyn Kiser in the principal amount of $55,030. The Company also executed mutual release relating to litigation with Joan Sherman and the Kaythern Sherman Trust, which were signed on December 17, 2002.
		The Company also signed mutual general releases with Messrs. Bailey and Clark, which, among other things, release the Company from all claims related to their employment and separation agreements and any rights they may have had regarding advancement or indemnification of attorneys’ fees and other costs of defense.
		The parties to the Company action against former officers executed a stipulation of dismissal, which dismissed the action with prejudice.
		Patent Litigation
		On August 8, 2002, Anaren Microwave, Inc. (“Anaren”) filed suit against the Company for infringement of U.S. Patent No. 4,821,007. On November 19, 2002, the Company was served with the complaint. Anaren has requested damages in an unspecified amount and attorneys’ fees, costs and expenses. The Company and its counsel are investigating Anaren’s allegations. The complaint does not specify which of the Company’s products is alleged to infringe the intellectual property of Anaren, nor the exact nature of the alleged infringement. However, the Company believes that Anaren’s claim is directed at its coupler product line. The coupler line is a recently introduced product line which accounts

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VL DISSOLUTION CORPORATION

Notes to Financial Statements (Unaudited)

Three and nine months ended March 31, 2003

		for less than $10,000 of gross sales from its inception through March 31, 2003. The Company and Anaren have entered into discussions regarding the possibility of purchasing a license to the Anaren technology that the Company is alleged to have infringed. There can be no assurance that the outcome of this matter will not have a material adverse effect on its financial condition, results of operations or liquidity.
		Other
		The Company is a party to other legal proceedings and claims in the ordinary course of its business. The Company believes that the outcome of these other matters will not have a material adverse effect on its financial condition, results of operations or liquidity.
(11)		Definitive Asset Purchase Agreement with Sirenza Microdevices, Inc.
		On December 2, 2002, the Company entered into a definitive asset purchase agreement (the “Asset Purchase Agreement”) to sell substantially all of its assets to Sirenza. Under the terms of the Asset Purchase Agreement, Sirenza would forgive $1.4 million in secured loans. Additionally, Sirenza would pay the Company approximately $13.6 million in cash and common stock consideration to be decreased by the amount of any indebtedness in excess of $1.4 million owed to Sirenza as of the closing date of the asset sale pursuant to the existing Sirenza Loan Facility as described in Note 3. The consideration to be received would be further increased or decreased by the amount of the net asset adjustment as described below. Forty-five percent of the net amount of consideration described above would be paid to the Company in cash and the remaining fifty-five percent would be paid in shares of Sirenza common stock, which would be valued for such purpose at $1.44 per share (the 15-day trailing average closing price of Sirenza’s common stock as quoted on the Nasdaq National Market as of the execution date of the Asset Purchase Agreement).
		Pursuant to the Asset Purchase Agreement, the Company and Sirenza designated as either “included” or “excluded” each of the assets and liabilities of the Company as listed on its balance sheet at September 30, 2002, which is referred to as the reference balance sheet. By subtracting the total included liabilities from the total included assets, Sirenza and the Company agreed upon a beginning net asset balance of $8,447,000. The Company prepared a new balance sheet as of March 31, 2003, which is referred to as the preliminary closing balance sheet, on a basis consistent with that of the reference balance sheet. In accordance with the Asset Purchase Agreement, the net asset balance based on the preliminary closing balance sheet was $8,217,000 resulting in a $230,000 decrease in proceeds from the asset sale. Within fifteen business days following the closing, the Company will prepare another balance sheet as of the closing date, which shall be prepared on a basis consistent with that of the reference balance sheet, and which is referred to as the closing balance sheet. To the extent that the net asset balance listed on the closing balance sheet exceeds the net asset balance listed on the preliminary closing balance sheet by at least $25,000, the proceeds of the asset sale to the Company will be increased on a dollar-for-dollar basis. To the extent that the net asset balance listed on the closing balance sheet is less than the net asset balance listed on the preliminary closing balance sheet by at least $25,000, the proceeds of the asset sale to the Company will be decreased on a dollar-for-dollar basis.

