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U.S. SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

For the fiscal year ended June 30, 2002

Commission File No. 0-23866

VARI-L COMPANY, INC.

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

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

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

Title of Class
Common Stock, $.01 Par Value

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

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

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

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PART I

Item 1. Business

Introduction

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

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

Impact of Industry Condition on our Liquidity and Related Actions

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

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

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

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

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

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

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

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

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

Accounting Restatement and Related Issues

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

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

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Acquisition of Asvan Technology, LLC

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

Industry Background

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

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

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

Overview

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

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

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

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

Products

We have three primary product lines:

	•		Commercial Signal Sources
	•		High-Reliability Signal Sources
	•		Military Signal Processing Components

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

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

Commercial Signal Source Components

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

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

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

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

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

High-Reliability Signal Source Components

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

Military Signal Processing Components

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

Other Products

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

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

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

Manufacturing

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

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

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

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

Suppliers

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

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

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

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

Sales and Marketing

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

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

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

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

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

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

	•		Vice President of Sales & Marketing
	•		Directors of Strategic Accounts(2)
	•		Regional Sales Manager — East
	•		Regional Sales Manager — West
	•		Regional Sales Manager — International
	•		Manager of Military Accounts

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

Backlog

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

Customers

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

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

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

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

Competition

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

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

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

Research and Development

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

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

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

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

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

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

Patents

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

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

Government Regulation

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

Employees

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

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

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Financial Information about Geographic Regions

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

Item 2. Description of Property

We currently lease four buildings.

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

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Item 3. Legal Proceedings

Securities and Exchange Commission Investigation

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

Private Securities Class Action

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

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

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

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Shareholder Derivative Suit

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

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

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

Insurance Claims

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

Declaratory Judgment Action by Excess Insurer

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

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

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Company Action against Former Officers

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

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

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

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

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

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

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

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

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

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

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

Patent Litigation

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

Financial Impact of Litigation

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

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

None

Item 4A. Executive Officers of the Registrant

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

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

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

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

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

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

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

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

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PART II

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

Market

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

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

Holders

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

Dividends

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

Equity Compensation Plan Information

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

Sales of Unregistered Securities

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

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

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

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Item 6. Selected Financial Data

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

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

Forward Looking Statements

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

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

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

Critical Accounting Policies and Estimates

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

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

Commitments and Contingencies

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

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

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

Net Sales

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

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

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Gross Profit

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

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

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

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

Operating Expenses

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

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

Selling Expenses

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

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General and Administrative Expenses

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

Research and Development Expenses

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

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

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

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

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

Other Income (Expense)

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

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Net Loss and Loss per Share

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

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

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

Net Sales

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

Gross Profit

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

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

Operating Expenses

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

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

Selling Expenses

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

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General and Administrative Expenses

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

Research and Development Expenses

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

Expenses Relating to Accounting Restatements and the Related Shareholder Litigation

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

Total Other Income (Expense)

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

Net Loss and Loss Per Share

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

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Factors Affecting Our Future Results

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

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

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

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

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

Our future results are likely to fluctuate.

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

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

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

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

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

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

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

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

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

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

Increases in raw materials prices may significantly harm our results.

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

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

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

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

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

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

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

We may fail to successfully integrate businesses that we acquire.

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

Wells Fargo Credit Facility

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

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

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

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

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

Sirenza Loan Facility

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

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

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

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

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

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

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

Other

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

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

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

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

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

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

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

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

Effect of Recently Issued Accounting Standards

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

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

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

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

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

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

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

Item 8. Financial Statements

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

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

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

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

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PART III

Item 10. Directors and Executive Officers of the Registrant

Board of Directors

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

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

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

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

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

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

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

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

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

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Item 11. Executive Compensation

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

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

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

Option/SAR Grants in Last Fiscal Year

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

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

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