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VL DISSOLUTION CORPORATION

Notes to Financial Statements (Unaudited)

Three and nine months ended March 31, 2003

(12)		Subsequent Event
		On May 5, 2003, the asset sale contemplated by the Asset Purchase Agreement as described in Note 11 was consummated. The Company received $3.972 million in cash, 3.371 million shares of Sirenza’s common stock with a market value of $5.158 million as of May 2, 2003, forgiveness of $1.354 million and assumption of $4.594 million in secured loans and accrued interest payable to Sirenza. The final consideration to be received is subject to adjustments based upon finalization of the closing balance sheet. Under the terms of the Asset Purchase Agreement, the Company is required to set aside $1.510 million in cash and 1.281 million shares of Sirenza’s common stock to satisfy any indemnification claims from Sirenza that may arise prior to March 31, 2004.
		The closing of the asset sale caused the Company to incur liabilities aggregating approximately $1.9 million. The amounts due will be paid out of net proceeds from the sale. The amounts due consist of post-closing bonuses payable to key officers, investment banking fees and contract and lease termination penalties.
		The Company’s remaining assets following the closing of the asset sale consist primarily of the cash surrender value of life insurance policies, Sirenza common stock, prepaid insurance and security deposits on its leased properties. All employees of the Company resigned and accepted employment with Sirenza.
		Pursuant to the amended plan of dissolution, which was approved by the shareholders at the special meeting, the Company intends to file articles of dissolution with the Secretary of State of the State of Colorado. After the articles of dissolution are filed, the Company’s operations will be limited to winding-up its business and affairs, selling certain of its remaining assets, discharging its known liabilities, establishing a contingency reserve for payment of expenses and contingent liabilities, and distributing any remaining assets to its shareholders, all in accordance with the amended plan of dissolution.
		In connection with the asset sale and subsequent dissolution of the Company, the Company filed articles of amendment to change its corporate name to VL Dissolution Corporation, effective May 5, 2003.

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VARI-L COMPANY, INC.

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

Forward Looking Statements

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

We cannot list here all of the risks and uncertainties that could cause our actual future financial and operating results to differ materially from our historical experience and our present expectations or projections but we can identify many of them. For example, our future results could be affected increases in the amount of our liabilities and obligations or estimated costs and expenses of operations following the closing of the asset sale; unknown or contingent liabilities arising after the closing of the asset sale; the sufficiency of the consideration received in the asset sale to cover our liabilities; declines in the price of Sirenza’s common stock following the closing of the asset sale; claims by Sirenza for indemnification under the indemnity provisions of the asset purchase agreement; the timing of distributions, if any, to our shareholders, whether Sirenza’s board of directors approves any such distributions, if any, as the terms of the asset purchase agreement require; the liability of our shareholders to creditors for an amount up to the amount of any distributions received from the Company if our reserves for payments to creditors are inadequate; the tax impact to us and our shareholders of the asset sale and the dissolution of the Company including the creation of a liquidating trust; the ultimate outcome of pending or threatened litigation as well as those factors discussed in our Form 10-K for the year ended June 30, 2002. It is also important to remember that forward-looking statements speak only as of the date when they are made and we do not promise that we will publicly update or revise those statements whenever conditions change or future events occur. Accordingly, we do not recommend that any person seeking to evaluate our company should place undue reliance on any forward-looking statement in this report.

Critical Accounting Policies and Estimates

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

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

		Revenue Recognition and Allowances for Doubtful Accounts
		Revenues are recognized at the time of shipment to, or acceptance by, the customer provided title and risk of loss is transferred to the customer.
		We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is determined based on review of the overall condition of accounts receivable balances and review of significant past due accounts. Additionally, we maintain credit insurance on certain of our foreign accounts receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
		Inventory Valuation
		We value our inventories at the lower of cost or market on a part-by-part basis. Additionally, we make estimates regarding the market value of our inventory, including an assessment of excess or obsolete inventory. We determine excess and obsolete inventory based on an estimate of the future demand within a specified time horizon, generally twelve months. The estimates we use for demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our actual forecast is less than our demand forecast, we may be required to take additional excess inventory charges, which will decrease gross margin and net operating results in the future.
		Commitments and Contingencies
		We are party to legal proceedings and claims, as well as various other commitments and contingencies. We have recorded a liability if it is (1) probable that an obligation has been incurred because of a transaction or event happening on or before the date of the financial statements and (2) the amount of the obligation can be reasonably estimated.

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Results of Operations for the Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31, 2002

Net Sales

Net sales for the three months ended March 31, 2003 decreased 22.1% to $4.0 million compared with $5.2 million for the three months ended March 31, 2002. While the Company’s unit volume for its products increased slightly, the Company maintained its pattern of the last few quarters of lowering prices of its commercial signal source products to several key customers to maintain market share. Also contributing to the decline in revenue was a change in the product mix of all other products resulting in a lower average selling price for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002. Overall, the wireless telecommunications industry has been negatively impacted by the severe market downturn and more specifically by a rapid decline in expenditures for capital infrastructure equipment by service providers. Based on communication with our key customers and the results of benchmarking our decline in revenue against that of our competitors and customers within this industry, we do not believe that our market share has deteriorated.

Revenue from commercial signal source products was $3.1 million for the three months ended March 31, 2003, a 13.9% decrease from $3.6 million for the three months ended March 31, 2002. Revenue from all other products was $901,000 for the three months ended March 31, 2002, a 40.0% decrease from $1.5 million for the three months ended March 31, 2002. Revenue from all other products for the three months ended March 31, 2002 included fees earned from a contract termination of approximately $179,000.

Gross Profit

Gross profit for the three months ended March 31, 2003 decreased 31.8% to $1.3 million, or 32.7% of net sales, compared with $1.9 million, or 37.3% of net sales, for the three months ended March 31, 2002. The gross profit percent in any period can be affected significantly by volume, product mix and price concessions. Fixed manufacturing overhead adversely affects gross profit at lower sales levels. Accordingly, reduced sales levels combined with fixed manufacturing overhead levels comparable to prior periods has the effect of lowering gross profit as a percentage of sales. Additionally, changes in market demand for our products, combined with changes in product design can result in excess inventory parts. On a quarterly basis, we review our inventory on hand and firm purchase commitments versus our sales forecast to determine the adequacy of the existing reserve for excess and obsolete inventory.

Included in cost of goods sold for the three months ended March 31, 2003 and 2002 is a charge of $114,000 and $41,000 for excess and obsolete inventory, respectively.

Selling Expenses

Selling expenses for the three months ended March 31, 2003 decreased 14.9% to $588,000, or 14.6% of net sales, compared with $691,000, or 13.4% of net sales, for the three months ended March 31, 2002. The dollar decrease in selling expenses was primarily attributable to $50,000 in lower commissions paid to manufacturer’s representatives as a result of reduced sales volume and $49,000 in reduced spending for contract labor and marketing expense.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2003 decreased 20.3% to $1.2 million, or 30.7% of net sales, compared with $1.6 million, or 30.0% of net sales,

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for the three months ended March 31, 2002. The dollar decrease was primarily attributable to a decrease of $274,000 in salaries and benefits due to a decrease in personnel.

Research and Development Expenses

Research and development expenses for the three months ended March 31, 2003 decreased 1.4% to $615,000, or 15.3% of net sales, compared with $624,000 or 12.1% of net sales, for the three months ended March 31, 2002.

Expenses Related to Workforce Reductions and the Transaction with Sirenza Microdevices, Inc.

As a result of the continuing weakness in the wireless industry and the impact it has had upon our revenues, we reduced our workforce and incurred severance expenses. Additionally, we incurred certain transaction costs in connection with the Asset Purchase Agreement with Sirenza Microdevices, Inc. (“Sirenza”) as described in Part I, Item II, “Liquidity and Capital Resources.” Such costs are defined under the Loan Facility with Sirenza and include restructuring, severance benefits, legal and accounting fees and other related costs incurred. Expenses related to workforce reductions and the transaction with Sirenza were as follows:

We continued to incur costs related to workforce reductions and the transaction with Sirenza until the closing of the asset sale. See Part I, Item 2 under “Liquidity and Capital Resources” for additional information regarding the closing of the asset sale.

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

In early 2000, management of the Company commenced efforts to restate its previously issued financial statements after being notified by the Securities and Exchange Commission (the “Commission”) that the Commission was investigating its accounting and reporting practices. Certain costs incurred in conjunction with these efforts have been separately classified in the Company’s Statements of Operations as “Expenses relating to accounting restatements and related legal matters, net of recoveries.” Expenses included in this classification include the cost of external counsel for services provided in connection with shareholder lawsuits, the Commission’s investigation of the Company, legal fees and expenses of the Special Litigation Committee of the Board of Directors, the costs incurred to settle the private securities action and the Company action against former officers (net of recoveries), the cost of certain consultants and temporary labor hired to assist in the accounting restatements, and reimbursements to current and former employees of the Company for their legal fees and expenses.

The accounting restatements were completed in February 2001. Additionally, during October 2002 and December 2002, the Company, the individual defendants in the private securities class action, the Agricultural Excess and Surplus Insurance Company, and the individual defendants in the action against former officers attended global settlement conferences. All parties involved reached an agreement in principle for the global settlement of all litigation as further described in

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Part II, Item I, “Legal Proceedings.” On January 22, 2003, the Company, the class action representatives and the individual defendants in the private securities class action executed and filed a Stipulation of Settlement (the “Stipulation”) with the United States District Court for the District of Colorado (the “Court”). On January 29, 2003, the Court issued its order preliminarily approving the settlement of the private securities class action, certification of the class, and the provision of notice to members of the class (the “Preliminary Approval”). On March 28, 2003, the Court held a fairness hearing regarding the settlement of the private securities class action. At the hearing, the court approved the settlement of the private securities class action as fair and reasonable to the members of the class. Following the hearing, the Court entered its final judgment and order of dismissal of the actions with prejudice. See Part II, Item 1 “Legal Proceedings” for additional information.

Expenses relating to accounting restatements and related legal matters, net of recoveries, were as follows:

Other Income (Expense)

Other income (expense), net, increased 541.2% to expense of $327,000 for the three months ended March 31, 2003, compared with expense of $51,000 for the three months ended March 31, 2002. The increase was primarily attributable to an increase in interest expense of $287,000 due to a larger balance of debt outstanding at March 31, 2003 as compared to March 31, 2002 at significantly higher interest rates as a result of our Loan Facility with Sirenza as discussed in Part I, Item II, “Liquidity and Capital Resources.”

Results of Operations for the Nine Months Ended March 31, 2003 Compared to the Nine Months Ended March 31, 2002

Net Sales

Net sales for the nine months ended March 31, 2003 decreased 25.1% to $12.3 million compared with $16.4 million for the nine months ended March 31, 2002. While the Company’s unit volume for its commercial signal source products increased slightly, the Company maintained its pattern of the last few quarters of lowering prices of its commercial signal source products to several key customers to maintain market share. Also contributing to the decline in revenue was a change in the product mix of all other products resulting in a lower average selling price for the nine months ended March 31, 2003 as compared to the nine months ended March 31, 2002. Overall, the wireless telecommunications industry has been negatively impacted by the severe market downturn and more specifically by a rapid decline in expenditures for capital infrastructure equipment by service providers. Based on communication with our key customers and the results of benchmarking our decline in revenue against that of our competitors and customers within this industry, we do not believe that our market share has deteriorated.

Revenue from commercial signal source products was $9.4 million for the nine months ended March 31, 2003, a 24.4% decrease from $12.3 million for the nine months ended March 31,

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2002. Revenue from all other products was $2.9 million for the nine months ended March 31, 2003, a 29.3% decrease from $4.1 million for the nine months ended March 31, 2002. Revenue from all other products for the nine months ended March 31, 2002 included fees earned from a contract termination of approximately $436,000.

Gross Profit

Gross profit for the nine months ended March 31, 2003 decreased 46.2% to $3.5 million, or 28.2% of net sales, compared with $6.5 million, or 39.3% of net sales, for the nine months ended March 31, 2002. The gross profit percent in any period can be affected significantly by volume and price concessions. Fixed manufacturing overhead adversely affects gross profit at lower sales levels. Accordingly, reduced sales levels combined with fixed manufacturing overhead levels comparable to prior periods has the effect of lowering gross profit as a percentage of sales. Additionally, changes in market demand for our products, combined with changes in product design can result in excess inventory parts. On a quarterly basis, we review our inventory on hand and firm purchase commitments versus our sales forecast to determine the adequacy of the existing reserve for excess and obsolete inventory.

Included in cost of goods sold for the nine months ended March 31, 2003 and 2002 is a charge of $329,000 and $183,000 for excess and obsolete inventory, respectively. Additionally, for the nine months ended March 31, 2002, we recognized a benefit of $268,000 of recoveries for previously written-off inventory.

Selling Expenses

Selling expenses for the nine months ended March 31, 2003 decreased 1.2% to $1.9 million, or 15.8% of net sales, compared with $2.0 million, or 12.0% of net sales, for the nine months ended March 31, 2002. The dollar decrease in selling expenses was primarily attributable to a decrease of $157,000 in commissions paid to manufacturer’s representatives as a result of reduced sales volume offset by an increase of $154,000 in salaries paid to new members of our sales management team.

General and Administrative Expenses

General and administrative expenses for the nine months ended March 31, 2003 decreased 14.6% to $4.2 million, or 34.2% of net sales, compared with $4.9 million, or 30.0% of net sales, for the nine months ended March 31, 2002. The dollar decrease was primarily attributable to a decrease of $418,000 in salaries and benefits due to a decrease in personnel and reduced spending of $327,000 on independent contractors for accounting and information technology services.

Research and Development Expenses

Research and development expenses for the nine months ended March 31, 2003 increased 12.9% to $2.2 million, or 17.7% of net sales, compared with $1.9 million or 11.7% of net sales, for the nine months ended March 31, 2002. The dollar increase was primarily attributable to $272,000 in salaries and benefits due to an increase in personnel.

Expenses Related to Workforce Reductions and the Proposed Transaction with Sirenza Microdevices, Inc.

As a result of the continuing weakness in the wireless industry and the impact it has had upon our revenues, we reduced our workforce and incurred severance expenses. Additionally, we incurred certain transaction costs in connection with the Asset Purchase Agreement with

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Sirenza Microdevices, Inc. (“Sirenza”) as described in Part I, Item II, “Liquidity and Capital Resources.” Such costs are defined under the Loan Facility with Sirenza and include restructuring, severance benefits, legal and accounting fees and other related costs incurred. Expenses related to workforce reductions and the transaction with Sirenza were as follows: