<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
 
                     For the year ended December 31, 1998
                                      or
 
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
    EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
 
                    For the transition period from       to
                                                   -----    -----
 
                       Commission File Number 0-19923
 
                               ----------------
 
                              STM WIRELESS, INC.
          (Exact name of the registrant as specified in its charter)
 
                  Delaware                                       95-3758983
       (State or other jurisdiction of                        (I.R.S. Employer
       incorporation or organization)                       Identification No.)
 
                     One Mauchly, Irvine, California 92618
                   (Address of principal executive offices)
 
                                (949) 753-7864
             (Registrant's telephone number, including area code)
 
                               ----------------
 
          Securities registered pursuant to Section 12(b) of the Act:
                                     None
 
          Securities registered pursuant to Section 12(g) of the Act:
                   Common Stock, $0.001 par value per share
 
                               ----------------
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  As of April 12, 1999, the aggregate market value of the registrant's common
stock, held by non-affiliates of the registrant was approximately $16,800,422
based on the closing sales price of $4.75 per share of the common stock as of
such date, as reported by The NASDAQ Stock Market. As of April 12, 1999,
7,042,204 shares of the registrant's common stock were outstanding.
 
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                              Page 1 of 78 Pages
                       Exhibit Index appears on Page 75
<PAGE>
 
                                    PART I
 
ITEM 1--BUSINESS
 
The Company
 
  STM Wireless, Inc. (the "Company" or "STM"), is a developer, manufacturer
and provider of wireless-based satellite communications infrastructure and
user terminal products utilized in public and private telecommunications
networks. These networks support data, fax, voice and video communication and
are used to either bypass or extend terrestrial networks or provide a
communications infrastructure where a network does not currently exist. The
Company's product line is based on proprietary hardware and software and
primarily consists of two-way earth stations, sometimes referred to as VSATs
(very small aperture terminals), associated infrastructure equipment and
software, transceivers, modems and other networking equipment. The Company
historically has focused its sales efforts on the international marketplace,
particularly developing countries because management believes that these areas
offer greater applications for the Company's technology, a higher growth
potential and more favorable competitive dynamics. The Company's proprietary
equipment and software are utilized by businesses, government agencies and
telephone companies in Europe, the Americas, Africa and Asia.
 
  The Company was incorporated in California in January 1982 as Services Via
Satellite and in December 1982 changed its name to Satellite Technology
Management, Inc. In January 1995, the Company registered in California to do
business as STM Wireless, Inc. In December 1995, the Company reorganized as a
Delaware corporation via a merger into a wholly-owned subsidiary with the name
STM Wireless, Inc.
 
Recent Events
 
  On April 14, 1999, the Company announced that it had entered into a letter
of intent with Remec, Inc. (Nasdaq NM Symbol: REMC) ("Remec") which provides
for the merger of the Company with Remec, or a subsidiary of Remec. The merger
will be structured as a tax-free, pooling of interests transaction. Each
stockholder of the Company will receive one share of Remec Common Stock for
every 3.8 shares of STM common stock currently owned by the stockholder. The
transaction is subject to the preparation and execution of a definitive merger
agreement, final approval of the board of directors of the Company and Remec,
approval by the Company's stockholders and other customary terms and
conditions. As a result of the foregoing contingencies, there can be no
assurance that the Company will consummate the transaction.
 
 
Description of the Business
 
  The Company develops, manufactures and markets wireless based satellite
communications infrastructure products to customers for the creation of public
and private networks. These networks are used to either bypass or extend
terrestrial networks or in some instances to provide a communications
infrastructure where a terrestrial network does not exist. The Company's
products provide customers with the ability to transmit many forms of
information including voice, fax, data and video. The Company sells its
products primarily in the international marketplace where the growing
deregulation of telecommunications markets and rapid economic growth
stimulates the demand for communications infrastructure. The solutions
currently provided by the Company are principally satellite communications
networks which can be deployed and reconfigured faster and at a lower cost
than terrestrial alternatives. The main products that STM sells are small,
two-way earth stations referred to as VSATs (very small aperture terminals),
associated infrastructure equipment and software, transceivers, modems and
other networking equipment.
 
  The Company's product line is based on proprietary hardware and software
used in the remote terminals, hubs/gateways and network management systems.
The Company's satellite communications product line includes products that are
capable of concurrently transmitting and receiving data as well as several
channels of digitized voice, using the Company's software to perform call
routing and to allocate satellite capacity on call initiation. These product
features allow more efficient use of satellite transponders and are attractive
to international customers for whom combined voice and data communications
costs are a prime concern.
 
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<PAGE>
 
  The Company has established alliances with customers, distributors and sales
representatives in over 30 countries and has supplied networks to customers or
end users in many geographic areas, including Argentina, Bosnia, Brazil,
Canada, Chile, China, Columbia, Dominican Republic, Ecuador, Germany, Haiti,
Holland, Hungary, India, Italy, Kenya, Malaysia, Mauritania, Mexico, Pakistan,
Peru, Philippines, Poland, Saudi Arabia, Spain, Sudan, Thailand, the United
States, Venezuela and Zambia.
 
Industry Background
 
  VSAT products provide customers with the ability to transmit several forms
of information including voice, fax, data and video by attaching standard
communications equipment such as telephones, fax machines or computers to the
VSAT which in turn relays information to and from satellites. The primary
advantage of VSAT networks is the substantial cost savings compared to land-
based telephone networks where the network users are geographically
widespread. Due to the nature of satellites, transmission costs are not
affected by the distance information travels, while in terrestrial networks,
transmission costs are directly related to the distance between the network
users. VSAT equipment can be rapidly installed, upgraded or moved. Thus,
networks can be expanded or changed with relatively little expense and
disruption to users. Bandwidth allocated to each user can be changed
dynamically, and the network can be reconfigured and additional features and
changes downloaded to the user. Furthermore, the network user or service
provider has the ability to monitor operations of the network, collect
performance statistics and perform diagnostics.
 
  The Company focuses its sales efforts on both VSAT applications for rural
telephony comprising the provision of basic telephony services to rural or
isolated areas of developing countries and enterprise networks for businesses
or government organizations.
 
  Since the mid-1980s, the VSAT network market has grown with the North
American enterprise network market share dominating. In recent years, changes
in both the political and regulatory environments have contributed to the
international expansion of the VSAT network market. While the North American
market is primarily for data transmission applications, in most international
markets, applications for basic telephony services including voice, facsimile
and low speed data transmission are important. Recently, VSATs have emerged as
a compelling solution for providers of such basic telephony services in
developing countries. In certain developing countries where existing
communications systems are inadequate for the growing economy, VSATs are a
practical method of quickly making available sophisticated communications
capabilities. A significant growth opportunity for these capabilities is rural
telephony, the provision of telephone facilities to villages located in remote
or difficult terrain.
 
  In response to the current opportunity that exists for the provision of
products and services in the rural telephony market, the Company is incurring
significant expenditures on developing improved products that are especially
suitable for rural telephony applications and should result in the
availability of lower priced, high quality rural telephony products.
Additionally, due to the similarities between rural telephony and enterprise
network products, the Company's research and development expenditures should
also result in the availability of lower priced, high quality enterprise
network products.
 
Rural Telephony Market
 
  As the world's economies continue to globalize, the need for countries to
provide their population with access to telecommunications service has become
significantly more important as a means of increasing competitiveness. In
developed countries, the International Telecommunications Union reports
estimate that the average telephony penetration is over 50 lines per 100
inhabitants, while the overall global penetration is still under 15 lines per
100 inhabitants and, in certain developing countries, less than two lines per
100 inhabitants. In response, many developing countries throughout the world
have begun to make significant capital expenditures on the deployment of new
networks and the expansion of their existing telephone infrastructure to
increase telephony penetration. While traditional terrestrial
telecommunications networks are being deployed and expanded in the urban areas
of these developing countries to increase telephony penetration, it is more
difficult
 
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<PAGE>
 
to provide networks to the rural areas of these countries due to the
dispersion of the population and difficult terrain that often characterizes
these locations. As a result, in a large number of remote and rural areas in
developing countries, there continues to be limited or no telephone service.
 
  Historically, the local telephone service providers in less developed
countries, where the need for rural telephony is greatest, have focused their
attention on developing and increasing the telephony penetration in urban
areas, which they have considered better short-term opportunities to increase
revenues at a lower cost, rather than providing rural telephony. In response
to the need for telephone service in rural areas, governments are increasingly
putting pressure on the telephone service providers to offer universal service
coverage by ensuring telephony availability in these regions. Deregulation of
the telecommunication markets in these developing countries has led to
increased competition and many governments are requiring the domestic
telephone companies to fulfill certain rural telephony obligations as a
prerequisite to renewing their licenses. The Company believes that this
increased emphasis on providing rural telephony services will generate
significant market opportunities primarily in Latin America, Asia/Pacific and
Eastern Europe.
 
  There are a number of alternatives to satellite technology that are being
used to meet increased demand for telecommunication services. Wireline and
cellular telephony networks can be used to effectively meet telecommunications
needs in rural areas with relatively higher population densities. However, in
many of the rural areas of developing countries, villages can be scattered
several hundred miles apart and may be inaccessible by road at times due to
harsh terrain or at certain times of the year due to climatic conditions. In
addition, the spending power of the inhabitants of those villages has limited
the subscriber count. Satellite telephony networks offer significant
advantages compared to traditional telephony systems in these areas. The
following describes the primary disadvantages of using alternative
technologies in these markets:
 
     Wireline systems: Wireline systems involve the laying of fiber or copper
  wires between the telephone operating company's central office and each
  subscriber's home or office. The principal drawbacks of wireline systems
  include: expense of constructing networks over long distances and rough
  terrain; susceptibility to weather and vandalism and long construction
  time.
 
     Cellular systems: Cellular systems involve the use of a cellular phone
  to communicate directly with a locally installed base station transmitter
  which, in turn, switches the communication to the intended recipient. The
  principal drawbacks to cellular systems for rural telephony arise from the
  limited geographical coverage of cellular base stations resulting in the
  need for a relatively high population density over which to spread the
  infrastructure costs of the many base stations needed.
 
     Wireless local loop systems ("WLL"): Much like cellular systems, typical
  WLL systems involve the use of fixed or mobile telephone handsets to
  communicate with locally installed base station transmitters. WLL systems
  are generally designed for higher density applications than those addressed
  by the Company. However, due to their lower cost and efficiency for local
  distribution WLL systems can be used as a complementary distribution
  product in satellite-based rural telephony networks and the Company is
  examining such combined product solutions through its SpaceLoop product
  which is currently under development.
 
     Microwave systems: Microwave systems involve the use of microwave radios
  to communicate directly between two points. The principal drawbacks to
  microwave systems are the high cost of providing service and limited
  service availability in rough terrain due to the requirement for a line of
  sight between the two points. Many rural areas are not easily accessible
  and the terrain makes the cost of constructing many microwave towers with
  relay sites prohibitive.
 
     Mobile satellite systems ("MSS"): Mobile satellite systems involve the
  use of hand held phones to communicate typically via Low Earth Orbiting
  Satellites ("LEOS"). In the MSS model, the LEOS act as a replacement for
  the local base station transmitter of cellular systems but provide much
  greater range based on the satellite footprint. The first major MSS system,
  Iridium, commenced operation in 1998. Due to the high cost of satellite
  construction and launch, MSS systems are expected to have much higher usage
  costs. This predicates against their use as a viable replacement of VSATs
  for the rural telephony market.
 
                                       4
<PAGE>
 
  In summary, the Company believes that VSAT networks have a number of
advantages over alternative solutions for many rural and urban telephony
applications in developing countries where low population density and rough
terrain are considerations. Due to the nature of satellites, transmission
costs are not affected by the distance signals must travel. Therefore,
generally, the greater the distance between the sites to be served, the
greater the benefit of a VSAT network. VSAT equipment can be rapidly installed
and connected to a network and can easily be upgraded, expanded or relocated
with relatively little expense and disruption. VSAT networks are relatively
simple to reconfigure, are relatively immune to difficulties in topography and
can be located almost anywhere.
 
  To complement its product offerings, the Company is developing a WLL
product, SpaceLoop, and is considering entering into strategic relationships
with other providers of WLL products, thereby ensuring that the Company has an
economical product offering in more densely populated regions.
 
Enterprise Networks
 
  Enterprise networks are private communications systems which provide a
solution for organizations with frequent communications needs between remote
locations allowing them to collect, process, respond to and disseminate
information in a timely, reliable and cost-efficient manner. VSATs have
historically been used in developed countries for transaction oriented
applications, including point-of-purchase transactions, credit card
verification, automatic teller machine transactions, and inventory management.
 
  In recent years, the price of VSATs has decreased, their functionality and
reliability have improved and the number of communication protocols that can
be supported has increased. These improvements allow VSAT networks to compete
effectively as full service communications systems in international markets
where the lack of reliable terrestrial networks necessitates the use of
alternative telecommunication infrastructure. In addition to transaction
oriented applications, international VSAT enterprise networks are used for
communications applications such as e-mail, intranets, Internet access and
basic voice service.
 
  Historically, the concentration of sales of VSATs in the United States and
other developed countries has been primarily to large corporations for
transaction oriented enterprise networks. It is believed that over 60% of
worldwide installations for enterprise network VSAT terminals are in North
America. The Company has traditionally focused its efforts in the
international markets due to the more favorable competitive environment, the
growth potential of the market, especially in rural telephony and other
services and the Company's overseas operating experience.
 
Business Strategy
 
  STM seeks to leverage its technical strength in networking and telephony
technologies as well as its strong position and marketing expertise in
international markets to become the leading supplier of satellite-based
communications solutions to emerging countries. To achieve this objective, the
Company is pursuing the following initiatives:
 
  Solidify Position in Rural Telephony Market: In a large number of rural
areas in developing countries, telephone service is limited or non-existent.
Often such areas are characterized by rough terrain, low population density
and a harsh climate. As deregulation and economic necessity have spurred
demand in developing nations for telecommunications infrastructure, many
countries have mandated that their telephone companies provide telephony
services to rural regions. The Company believes that satellite communications
networks, which can be deployed and reconfigured faster and at a lower cost
than terrestrial and microwave transmission alternatives, offers a cost
effective solution for these regions.
 
  Management believes that STM offers a comprehensive rural telephony solution
through a suite of products specifically designed to service these needs.
Management believes that the use of VSATs for rural telephony is still in its
infancy and a substantial global market opportunity exists for this technology
to serve rural telephony needs.
 
                                       5
<PAGE>
 
  Expand Market Share in Enterprise Networks: VSAT networks are also used by
organizations with numerous geographically dispersed locations and frequent
communications needs between those remote locations. VSAT-based enterprise
networks are attractive to customers due to the substantial cost savings as
well as the higher level of flexibility and control these networks offer
compared to traditional telephone service. Both political and regulatory
advances have contributed to the international market growing faster than the
domestic market. The Company's enterprise network strategy is to capitalize on
its international expertise to sell products in the international market.
 
  Leverage Existing Marketing and Distribution Channels: STM's sales and
distribution networks comprise 30 countries in five continents and the
Company's products are currently utilized by more than 70 customers with
equipment installed in approximately 90 countries. The Company seeks to
increase the breadth of products that can be sold through its distribution
network by both internal research and development ("R&D") and strategic
alliances with other manufacturers, as well as complementary acquisitions. STM
has incurred significant R&D expenditures in recent years relative to its
revenues, as management believes that the Company's significant dedication of
resources to R&D is the primary reason for the competitive edge and market
leadership of the Company's product portfolio. STM's R&D efforts are primarily
focused on reducing the overall cost of its products to its customers, as well
as increasing their performance, thereby expanding the addressable market
size.
 
Products
 
  The principal products sold by the Company are two-way small earth stations
referred to as VSATs (very small aperture terminals), associated
infrastructure equipment and software, transceivers, modems and other
networking equipment, as well as voice over IP gateway and software solutions.
The Company's satellite products communicate via geostationary satellites in
order to provide customers the ability to exchange several forms of
information including voice, fax, data and video within their networks.
Geostationary satellites are placed in orbit approximately 23,000 miles above
the earth so that their orbit matches the speed of the earth's rotation
resulting in the satellite maintaining a fixed position relevant to the
earth's surface. VSAT networks can offer advantages over traditional networks
of terrestrial telephone lines including control over the network itself,
improved response times with cost reduction opportunities and increased
flexibility and reliability. For voice communications, VSAT networks are
particularly suited to providing communications between geographically
dispersed locations in that they are easier to install and provide wider
accessibility and availability than terrestrial and microwave transmission
alternatives.
 
  The Company's VSAT products fall into two categories. Both of these product
categories may be used by customers to build networks capable of communicating
voice, fax, data and video, but, because they use different architectures, the
use of each product is determined by the particular needs of the customer's
network. The principal difference between the two product categories lie in
the methodology used for communicating between any two remote VSATs on a
network. There is a "mesh" product that employs circuit switched transmission.
In mesh networks, any one VSAT communicates directly with any other VSAT on
the network via a single transmission to and from the satellite. Then, there
is what is often termed a "star" product that employs packetized transmission.
 
 Existing Products and Products Under Development
 
  Satellite Products:
 
  SpacePhone: In 1998, the Company completed development of SpacePhone, which
is a low cost telephony product derived from and compatible with DAMA 10000.
As an extension of DAMA 10000, the SpacePhone is targeted at the provision of
telephony services to unserved or underserved regions of the world. SpacePhone
is designed to provide reliable, affordable, on-demand telecommunications
service in remote and rural areas. SpacePhone is a small, lightweight and low
cost terminal ideally suited for areas where telecommunications service is
unavailable, unreliable or simply too expensive. Since it is satellite-based,
a SpacePhone terminal is capable of being installed quickly, virtually
anywhere, to allow immediate access to the
 
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<PAGE>
 
SpacePhone network and the PSTN. SpacePhone provides telecommunications
service with high quality voice and industry standard interfaces.
 
  SpaceWeb: In 1998, the Company completed development of SpaceWeb, which is
an evolutionary development of the X.STAR family and is fully compatible with
X.STAR. SpaceWeb provides a low cost, star-connected solution for data, fax
and voice applications and is aimed at international Internet access. SpaceWeb
is a low cost terminal that communicates with a low cost central hub whose
modular architecture will be designed to provide attractive start up costs,
without restricting network growth potential. For reliable end to end
communications, SpaceWeb utilizes the Company's X.STAR communications protocol
and supports all of the same communications protocols as X.STAR.
 
  Hubs/Gateways: The Company manufactures the digital and modem portion of the
hubs/gateways which are comprised of a series of special purpose processing
units utilized in multiplexing, network configuration and routing of
information to the appropriate network destinations. This is controlled by the
Company's proprietary networking and system software. Typically, the digital
portion of the hub/gateway has a number of voice and data ports that directly
attach to the user's equipment. Transmission between the hub/gateway and the
remote VSAT is via a satellite transponder. The hub/gateway also includes
radio frequency components and an antenna, which are purchased from suppliers
and integrated into the system by the Company. The hub/gateway interacts with
a network management system, which operates on a local or remote work station
using proprietary software supplied by the Company.
 
  Network Management Systems: The Company provides a network management system
which shows network status in real time, and permits the operator to monitor
and control network operations, including the diagnosis of problems. The
interface with the operator is by a graphic display of the network status on a
color monitor. The network management system can also be used for redefining
network parameters, for adding and deleting remote network locations, for
changing protocols and for collecting and reporting operational information
and providing management reports. In addition, the system can be expanded if
the hub/gateway is shared among several customers, to permit each customer to
have such capabilities. The network management system can be installed
remotely from the hub/gateway location if required.
 
  Systems Integration Products: The Company also integrates equipment from
other manufacturers into systems or earth stations manufactured by the
Company. These products include antennas, radio frequency equipment, satellite
modems, voice and data multiplexers, local area network routers and video
communications equipment. The STM Network Systems division expects to continue
to sell such systems on an individual project basis as part of its direct
sales effort.
 
  DAMA 10000: The Company's DAMA 10000 product primarily supports public and
private networks that need to have full connectivity among all sites. The DAMA
10000 is a fully integrated product that offers the flexibility to create and
manage both large and small networks. With an expandable system architecture
and highly configurable terminal equipment, the DAMA 10000 is a cost efficient
solution for small to very large networks. The system supports full mesh,
point-to-point or point-to-multi-point communications circuits and any user
can connect to any other user on the network. DAMA 10000 uses a proprietary
control channel to set up and tear down calls between VSATs as these are
requested by users on the network. This results in satellite capacity only
being consumed when calls are requested, thereby optimizing satellite
transponder costs for the customer. In addition, DAMA 10000 provides support
for the major international telephony signaling systems including R2 and DTMF
as well as various payphone metering schemes, allowing it to be interconnected
with the Public Switched Telephony System ("PSTN") in many countries around
the world. These features of the product have resulted in it being ideally
suited for rural telephony applications where individual VSATs provide
multiple telephone lines to subscribers in remote locations. These VSATs are,
in turn, all interconnected via satellite with the PSTN in the country of
deployment providing the remote subscribers with worldwide calling capability.
 
  X.STAR: The Company's X.STAR product primarily supports private networks
with a need to connect remote user locations with a central site. A typical
application of an X.STAR network would be the processing
 
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<PAGE>
 
of point of sale transactions between retail outlets and a central database.
However, the X.STAR product supports all types of data including voice, fax
and broadcast video and more recently has been used by customers to
interconnect LANs across their enterprises. The network is controlled by a
central hub that acts as a gateway to the host facilities and as a switching
and routing center for transmitting information between VSATs. A powerful
network management system ("NMS") is also a part of the hub and multiple
remote NMS stations may be deployed on the network.
 
  In an X.STAR network, VSATs all receive a common broadcast signal from the
hub, filtering the data received to accept only the information addressed to
devices connected to the VSAT. In order to transmit information back to the
hub or to another VSAT via the hub, VSATs on the network share a common
transmit channel back to the hub. Access to this transmit channel is
controlled by the Company's unique dynamic capacity allocations algorithm
which allocates a transmission time and duration to each VSAT dynamically
based on its traffic requirements.
 
  X.STAR uses a packet-based transmission and switching protocol that makes it
suitable for the transmission of packetized data which is increasingly being
used in today's communications networks including the Internet. This protocol
establishes and maintains error-free channels from initiation points to
destination points on a network. In addition, the X.STAR product supports most
major communications protocols including SDLC, X.25, X.3, HDLC and TCP/IP,
resulting in seamless transport of information using these protocols across an
X.STAR network.
 
  SpaceLoop: The Company's SpaceLoop product, currently under development,
provides a wireless local loop ("WLL") solution for rural telephony. In rural
areas where there are a fairly large number (approximately between 50 and 500)
of potential subscribers within a five-kilometer radius, both business and
residential, it is not economical to deploy DAMA 10000 or SpacePhone terminals
for each subscriber due to their relatively high cost per line deployed. Where
the average usage per month per subscriber is likely to be 400 minutes or
less, STM would deploy a WLL solution with a lower capital cost per line
installed, that allows such customers to become subscribers at a much lower
price point. STM's SpaceLoop technology would be used to provide WLL
connectivity within a community. STM has already deployed an early version of
its SpaceLoop product in the field and it is expected that final development
of SpaceLoop will be completed in 1999.
 
Services
 
  Rural Telephony Services: Utilizing equipment manufactured by STM and
others, Direc-To-Phone International ("DTPI"), through joint ventures and
partnership agreements with local telecommunication service providers,
provides rural telephony services in developing countries. DTPI invests in the
joint ventures, contributes technology, know-how and expertise, while the
local partners maintain the operating licenses, and provide frontline customer
service, as well as contributing their share of the required investment.
 
  Project Management: The Company offers engineering, project management, and
contract services in support of products sold.
 
  Custom Development: From time to time the Company receives orders from its
customers and distributors for product features, new products or software
protocols and functions that enhance the Company's product lines. While such
custom development orders do not contribute significantly to the Company's
revenues, they demonstrate the Company's ability to be responsive to market
requirements.
 
  Technical Support Services: The Company provides technical support services
to its installed base of customers either directly or through third-parties.
Services include technical support, installations, maintenance, training and
spares provisioning.
 
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<PAGE>
 
Sales and Marketing
 
  Network Systems Division: The Company sells its satellite communication
products directly and through international distributors and alliances which
are supported by the Company's sales and marketing personnel. The Network
Systems division has focused its sales efforts on the following:
 
  .  Expanding global coverage through increasing the number of highly
     trained, direct sales personnel with regional responsibilities.
 
  .  Identifying sales opportunities that exist with newly licensed service
     providers in international markets, particularly those focused on
     providing rural telephony services.
 
  .  Identifying capable, local distributors and replacing, if necessary, its
     current distributors and alliances.
 
  .  Supplying highly integrated, low cost solutions to customers through the
     Company's product offerings.
 
  Direc-To-Phone International, Inc.: DTPI was founded as a separate business
unit of STM with the intention of becoming the predominant provider of Direct
To Home telephony services in developing countries. DTPI aims to achieve
market penetration and volume by moving toward consumer level pricing and
operation. To achieve this, DTPI is focused on the following:
 
  .  Being the first to market a fixed satellite telephony solution, on a
     mass scale, with a consumer oriented product that can satisfy the demand
     in unserved areas;
 
  .  leveraging the marketing, operating and technical capabilities of local
     partners for each region or country;
 
  .  providing potential subscribers and users with a high quality telephone
     and other added value services;
 
  .  employing a system design that has the lowest recurring cost compared to
     other satellite-based competing systems;
 
  .  offering domestic long distance calls, to the extent possible from a
     regulatory standpoint, at the same basic per minute rate as local calls;
 
  .  employing a consumer oriented sales and marketing strategy that
     differentiates the Company from others and provides for a higher level
     of product acceptance by end users; and
 
  .  seeking strategic partners who can further increase the visibility and
     market penetration of the Company's services.
 
  Export sales, as a percentage of revenues, were approximately 90%, 95% and
90% in 1998, 1997 and 1996, respectively. In 1998, two customers, one in Latin
American and one in Asia, represented 23% and 10% of revenues, respectively.
Reference is made to note 15 to the consolidated financial statements--
Business Segment Information and Sales to Principal Customers in item 8
"Financial Statements, Financial Statement Schedule and Supplementary Data".
 
Backlog
 
  The Company's backlog represents all future revenues that may be earned from
sales orders or sales contracts for products or services. As of December 31,
1998, the Company's backlog was approximately $21.1 million, comprising
approximately $7.5 million in long-term service related contracts and
approximately $13.6 million for products. At December 31, 1997, the Company's
backlog was approximately $153.2 million, which included approximately $100
million relating to DTPI's contract in Mexico with Miditel S.A. de C.V.
("Miditel") and $50 million relating to DTPI's share of a long-term service
agreement in Venezuela with Compania Anonima Nacional Telefonos de Venezuela
("CANTV"). The $100 million service contract with Miditel was renegotiated in
September 1998, whereby Miditel paid for certain equipment and entered into a
new contractual commitment for $70 million. As a result of Miditel's
inability, to date, to secure additional funding, the December 31, 1998
 
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<PAGE>
 
backlog does not include a contractual commitment for this $70 million from
Miditel to DTPI. See Management's Discussion and Analysis of Results of
Operations and Financial Condition in Item 7 for a further description of the
status of the Miditel contract. The long-term service agreement with CANTV was
effected through the formation of a joint venture company, Altair C.A. CANTV
has control of Altair, although DTPI manages day-to-day operations. The Altair
investment is accounted for under the equity method. As such, the revenue that
the Company will recognize under the contract is approximately $10.2 million
of which $7.5 million is in backlog at December 31, 1998. The Company
manufactures its products on the basis of customer orders and its forecast of
near-term demand from its customers and for use by DTPI in its service
business. The Company conducts nearly all of its business with foreign
customers in United States currency and accordingly, is generally not subject
to foreign currency fluctuations. However, reference is made to Management's
Discussion and Analysis of Results of Operations and Financial Condition for a
description of the Company's foreign currency exposure in Brazil. Customary
terms of business for product sales are a substantial deposit on order with
the remainder guaranteed by an irrevocable letter of credit or, when
appropriate, open account.
 
Manufacturing
 
  The Company's products are assembled by the Company using subsystems and
circuit boards supplied by subcontractors. The Company's microwave products
are designed and fabricated utilizing microwave components manufactured by
outside suppliers. The Company maintains adequate stock to reduce the
procurement lead time for certain components. The Company's products use a
number of application specific integrated circuit (ASIC) chips, monolithic
microwave integrated circuits (MMIC) and customized components or
subassemblies produced by a limited number of suppliers. In the event that
such suppliers are unable to fulfill the Company's requirements, the Company
may experience an interruption in production until an alternative source of
supply is developed. The Company maintains an inventory of certain long lead
time components and subassemblies to limit the potential for such an
interruption. The Company believes that there are a number of companies
capable of providing replacements for the types of unique chips, customized
components and subassemblies used in its products.
 
Research and Development
 
  The Company's research and development efforts are devoted to the design and
implementation of satellite and wireless radio communications network hardware
and software. The Company's future growth depends on adaptation of its
existing satellite communications products to new applications, and the
introduction of new communications products that will gain market acceptance
and benefit from the Company's established international distribution
channels. Accordingly, the Company is actively applying its communications
expertise to design and develop new hardware and software products and enhance
existing products.
 
  STM's R&D efforts are primarily focused on reducing the overall cost of
ownership of its products to its customers, thereby expanding the addressable
market size. For example, in 1998, the Company completed development of two
new low cost products; SpacePhone, aimed at the rural telephony market, and
SpaceWeb, to provide fast internet communication in enterprise networks. The
Company believes that these products will be priced low enough to attract a
large market internationally. In addition, the Company may opportunistically
acquire products, technologies or companies consistent with its commercial
objectives to serve the evolving needs of the Company's customer base.
 
  In 1998, 1997, and 1996, the Company incurred expenses of $8,102,000,
$6,387,000, and $6,895,000, respectively, on research and development
activities. During this period, the Company enhanced the TXR-3000 VSAT, and
continued the development of the DAMA 10000 VSAT, SMR 2000, SCPC C-Band
satellite transceiver, completed development of the SpacePhone and SpaceWeb
products and continued development of the SpaceLoop product.
 
 
                                      10
<PAGE>
 
Competition
 
  Network Systems Division: The Company has a number of competitors in the
satellite communications field, most of which have substantially greater
financial, marketing, and technological resources than the Company. The
Company's competitors include large companies such as Hughes Network Systems
and Scientific Atlanta, all of whom compete to some extent in some
international markets. There can be no assurance that the Company will not
experience increased competition in the future from these or other competitors
which may adversely affect the Company's ability to continue to successfully
market its products or services. The Company believes that it has been able to
compete with these companies by offering flexible and cost effective products
and utilizing the resources of local distributors, forming strategic alliances
with major corporations, and by emphasizing product features and functions
such as concurrent support of multiple protocols, voice capability, built-in
diagnostic ports and downloadable software and configurations, which allow the
products to serve the diverse needs of international customers. These product
features and functions are based upon the Company's proprietary hardware and
software. See "Patents and Intellectual Property."
 
  However, most of the Company's competitors offer products which have one or
more of the features and functions similar to those offered by the Company.
The Company believes that the quality, performance and capabilities of its
products, its ability to customize certain network functions and the efficient
utilization of satellite capacity, coupled with the products generally offered
by the Company's major vendors, have contributed to the Company's ability to
compete successfully. The Company's major competitors have the resources
available to develop products with features and functions, competitive with,
or superior to, those offered by the Company. There can be no assurance that
such competitors will not develop such features or functions, or that the
Company will be able to maintain a lower cost advantage for these products.
 
  Direc-To-Phone International, Inc.: DTPI deploys wireless-based
communication infrastructure products utilizing geostationary satellite
spectrum. Geostationary satellites are placed in orbit approximately 23,000
miles above the earth so that their orbit matches the speed of the earth's
rotation resulting in the satellite maintaining a fixed position relative to
the earth's surface. This gives a fixed area of coverage, or footprint, in
which satellite networks can operate. This distance above the earth also
produces two drawbacks of geostationary satellites. First, because there is a
significant distance traveled, there is a noticeable delay (approximately 250
msec) between transmission and reception. This can be disconcerting in voice
networks, especially if a double-hop (or two transmissions) is needed because
of the network design. DTPI uses full-mesh products which minimize this delay
and so it is not a significant factor in DTPI rural telephony networks. A
similar delay occurs on many standard international calls when the trunking is
done by satellite transmission. The second disadvantage is, due to the long
distance, transmission power and reception sensitivity needs to be greater
than for the LEOS (see below). This means larger equipment which precludes
mobile telephony. However, in the rural telephony market, mobility is not a
requirement.
 
  DTPI's potential direct competitors in the geostationary rural telephony
service arena are suppliers of geostationary networks such as Hughes,
Scientific-Atlanta and Gilat. However, due to the significant investments in
technology made by STM in the past years, it is believed that STM presently
holds a strong competitive position in rural telephony products. Furthermore,
with DTPI's installations in Mexico and Venezuela and STM's prior rural
telephony sales in Thailand and Argentina, the Company believes DTPI is a
leader in rural telephony solutions. Other geostationary satellite-based
competitors include American Mobile Satellite Corporation (AMSC), Asia Pacific
Mobile Telecom (APMT), Afro-Asian Satellite (ASC), Asean Cellular System (ACS)
and Comsat.
 
  Mobile Satellite Systems (MSS) use Low Earth Orbit Satellites (LEOS). LEOS,
because of their low proximity to the earth, move in relation to the earth's
surface, therefore, a constellation of satellites is needed. At any one time,
two or more satellites must be in sight of the user in order to carry out a
successful call handoff if the active satellite disappears below the horizon.
This adds to the complication and expense of the MSS offering. MSS does have
two advantages--smaller handheld terminals and lower voice transmission delay.
 
 
                                      11
<PAGE>
 
  DTPI considers its most immediate and serious competition to come from MSS.
Despite their potential higher cost of service, compared to DTPI, their
financial projections include significant penetration into the unserved and
underserved areas of developing countries. Despite the advantages of a mobile
service, DTPI believes that the high cost of MSS service will make its
geostationary solution a more realistic solution for telephony service in
remote areas.
 
Patents and Intellectual Property
 
  The Company relies on a combination of trade secrets, copyrights,
trademarks, service marks and contractual rights to protect its technology and
software. The Company attempts to protect its trade secrets and other
proprietary information through agreements with its customers, suppliers,
employees and consultants. Except for terrestrial and low cost telephony
products, the Company does not have patent protection on any aspect of its
technology or software. The Company believes that the improvement of existing
products, reliance upon trade secrets, copyrights and unpatented proprietary
know-how and the development of new products are generally as important as
patent protection in establishing and maintaining a competitive advantage
because, among other reasons, patents often provide only narrow protection
which may not result in a competitive advantage in areas of rapid
technological change. Further, patents require public disclosure of
information which may otherwise be subject to trade secret protection. The
Company believes that the value of its products is dependent upon its
proprietary software and hardware remaining trade secrets or subject to
copyright protection. However, with its venture into new fields such as
terrestrial and low cost telephony products, the Company believes that patent
protection may be more appropriate. Accordingly, the Company has applied for
two patents and intends to pursue patent protection for additional products
developed by the Company. However, there can be no assurance that the
Company's proprietary technology will remain a trade secret, or that others
will not develop a similar technology and use such technology to compete with
the Company. In addition, the laws of certain countries in which the Company's
products are or may be developed, manufactured or sold may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. The inability of the Company to protect its
intellectual property and proprietary technology could have a material adverse
effect on its business, operating results and financial condition. As the
number of patents, copyrights and other intellectual property rights in the
Company's industry increases, and as the coverage of these rights and the
functionality of the products of new markets further overlap, the Company
believes that its products may increasingly become the subject of infringement
claims. The Company may in the future be notified that it is infringing upon
certain intellectual property rights of others. Although the Company has not
received any such notification to date, and there are no pending or threatened
intellectual property lawsuits against the Company, there can be no assurance
that such litigation or infringement claims will not occur in the future. Any
such litigation or claims could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results and financial condition.
 
Government Regulations
 
  The Communications Act of 1934, as amended, gives the Federal Communications
Commission ("FCC") jurisdiction over the communications products and services
provided by the Company in the United States. Part 25 of the FCC's rules and
regulations governs the operation and use of satellite transponders and
requires authorization for construction and operation of each transmitting
earth station, including VSATs installed on customers' premises.
 
  The Company's international sales are also subject to Department of Commerce
regulations for export of its products, which usually meet general license
requirements depending on country of destination.
 
Employees
 
  As of December 31, 1998, the Company employed 197 people on a full-time
basis, including 66 employees in engineering/research and development, 40
employees in manufacturing, 22 employees in marketing and sales, 43 employees
in administration and accounting and 26 employees in customer service and
support.
 
                                      12
<PAGE>
 
  The Company believes that its relations with all employees are satisfactory.
The employees and the Company are not parties to any collective bargaining
agreements.
 
Risk Factors
 
  FORWARD LOOKING STATEMENTS. THIS DOCUMENT CONTAINS CERTAIN FORWARD LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THAT INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME
TO TIME MAKE FORWARD LOOKING STATEMENTS, ORALLY OR IN WRITING. THE WORDS
"ESTIMATE", "PROJECT", "POTENTIAL", "INTENDED", "EXPECT", "BELIEVE" AND
SIMILAR EXPRESSIONS OR WORDS ARE INTENDED TO IDENTIFY FORWARD LOOKING
STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED OR
SUGGESTED IN ANY FORWARD LOOKING STATEMENTS AS A RESULT OF A WIDE VARIETY OF
FACTORS AND CONDITIONS, AMONG OTHERS, LIQUIDITY AND FINANCING RISKS, LONG TERM
CYCLES INVOLVED IN COMPLETING MAJOR CONTRACTS, PARTICULARLY IN FOREIGN
MARKETS, INCREASING COMPETITIVE PRESSURES, GENERAL ECONOMIC CONDITIONS,
TECHNOLOGICAL ADVANCES, THE TIMING OF NEW PRODUCT INTRODUCTIONS, POLITICAL AND
ECONOMIC RISKS INVOLVED IN FOREIGN MARKETS AND FOREIGN CURRENCIES AND THE
TIMING OF OPERATING AND OTHER EXPENDITURES.
 
  BECAUSE OF THESE AND OTHER FACTORS THAT MAY AFFECT THE COMPANY'S OPERATING
RESULTS, PAST FINANCIAL PERFORMANCE SHOULD NOT BE CONSIDERED AN INDICATOR OF
FUTURE PERFORMANCE, AND INVESTORS SHOULD NOT USE HISTORICAL TRENDS TO
ANTICIPATE RESULTS OR TRENDS IN FUTURE PERIODS.
 
Liquidity; Future Capital Requirements
 
  The Company used net cash in operations of approximately $19.4 million in
the year ended December 31, 1998. There can be no assurance that the Company
will generate positive cash flow from operations in 1999 or thereafter. The
Company's ability to fund its capital requirements out of available cash,
traditional sources of financing and cash generated from operations will
depend on numerous factors, including but not limited to the commercial
success of the Company's products and services, the Company's ability to renew
its $10 million line of credit, which expired as of April 1, 1999, and the
Company's ability to collect payments for certain sales commitments. See
Management's Discussion and Analysis of Results of Operations and Financial
Condition in Item 7 for a discussion of the Company's line of credit status.
The Company may be required to seek additional funds through debt or equity
financings, product licensing or distribution transactions or some other
source of financing in order to provide sufficient working capital for the
Company. The Company believes that such alternative sources of financing are
available to meet its anticipated cash requirements in the next 12 months. The
issuance of additional equity securities by the Company could result in
substantial dilution to stockholders. If the Company is required to raise
additional working capital, there can be no assurance that the Company will be
able to raise such additional working capital on acceptable terms, if at all.
The Company is currently implementing a plan to reduce its operating expenses.
However, in the event the Company is unable to raise additional working
capital, further cost reduction measures would be necessary including, without
limitation, the sale or consolidation of certain operations, the delay,
cancellation or scale back of product development and marketing programs and
other actions. No assurance can be given that such measures would not
materially adversely affect the Company's ability to manufacture and sell
commercially viable products and services, or that such measures would be
sufficient to generate operating profits. Certain of such measures may require
third party approvals, including the Company's financial institution, and
there can be no assurance that such consents or approvals can be obtained.
 
Bank Financing
 
  In connection with the Company's short-term borrowings (see note 8 to the
consolidated financial statements) under a secured $10,000,000 revolving line
of credit with Wells Fargo HSBC Trade Bank N.A.
 
                                      13
<PAGE>
 
guaranteed by the Export-Import Bank of the United States ("EXIM") under its
Working Capital Guarantee Program (collectively, the "Bank"), the Company was
not in compliance with certain covenants at December 31, 1998. In addition,
the line of credit expired on April 1, 1999 with the current borrowings at
$9,050,000. On April 13, 1999, the Company received a demand letter from the
Bank, in which the Bank threatened to pursue all available remedies, including
commencing foreclosure proceedings on its collateral if all outstanding
amounts were not paid by the Company within ten days. The Company is currently
in discussions with the Bank with respect to a six month Forbearance Agreement
and expects to make suitable arrangements with the Bank prior to the
expiration of the ten day period in the demand letters. The Forbearance
Agreement will require the Company to give the bank, amongst other things,
additional collateral including a second deed of trust on the Company's
corporate headquarters, a pledge of stock of and guarantees from all the
Company's domestic and foreign subsidiaries (except DTPI), a pledge of the
note receivable from DTPI (see note 10 to the consolidated financial
statements) and an assignment of the Company's patents, trademarks and
leasehold interests. The Forbearance Agreement will also reduce the advance
rates against inventory and accounts receivable balances and will require a
permanent paydown of the line of credit should the Company sell its corporate
headquarters or should DTPI repay the note to STM out of the proceeds of
future financings.
 
  There can no assurance that the Company will reach agreement with the bank
for this Forbearance Agreement, nor that should the Company reach agreement
with the bank, that there will not be another event of default during the
forbearance period. Additionally, there can be no assurance that the Company
will have sufficient eligible foreign orders, inventory and accounts
receivable balances to enable the Company to continue to borrow at its current
level. Should the Company not reach agreement with the bank or should the
Company experience an event of default under the Forbearance Agreement or
should the Company not have sufficient eligibility to continue to borrow at
its existing levels, the Company may be required to paydown either all or a
portion of the line of credit and dispose of certain assets to satisfy
obligations to the bank.
 
History of Losses and Fluctuations in Quarterly Operating Results
 
  Results of operations may fluctuate significantly and will depend upon
numerous factors, including the competitive environment in which the Company
operates, the delays that arise when operating in an international
environment, the long lead time and extended sales effort required to secure
larger value orders that the Company focuses on obtaining, the continued need
to invest in the development of new products and in the enhancement of
existing products, the risk of inventory obsolescence and the exposure to
disputes by international customers.
 
  The Company has incurred operating losses in 1998, 1997 and 1996. There can
be no assurance that there will not be operating losses in the future periods.
 
  The Company's quarterly operating results fluctuate primarily due to the
timing of product sales. Sales of the Company's products are generally
consummated through large orders which require a long lead-time and an
extended sales effort. The Company's sales in any quarter are dependent on
orders booked and shipped in that quarter. As a result, the precise timing of
the recognition of revenue from an order can have a significant impact on the
Company's total revenues and operating results for a particular period. The
Company's operating results for a particular period could be adversely
affected if an order is cancelled or rescheduled by customers or cannot be
shipped in time to recognize revenue during that period due to, for example,
unanticipated manufacturing, testing, shipping or product acceptance delays.
In addition, the Company's expense levels are based, in large part, on the
Company's expectations as to future revenues and are, therefore, relatively
fixed in the short term. If revenue levels fall below expectations, net income
will be disproportionately and adversely affected. The impact of these and
other factors on the Company's revenues and operating results in any future
period cannot be forecast with any degree of certainty. Accordingly, the
Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
                                      14
<PAGE>
 
Dependence on VSAT Market
 
  A significant part of the Company's product revenues are derived from sales
of VSAT communications networks. While the market for VSAT communications
networks and services has grown steadily since its inception in the mid-1980s,
there can be no assurance that this market will continue to grow or that the
technology serving this market will not be replaced by an alternative
technology. A significant slowdown in this market or the replacement of the
existing VSAT technology by an alternative technology could have a material
adverse effect on the Company's business, operating results and financial
condition.
 
Dependence on Latin & South America and Asian Markets
 
  The Company has generated approximately 50%, 14% and 14% of its revenue in
Latin and South America in 1998, 1997 and 1996, respectively and 17%, 68% and
53% of its revenue in Asia in 1998, 1997 and 1996, respectively. In 1998, the
Company had two customers, one in Latin America and one in Asia, which
represented approximately 23% and 10% of the Company's consolidated revenues
for 1998 respectively. The customer in Latin America is experiencing financial
difficulties at this time and it is uncertain if any revenues will be
generated from this customer in future years. In addition, the Company
generated approximately 2%, 59% and 33% of revenues from another Asian
customer in 1998, 1997 and 1996, respectively. The recent deterioration of the
Asian economies is impacting the level of revenues that the Company is earning
from this customer. While in any individual year, the Company's revenues
generally represent new projects to new or existing customers in new or
existing geographic regions, there can be no assurance that the turmoil in the
Asian economies and the Brazilian currency crisis will not negatively impact
the level of revenues generated by the Company in these markets in future
years. The Company has currently broadened its sales efforts to Latin America,
Africa and the Middle East.
 
Rural Telephony Market
 
  The Company's strategy includes focusing on establishing rural telephony
networking infrastructure for developing countries through strategic alliances
with regional and local service providers. There can be no assurance that a
substantial market for rural telephony equipment in developing countries will
ever develop, or if such a market does develop, that fixed-site VSAT-based
equipment will capture a significant portion of that market. The Company's
ability to penetrate this market will be dependent on its ability to develop
equipment and software which can be utilized by regional and local service
providers to market and sell the use of such systems. Furthermore, there can
be no assurance that the regional and local service providers will be able to
successfully market such services to rural subscribers.
 
Sales To Foreign Customers
 
  The Company's success is dependent upon its ability to continue to
successfully market voice and data VSAT communication networks in the
international market. The Company's export sales, as a percentage of total
revenues, were approximately 90%, 95% and 90% in 1998, 1997 and 1996,
respectively. As a result, the Company is subject to various risks, including
currency fluctuations, greater difficulty of administering business globally,
compliance with multiple and potentially conflicting regulatory requirements,
such as import requirements, tariffs and other barriers, differences in
intellectual property protections, difficulties in staffing and managing
foreign operations, longer accounts receivable cycles and delays in resolving
customer disputes, repatriation of earnings, export control restrictions,
overlapping or differing tax structures, political and economic instability
and general trade restrictions. If any of these risks materializes, it could
have a material adverse effect on the Company's business, operating results
and financial condition. In addition, the satellite network service industries
in the Company's target markets are highly regulated, which may limit the
number and identity of potential service providers to which the Company can
sell its products. Given the high degree of regulation in the Company's target
market, and given the fact that such markets, which are primarily developing
countries, involve greater political and economic instability, there can be no
assurance that the Company's products will achieve general market acceptance
in the Company's target markets. The Company's foreign sales are generally
invoiced in U.S. dollars.
 
                                      15
<PAGE>
 
However, as the Company continues to expand its international operations, the
Company may be paid in foreign currencies with greater frequency, and exposure
to losses in foreign currency transactions may increase. See Management's
Discussion and Analysis of Results of Operations and Financial Condition for a
description of the Company's foreign currency exposure in Brazil. In addition,
if the relative value of the U.S. dollar in comparison to the Company's
foreign customers' currency should increase, the resulting effective price
increase of the Company's products to such foreign customers could result in
decreased sales which could have a material adverse effect on the Company's
business, operating results and financial condition.
 
Dependence on Success of DTPI
 
  Under the terms of its contract in Venezuela, Direc-to-Phone International,
Inc., a subsidiary of STM ("DTPI"), is required to finance a portion of the
build-out of the rural telephony network for its long-term service contract in
Venezuela. This will require substantial capital expenditures by DTPI.
Furthermore, DTPI is investing in establishing a senior management team, whose
responsibilities will be to grow the business and to secure new contracts in
other countries. For DTPI to succeed, the Company will have to attract
substantial debt or equity financings either into DTPI directly, or into STM.
Due to the long term nature of the contracts that DTPI enters into, should
there be a breach of contract by either party to the contracts, or should the
customer be unable to pay the guaranteed revenues under the contracts, DTPI
may not be able to realize expected revenues and cash flows. In March 1998,
the Company completed a $10 million equity offering and is working with other
investors to secure additional financing. Should the Company not be able to
secure additional financing, or should customer disputes or collectibility
issues arise, the Company may not be able to meet its business objectives for
DTPI which could have a significant impact on the size of the Company's
business and its level of profitability in the future.
 
Competition
 
  The market for the Company's products is intensely competitive. Many of the
companies that have developed competing technologies and that market competing
products, including Hughes Network Systems and Scientific Atlanta, have
significantly greater financial, technical and marketing resources than the
Company. In addition, the Company's competitors in rural telephony have
substantially greater resources available to them to develop their products
and to establish strategic relationships in developing countries. There can be
no assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective or less costly than any
which have been or are being developed by the Company or that would render the
Company's technologies or products obsolete or not competitive or that their
greater financial resources will not enable them to penetrate developing
countries more quickly than DTPI. The Company also competes against various
companies that offer communications network systems based on other
technologies (e.g., terrestrial lines and frame relay or radio and microwave
transmission) that in certain circumstances can be competitive in price and
performance with the Company's products. There can be no assurance that these
or other technologies will not capture a significant part of the markets in
which the Company's VSAT products compete.
 
Rapid Technological Change
 
  The technology underlying the Company's products and services is subject to
rapid change. The Company's success will depend in part upon its continuing
ability to respond quickly and successfully to technological advances by
developing and introducing new products. Most of the Company's competitors
have substantially greater financial and technical resources than the Company.
If one or more of the Company's competitors were to introduce competing
products with superior technological features, such introduction could have a
material adverse effect on the success of the Company's products.
 
Dependence On Proprietary Rights; Risk of Infringement Claims
 
  The Company relies on a combination of trade secrets, copyrights,
trademarks, service marks and contractual rights to protect its technology and
software. The Company attempts to protect its trade secrets and other
proprietary information through agreements with its customers, suppliers,
employees and consultants.
 
                                      16
<PAGE>
 
Except for terrestrial and low cost telephony products, the Company does not
have patent protection on any aspect of its technology or software. The
Company believes that the improvement of existing products, reliance upon
trade secrets, copyrights and unpatented proprietary know-how and the
development of new products are generally as important as patent protection in
establishing and maintaining a competitive advantage because, among other
reasons, patents often provide only narrow protection which may not provide a
competitive advantage in areas of rapid technological change. The use of trade
secrets and copyrights will not necessarily protect the Company from the use
by other persons of its technology or software, or technology or software that
is similar to that which is embodied in the Company's trade secrets or
copyrights. There can be no assurance that others will not be able to
duplicate the Company's technology and software in whole or in part. In
addition, the laws of certain countries in which the Company's products are or
may be developed, manufactured or sold may not protect the Company's products
and intellectual property rights to the same extent as the laws of the United
States. The inability of the Company to protect its intellectual property and
proprietary technology could have a material adverse effect on its business,
operating results and financial condition. With respect to the Company's
venture into new fields such as terrestrial and low cost telephony products,
the Company believes that patent protection may be necessary. Accordingly, the
Company has applied for two patents and intends to pursue patent protection
for additional products developed by the Company. In addition, as the number
of patents, copyrights and other intellectual property rights in the Company's
industry increases, and as the coverage of these rights and the functionality
of the products of new markets further overlap, the Company believes that its
products may increasingly become the subject of infringement claims. The
Company may in the future be notified that it is infringing upon certain
intellectual property rights of others. Although the Company has not received
any such notification to date, and there are no pending or threatened
intellectual property lawsuits against the Company, there can be no assurance
that such litigation or infringement claims will not occur in the future. Any
such litigation or claims could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results and financial condition.
 
Dependence On Key Personnel
 
  The Company's future performance is significantly dependent on the continued
active participation of Emil Youssefzadeh, the Company's founder and Chief
Executive Officer. Should Mr. Youssefzadeh leave or otherwise become
unavailable to the Company, the Company's business, operating results and
financial condition may be materially adversely affected. The Company has
obtained a "key man" life insurance policy in the amount of $5,000,000 on the
life of Mr. Youssefzadeh. In addition to Mr. Youssefzadeh, the Company's
future success depends upon its ability to attract and retain additional
highly qualified management and technical personnel. The Company faces intense
competition for qualified personnel, and there can be no assurance that the
Company will be able to attract and retain such personnel.
 
Dependence On Key Suppliers And Manufacturers
 
  Certain components used by the Company in its existing products are
purchased from single source suppliers and manufacturers. While the Company
maintains an inventory of components and believes that alternative suppliers
and manufacturers for all such components are currently available at
reasonable terms, an interruption in the delivery of these components may have
a material adverse effect on the Company. There can be no assurance as to when
or whether the Company would be able to locate any such alternative suppliers.
Furthermore, there can be no assurance that the Company will not encounter
future component shortages or other disruptions in the supply of materials.
Delays associated with raw materials or component shortages could have a
material adverse effect on the Company's business, operating results and
financial condition.
 
Dependence on a Limited Number of Customers
 
  A significant portion of the Company's revenues are derived from a limited
number of customers. The Company's success depends, in part, on its ability to
establish and maintain relationships with such customers. Revenues
attributable to the Company's top two customers in 1998 constituted
approximately 33% of the Company's revenues. As a result, a decrease in
revenues generated from either of these customers could have a material
adverse effect on the Company's business, results of operation and financial
condition.
 
                                      17
<PAGE>
 
Potential Product Liability Claims
 
  Although to date the Company has not experienced any product liability
claims, the sale and support of products by the Company involves the risk of
such claims. The Company maintains product liability insurance in amounts it
believes are customary for similar businesses in the industry; however, a
successful product liability claim brought against the Company, in excess of
the amount for which the Company is insured, or for which coverage is not
provided under the Company's insurance policies, could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
 
Control by Directors, Executive Officers and Affiliated Entities
 
  As of March 31, 1999, the officers, directors, principal stockholders and
their affiliates owned approximately 51.4% of the outstanding Common Stock. If
such stockholders were to act in concert, they would be able to control
substantially all matters requiring approval by the stockholders of the
Company, including the election of directors. Such concentration of ownership
could discourage or prevent a change in control of the Company. See "Principal
Stockholders."
 
Possible Volatility of Stock Prices
 
  The market prices for securities of technology companies, including the
Company, have been volatile. Quarter to quarter variations in operating
results, changes in earnings estimates by analysts, announcements of
technological innovations or new products by the Company or its competitors,
announcements of major contract awards and other events or factors may have a
significant impact on the market price of the Company's Common Stock. In
addition, the securities of many technology companies have experienced extreme
price and volume fluctuations, which have often been unrelated to the
companies' operating performance. These conditions may adversely affect the
market price of the Company's Common Stock. In addition, the Company trades on
the NASDAQ National Market under the symbol "STMI". For continued inclusion on
the NASDAQ National Market, a company must satisfy a net tangible asset test,
a minimum bid price of $1.00 and certain other requirements. Failure to meet
listing requirements may result in the Company being moved from the National
Market to the SmallCap Market or being de-listed. As a result, investors could
find it more difficult to dispose of, or to obtain accurate quotations as to
the value of the Company's Common Stock and the trading price per share could
be reduced. There can be no assurance that the Company will continue to be
able to satisfy the NASDAQ listing requirements.
 
Anti-Takeover Provisions
 
  The Company's Certificate of Incorporation provides for 5,000,000 authorized
but unissued shares of Preferred Stock, the rights, preferences,
qualifications, limitations and restrictions of which may be fixed by the
Board of Directors without any further vote or action by the stockholders. The
Company's charter documents prescribe procedures for the nomination and
election of directors and limit the ability of stockholders to take actions by
written consent which could make it more difficult for stockholders to elect
directors or take other actions. Further, the Company's Bylaws include a "fair
price provision" which requires the affirmative vote of two-thirds of the
outstanding shares of capital stock entitled to vote generally in the election
of directors to approve certain business combinations. In addition, the
Company's stock option plan provides for the acceleration of vesting of
options granted under such plan in the event of certain transactions which
result in a change of control of the Company. Further, Section 203 of the
General Corporation Law of Delaware prohibits the Company from engaging in
certain business combinations with interested stockholders. These provisions
may have the effect of delaying or preventing a change in control of the
Company without action by the stockholders and therefore could adversely
affect the price of the Company's Common Stock.
 
Concentration of Credit Risk
 
  See note 14 to the consolidated financial statements which discusses sales
to Principal Customers. The Company generates a substantial amount of its
revenues from individually significant orders, primarily on an international
basis. These sales are on a letter of credit or a similar guaranteed basis or
on an open account basis.
 
                                      18
<PAGE>
 
Generally, credit on an open account basis is only extended to customers with
substantial financial resources or to public utilities that are government
owned in the country to which the product is shipped. There can be no
assurance, however, that these customers will not encounter liquidity problems
that could result in exceptional delays in the payment of or the inability to
pay, accounts receivable balances. In the event of such an occurrence, the
Company's financial condition and results of operations could be adversely
affected.
 
Year 2000
 
  Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because such computer programs would not properly recognize a year that begins
with "20" instead of "19". This, in turn, could result in major system
failures or miscalculations, and is generally referred to as the "Year 2000
issue." The Company has formulated a Year 2000 Plan to address the Company's
Year 2000 issues and has created a Year 2000 Task Force to implement the Year
2000 Plan.
 
  The Company's Year 2000 Plan has seven phases, which are as follows: 1)
Phase 1--Organizational Awareness, which entails educating employees, senior
management and the board of directors about the Y2k problem and how to deal
with it; 2) Phase 2--Inventory and Supply Management, which entails taking a
complete inventory of systems and their relative priority to continuing
operation and implementing a supply management process for top vendors and
critical components; 3) Phase 3--Assessment, which entails assessing systems
and their Y2k compliance status; 4) Phase 4--Planning, which entails preparing
an estimate of cost and identifying potential solutions and their cost in
dollars, schedule and ripple effect; 5) Phase 5--Renovation, which entails
implementation of fixes; 6) Phase 6--Validation, which entails testing the
fixes for compliance; and 7) Phase 7--Contingency Planning, which entails
preparing for rollover staffing, inventory adjustment and other actions which
would mitigate the effect of a Y2k failure.
 
  The Company's Year 2000 Plan will be applied in five different areas of
coverage: a) internal systems; b) current products; c) vendors; d) existing
customers; and e) key business partners.
 
  Internal Systems. The Company's internal business systems and PC
applications will be a primary area of focus. The Company is currently
evaluating its software applications, including, but not limited to, its
business systems software, personal computers, computerized manufacturing
equipment and embedded chips to identify any Year 2000 issues that could
significantly disrupt the Company's operations.
 
  The Company has completed the Inventory and Assessment phase of
substantially all critical systems. The Renovation and Validation phases are
scheduled to be completed by September 1, 1999. With the exception of a
scheduled upgrade to the Companies Infoflow business management software
system, upgrades primarily consist of implementing free bug patches or planned
software upgrades to current versions. The Company expects to be Year 2000
compliant on all critical systems which rely on the calendar year before
December 31, 1999. Some non-critical systems may not be addressed until after
January 2000, however, the Company believes such systems will not disrupt the
Company's operations significantly.
 
  Current Products. The Company's certification group has conducted
evaluations of its current products to determine if they are Year 2000
compliant. The Company does not currently believe that there are any material
Year 2000 defects in its products. With respect to components in the Company's
products that are manufactured by third parties, the Company has completed the
Inventory and Assessment phase and does not currently believe that there are
any material Year 2000 defects.
 
  Vendors. The Company has completed the Inventory phase and is currently in
the Assessment phase with respect to the Year 2000 status of critical
suppliers. The Company has contacted the top 99% of critical suppliers, and
has completed over 65% of the Assessment phase with no serious risks
discovered. The Company does not currently believe that any Year 2000
compliance issues related to its suppliers will result in a material adverse
effect on the business operations or financial performance of the Company.
 
 
                                      19
<PAGE>
 
  Existing Customers. With respect to products that have been shipped to
existing customers, the Company has identified certain problems that will
require upgrades to operational networks to make them Year 2000 compliant. The
Company is in the process of contacting its customers to notify them of such
problems and expects to complete all necessary upgrades by September 30, 1999.
The Company currently estimates that the total cost of implementing such
upgrades will not be material and will likely be offset by service fees
charged in connection with completing such upgrades. The Company believes that
a small portion of the upgrades will be provided free of charge as part of the
warranty coverage or software maintenance agreements on the products being
upgraded.
 
  Key Business Partners. The Company has completed the Inventory phase with
respect to its key business partners, and currently is in the Assessment phase
with over 60% completion to date. The Company has not identified any areas
where the Company is vulnerable to those third parties' failure to remedy
their own Year 2000 issues.
 
  Contingency Plan. The Company has not formulated a contingency plan at this
time but expects to have a contingency plan in place prior to January 1, 2000.
 
  The Company currently estimates that the cost of implementing its Year 2000
Plan will not exceed $1.0 million (including the cost of upgrading the
operational networks of current customers).
 
  The Company anticipates that the Year 2000 issue will not have a material
adverse effect on the financial position or results of operations of the
Company. There can be no assurances, however, that the systems of other
companies or governmental entities, on which the Company relies for supplies,
cash payments, and future business, will be timely converted, or that a
failure to convert by another company or the governmental entities, would not
have a material adverse effect on the financial position or results of
operations of the Company. If third party service providers and vendors, due
to the Year 2000 issue, fail to provide the Company with components or
materials which are necessary to manufacture its products, with sufficient
electrical power and other utilities to sustain its manufacturing process, or
with adequate, reliable means of transporting its products to its customers
worldwide, then any such failure could have a material adverse effect on the
Company's ability to conduct business, as well as the Company's financial
position and results of operations.
 
ITEM 2--PROPERTIES
 
  The Company's principal offices are located in a 62,000 square foot facility
in Irvine, California, which houses all functions including manufacturing,
engineering, accounting, administration, marketing, sales, and service. The
Company purchased this facility on July 28, 1994 with cash reserves and a
purchase money promissory mortgage note (the "Mortgage Note") in the amount of
approximately $4.3 million. The Mortgage Note is secured by the Company's land
and building, accrues interest at 7% per annum, and requires monthly principal
and interest payments of approximately $28,700 which commenced with the
Company's occupancy in October 1994. The Mortgage Note is being amortized over
a thirty-year period and matures on September 1, 2009, at which time all
remaining principal and accrued interest is due. In addition, the Company's
Network Systems Division presently operates out of Duluth, Georgia, where the
Company leases a 45,000 square foot building.
 
ITEM 3--LEGAL PROCEEDINGS
 
  From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. As of December
31, 1998, the Company was not engaged in any material legal proceedings which
the Company expects, individually or in the aggregate, will have a material
adverse effect on the Company's results of operations or its financial
condition. However, see Management's Discussion and Analysis of Results of
Operations and Financial Condition in Item 7 for a discussion of the status of
the Company's relationship with its Bank.
 
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  None.
 
                                      20
<PAGE>
 
                                    PART II
 
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The Company's common stock is traded on the NASDAQ Stock Market under the
symbol STMI. The high and low transaction prices for the common stock, as
reported by the National Association of Securities Dealers, Inc. for each of
the quarterly periods for the years ended December 31, 1998 and 1997 are set
forth in the following table:
 
<TABLE>
<CAPTION>
                                                1st     2nd     3rd     4th
   Price Range Per Share of Common Stock      Quarter Quarter Quarter Quarter
   -------------------------------------      ------- ------- ------- --------
   <S>                                        <C>     <C>     <C>     <C>
   Year Ended December 31, 1998
     High.................................... 13 1/4  14 3/4  10 1/4   7 11/16
     Low.....................................  6 3/4   8 3/4   3 9/16  4
   Year Ended December 31, 1997
     High....................................  8 3/4   9 5/8  18 1/4  20 1/2
     Low.....................................  6 1/2   6 3/8   9       7 7/8
</TABLE>
 
  As of September 30, 1998, there were 88 stockholders of record, and
approximately 1,771 beneficial owners.
 
  The Company does not currently pay cash dividends on its common stock and
intends to retain earnings, if any, for use in the operation and expansion of
its business.
 
  In March 1998, the Company completed a $10 million equity offering of common
stock of STM and mandatory redeemable preferred stock of its subsidiary,
Direc-To-Phone International, Inc. ("DTPI"), to Pequot Private Equity Fund
L.P. ("Pequot"), the private investment vehicle of Pequot Capital Management,
Inc. Through the transaction, Pequot acquired 571,429 shares in the Company
and an interest in DTPI. The transaction was exempt from the registration
requirements of Section 5 of the Securities Act of 1933 (the "Act") pursuant
to Section 4(2) of the Act and Rule 506 promulgated under the Act. The
mandatory redeemable preferred stock of DTPI is convertible, at the election
of the holder, on a one for one basis (subject to antidilution protection),
into common stock of DTPI.
 
ITEM 6--SELECTED FINANCIAL DATA
 
  The following selected financial data should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere herein.
 
  Effective March 31, 1996, the Company sold all the outstanding common stock
of RF Microsystems ("RF"), a wholly-owned subsidiary for $2,926,000. This sale
qualified as a disposal of a segment of the business and accordingly prior
period financial statements have been reclassified to reflect the
discontinuance of this segment of the business. (See note 4 to the
consolidated financial statements.)
 
  In December 1997, the Company issued 480,000 shares of common stock in
exchange for all the outstanding common stock of Telecom International, Inc.
("TI"), a company that specializes in network systems integration. The
transaction was accounted for as a pooling of interests and accordingly, the
Company's financial statements have been restated to include the results of TI
for all applicable periods. TI commenced operations on June 12, 1995. (See
note 3 to the consolidated financial statements.)
 
  In March 1998, the Company completed a $10 million equity offering of common
stock of STM for $4,000,000 and mandatory redeemable preferred stock of DTPI
for $6,000,000. The proceeds from the issuance of the mandatory redeemable
preferred stock in DTPI plus accrued dividends of $450,000 are classified as
redeemable minority interest in the Balance Sheet data at December 31, 1998.
The dividends of $450,000 are classified as minority interest in the Company's
consolidated statement of operations for the year ended December 31, 1998, and
are included in the net loss in the statement of operations data below. (See
note 10 to the consolidated financial statements).
 
                                      21
<PAGE>
 
  The Company completed the sale of its majority-owned subsidiary, Telecom
Multimedia Systems, Inc. (TMSI) to Inter-Tel, Inc. (Inter-Tel), pursuant to
which Inter-Tel agreed to purchase certain assets and assume certain
liabilities of TMSI for approximately $25 million in cash. A gain of
$9,950,000 (net of costs and reserves considered necessary) was realized and
is included in the accompanying statement of operations data for the year
ended December 31, 1998. (See notes 3 and 12 to the consolidated financial
statements.)
 
  In September 1998, DTPI renegotiated a long-term service contract with its
Mexican partner whereby DTPI was paid approximately $9,500,000 (before
expenses) for the sale and installation of remote terminal equipment utilized
in the provision of telephony services. DTPI retained ownership of certain
gateway infrastructure equipment. Both the remote and gateway equipment were
classified as Assets for Long-Term Service Contracts as part of Property,
Plant & Equipment in the accompanying Consolidated Balance Sheet at December
31, 1997. As a result of the revision of the agreement, the sales of remote
equipment were classified as revenue in the accompanying statements of
operations data for 1998, and the gateway equipment continues to be classified
as Property, Plant & Equipment in the balance sheet data at December 31, 1998.
 
  In 1998, the Company formed a joint venture ("Altair") with the national
telephone company in Venezuela to provide telephony services in Venezuela.
Through its DTPI subsidiary, the Company owns 49% of this joint venture and
accounts for its investment on an equity basis. The equity investment of
$4,151,000 at December 31, 1998, is included in total assets in the balance
sheet data. Revenues earned from sales of equipment to Altair of approximately
$3,600,000 are included in total revenues for 1998 in the Statement of
Operations data and the equity share of the net income of Altair is included
in the net loss for 1998 in the Statement of Operations data.
 
  The statement of operations data and loss per share of common stock with
respect to the years ended December 31, 1998, 1997 and 1996, and the balance
sheet data at December 31, 1998 and 1997 are derived from audited financial
statements included elsewhere herein. The statement of operations data and
income (loss) per share of common stock for the years ended December 31, 1995
and 1994 and the balance sheet data at December 31, 1996, 1995 and 1994 are
derived from audited financial statements reclassified in connection with the
disposal discussed above.
 
                                      22
<PAGE>
 
<TABLE>
<CAPTION>
                                            Year ended December 31,
                                    -------------------------------------------
                                      1998     1997     1996     1995    1994
                                    --------  -------  -------  ------- -------
                                     (in thousands, except per share data)
<S>                                 <C>       <C>      <C>      <C>     <C>
Statement of Operations Data
Total revenues....................  $ 42,022  $52,148  $38,294  $31,881 $20,474
Gross profit......................     7,064   13,749    9,328   10,990   8,568
Operating (loss) income...........   (14,764)  (2,227)  (7,255)     998   1,682
Gain on sale of assets............     9,950      --       --       --      --
(Loss) income before cumulative
 effect of change in accounting
 principle in 1994 and
 discontinued operations..........    (9,406)  (2,051)  (5,156)   1,067   1,767
Net (loss) income.................  $ (9,406) $(2,051) $(5,068) $ 1,400 $ 1,562
(Loss) income per share of common
 stock:
  (Loss) income before cumulative
   effect of change in accounting
   principle and discontinued
   operations:
    Basic.........................  $  (1.36) $ (0.32) $ (0.81) $  0.18 $  0.33
    Diluted.......................  $  (1.36) $ (0.32) $ (0.81) $  0.17 $  0.32
  Net (loss) income:
    Basic.........................  $  (1.36) $ (0.32) $ (0.80) $  0.23 $  0.29
    Diluted.......................  $  (1.36) $ (0.32) $ (0.80) $  0.22 $  0.28
Weighted average common shares for
 calculating basic income (loss)
 per share........................     6,936    6,384    6,318    6,009   5,314
Weighted average common shares for
 calculating diluted income (loss)
 per share........................     6,936    6,384    6,318    6,335   5,570
Balance Sheet Data
Working capital...................  $ 16,013  $12,374  $21,773  $24,529 $26,770
Equity investment.................     4,151      --       --       --      --
Total assets......................    63,201   54,417   51,840   46,839  40,216
Redeemable minority interest......     6,355      --       --       --      --
Long term debt....................     4,306    4,577    4,828    4,488   4,445
Stockholders' equity..............  $ 21,758  $27,062  $28,292  $33,028 $30,229
</TABLE>
 
                                       23
<PAGE>
 
Quarterly Information (unaudited):
 
  The following table sets forth certain unaudited quarterly financial
information for the Company's last eight fiscal quarters. All quarters have
been restated to include the results of TI. This information includes all
normal recurring adjustments that the Company considers necessary for a fair
presentation. The operating results for any quarter are not necessarily
indicative of results for any future period. See Risk Factors: History of
Losses and Fluctuations in Quarterly Operating Results in Part 1 of this
document.
 
<TABLE>
<CAPTION>
                                          Year ended December 31, 1998
                                   -------------------------------------------
                                     1st      2nd      3rd      4th     Total
                                   Quarter  Quarter* Quarter Quarter**  Year
                                   -------  -------- ------- --------- -------
                                    (dollars in thousands, except per share
                                                     data)
<S>                                <C>      <C>      <C>     <C>       <C>
Total revenues...................    6,949    9,107  14,323   11,643    42,022
Gross profit.....................      959    2,141   4,815     (851)    7,064
Operating (loss) income .........   (3,967)  (4,906)    335   (6,226)  (14,764)
Gain on sale of assets...........      --     9,950     --       --      9,950
Net (loss) income ...............   (4,074)   4,434      39   (9,805)   (9,406)
Income (loss) per share of common
 stock:
  Basic:.........................  $ (0.62)    0.63    0.01    (1.39)    (1.36)
  Diluted........................  $ (0.62)    0.60    0.01    (1.39)    (1.36)
<CAPTION>
                                          Year ended December 31, 1997
                                   -------------------------------------------
<S>                                <C>      <C>      <C>     <C>       <C>
Total revenue....................  $ 8,228   16,241  20,564    7,115    52,148
Gross profit.....................    2,863    4,514   5,438      934    13,749
Operating income (loss)..........      123      813   1,562   (4,725)   (2,227)
Net income (loss)................  $   152      724   1,200   (4,127)   (2,051)
Income (loss) per share of common
 stock:
  Basic:.........................  $  0.02     0.11    0.19    (0.64)    (0.32)
  Diluted........................  $  0.02     0.11    0.18    (0.64)    (0.32)
</TABLE>
--------
 * The results for the second quarter of 1998 include a gain on sale of the
   assets of TMSI of $9,950,000 which has been classified as part of loss from
   continuing operations before taxes. This gain was classified as part of
   operating income in the Form 10-Q for the periods ended June 30, 1998, and
   September 30, 1998.
 
** The results for the fourth quarter of 1998 includes charges of
   approximately $7,100,000 which comprised approximately $2,500,000 for
   inventory obsolescence associated with an earlier version of the Company's
   products, certain items that are considered excess to requirements and
   reserves established for certain inventory on long-term loan to customers,
   approximately $3,200,000 for taxes comprising the write-off of deferred tax
   assets due to uncertainty concerning the realizability of such assets due
   to continued losses by the Company and a reserve established for certain
   tax exposures in Brazil, reserves established for accounts receivable
   balances of approximately $900,000 associated with the Company's Mexican
   partner (see notes 5 and 14 to the consolidated financial statements) and
   other overdue balances and an impairment reserve of $500,000 associated
   with the carrying value of certain long-term revenue generating assets due
   to the Mexican partner experiencing financial difficulties.
 
                                      24
<PAGE>
 
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION
 
Background
 
  STM is a developer, manufacturer, supplier and service provider of wireless-
based satellite communications infrastructure and user terminal products
utilized in public and private telecommunications networks. These networks
support data, fax, voice and video communication and are used to either bypass
or extend terrestrial networks or provide a communications infrastructure
where a network does not currently exist. The Company's product line is based
on proprietary hardware and software and primarily consists of two-way earth
stations sometimes referred to as VSATs (very small aperture terminals),
associated infrastructure equipment and software, transceivers, modems and
other networking equipment. The Company currently focuses its sales efforts on
the international marketplace, particularly developing countries because
management believes that these areas offer greater applications for the
Company's technology, a higher growth potential and more favorable competitive
dynamics. For the year ended December 31, 1998, approximately 90% of the
Company's revenue was generated in the international market through foreign
distributors and sales representatives. The Company's customers include
government agencies, telephone companies, multi-location corporations and
others.
 
  On April 14, 1999, the Company announced that it had entered into a letter
of intent with Remec, Inc. (Nasdaq NM Symbol: REMC) ("Remec") which provides
for the merger of the Company with Remec, or a subsidiary of Remec. The merger
will be structured as a tax-free, pooling of interests transaction. Each
stockholder of the Company will receive one share of Remec common stock for
every 3.8 shares of STM common stock currently owned by the stockholder. The
transaction is subject to the preparation and execution of a definitive merger
agreement, final approval of the board of directors of the Company and Remec,
approval by the Company's stockholders and other customary terms and
conditions. As a result of the foregoing contingencies, there can be no
assurance that the Company will consummate the transaction.
 
  Effective March 31, 1996, the Company sold its RF subsidiary for $2,926,000
cash to Remec. Further, the Company also entered into a Technology Purchase
Agreement on March 31, 1996 with REMEC whereby the Company sold certain of its
technologies, which were not part of the RF business segment, for $1,000,000
cash. See note 4 to the consolidated financial statements. In addition, the
Company entered into a Development, Manufacturing and Product Supply Agreement
and a Manufacturing Supply Agreement which established Remec as the sole
provider for certain components that are incorporated into the Company's
products utilizing the aforementioned technologies. The Development,
Manufacturing and Product Supply Agreement also provides for joint development
of other products by the Company and Remec which will require purchases of
such products by the Company at specified levels and market prices. See note
12 to the consolidated financial statements. The sale of RF has been accounted
for as a discontinuation of a segment of the business and prior period
financial statements have been reclassified.
 
  In December 1997, the Company issued 480,000 shares of common stock in
exchange for all the outstanding common stock of Telecom International, Inc.
("TI"), a company that specializes in network systems integration. The
transaction was accounted for as a pooling of interests and accordingly, the
Company's consolidated financial statements have been restated to include the
results of TI for all applicable periods.
 
  In 1997, the Company was awarded, through its Direc-To-Phone International
subsidiary, two long-term service contracts to provide rural telephony
services in Mexico and Venezuela. DTPI was established in 1996 for the purpose
of offering fixed satellite telephony and advanced data services in emerging
markets. DTPI uses products manufactured by STM to enter into service
agreements with local partners for the purpose of generating long-term cash
flows. In September 1998, DTPI renegotiated its long-term service contract
with its Mexican partner whereby DTPI was paid approximately $9,500,000
(before expenses) for the sale and installation of remote terminal equipment
utilized in the provision of telephony services. DTPI retained ownership of
certain gateway infrastructure equipment. Both the remote equipment and the
gateway equipment were classified as Assets for Long-Term Service Contracts as
part of Property, Plant & Equipment in the Consolidated Balance
 
                                      25
<PAGE>
 
Sheet at December 31, 1997. As a result of the revision of the agreement, the
sales of remote equipment are classified as revenue in the Company's
consolidated statement of operations for 1998 and the gateway equipment
continues to be classified as Property, Plant and Equipment in the
consolidated balance sheet at December 31, 1998.
 
  Arising from the award of the long-term service contract in Venezuela in
1998, the Company formed Altair with the national telephone company in
Venezuela to provide telephony services in Venezuela. Through its DTPI
subsidiary, the Company owns 49% of this joint venture and accounts for its
investment on an equity basis. At December 31, 1998, the equity investment of
$4,151,000 is included in the Consolidated Balance Sheet. Revenues of
approximately $3,600,000 are included in total revenues in 1998 and the equity
share of the net income of Altair for 1998 of $66,000 is included in the
consolidated statement of operations.
 
  In March 1998, the Company completed a $10 million equity offering of common
stock of STM for $4,000,000 and mandatory redeemable preferred stock of DTPI
for $6,000,000. The proceeds from the issuance of the mandatory redeemable
preferred stock in DTPI plus accrued dividends are classified as redeemable
minority interest in the consolidated balance sheet at December 31, 1998. The
dividends of $450,000 are classified as minority interest in the Company's
statement of operations for the year ended December 31, 1998.
 
  The Company completed the sale of its majority-owned subsidiary, TMSI, to
Inter-Tel, Incorporated ("Inter-Tel") pursuant to which Inter-Tel agreed to
purchase certain assets and assume certain liabilities of TMSI for
approximately $25 million in cash. A gain of $9,950,000 (net of costs and
reserves considered necessary) was realized and is included in the
consolidated statement of operations for the year ended December 31, 1998.
(See notes 3 and 12 to the consolidated financial statements.)
 
Results of Operations
 
  The following table sets forth for the periods presented the percentages of
revenues represented by certain items in the Company's consolidated statements
of operations for the last three fiscal years. These percentages have been
recalculated to give effect to the discontinuation of the RF business segment
in 1996 and the acquisition of TI in 1997.
 
<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                                 ---------------------------
                                                  1998      1997      1996
                                                 -------   -------   -------
<S>                                              <C>       <C>       <C>
Revenues........................................   100.0%    100.0%    100.0%
Cost of revenues................................    83.2      73.6      75.6
                                                 -------   -------   -------
  Gross profit..................................    16.8      26.4      24.4
Selling, general and administrative expenses....    30.3      18.4      25.3
Research and development costs..................    19.3      12.2      18.0
Move and relocation charges.....................     2.3       --        --
                                                 -------   -------   -------
  Total operating costs.........................    51.9      30.6      43.3
                                                 -------   -------   -------
  Operating loss................................   (35.1)     (4.2)    (18.9)
Gain on sale of assets..........................    23.6       --        --
Other income (expense)..........................     --        0.1      (0.2)
Net interest (expense) income...................    (1.3)     (0.6)      0.5
                                                 -------   -------   -------
Loss from continuing operations before income
 taxes and minority interest....................   (12.8)     (4.7)    (18.6)
Income tax (expense) benefit....................    (8.8)      0.5       5.0
                                                 -------   -------   -------
Loss from continuing operations before minority
 interest.......................................   (21.6)     (4.2)    (13.6)
Minority interest...............................    (0.8)      0.3       0.1
                                                 -------   -------   -------
Loss from continuing operations.................   (22.4)     (3.9)    (13.5)
Income from discontinued operations and gain on
 sale in 1996...................................     --        --        0.3
                                                 -------   -------   -------
Net loss........................................   (22.4)%    (3.9)%   (13.2)%
                                                 =======   =======   =======
</TABLE>
 
 
                                      26
<PAGE>
 
Results of Continuing Operations
 
 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
 
  Revenues decreased to $42,022,000 in 1998, from $52,148,000 in 1997. The
decrease of $10,126,000 was primarily in product revenues. In 1997, the
Company benefited from a $30 million product sale to a customer in Southeast
Asia that was fully recognized as revenue in 1997. During 1998, the Company
refocused its sales efforts to Latin and South America, Africa and the Middle
East in an effort to recover momentum in the business. In addition, in 1998,
the Company renegotiated its long-term service contract with its Mexican
partner resulting in approximately $9,500,000 of revenue in the third quarter
of 1998 and generated revenues of approximately $3,600,000 from its Venezuelan
Altair joint venture. These refocused efforts resulted in the Company
generating revenues of $11,643,000 in the fourth quarter of 1998 compared to
$7,115,000 in the fourth quarter of 1997. The Company believes that the
diversion of management attention to the setting up of the DTPI service
business (especially in the fourth quarter of 1997 and the first quarter of
1998) as well as the Asian financial crisis, in general, are the primary
reasons for the decline in product revenues in 1998 compared to 1997. Product
revenues in Asia decreased to $7,034,000 in 1998 from $35,630,000 in 1997. The
increase in service revenue in 1998 compared to 1997 relates to service
revenues generated by the Company's DTPI long-term service business, which
commenced operations in the fourth quarter of 1997. However, approximately
$1,400,000 of such service revenues were from the Company's Mexican partner
(see note 5 to the consolidated financial statements). The Company's Mexican
partner is experiencing financial difficulties at present and it is uncertain
if the Company will generate any future revenues from this customer. As a
result of the Asian financial crisis, as well as the economic instability in
Latin America and the other developing regions of the world which comprise the
Company's primary market, the Company's revenues for 1998 were not as high as
anticipated and the Company incurred a substantial loss in 1998.
 
  As a result of the continuing economic instability in Asia and Latin
America, the Company expects to experience a substantial decrease in revenues
for the first quarter of 1999 compared with the corresponding period in 1998
and the level of revenues for the second quarter of 1999 is uncertain. The
Company is in the process of reducing its operating costs to a level that is
commensurate with such lower expected revenues. However, there can be no
assurance that the Company will be able to successfully align its expenses
with its revenue or that revenue will not decline faster than the reduction in
expenses.
 
  The Company expects to incur a substantial loss for the quarter ended March
31, 1999, primarily as a result of a decrease in revenues. The expected loss
for the quarter ended March 31, 1999, will also be adversely impacted by a
restructuring charge associated with the Company's cost reduction efforts as
well as a charge associated with the currency devaluation in Brazil, which
adversely affected the Company's receivables from two customers and certain
cash balances. While the contracts relating to such receivables contain
provisions that call for payments to be adjusted to take into account
fluctuations in foreign currency rates, the Company's customers have expressed
an unwillingness to adjust contract amounts to fully reflect the exchange rate
fluctuation. Brazilian counsel has advised the Company that there is
uncertainty as to the enforceability of provisions which tie payments to
foreign currency rates. The Company, therefore, has reached a settlement with
one customer and is currently in the process of negotiating a settlement of
its receivables from another of its Brazilian customers. The Company's
currency exposure in Brazil is also exacerbated by the Brazilian exchange
control rules, which limit the Company's ability to repatriate its Brazilian
currency. As of April 13, 1999, the Company's cash assets included
approximately $2.0 million in Brazil (based on the exchange rates as of such
date). While the Company is in the process of repatriating such funds, there
can be no assurance that such process will be completed in a timely fashion or
that the Company will not suffer additional losses as a result of the
Brazilian currency fluctuation. In addition, the Company expects that its
future sales projects in Brazil may be adversely impacted by the recent
Brazilian currency devaluation since the effective price that Brazilian
customers would pay for the Company's products and services will be higher.
 
 
                                      27
<PAGE>
 
  The Company's results for 1999 will also be materially impacted by the
ability of DTPI's service partner to raise funding to meet its obligations to
DTPI. In 1998, the Company generated approximately $9,500,000 of revenue from
its Mexican partner. The inability of the Company's Mexican partner to date to
raise additional funding for continuing operations has, in the Company's
opinion, made it unlikely that the Company's Mexican partner will be able to
meet its contractual obligation to purchase a minimum of $70 million of
equipment from DTPI over the course of the next two years.
 
  Gross profit decreased to 16.8% of revenues in 1998 compared to 26.4% in
1997. The decrease to 16.8% in 1998 relates to inventory reserves of
approximately $2,640,000 established in 1998 and direct costs associated with
the DTPI business of approximately $2,200,000 that did not exist in 1997 due
to DTPI only commencing operations in the fourth quarter of 1997. The
inventory reserves were for (i) inventory obsolescence associated with an
earlier version of the Company's products, (ii) certain items that are
considered excess to requirements and, (iii) reserves considered necessary for
product on long-term loan to certain customers. The product gross profit
percentage is comparable year on year when adjusted for the inventory
reserves. The service gross profit decreased from 43.4% in 1997 to a negative
10.5% and reflects the direct infrastructure costs of establishing DTPI as
well as a $500,000 impairment reserve established against certain gateway
equipment associated with the Company's Mexican partner where there is an
impairment of the carrying value of revenue generating assets, due to the
Mexican partner currently experiencing financial difficulties.
 
  Selling, general and administrative expenses in 1998 were $12,746,000
compared to $9,589,000 in 1997. Measured as a percent of revenues, these
expenses increased to 30.3% in 1998 as compared to 18.4% in 1997. The dollar
increase of $3,157,000 in 1998 compared to 1997 reflects increased costs of
approximately $2,600,000 relating to DTPI that did not exist in the prior year
and other general increases in costs including bad debt reserves, rent on the
Company's new Atlanta facility with associated administrative overhead and an
increased number of sales personnel. The increase in percentage terms reflects
the relatively fixed nature of such costs irrespective of the level of
revenues.
 
  Research and development costs were $8,102,000 in 1998 as compared to
$6,387,000 in 1997. Measured as a percent of revenues, these costs increased
to 19.3% in 1998 as compared to 12.2% in 1997. The dollar increase was due to
expenditures for personnel and outside services in support of the Company's
continuing new product development efforts for the Space Phone and SpaceWeb
and to an expense of approximately $1,400,000 for a contractually committed
research and development project with no discernible future benefit that was
recognized in 1998.
 
  The move and relocation charges of $980,000 in 1998 primarily comprised
severance, relocation and move costs incurred in connection with the
consolidation of the Company's Network Systems Division in Georgia.
 
  The gain on sale of assets of $9,950,000 in 1998 represented a gain (net of
costs and reserves considered necessary) on the sale of the Company's majority
owned subsidiary, TMSI. The reserves established primarily related to
exposures to litigation, intellectual property indemnifications, customer
concessions, license fees and management bonuses. (See note 12 to the
consolidated financial statements.)
 
  Interest income increased by $295,000 to $979,000 in 1998, compared to 1997.
The increase in interest income was due primarily to higher cash deposits
being maintained by the Company as a result of the issuance of shares for cash
by both STM and DTPI, the sale of the assets of TMSI, the receipt of cash from
the revised long-term service agreement in Mexico and higher level of bank
borrowings in 1998 compared to 1997.
 
  Interest expense increased by $494,000 to $1,476,000 in 1998 compared to
1997. The increase was primarily due to an increase in short-term borrowings
from banks compared to 1997 when the Company partially financed its working
capital requirements by discounting letters of credit from customers at a
lower cost.
 
  The tax provision of $3,698,000 in 1998, compared to a tax benefit of
$306,000 in 1987, reflects the write-off of the Company's deferred tax assets
at December 31, 1998, due to uncertainty concerning the ability to realize
such assets as a result of the Company experiencing continued losses and a tax
provision of $1,000,000 established for tax exposures in Brazil.
 
                                      28
<PAGE>
 
  The minority interest charge relates to accrued dividends on the mandatory
redeemable shares issued in March 1998, by DTPI (see note 10 to the
consolidated financial statements), offset by a credit associated with TMSI's
minority interest in the first quarter of 1998.
 
 Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
  Revenues increased to $52,148,000 in 1997 from $38,294,000 in 1996, a 36.2%
increase, primarily as a result of the revenue earned under a $30 million
equipment supply contract with a customer in Thailand. Approximately $30
million of revenues were recognized under this equipment supply agreement and
these revenues were recognized throughout the year primarily in quarters 1
through 3 of 1997. The Company earned approximately $12,500,000 from the same
customer in Thailand in 1996 under another contract. The decline in service
revenues to $2,324,000 in 1997 compared to $2,904,000 in 1996 reflected a
lower service content in 1997 revenues that can occur, depending upon the
nature of the contracts that the Company enters into in any given period. The
Company's focus on larger value sales exposed the Company to a concentration
of revenues to individual customers and in geographic regions as evidenced by
the decline in revenues in 1998. The $30 million equipment supply contract in
1997 increased this concentration of revenues. In recognition of this, in 1998
the Company's sales and marketing activities have been increased to broaden
coverage in the Company's selected markets.
 
  Gross profits increased to 26.4% of revenues in 1997 from 24.4% in 1996.
Excluding approximately $2,500,000 of inventory obsolescence reserves included
in cost of revenues in 1996, the adjusted gross profit percentage for 1996
would have been approximately 30.9%. The decline in the gross profit in 1997
reflected a relatively lower gross profit percentage earned by the Company on
the $30 million equipment supply sale to the customer in Thailand and a lower
gross profit percentage due to product mix in 1997 as compared to 1996.
 
  Selling, general and administrative expenses in 1997 were $9,589,000
compared to $9,688,000 in 1996. Measured as a percent of revenues, these
expenses decreased to 18.4% in 1997 as compared to 25.3% in 1996. The 1996
expense included approximately $1,700,000 associated with customer concessions
and allowances. Excluding this $1,700,000 from the 1996 expense, the adjusted
1996 selling, general and administrative expenses would have been $7,988,000
or 20.9% of revenues, compared to 18.4% for 1997. The decrease in percentage
terms in 1997 reflected the relatively fixed nature of certain costs that did
not increase in proportion to the increase in revenues. The dollar increase in
selling, general and administrative expenses in 1997 compared to 1996
(adjusted for the $1,700,000 previously discussed) reflected increased costs,
primarily to support the growth in revenue in both the core manufacturing
business and the system integration business.
 
  Research and development expenses were $6,387,000 in 1997 compared to
$6,895,000 in 1996. Measured as a percent of revenues, these expenses
decreased to 12.2% in 1997 as compared to 18.0% in 1996. Adjusting the 1996
expense for $1,000,000 of non-recurring engineering charges associated with a
product that the Company does not expect to sell in significant numbers and
was fully expensed in 1996, research and development expenses in 1997 would
have increased by $492,000, or 8.3% over the comparable 1996 expense. This
dollar increase was due to planned expenditures for personnel and outside
services in support of the Company's continuing new product development
efforts. In percentage terms, the adjusted 1996 expenses represented 15.4% of
revenues. The decrease in percentage terms in 1997 was due to the relatively
fixed nature of certain costs that did not increase in proportion to the
increase in revenues.
 
  The income tax benefit for 1997 was $306,000 as compared to $1,907,000 in
1996. The decrease in the income tax benefit in 1997 compared to 1996 related
to a lower loss in 1997 compared to 1996 and the Company reviewing the level
of deferred tax assets existing at December 31, 1997 for realizability due to
the Company incurring losses for both 1997 and 1996.
 
  The minority interest of $126,000 and $67,000 in 1997 and 1996 respectively,
represented the share of the losses of TMSI attributable to the minority
shareholders.
 
  The income from discontinued operations and gain on sale, net of income
taxes in 1996 of $88,000 related to the disposal of RF.
 
                                      29
<PAGE>
 
Results of Discontinued Operations
 
  For 1996, revenues for RF were $1,216,000, net income was $37,000 and the
gain on sale in 1996 was $51,000.
 
Liquidity and Capital Resources
 
  In connection with the award of certain long-term service contracts in
Mexico and Venezuela, which require initial capital investments by the Company
to enable the Company to render such services and other contracts that DTPI
may be awarded in the future, the Company continues to review financing
alternatives to enable it to pursue these business opportunities in the most
beneficial manner. However, there can be no assurance that such financing will
be available, or that such financing will be available on terms acceptable to
the Company. See "Risk Factors--Liquidity; Future Capital Requirements".
 
  In connection with the Company's short-term borrowings (see note 8 to the
Company's consolidated financial statements) under a secured $10,000,000
revolving line of credit with Wells Fargo HSBC Trade Bank N.A. guaranteed by
the Export-Import Bank of the United States ("EXIM") under its Working Capital
Guarantee Program (collectively, the "Bank"), the Company was not in
compliance with certain covenants at December 31, 1998. In addition, the line
of credit expired on April 1, 1999 with the current borrowings at $9,050,000.
On April 13, 1999, the Company received a demand letter from the Bank, in
which the Bank threatened to pursue all available alternatives, including
commencing foreclosure proceedings on its collateral, if all outstanding
amounts were not paid by the Company within ten days. The Company is currently
in discussions with the Bank with respect to a six month Forbearance Agreement
and expects to make suitable arrangements with the Bank prior to the
expiration of the ten day period in the demand letters. The Forbearance
Agreement will require the Company to give the bank, amongst other things,
additional collateral including a second deed of trust on the Company's
corporate headquarters, a pledge of stock of and guarantees from all the
Company's domestic and foreign subsidiaries (except DTPI), a pledge of the
note receivable from DTPI (see note 10 to the consolidated financial
statements) and an assignment of the Company's patents, trademarks and
leasehold interests. The Forbearance Agreement will also reduce the advance
rates against inventory and accounts receivable balances and will require a
permanent paydown of the line of credit should the Company sell its corporate
headquarters or should DTPI repay the note to STM out of the proceeds of
future financings.
 
  There can no assurance that the Company will reach agreement with the bank
for this Forbearance Agreement, nor, that should the Company reach agreement
with the bank, that there will not be another event of default during the
forbearance period. Additionally, there can be no assurance that the Company
will have sufficient eligible foreign orders, inventory and accounts
receivable balances to enable the Company to continue to borrow at its current
level. Should the Company not reach agreement with the bank or should the
Company experience an event of default under the Forbearance Agreement or
should the Company not have sufficient eligibility to continue to borrow at
its existing levels, the Company may be required to paydown either all or a
portion of the line of credit and dispose of certain assets to satisfy
obligations to the bank.
 
  In addition, the Company will incur substantial losses in the first quarter
of 1999 due to low revenues and foreign exchange losses arising form the
devaluation of the Brazilian Real. Furthermore, the level of revenues that the
Company will earn in the second quarter of 1999 and future quarters is
uncertain. The Company has implemented certain cost saving measures and is
reviewing other alternatives to improve the performance of the business.
 
  In order for the Company to meet its working capital requirements, the
Company may be required to seek additional funds through debt or equity
financings in order to provide sufficient working capital for the Company. The
Company believes that such alternative sources of financing are available to
meet its anticipated cash requirements in the next 12 months. The issuance of
additional equity securities by the Company could result in substantial
dilution to the stockholders. If the Company incurs additional debt, the
Company's increased leverage may affect its ability to raise capital in the
future and may limit its flexibility to adapt to changing market conditions.
See "Risk Factors--Liquidity; Future Capital Requirements".
 
                                      30
<PAGE>
 
  In March of 1998, the Company completed a $10 million equity offering of
common stock of STM and mandatory redeemable preferred stock of its DTPI
subsidiary. Concurrently with and as a condition of this transaction, the
Company also invested $5 million of equity in DTPI, extended a $10 million
loan and entered into a Product Supply Agreement with DTPI. The principal on
the loan is repayable by DTPI out of the proceeds of any future financings of
DTPI that may occur. The proceeds from the issuance of the mandatory
redeemable preferred stock in DTPI plus accrued dividends have been classified
as redeemable minority interest in the accompanying consolidated balance sheet
at December 31, 1998. The mandatory redeemable shares in DTPI are redeemable
at the option of the holder (if not sooner converted into common stock of
DTPI), on the 5th anniversary of the date of issuance, or in the event of an
acquisition of STM and STM continues to hold greater than 50% of the voting
stock of DTPI. The redemption amount is equal to $6,000,000 plus dividends of
$0.50 per share per annum accruing from the date of issuance. The dividends of
$450,000 for 1998 have been classified as a minority interest in the
consolidated statement of operations for 1998. (See note 10 to the
consolidated financial statements.)
 
  In June 1998, the Company completed the sale of its majority-owned
subsidiary, TMSI, to Inter-Tel, Incorporated ("Inter-Tel"), pursuant to which
Inter-Tel agreed to purchase certain assets and assume certain liabilities of
TMSI for approximately $25 million in cash. A gain of $9,950,000 (net of costs
and reserves considered necessary) was realized and is included in the
accompanying consolidated statement of operations for 1998.
 
  In September 1998, DTPI renegotiated its long-term service contract with its
Mexican partner whereby DTPI was paid approximately $9,500,000 (before
expenses) for the sale of remote terminal equipment utilized in the provision
of telephony service.
 
  In 1998, the Company had negative cash flows from continuing operations of
$19,430,000 compared to positive cash flows of $1,417,000 in 1997. This net
cash usage from continuing operations in 1998 compared to 1997, was primarily
a result of net losses for the year, increases in accounts receivable and
inventories and decreases in accounts payable.
 
  In 1998, the Company generated $13,828,000 from investing activities
compared with a use of $9,940,000 in 1997. The significant changes in 1998
compared to 1997 relate to cash generated from the sale of TMSI of
$17,299,000, net of the minority interest portion, offset by cash used to
invest in the Company's joint venture in Venezuela of $3,168,000 and
investment in property, plant and equipment of $1,500,000.
 
  In 1998, net cash provided by financing activities was $12,523,000 compared
to $2,165,000 in 1997, primarily comprising in 1998 of net proceeds received
under credit facilities of $2,750,000 and proceeds from the issuance of common
stock of the Company and redeemable preferred stock in a subsidiary of
$9,988,000.
 
  Overall, the Company's cash, cash equivalents and short-term investments
(net of restricted balances) totaled $12,122,000 at December 31, 1998 compared
to $7,022,000 at December 31, 1997.
 
  In September, 1994 the Company's Board of Directors authorized a stock
repurchase program whereby the Company may repurchase, in the open market, up
to 10% of its shares outstanding, at times and prices to be determined by the
Board. The repurchased shares would be used for potential future acquisitions
and for exercises under the Company's stock option plans. The Company has not
repurchased any shares to date nor does it have any present commitments to
repurchase shares at this time.
 
New Accounting Standards
 
  In June 1998, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters or fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting
 
                                      31
<PAGE>
 
and reporting standards for derivative instruments embedded in other contracts
and for hedging activities. Application of SFAS 133 is not expected to have a
material impact on the Company's consolidated financial position, results of
operations or liquidity.
 
Year 2000
 
  Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because such computer programs would not properly recognize a year that begins
with "20" instead of "19". This, in turn, could result in major system
failures or miscalculations, and is generally referred to as the "Year 2000
issue." The Company has formulated a Year 2000 Plan to address the Company's
Year 2000 issues and has created a Year 2000 Task Force to implement the Year
2000 Plan.
 
  The Company's Year 2000 Plan has seven phases, which are as follows: 1)
Phase 1--Organizational Awareness, which entails educating employees, senior
management and the board of directors about the Y2k problem and how to deal
with it; 2) Phase 2--Inventory and Supply Management, which entails taking a
complete inventory of systems and their relative priority to continuing
operation and implementing a supply management process for top vendors and
critical components; 3) Phase 3--Assessment, which entails assessing systems
and their Y2k compliance status; 4) Phase 4--Planning, which entails preparing
an estimate of cost and identifying potential solutions and their cost in
dollars, schedule and ripple effect; 5) Phase 5--Renovation, which entails
implementation of fixes; 6) Phase 6--Validation, which entails testing the
fixes for compliance; and 7) Phase 7--Contingency Planning, which entails
preparing for rollover staffing, inventory adjustment and other actions which
would mitigate the effect of a Y2k failure.
 
  The Company's Year 2000 Plan will be applied in five different areas of
coverage: a) internal systems; b) current products; c) vendors; d) existing
customers; and e) key business partners.
 
  Internal Systems. The Company's internal business systems and PC
applications will be a primary area of focus. The Company is currently
evaluating its software applications, including, but not limited to, its
business systems software, personal computers, computerized manufacturing
equipment and embedded chips to identify any Year 2000 issues that could
significantly disrupt the Company's operations.
 
  The Company has completed the Inventory and Assessment phase of
substantially all critical systems. The Planning, Renovation and Validation
phases are scheduled to be completed by September 1, 1999. With the exception
of a scheduled upgrade to the Companies Infoflow business management software
system, upgrades primarily consist of implementing free bug patches or planned
software upgrades to current versions. The Company expects to be Year 2000
compliant on all critical systems which rely on the calendar year before
December 31, 1999. Some non-critical systems may not be addressed until after
January 2000, however, the Company believes such systems will not disrupt the
Company's operations significantly.
 
  Current Products. The Company's certification group has conducted
evaluations of its current products to determine if they are Year 2000
compliant. The Company does not currently believe that there are any material
Year 2000 defects in its products. With respect to components in the Company's
products that are manufactured by third parties, the Company has completed the
Inventory and Assessment phase and does not currently believe that there are
any material Year 2000 defects.
 
  Vendors. The Company has completed the Inventory phase and is currently in
the Assessment phase with respect to the Year 2000 status of critical
suppliers. The Company has contacted the top 99% of critical suppliers, and
has completed over 65% of the Assessment phase with no serious risks
discovered. The Company does not currently believe that any Year 2000
compliance issues related to its suppliers will result in a material adverse
effect on the business operations or financial performance of the Company.
 
 
                                      32
<PAGE>
 
  Existing Customers. With respect to products that have been shipped to
existing customers, the Company has identified certain problems that will
require upgrades to operational networks to make them Year 2000 compliant. The
Company is in the process of contacting its customers to notify them of such
problems and expects to complete all necessary upgrades by September 30, 1999.
The Company currently estimates that the total cost of implementing such
upgrades will not exceed $1.0 million and will likely be offset by service
fees charged in connection with completing such upgrades. The Company believes
that a small portion of the upgrades will be provided free of charge as part
of the warranty coverage or software maintenance agreements on the products
being upgraded.
 
  Key Business Partners. The Company has completed the Inventory phase with
respect to its key business partners, and currently is in the Assessment phase
with over 60% completion to date. The Company has not identified any areas
where the Company is vulnerable to those third parties' failure to remedy
their own Year 2000 issues.
 
  Contingency Plan. The Company has not formulated a contingency plan at this
time but expects to have a contingency plan in place prior to January 1, 2000.
 
  The Company currently estimates that the cost of implementing its Year 2000
Plan will not exceed $1.0 million (including the cost of upgrading the
operational networks of current customers).
 
  The Company anticipates that the Year 2000 issue will not have a material
adverse effect on the financial position or results of operations of the
Company. There can be no assurances, however, that the systems of other
companies or governmental entities, on which the Company relies for supplies,
cash payments, and future business, will be timely converted, or that a
failure to convert by another company or the governmental entities, would not
have a material adverse effect on the financial position or results of
operations of the Company. If third party service providers and vendors, due
to the Year 2000 issue, fail to provide the Company with components or
materials which are necessary to manufacture its products, with sufficient
electrical power and other utilities to sustain its manufacturing process, or
with adequate, reliable means of transporting its products to its customers
worldwide, then any such failure could have a material adverse effect on the
Company's ability to conduct business, as well as the Company's financial
position and results of operations.
 
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  To avoid the risk of fluctuating exchange rates associated with
international sales, the Company conducts most international sales in United
States currency. However, the Company has generated, and expects to continue
generating, a significant portion of its Brazilian revenue in the local
currency of Brazil. While the contracts relating to such arrangements
generally contain provisions that call for payments to be adjusted to take
into account fluctuations in foreign currency exchange rates, the Company's
customers in Brazil have expressed an unwillingness to adjust contract amounts
to fully reflect some of the exchange rate fluctuations. Brazilian counsel has
advised the Company that there is uncertainty as to the enforceability of
provisions which tie payments to foreign currency rates. The Company,
therefore, has reached a settlement with one customer and is currently in the
process of negotiating a settlement of its receivables from another of its
Brazilian customers. The Company's currency exposure in Brazil is also
exacerbated by the Brazilian exchange control rules, which limit the Company's
ability to repatriate its Brazilian currency. As of April 13, 1999, the
Company's cash assets included approximately $2.0 million in Brazil (based on
the exchange rates as of such date). While the Company is in the process of
repatriating such funds, there can be no assurance that such process will be
completed in a timely fashion or that the Company will not suffer additional
losses as a result of the Brazilian currency fluctuation.
 
  The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment rate and credit risks by monitoring
credit quality standards and maturity dates of investments. The Company's
exposure to market risk is not expected to be material. The Company does not
use derivative financial instruments in its investment portfolio.
 
                                      33
<PAGE>
 
ITEM 8--FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND
        SUPPLEMENTARY DATA
 
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE:
 
<TABLE>
<S>                                                                        <C>
Consolidated Financial Statements:
Report of Independent Auditors............................................  35

Consolidated Balance Sheets as of December 31, 1998 and 1997..............  36

Consolidated Statements of Operations for the years ended December 31,
 1998, 1997 and 1996......................................................  37

Consolidated Statements of Stockholders' Equity for the years ended
 December 31, 1998, 1997 and 1996.........................................  38

Consolidated Statements of Cash Flows for the years ended December 31,
 1998, 1997 and 1996......................................................  39

Notes to Consolidated Financial Statements................................  41

Financial Statement Schedule:
(For the three years ended December 31, 1998)

Schedule II--Valuation and Qualifying Accounts and Reserves...............  62
</TABLE>
 
  All other financial statement schedules are omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
 
                                       34
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors
STM Wireless, Inc.:
 
  We have audited the accompanying consolidated financial statements of STM
Wireless, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of STM
Wireless, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
 
                                          KPMG LLP
 
Orange County, California
March 26, 1999, except for the
second paragraph of note 8,
which is as of April 13, 1999.
 
                                      35
<PAGE>
 
                               STM WIRELESS, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
                           December 31, 1998 and 1997
                   (dollars in thousands, except share data)
 
<TABLE>
<CAPTION>
                                                               1998     1997
                                                             --------  -------
<S>                                                          <C>       <C>
                           ASSETS
                           ------
 
Current assets:
  Cash and cash equivalents................................. $ 11,016  $ 4,095
  Short-term investments....................................    1,106    2,927
  Restricted cash and short-term investments................    2,224    1,600
  Accounts receivable, less allowances of $2,022 in 1998 and
   $1,019 in 1997...........................................   17,016   10,937
  Inventories...............................................   13,108   11,211
  Current portion of long-term receivables..................      702      592
  Prepaid expenses and other current assets.................    1,623      399
  Deferred income taxes.....................................      --     3,132
                                                             --------  -------
    Total current assets....................................   46,795   34,893
Property, plant and equipment, net..........................   11,056   17,025
Long-term receivables.......................................      788    1,462
Equity investment in affiliate..............................    4,151      --
Other assets................................................      411    1,037
                                                             --------  -------
    Total assets............................................ $ 63,201  $54,417
                                                             ========  =======
 
            LIABILITIES AND STOCKHOLDERS' EQUITY
            ------------------------------------
 
Current liabilities:
  Short term borrowings..................................... $ 10,650  $ 7,900
  Current portion of long-term debt.........................      384      328
  Accounts payable..........................................    9,582   11,442
  Accrued liabilities.......................................    7,256    2,139
  Customer deposits and deferred revenue....................    1,910      285
  Income taxes payable......................................    1,000      425
                                                             --------  -------
    Total current liabilities...............................   30,782   22,519
Long-term debt..............................................    4,306    4,577
Redeemable minority interest................................    6,355      259
Commitments and contingencies (note 12).....................
Stockholders' equity:
  Preferred stock, $0.001 par value; 5,000,000 shares
   authorized, none issued or outstanding...................      --       --
  Common stock, $0.001 par value; 20,000,000 shares
   authorized; 7,042,204 and 6,448,164 shares issued and
   outstanding at December 31, 1998 and 1997, respectively..        7        6
  Additional paid in capital................................   38,140   34,039
  Accumulated deficit.......................................  (16,389)  (6,983)
                                                             --------  -------
    Total stockholders' equity..............................   21,758   27,062
                                                             --------  -------
    Total Liabilities and Stockholders' Equity.............. $ 63,201  $54,417
                                                             ========  =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       36
<PAGE>
 
                               STM WIRELESS, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                  Years ended December 31, 1998, 1997 and 1996
                 (dollars in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                       1998     1997     1996
                                                      -------  -------  -------
<S>                                                   <C>      <C>      <C>
Revenues:
  Products..........................................  $39,355  $49,824  $35,390
  Services..........................................    2,667    2,324    2,904
                                                      -------  -------  -------
      Total revenues................................   42,022   52,148   38,294
Cost of revenues:
  Products..........................................   32,010   37,084   27,573
  Services..........................................    2,948    1,315    1,393
                                                      -------  -------  -------
      Total cost of revenues........................   34,958   38,399   28,966
                                                      -------  -------  -------
      Gross profit..................................    7,064   13,749    9,328
Selling, general and administrative expenses........   12,746    9,589    9,688
Research and development costs......................    8,102    6,387    6,895
Move and relocation charges.........................      980      --       --
                                                      -------  -------  -------
      Total operating costs.........................   21,828   15,976   16,583
                                                      -------  -------  -------
      Operating loss................................  (14,764)  (2,227)  (7,255)
Interest income.....................................      979      684      982
Interest expense....................................   (1,476)    (982)    (764)
Gain on sale of assets..............................    9,950      --       --
Other income (expense)..............................      (53)      42      (93)
                                                      -------  -------  -------
      Loss from continuing operations before income
       taxes, equity income and minority interest...   (5,364)  (2,483)  (7,130)
Income tax benefit (expense)........................   (3,698)     306    1,907
                                                      -------  -------  -------
      Loss from continuing operations before equity
       income and minority interest.................   (9,062)  (2,177)  (5,223)
Equity in net income of unconsolidated affiliate....       66      --       --
Minority interest (benefit) expense ................     (410)     126       67
                                                      -------  -------  -------
      Loss from continuing operations...............   (9,406)  (2,051)  (5,156)
Income from discontinued operations and gain on sale
 in 1996, net of income taxes.......................      --       --        88
                                                      -------  -------  -------
      Net loss......................................  $(9,406) $(2,051) $(5,068)
                                                      =======  =======  =======
Loss per share of common stock:
  Basic:
    Continuing operations...........................    (1.36) $ (0.32) $ (0.81)
    Discontinued operations.........................      --       --      0.01
                                                      -------  -------  -------
      Net loss......................................  $ (1.36) $ (0.32) $ (0.80)
                                                      =======  =======  =======
  Diluted:
    Continuing operations...........................    (1.36) $ (0.32) $ (0.81)
    Discontinued operations.........................      --       --      0.01
                                                      -------  -------  -------
      Net loss......................................  $ (1.36) $ (0.32) $ (0.80)
                                                      =======  =======  =======
Common shares used in computing per share amounts:
  Basic.............................................    6,936    6,384    6,318
  Diluted...........................................    6,936    6,384    6,318
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       37
<PAGE>
 
                               STM WIRELESS, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
                  Years ended December 31, 1998, 1997 and 1996
                    (dollars in thousands except share data)
 
<TABLE>
<CAPTION>
                                                                 Retained
                           Number of                Additional   Earnings       Total
                             Shares    Common Stock  Paid-in   (Accumulated Stockholders'
                          Common Stock at Par Value  Capital     Deficit)      Equity
                          ------------ ------------ ---------- ------------ -------------
<S>                       <C>          <C>          <C>        <C>          <C>
Balance at December 31,
 1995...................   6,181,209       $ 6       $32,882     $    136      $33,024
Issuance of common
 stock..................      80,100        --           240          --           240
Exercise of stock
 options................      32,941        --            96          --            96
Net loss................         --         --           --        (5,068)      (5,068)
                           ---------       ---       -------     --------      -------
Balance at December 31,
 1996...................   6,294,250         6        33,218       (4,932)      28,292
Issuance of common
 stock..................      34,900        --           162          --           162
Exercise of stock
 options................     119,014        --           659          --           659
Net loss................         --         --           --        (2,051)      (2,051)
                           ---------       ---       -------     --------      -------
Balance at December 31,
 1997...................   6,448,164         6        34,039       (6,983)      27,062
Issuance of common stock
 in equity private
 placement, net of
 issuance costs
 (note 10)..............     571,429         1         3,955          --         3,956
Exercise of stock
 options................      22,611        --           146          --           146
Net loss................         --         --           --        (9,406)      (9,406)
                           ---------       ---       -------     --------      -------
Balance at December 31,
 1998...................   7,042,204       $ 7       $38,140     $(16,389)     $21,758
                           =========       ===       =======     ========      =======
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                       38
<PAGE>
 
                               STM WIRELESS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                  Years ended December 31, 1998, 1997 and 1996
                             (dollars in thousands)
 
<TABLE>
<CAPTION>
                                                      1998     1997     1996
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
Cash flows from operating activities:
  Net loss......................................... $ (9,406) $(2,051) $(5,068)
  Deduct:
    Income from discontinued operations............      --       --       (37)
    Gain on sale of discontinued operations........      --       --       (51)
                                                    --------  -------  -------
Loss from continuing operations....................   (9,406)  (2,051)  (5,156)
Adjustments to reconcile net loss to net cash
 provided by (used in) continuing operations:
  Minority interest in net earnings................      410     (126)     (67)
  Equity in earnings of affiliated companies.......      (66)     --       --
  Gain on sale of TMSI.............................   (9,950)     --       --
  Provision for allowances on accounts receivable..    1,488       91    1,931
  Provision (recovery) for inventory obsolescence..    2,640     (456)   2,728
  Provision for impairment of long-lived assets....      500      --       --
  Reversal of sale.................................      --       --     2,132
  Depreciation and amortization....................    2,025    1,548    1,181
  Changes in assets and liabilities:
    (Increase) decrease in accounts receivable.....   (6,656)   1,540   (2,753)
    Increase in inventories........................   (1,218)  (1,539)  (5,689)
    Increase in prepaid and other current assets...   (1,167)    (206)     --
    Increase (decrease) in deferred income taxes...    3,132     (306)  (1,250)
    Increase (decrease) in long-term receivables...      564      473     (600)
    (Increase) decrease in other assets............      --      (140)      38
    Increase (decrease) in accounts payable........   (3,811)   3,009    4,590
    Increase (decrease) in customer deposits.......    1,625     (628)     698
    Increase (decrease) in accrued liabilities.....     (115)     240     (116)
    Increase (decrease) in income taxes payable....      575      (32)    (645)
                                                    --------  -------  -------
      Net cash provided by (used in) continuing
       operations..................................  (19,430)   1,417   (2,978)
                                                    --------  -------  -------
      Net cash provided by discontinued
       operations..................................      --       --       923
                                                    --------  -------  -------
      Net cash provided by (used in) operating
       activities.................................. $(19,430) $ 1,417  $(2,055)
                                                    --------  -------  -------
</TABLE>
 
                                                                     (continued)
 
          See accompanying notes to consolidated financial statements.
 
                                       39
<PAGE>
 
                              STM WIRELESS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                 Years ended December 31, 1998, 1997 and 1996
                            (dollars in thousands)
 
<TABLE>
<CAPTION>
                                                       1998     1997    1996
                                                      -------  ------  -------
<S>                                                   <C>      <C>     <C>
Cash flows from investing activities:
  Net change in short-term investments............... $ 1,821  $  (18) $   941
  Increase in restricted assets......................    (624)    --      (500)
  Purchases of property, plant, & equipment..........  (1,500) (9,922)  (1,035)
  Sales of property, plant, & equipment..............     --      --       --
  Equity investment in Altair........................  (3,168)    --       --
  Proceeds from sale of TMSI.........................  17,299     --       --
  Proceeds from sale of discontinued operations......     --      --     2,926
                                                      -------  ------  -------
    Net cash provided by (used in) investing
     activities......................................  13,828  (9,940)   2,332
                                                      -------  ------  -------
Cash flows from financing activities:
  Net change in short-term borrowings................   2,750   1,500    4,800
  Proceeds from issuance of common stock, net........   4,102     821      316
  Proceeds from issuance of redeemable preferred
   stock in subsidiary, net..........................   5,886     --       --
  Proceeds from issuance of long-term debt...........      56     120      577
  Repayments of long-term debt.......................    (271)   (276)    (220)
                                                      -------  ------  -------
    Net cash provided by financing activities........  12,523   2,165    5,473
                                                      -------  ------  -------
Net increase (decrease) in cash and cash
 equivalents.........................................   6,921  (6,358)   5,750
Cash and cash equivalents at beginning of year.......   4,095  10,453    4,703
                                                      -------  ------  -------
Cash and cash equivalents at end of year............. $11,016  $4,095  $10,453
                                                      =======  ======  =======
Supplemental disclosure of cash flow information:
  Interest paid...................................... $ 1,476  $  982  $   722
                                                      =======  ======  =======
  Income taxes paid.................................. $   --   $  230  $    79
                                                      =======  ======  =======
</TABLE>
 
  In 1998, the Company contributed approximately $917,000 in inventory to
Altair, the Company's joint venture with CANTV.
 
 
         See accompanying notes to consolidated financial statements.
 
                                      40
<PAGE>
 
                              STM WIRELESS, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                 Years ended December 31, 1998, 1997 and 1996
 
(1) Description of the Company
 
  STM Wireless, Inc. (the "Company" or "STM") is a developer, manufacturer and
provider of wireless-based satellite communications infrastructure and user
terminal products utilized in public and private telecommunications networks.
These networks support data, fax, voice and video communication and are used
to either bypass or extend terrestrial networks or provide a communications
infrastructure where a network does not currently exist. The Company's product
line is based on proprietary hardware and software and primarily consists of
two-way earth stations sometimes referred to as VSATs (very small aperture
terminals), associated infrastructure equipment and software, transceivers,
modems and other networking equipment. The Company historically has focused
its sales efforts on the international marketplace, particularly developing
countries. The Company's subsidiary, Direc-To-Phone International, Inc.
("DTPI"), provides fixed telephony services in international markets.
 
(2) Summary of Significant Accounting Policies
 
 Principles of Consolidation
 
  The consolidated financial statements include the accounts of the Company
and its majority and wholly-owned subsidiaries including DTPI, the Company's
majority-owned fixed telephony service subsidiary, Telecom International, Inc.
("TI"), and, for the period January 1, 1998, through March 31, 1998, the
financial results of the Company's former majority-owned Telecom Multimedia
Systems, Inc., ("TMSI"). All significant intercompany balances and
transactions have been eliminated in consolidation.
 
 Use of Estimates
 
  The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the dates of the balance sheets and revenues and
expenses for the periods presented. Actual results could differ significantly
from those estimates.
 
 Revenue Recognition
 
  Sales of the Company's communications products and related installed
software are generally recognized upon shipment. Sales of the Company's
products to distributors are normally not subject to right of return. Service
revenues are generally recognized when services have been performed.
 
  Revenues from certain long-term product and service contracts are recognized
under the percentage-of-completion method, whereby contract costs are expensed
as incurred and revenues are recorded based on the ratio of costs incurred to
total estimated costs at completion. If the estimate of total contract costs
results in a loss, a provision is made currently for the total anticipated
loss.
 
  The Company generally warrants its products to be free from defects for a
period of one year from shipment. Estimated warranty liabilities are evaluated
for adequacy on an on-going basis.
 
 Cash and Cash Equivalents
 
  Cash equivalents are highly liquid investments which are readily convertible
into known amounts of cash and have original maturities of three months or
less, consisting primarily of cash, certificates of deposit and other money
market instruments.
 
                                      41
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 Short-Term Investments
 
  The Company's short-term investments consist primarily of certificates of
deposit with original maturities between 90 and 360 days. As of December 31,
1998 and 1997 the fair market value of these securities approximates cost.
 
 Restricted Assets
 
  Cash and short-term investments whose use is restricted are classified
separately as restricted cash,and short-term investments.
 
 Inventories
 
  Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of the following:
 
<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 ---------------
                                                                  1998    1997
                                                                 ------- -------
                                                                   (dollars in
                                                                   thousands)
       <S>                                                       <C>     <C>
       Raw materials............................................ $ 7,423 $ 5,727
       Work in process..........................................     823     980
       Finished goods...........................................   4,862   4,504
                                                                 ------- -------
                                                                 $13,108 $11,211
                                                                 ======= =======
</TABLE>
 
  Certain components used by the Company in its existing products are
purchased from single source suppliers and manufacturers. While the Company
maintains an inventory of components and believes that alternative suppliers
and manufacturers for all such components are available at reasonable terms,
an interruption in the delivery of these components may have a material
adverse effect on the Company.
 
  In December 1998, the Company increased its inventory reserves by
approximately $2,640,000 to recognize the increased risk of obsolescence
associated with previous generations of the Company's products, certain other
items that are considered excess to requirements and certain inventory on
long-term loan to customers.
 
 Equity Method of Accounting
 
  Investments in significant 20- to 50-percent-owned affiliates are accounted
for by the equity method of accounting, whereby the investment in and advances
to the affiliate are carried at cost, plus the Company's equity in
undistributed earnings or losses since acquisition. The Company defers its
share of the profits or losses on sales to affiliates and when appropriate
these amounts are amortized to income. Reserves are provided where management
determines that the investment or equity in earnings has been permanently
impaired. As of December 31, 1998, no such reserves were considered necessary.
 
 Property, Plant and Equipment
 
  Property, plant and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets. Buildings
are depreciated over 30 years. Satellite equipment, other equipment and
furniture and fixtures are depreciated over 3-5 years. Assets used for long-
term service contracts, are depreciated commencing when the asset is placed in
service, over the shorter of their estimated useful lives or the lives of the
contracts to which they relate. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the term of the lease.
 
                                      42
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Long-Term Receivables
 
  Long-term receivables are recorded at cost. Management, considering current
information and events regarding the borrowers' ability to repay their
obligations, considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the note agreement. When a loan is considered to be impaired, the
amount of the impairment is measured based on the present value of expected
future cash flows discounted at the note's effective interest rate. Impairment
losses are included in the allowance for doubtful accounts through a charge to
bad debt expense. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such notes until the principal has been
recovered and are recognized as interest income, thereafter. As of December
31, 1998 and 1997, the Company has not considered an allowance for impaired
notes receivable to be necessary.
 
 Fair Value of Financial Instruments
 
  As of December 31, 1998 and 1997, the carrying value of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and
income taxes payable approximate fair value due to the short term nature of
such instruments. The carrying value of short-term investments approximates
fair value based on quoted market prices for those or similar investments. The
fair value of all debt and long-term receivables approximate fair value as the
related interest rates approximate rates currently available to/from the
Company.
 
 Research and Development
 
  All research and development costs are charged to expense as incurred and
primarily consist of salaries and applicable overhead expenses of employees
directly involved in the design and implementation of the satellite network
hardware and software and certain third party outside service costs.
 
 Income Taxes
 
  Income taxes are accounted for under the asset and liability method. This
method generally provides that deferred tax assets and liabilities be
recognized for temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities and expected benefits of
utilizing net operating loss ("NOL") carryforwards. The Company records a
valuation allowance for certain temporary differences for which it is not more
likely than not that it will realize future tax benefits. The impact on
deferred taxes of changes in tax rates and laws, if any, are applied to the
years during which temporary differences are expected to be settled and
reflected in the financial statements in the period of enactment.
 
 Stock Options Plans
 
  The Company measures stock-based compensation for employees using the
intrinsic-value method which assumes that options granted at the fair market
value at the date of grant have no intrinsic value. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," pro forma net loss and net loss per share are
presented in note 11 as if the fair value method had been applied.
 
 Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
 
  Long-lived assets are reviewed for impairment in value based upon
undiscounted future operating cash flows, and appropriate losses are
recognized whenever circumstances indicate that the carrying amount of an
asset may not be recoverable.
 
 
                                      43
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 Foreign Currency Translation
 
  The Company has determined that the U.S. dollar is the functional currency
for its subsidiaries outside the U.S. under SFAS No. 52, "Foreign Currency
Translation" ("SFAS 52"). Based on this determination, the Company's foreign
operations are measured by reflecting the financial results of such operations
as if they had taken place within a U.S. dollar-based economic environment.
Inventory, fixed assets and other non-monetary assets and liabilities are
remeasured from foreign currencies to U.S. dollars at historical exchange
rates where cash, accounts receivable and other monetary assets and
liabilities are remeasured at current exchange rates. Gains and losses
resulting from those remeasurements are included in income for the current
period.
 
 New Accounting Pronouncements
 
  In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") was issued and is effective for all periods
for fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The Company believes that
implementation of SFAS 133 will have no material impact on its financial
statements.
 
 Reclassifications
 
  Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 presentation.
 
(3) Acquisitions and Disposals
 
 Telecom International, Inc.
 
  On December 12, 1997, the Company issued 480,000 shares of its common stock
in exchange for all of the outstanding common stock of TI. TI is a system
integrator and installer of large satellite terminals used in rural telephony
and enterprise networks. The merger was accounted for as a pooling of
interests and accordingly, all prior period financial statements have been
restated as if the merger took place at the beginning of such periods.
 
  TI was a Subchapter S corporation for income tax purposes from its inception
on June 12, 1995, to December 31, 1995, and therefore did not pay U.S. federal
income taxes. Effective January 1, 1996, TI elected C corporation status for
federal income tax reporting purposes. TI has been and will continue to be
included in the Company's U.S. consolidated tax return since the effective
date of December 12, 1997 (the date of acquisition).
 
 Telecom Multimedia Systems, Inc.
 
  In August 1995, the Company purchased 72.5% of the outstanding common stock
and newly issued preferred stock of Telecom Multimedia Systems, Inc. ("TMSI")
for $1,000,000 cash and 10,000 shares of the Company's common stock valued at
$18.75 per share. TMSI develops and markets advanced Internet telephony
products, leveraging its expertise in digital signal processing solutions to
provide low delay, high quality, voice over IP solutions. The acquisition of
TMSI was accounted for under the purchase method of accounting. Accordingly,
the purchase price was allocated to the net assets acquired based upon their
estimated fair market values. The accompanying consolidated statements of
operations reflect the operations of TMSI through March 31, 1998, the
effective date of disposal.
 
 
                                      44
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  The Company sold certain assets and transferred certain liabilities of TMSI
for approximately $25 million in cash. A gain of approximately $9,950,000 (net
of transaction costs, the minority's share of the proceeds, certain normal
course reserves considered necessary and reserves required for certain
contingent liabilities of approximately $3,700,000 as described in note 12)
was recognized in the accompanying consolidated statement of operations for
1998. Included in the consolidated balance sheet at December 31, 1998, is
approximately $1,000,000 in cash held in escrow included as a component of
accounts receivable and approximately $4,300,000 included as a component of
accrued liabilities.
 
  The following sets out summarized financial information giving effect to the
disposal of TMSI in accordance with Article 11 of Regulation S-X.
<TABLE>
<CAPTION>
                                                     Three Months    Year Ended
                                                    Ended March 31, December 31,
                                                         1998           1997
                                                    --------------- ------------
                                                      (Unaudited)
<S>                                                 <C>             <C>
Net revenues:
  STM..............................................     $ 6,267       $50,440
  TMSI.............................................         682         1,708
                                                        -------       -------
    Total..........................................     $ 6,949       $52,148
                                                        =======       =======
Net loss
  STM..............................................     $(3,929)      $(1,592)
  TMSI.............................................        (145)         (459)
                                                        -------       -------
    Total..........................................     $(4,074)      $(2,051)
                                                        =======       =======
Changes in stockholders' equity
  As reported......................................     $26,790       $   --
  Gain on sale (net of tax)........................       9,452           --
                                                        -------       -------
                                                        $36,242       $   --
                                                        =======       =======
</TABLE>
 
(4) Discontinued Operations
 
  Effective March 31, 1996, the Company sold its RF Microsystems ("RF")
subsidiary to REMEC, Inc. ("REMEC") for cash of $2,926,000. RF designed and
manufactured microwave systems and components and provided technical support
under government contracts. Such disposition has been accounted for as a
disposal of a segment of a business and prior period financial statements have
been reclassified to reflect discontinuance of this business segment.
 
  During the three-months ended March 31, 1996, RF had revenues of $1,216,000
and net income of $37,000. Additionally, the Company recorded a gain on the
sale of RF of $51,000 which is included in income from discontinued operations
and gain on sale in 1996, net of income taxes, in the accompanying
consolidated statement of operations for 1996.
 
 
                                      45
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(5) Property, Plant and Equipment
 
  Property, plant and equipment consisted of the following:
 
<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1998    1997
                                                                ------- -------
                                                                  (dollars in
                                                                  thousands)
   <S>                                                          <C>     <C>
   Land........................................................ $ 2,530 $ 2,530
   Building and building improvements..........................   3,549   3,753
   Assets for long-term service contracts......................   2,380   7,776
   Satellite equipment.........................................     717     592
   Equipment...................................................   8,198   7,455
   Furniture and fixtures and Leasehold improvements...........     894     253
                                                                ------- -------
                                                                 18,268  22,359
   Less:
     Accumulated depreciation and amortization.................   7,212   5,334
                                                                ------- -------
                                                                $11,056 $17,025
                                                                ======= =======
</TABLE>
 
  Assets for long-term service contracts at December 31, 1997, consist
primarily of equipment related to DTPI's long-term fixed telephony service
operations in Mexico and Venezuela. In September of 1998, DTPI renegotiated
its long-term service contract with its Mexican partner whereby DTPI was paid
approximately $9,500,000 (before expenses) for the sale and installation of
remote terminal equipment utilized in the provision of telephony services.
Under the terms of the revised agreement, DTPI retained ownership of certain
gateway infrastructure equipment, earned revenues for maintaining the network
and providing the use of the gateway equipment and agreed to provide the
Mexican partner with additional equipment for up to a minimum of $70 million.
Arising from the revision of the agreement, the sales of remote equipment are
classified as revenue in the accompanying consolidated statement of operations
for 1998 and the gateway equipment continues to be classified in assets for
long-term service contracts.
 
  The Mexican partner has experienced financial difficulties and the Company
has reserved approximately $266,000 in allowances for doubtful accounts. Due
to uncertainty surrounding the recoverability of the gateway equipment, the
Company recognized an impairment charge of $500,000 in December 1998, in
accordance with SFAS 121 to adjust the carrying value of the equipment to its
estimated fair value.
 
(6) Long-term Receivables
 
  The Company's long-term receivables as of December 31, 1998 relate primarily
to a lease of certain satellite equipment to a customer in Brazil under a
sales-type lease arrangement. See note 19. Total minimum lease payments
receivable on this sales-type lease are as follows:
 
<TABLE>
<CAPTION>
                                                         Year ended December 31,
                                                         -----------------------
                                                         (dollars in thousands)
       <S>                                               <C>
       1999.............................................            759
       2000.............................................            759
       2001.............................................            114
                                                                 ------
                                                                  1,632
       Less: Unearned Interest..........................            142
                                                                 ------
                                                                  1,490
       Less: Current Portion............................            702
                                                                 ------
                                                                 $  788
                                                                 ======
</TABLE>
 
                                      46
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
(7) Accrued Liabilities
 
  Accrued liabilities consist of the following:
 
<TABLE>
<CAPTION>
                                                           December 31,
                                                      -----------------------
                                                         1998        1997
                                                      ----------- -----------
                                                      (dollars in thousands)
   <S>                                                <C>         <C>
   Accrued salaries, bonuses and payroll related
    expenses.........................................      $1,948      $  935
   Accrued engineering services......................         659         375
   Accrued legal & professional fees.................         254         295
   Accrued agent commissions.........................         373         350
   Accrued litigation, concessions and
    indemnifications.................................       2,654         --
   Accrued licenses..................................         368         --
   Other.............................................       1,000         184
                                                           ------      ------
                                                           $7,256      $2,139
                                                           ======      ======
</TABLE>
 
(8) Short-Term Borrowings and Long-Term Debt
 
 Short Term Borrowings
 
  Through March 31, 1999, the Company had a secured $10,000,000 revolving line
of credit with Wells Fargo HSBC Trade Bank N.A. guaranteed by the Export-
Import Bank of the United States under its Working Capital Guarantee Program
(collectively the "bank"). Borrowings under this facility bore interest at
Prime plus 1.0%. The prime rate at December 31, 1998 was 8.50%. Funds were
available under this line of credit based upon the level of foreign orders,
inventory balances available to fulfill foreign orders and certain eligible
foreign accounts receivable balances. In addition, this facility could be used
to issue standby letters of credit for bid and performance guarantees subject
to a 25% collateral requirement and availability under the line of credit. The
agreement contained various restrictions and covenants including maintaining a
minimum net worth, a minimum current ratio, and the requirement to be
profitable on an annual and quarterly basis. At December 31, 1998, and 1997,
the amounts available for borrowing under this facility were $10,000,000, of
which $9,050,000 and $5,850,000 were drawn down at December 31, 1998 and 1997,
respectively.
 
  The Company was not in compliance with certain covenants at December 31,
1998. In addition, the line of credit expired on April 1, 1999. On April 13,
1999, the Company received a demand letter from the bank in which the bank
threatened to pursue all available remedies, including commencing foreclosure
proceedings on its collateral if all outstanding amounts were not paid by the
Company within ten days. The Company is currently in discussions with the bank
with respect to a six month Forbearance Agreement and expects to reach an
arrangement with the bank prior to the expiration of the ten day period in the
demand letter. The Forbearance Agreement will require the Company to give the
bank amongst other things, additional collateral including a second deed of
trust on the Company's corporate headquarters, a pledge of stock of and
guarantees from all the Company's domestic and foreign subsidiaries (except
DTPI), a pledge of the note receivable from DTPI (see note 10) and an
assignment of the Company's patents, trademarks and leasehold interests. The
Forbearance Agreement will also reduce the advance rates against inventory and
accounts receivable balances and will require a permanent paydown of the line
of credit should the Company sell its corporate headquarters or should DTPI
repay the note to STM out of the proceeds of future financings.
 
  There can no assurance that the Company will reach agreement with the bank
for this Forbearance Agreement, nor that should the Company reach agreement
with the bank, that there will not be another Event of Default during the
Forbearance Agreement, nor that the company will have sufficient eligible
foreign orders, inventory and accounts receivable balances to enable the
Company to continue to borrow at its current level.
 
                                      47
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Should the Company not reach agreement with the bank or should the Company
experience an event of default under the Forbearance Agreement or should the
Company not have sufficient eligibility to continue to borrow at is existing
levels, the Company may be required to paydown either all or a portion of the
line of credit and dispose of certain assets to satisfy obligations to the
bank. However, the Company believes that alternative sources of funds are
available to meet its anticipated cash requirements for the next 12 months.
 
 Other Short-Term Lines of Credit
 
  In January 1997, the Company arranged a secured additional line of credit
with a bank for $1,750,000. The facility bears interest at prime, plus 1% and
is guaranteed by the Company. Funds are available under this line of credit
based on certain eligible accounts receivables and inventory balances. At
December 31, 1997, the amount available under this facility was approximately
$1,466,000 of which $450,000 was drawn down. The facility expired in February
1998 and was fully repaid.
 
  The Company continues to have two revolving credit facilities with one bank
totaling $1,600,000. The facilities are secured by the Company's certificates
of deposit in the same amount with the bank. Borrowings are due on demand and
accrue interest at .75% over the certificates of deposit rate. At both
December 31, 1998 and 1997, the outstanding balances under these credit
facilities was $1,600,000.
 
 Long-Term Debt
 
  In connection with the purchase of the Company's headquarters on July 28,
1994, the Company entered into a purchase money promissory mortgage note
("Mortgage Note") in the amount of $4,320,000. The Mortgage Note is secured by
the Company's land and building, accrues interest at 7% per annum, and
requires monthly principal and interest payments of $28,741 which commenced on
October 1, 1994. The Mortgage Note is being amortized over a 30-year period
and matures on September 1, 2009, at which time all remaining principal and
accrued interest is due.
 
  Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                            December 31,
                                                       ------------------------
                                                          1998         1997
                                                       -----------  -----------
                                                       (dollars in thousands)
       <S>                                             <C>          <C>
       Mortgage payable on building...................    $4,063      $4,165
       Capitalized lease obligations..................       627         740
                                                          ------      ------
         Total........................................     4,690       4,905
       Less current portion...........................      (384)       (328)
                                                          ------      ------
       Long-term debt.................................    $4,306      $4,577
                                                          ======      ======
</TABLE>
 
  The obligations for capital leases relate to leases entered into for the
purchase of computer and test equipment. The capitalized leases are at rates
which vary from 8.5% to 10.7% per annum.
 
  Future maturities on long-term debt are as follows:
 
<TABLE>
<CAPTION>
                                                         Year ended December 31,
                                                         -----------------------
                                                         (dollars in thousands)
       <S>                                               <C>
       1999.............................................         $  384
       2000.............................................            283
       2001.............................................            149
       2002.............................................             73
       2003.............................................             78
       Thereafter.......................................          3,723
                                                                 ------
                                                                 $4,690
                                                                 ======
</TABLE>
 
 
                                      48
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(9) Equity Investment in Affiliate
 
  In connection with the award of a contract for the provision of rural
telephony services in Venezuela, in May 1998, DTPI formed Altair C.A.
("Altair"), a joint venture company. Altair is 49% owned by DTPI and 51% owned
by Compania Anonima Nacional Telefonos de Venezuela ("CANTV"), the Venezuelan
national telephone company.
 
  Under the terms of the agreement, CANTV guarantees minimum revenues to
Altair for a fifteen year period.
 
  Altair is controlled by CANTV while DTPI manages day-to-day operations.
 
  The Company accounts for its investment in Altair under the equity method of
accounting as set out in note 3.
 
  At December 31, 1998, the Company's investment in Altair was $4,151,000
comprising a cash investment of approximately $625,000, non-cash contribution
of approximately $917,000, advances of approximately $2,543,000 plus equity in
the undistributed earnings of Altair of approximately $66,000.
 
  Summarized unaudited balance sheet and statement of operations information
for Altair as of December 31, 1998, and for the period May 1998 through
December 31, 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                            December 31, 1998
                                                          ----------------------
                                                          (dollars in thousands)
   <S>                                                    <C>
   Summarized balance sheet information:
     Current assets......................................        $ 3,269
     Assets for long-term service contracts..............          7,247
                                                                 -------
     Total assets........................................        $12,230
                                                                 =======
     Current liabilities.................................        $ 5,095
     Total liabilities and stockholders equity...........        $12,230
                                                                 =======
 
<CAPTION>
                                                            Inception through
                                                            December 31, 1998
                                                          ----------------------
   <S>                                                    <C>
   Summarized statement of operations:
     Revenue.............................................        $ 2,745
     Operating income....................................            208
     Net income..........................................            135
                                                                 =======
</TABLE>
 
(10) Redeemable Minority Interest
 
  In March 1998, the Company completed a $10 million equity offering of
571,429 shares of STM common stock and 1,200,000 shares of mandatory
redeemable preferred stock of DTPI, the Company's majority-owned subsidiary.
Concurrently with and as a condition of this transaction, the Company invested
$5 million for 1,000,000 shares of Series B Preferred Stock in DTPI, extended
a $10 million loan and entered into a Product Supply Agreement with DTPI. The
principal on the loan is repayable by DTPI out of the proceeds of any future
financings of DTPI that may occur.
 
  These Series A shares are redeemable at the option of the holder, if not
converted earlier into DTPI common stock, on the fifth anniversary of the date
of issuance, or in the event of an acquisition of the Company and the Company
continues to hold a majority of the voting stock of DTPI and a public offering
of DTPI shares has not
 
                                      49
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

been consummated. In the event of such acquisition of the Company and the
Series A holder elects to have their shares repurchased, then the Company or
its successor shall be obligated to ensure sufficient cash is available to
DTPI to repurchase the shares. In the event of a liquidation, dissolution or
winding up of DTPI, the Series A holders will have a liquidation preference
over the Series B holders and the note payable by DTPI to STM.
 
  The proceeds from the issuance of the mandatory redeemable Series A
Preferred Stock in DTPI plus accrued dividends net of unamortized issuance
costs have been classified as redeemable minority interest in the accompanying
consolidated balance sheet at December 31, 1998.
 
  The redemption amount is equal to $6,000,000 plus dividends of $0.50 per
share per annum accruing from the date of issuance, or $6,450,000 as of
December 31, 1998, and for each of the following five years as follows:
 
<TABLE>
<CAPTION>
                                                           Redeemable value of
                                                         liquidation/acquisition
                                                          preference as of the
                                                         Year Ended December 31,
                                                         -----------------------
                                                         (dollars in thousands)
       <S>                                               <C>
       1999.............................................         $7,050
       2000.............................................          7,650
       2001.............................................          8,250
       2002.............................................          8,850
       Thereafter.......................................          9,000
</TABLE>
 
  The redeemable minority interest has a redemption value of $9,000,000 in
March of 2003, the fifth anniversary of the issuance, which includes
$3,000,000 in accumulated preferred dividends. The accompanying consolidated
balance sheet includes approximately $450,000 in accumulated preferred
dividends as of December 31, 1998. The balance of $259,000 as of December 31,
1997, represents the minority interest in TMSI prior to the disposal of the
assets of TMSI.
 
(11) Stockholders' Equity
 
 Preferred Stock
 
  The Company is authorized to issue 5,000,000 shares of preferred stock. The
Board of Directors has the authority to issue the preferred stock in one or
more series, and to fix the rights, preferences, privileges and restrictions
thereof without any further vote by the holders of common stock.
 
 Common Stock
 
  As set out in the consolidated statement of stockholders' equity for the
year ended December 31, 1998, the Company completed an equity offering of
571,429 shares of STM common stock in a private placement with funds managed
by Pequot Capital Management, Inc. in March of 1998. The offering resulted in
net proceeds of approximately $3,956,000.
 
  In December 1997, the Company issued 480,000 shares of common stock in
exchange for all the outstanding common stock of TI (see note 3).
 
 Stock Options
 
  In January 1992, the Company adopted the Incentive Stock Option, Non
Qualified Stock Option and Restricted Stock Purchase Plan--1992 (the "1992
Plan"). The 1992 Plan was amended by the Board of Directors in 1998 to
increase the number of stock options available for grant by 900,000. The 1992
Plan now provides for the grant by the Company of options and/or rights to
purchase up to an aggregate of 1,750,000 shares of common stock.
 
                                      50
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  In October 1994, the Company's Board of Directors adopted the Satellite
Technology Management, Inc. 1994 Option Plan for Non-Employee Directors (the
"1994 Plan"). The 1994 Plan was approved by the Company's stockholders in July
1995. The 1994 Plan provides for the grant by the Company of options to
purchase up to 250,000 shares of common stock to non-employee members of the
Company's Board of directors who are neither employees nor paid consultants of
the Company.
 
  Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's basic and
diluted net loss and net loss per share would have been adjusted to the
following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                       1998     1997     1996
                                                     --------  -------  -------
   <S>                                               <C>       <C>      <C>
   Net loss:
     As reported.................................... $ (9,406) $(2,051) $(5,068)
     Pro forma...................................... $(11,604) $(3,288) $(5,818)
   Loss per basic share:
     As reported.................................... $  (1.36) $ (0.32) $ (0.80)
     Pro forma...................................... $  (1.67) $ (0.52) $ (0.92)
   Loss per diluted share:
     As reported.................................... $  (1.36) $ (0.32) $ (0.80)
     Pro forma...................................... $  (1.67) $ (0.52) $ (0.92)
</TABLE>
 
  Compensation cost of $2,198,000, $1,237,000 and $750,000 for 1998, 1997 and
1996, respectively, was determined using the Black-Scholes option pricing
model with the following weighted average assumptions for grants in 1998, 1997
and 1996--risk free interest rate of 5.33%, 6.33% and 6.21%, respectively, an
expected life of five years and an expected volatility rate of 76.2%, 68.3%
and 55.8%, respectively.
 
  Pro forma net loss and pro forma loss per share reflects only options
granted in 1998, 1997 and 1996. Therefore, the full impact of calculating
compensation cost for stock options under SFAS 123 is not reflected in the net
loss presented above because compensation cost is reflected over the options'
vesting period of five years and compensation cost for options granted prior
to January 1, 1996 is not considered.
 
  A summary of stock option transactions under all plans follows:
 
<TABLE>
<CAPTION>
                                                                Weighted-Average
                                                      Number     Exercise Price
                                                     of Shares     Per Share
                                                     ---------  ----------------
   <S>                                               <C>        <C>
   Options outstanding at December 31, 1995.........   631,706       $ 9.34
     Granted........................................   272,000        11.69
     Exercised......................................   (32,941)        2.93
     Canceled.......................................  (151,350)       13.25
                                                     ---------       ------
   Options outstanding at December 31, 1996.........   719,415         9.71
     Granted........................................   207,000         8.40
     Exercised......................................  (119,014)        5.54
     Canceled.......................................  (112,858)        9.57
     Cancelled for regrant(1).......................  (332,850)       12.68
     Regranted(1)...................................   332,850         7.13
                                                     ---------       ------
   Options outstanding at December 31, 1997.........   694,543         7.40
     Granted........................................   488,000         8.57
     Exercised......................................   (22,611)        6.47
     Canceled.......................................   (73,659)       10.37
                                                     ---------       ------
   Options outstanding at December 31, 1998......... 1,086,273       $ 7.75
                                                     =========       ======
</TABLE>
 
 
                                      51
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  The following table summarizes information regarding the stock options
outstanding at December 31, 1998:
 
<TABLE>
<CAPTION>
                               Number    Weighted Average Weighted Average   Number    Weighted Average
           Range of          Outstanding    Remaining      Exercise Price  Exercisable  Exercise Price
        Exercise Prices      at 12/31/98 Contractual Life    Per Share     at 12/31/98    Per Share
        ---------------      ----------- ---------------- ---------------- ----------- ----------------
   <S>                       <C>         <C>              <C>              <C>         <C>
   $3.88- 6.75.............     139,375        7.98            $5.06          48,875        $4.86
    7.13- 7.88.............     523,498        7.62             7.18         296,963         7.16
    8.50-14.25.............     423,400        9.26             9.33          21,450         9.50
                              ---------                        -----                        -----
   $3.88-14.25.............   1,086,273        8.31            $7.75         367,288        $6.99
                              =========                        =====                        =====
</TABLE>
 
  Common stock received through the exercise of non-qualified stock options or
incentive stock options which are sold by the optionee within two years of
grant or one year of exercise result in a tax deduction for the Company
equivalent to the taxable gain recognized by the optionee. For financial
reporting purposes, the tax effect of this deduction is accounted for as a
credit to common stock rather than as a reduction of income tax expense.
 
  (1) The Company implemented an option cancellation/regrant program for
  directors, executive officers, and all other employees holding stock
  options with an exercise price per share in excess of the market value of
  STM Wireless, Inc. common stock at the time the cancellation/regrant
  occurred. Optionees who accepted the repricing agreed that the regranted
  options would vest ratably over a period one year longer than the vesting
  period of the options cancelled. The program was effected on March 20, 1997
  and 332,850 options in excess of $7.125 per share were cancelled and
  332,850 new options were granted at an exercise price of $7.125, the fair
  value on the date of grant.
 
(12) Commitments and Contingencies
 
 Purchase Commitments
 
 REMEC
 
  In connection with the sale of RF (see note 4), the Company entered into
purchase commitments with REMEC to purchase components that are incorporated
into certain of the Company's products.
 
  Under the Manufacturing and Product Supply Agreement dated April 30, 1996
the Company entered into a two year agreement to purchase a minimum of
$9,375,000 of product for which there is no remaining obligation at December
31, 1998.
 
  Under the Development, Manufacturing and Product Supply Agreement, dated
April 30,1996 as amended November 1, 1996, the Company entered into a three
year agreement to undertake the joint development of two products. The
agreement requires the Company to reimburse REMEC for engineering expenses for
the development of the products up to $1,250,000 and to purchase products up
to approximately $18,000,000. STM will have title to and ownership of the
design of the products and will have exclusive rights to the sale of the
products. The three year period commenced with the production of the first
unit, which was in 1998. Should the Company fail to purchase the minimum
requirement of the products or elects to terminate the agreement, the Company
will be required to pay REMEC up to $2,475,000. To date, the Company has
expensed $1,250,000 for engineering expenses of which $250,000 was recognized
in 1997 and $1,000,000 was recognized in 1996 ($650,000 of which was
recognized in the fourth quarter). The Company has purchased approximately
$940,000 of product in 1998.
 
 
                                      52
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Other Vendors Commitments
 
  Under a Development, Manufacturing and Product Supply Agreement dated March
27, 1998, the Company entered into a two-year agreement with a vendor to
undertake the joint development of a product. The agreement requires the
Company to reimburse the vendor for engineering expenses for the development
of the product up to $120,000 and to purchase up to approximately $7,300,000
of product. Both parties jointly own the technology created, although the
vendor cannot exploit the design of the product to manufacture a product that
directly or indirectly competes with the product. The two-year period
commences with the production of the first unit. Should the Company fail to
purchase the minimum requirement of the product or elects to terminate the
agreement, the Company will be required to pay the vendor up to $1,000,000. As
of December 31, no amounts had been expensed under this contract.
 
  While management believes that none of these purchase commitments are in
excess of requirements and all purchases will be used to fulfill customer
orders in the normal course of business, there can be no assurance that the
Company will generate any future level of revenues sufficient to satisfy its
purchase commitments. (See notes 8 and 19.)
 
 Lease Commitments
 
  In 1998, the Company relocated it Network Systems Division to Georgia and
entered into a five-year lease commitment for administrative offices,
warehouse and manufacturing facilities.
 
  At December 31, 1998, the minimum future rental commitments under this non-
cancelable lease were as follows:
 
<TABLE>
<CAPTION>
                                                                     Year ended
                                                                    December 31,
                                                                    ------------
                                                                     (dollar in
                                                                     thousands)
       <S>                                                          <C>
       1999........................................................    $  409
       2000........................................................       412
       2001........................................................       423
       2002........................................................       434
       2003........................................................       332
                                                                       ------
                                                                       $2,010
                                                                       ======
</TABLE>
 
  Rent expense for 1998 was approximately $102,000.
 
 Litigation
 
  The Company is involved as both plaintiff and defendant in various claims
and legal actions arising in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position or results of
operation. The Company recognized an expense of approximately $350,000
associated with the wrongful termination of an employee in the fourth quarter
of 1996.
 
 Contingency
 
  TMSI Accruals. In connection with the sale of the assets of TMSI (see note
3), the Company is required to indemnify and hold harmless the Buyer for
certain losses, liabilities, claims, damages, expense or diminution of value
arising directly or indirectly from or in connection with a breach of any
representation, covenant, claim for expenses, liabilities which are not
assumed, taxes or specific customer claims. The indemnification provisions
apply for periods ranging from 2 years to 6 years depending upon the nature of
the exposure. The maximum exposure to the Company under the indemnification
provisions is $9,000,000.
 
                                      53
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  In addition, there are potential liabilities to customers that are specific
to TMSI and certain management bonuses that are directly associated with the
disposal of TMSI that are payable upon the occurrence of future events and it
is probable that these events will occur.
 
  Upon review of the Company's exposure, the Company has determined that there
is approximately $3,700,000 (comprised of a customer claim, intellectual
property exposures and management bonuses) that is required to be accrued in
accordance with SFAS 5, "Accounting for Contingencies".
 
 Non-Recourse Bank Loan
 
  A wholly-owned subsidiary of the Company, the net assets of which are
insignificant, is contingently liable under a $873,000 standby letter of
credit as security for a non-recourse bank loan made to the Company in a back-
to-back lending arrangement. The total facility available to the Company is
$3,600,000. Under the arrangement, a customer pledged cash balances and cash
flows sufficient to repay bank indebtedness used by that customer to fund
purchases from the subsidiary. The customer's bank indebtedness was arranged
under terms duplicate to, and is being used to service, the non-recourse bank
loan. The Company has determined that the customer's cash security is
sufficient to repay the bank's loan and that it is remote that the standby
letter of credit will be negotiated to repay any indebtedness owed by the
customer. Accordingly, the back-to-back loans have been offset by the Company
in the years prior to December 31, 1998. Prior to December 31, 1998, the
customer prepaid certain balances in a foreign currency without the permission
of the Company, resulting in a foreign exchange loss in the first quarter of
1999 (see note 19). The Company is claiming compensation from its customer for
this loss. The prepayment has been classified as a customer deposit in the
accompanying consolidated balance sheet at December 31, 1998.
 
  In addition, at December 31, 1998, the Company was contingently liable for
standby letters of credit for $524,000 for a customer warranty and a bid bond
issued in connection with a customer tender document.
 
(13) Income Taxes
 
  The components of loss from continuing operations before income taxes,
equity income and minority interest are as follows:
 
<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                                      -------------------------
                                                       1998     1997     1996
                                                      -------  -------  -------
                                                      (dollars in thousands)
     <S>                                              <C>      <C>      <C>
     U.S............................................  $(3,781) $(2,294) $(5,838)
     Foreign........................................   (1,583)    (189)  (1,292)
                                                      -------  -------  -------
       Total........................................  $(5,364) $(2,483) $(7,130)
                                                      =======  =======  =======
</TABLE>
 
 
                                      54
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  The components of income tax benefit (expense) consists of the following:
 
<TABLE>
<CAPTION>
                                                         Year ended December 31,
                                                         -----------------------
                                                            1998    1997  1996
                                                           -------  ---- ------
                                                               (dollars in
                                                               thousands)
     <S>                                                   <C>      <C>  <C>
     Current:
       Federal............................................ $   272  $ -- $  549
       State..............................................     (88)   --    147
       Foreign............................................    (593)   --    (39)
                                                           -------  ---- ------
         Total current....................................    (409)   --    657
                                                           -------  ---- ------
     Deferred:
       Federal............................................  (2,777)  224  1,127
       State..............................................    (512)   82    123
                                                           -------  ---- ------
         Total deferred...................................  (3,289)  306  1,250
                                                           -------  ---- ------
         Total............................................ $(3,698) $306 $1,907
                                                           =======  ==== ======
</TABLE>
 
  The actual income tax (expense) benefit differs from the statutory Federal
income tax rate as follows:
 
<TABLE>
<CAPTION>
                                   Year ended
                                  December 31,
                                ---------------------
                                1998    1997    1996
                                -----   -----   -----
     <S>                        <C>     <C>     <C>
     Statutory Federal income
      tax rate.................  34.0 %  34.0 %  34.0 %
     State taxes, net of
      Federal tax benefit......  (2.0)   (3.3)    3.5
     Effect of foreign
      operations............... (17.5)  (19.4)    7.7
     (Increase) decrease in
      valuation allowance...... (41.9)   (1.0)  (16.9)
     Other, net................   2.0     2.0    (1.6)
     Permanent differences..... (43.5)    --      --
                                -----   -----   -----
       Effective tax rate...... (68.9)%  12.3 %  26.7 %
                                =====   =====   =====
</TABLE>
 
  Cumulative temporary differences which give rise to deferred tax assets and
liabilities at December 31, 1998 and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                            1998     1997
                                                           -------  -------
                                                               (dollars in
                                                               thousands)
     <S>                                                   <C>      <C>      
     Deferred tax assets:
       Inventories........................................ $ 2,164  $ 1,088
       Accounts receivable................................     186      408
       Accrued expenses...................................     348      497
       R&D costs capitalized for tax purposes.............     139      208
       Tax credit carryforwards...........................   1,051    1,051
       Net operating loss carryforwards...................     793    2,241
       Other..............................................     137       99
       Valuation allowance................................  (4,646)  (2,398)
                                                           -------  -------
         Total deferred tax assets........................     172    3,194
     Deferred tax liabilities:
       Fixed assets.......................................    (172)     (62)
       Minority interest..................................     --       --
       Unremitted earnings of foreign subsidiary..........     --       --
                                                           -------  -------
         Net deferred tax assets.......................... $   --   $ 3,132
                                                           =======  =======
</TABLE>
 
 
                                      55
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  The valuation allowance established against deferred tax assets was
increased by $2,248,000 in 1998 due to continuing losses over the last three
years and expected losses in 1999. The Company has determined that it is not
more likely than not that deferred tax assets will be realizable.
 
  Included in the tax provision for 1999 is a reserve for $1,000,000 for
certain tax exposures that have been assessed in Brazil. To date, the Company
has responded to the assessment by the Brazilian tax authorities and intends
to vigorously challenge the tax assessment.
 
  At December 31, 1998, the Company had available research and development
credit carryforwards of approximately $450,000 which expire in 2001 to 2010,
as well as $95,000 of alternative minimum tax credits which carryforward
indefinitely.
 
  The Company has not provided for U.S. Federal income and foreign withholding
taxes on its foreign subsidiaries' undistributed earnings as of December 31,
1999, because such earnings are intended to be reinvested indefinitely. If
these earnings are distributed in the future, foreign tax credits would become
available under U.S. law to reduce the effect on the Company's overall tax
liability.
 
(14) Business Segment Information and Sales to Principal Customer
 
  In 1998, the Company adopted SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes new
standards for reporting financial and descriptive information regarding an
enterprise's operating segments. As a results, amounts presented are
determined on a consistent basis in accordance with SFAS 131.
 
  The Company operates in one principal industry segment: the design,
manufacture and provision of wireless-based satellite communications
infrastructure and terminal user products.
 
                                      56
<PAGE>
 
                               STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
<TABLE>
<CAPTION>
                                                   
                                                    Year ended December 31,   
  Revenues by geographic area:                     -------------------------- 
                                                     1998     1997     1996
                                                   --------  -------  -------
                                                    (dollars in thousands)
     <S>                                           <C>       <C>      <C>
     Total:
       Latin & South America...................... $ 21,101  $ 7,269  $ 5,212
       Africa & Middle East.......................    8,856    2,976    2,436
       Asia.......................................    7,309   35,630   20,166
       United States..............................    4,164    2,362    3,702
       Europe.....................................      592    3,911    6,778
                                                   --------  -------  -------
         Total sales.............................. $ 42,022  $52,148  $38,294
                                                   ========  =======  =======
 
<CAPTION>
                                                   Year ended December 31,
                                                   --------------------------
                                                     1998     1997     1996
                                                   --------  -------  -------
                                                    (dollars in thousands)
     <S>                                           <C>       <C>      <C>
     Products:
       Latin & South America...................... $ 19,377  $ 6,865  $ 4,551
       Africa & Middle East.......................    8,856    2,976    2,436
       Asia.......................................    7,034   35,630   20,166
       United States..............................    3,496      442    1,459
       Europe.....................................      592    3,911    6,778
                                                   --------  -------  -------
                                                   $ 39,355  $49,824  $35,390
                                                   ========  =======  =======
 
<CAPTION>
                                                   Year ended December 31,
                                                   --------------------------
                                                     1998     1997     1996
                                                   --------  -------  -------
                                                    (dollars in thousands)
     <S>                                           <C>       <C>      <C>
     Services:
       Latin & South America...................... $  1,724  $   404  $   661
       Africa & Middle East.......................      --       --       --
       Asia.......................................      275      --       --
       United States..............................      668    1,920    2,243
       Europe.....................................      --       --       --
                                                   --------  -------  -------
                                                   $  2,667  $ 2,324  $ 2,904
                                                   ========  =======  =======
 
<CAPTION>
                                                   Year ended December 31,
                                                   --------------------------
                                                     1998     1997     1996
                                                   --------  -------  -------
                                                    (dollars in thousands)
     <S>                                           <C>       <C>      <C>
     Operating loss by geographic area is as
      follows:
       Latin & South America...................... $ (1,117) $   510  $(1,839)
       Africa & Middle East.......................      --       --       --
       Asia.......................................       11      (76)     --
       United States..............................  (13,658)  (2,661)  (5,416)
       Europe.....................................      --       --       --
                                                   --------  -------  -------
                                                   $(14,764) $(2,227) $(7,255)
                                                   ========  =======  =======
</TABLE>
 
                                       57
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
<TABLE>
<CAPTION>
                                                            
                                                              December 31,
  Identifiable assets by geographic area are as follows: -----------------------
                                                          1998    1997    1996
                                                         ------- ------- -------
                                                         (dollars in thousands)
     <S>                                                 <C>     <C>     <C>
     Latin & South America.............................. $11,487 $ 6,145 $ 8,773
     Africa & Middle East...............................     --      --      --
     Asia...............................................   1,146      53     --
     United States......................................  50,568  48,219  43,067
     Europe.............................................     --      --      --
                                                         ------- ------- -------
                                                         $63,201 $54,417 $51,840
                                                         ======= ======= =======
</TABLE>
 
  The Company generates a substantial amount of its revenues from individually
significant orders, primarily on an international basis to both developed and
developing countries. This can give rise to a concentration of revenues and
credit risks to individual customers and in geographic regions.
 
  In 1998, the Company generated revenues from approximately 46 customers in
22 countries compared with 45 customers in 25 countries in 1997 and
approximately 58 customers in 26 countries in 1996.
 
  While in an individual year a customer can represent a significant
proportion of the revenues for that year, the Company does not generate a
significant level of on-going repeat revenues from any individual customer
except its Altair joint venture in Venezuela where the Company will sell
product at a minimum through the next four years. The Company's revenues, in
general, in any given year represent new projects, to new or existing
customers in new or existing geographic regions.
 
  The Company has generated approximately 50%, 14% and 14% of its revenue in
Latin and South America in 1998, 1997 and 1996, respectively, and 17%, 68% and
53% of its revenue in Asia in 1998, 1997 and 1996 respectively. In 1998, the
Company had two customers, one in Latin America and one in Asia, which
represented approximately 23% and 10% of the Company's consolidated revenues
for 1998, respectively. The customer in Latin America is experiencing
financial difficulties at this time and it is uncertain if any revenues will
be generated from this customer in future years. In addition, the Company
generated approximately 2%, 59% and 33% of revenues from one Asian customer in
1998, 1997 and 1996, respectively. The recent deterioration of the Asian
economies is impacting the level of revenues that the Company is earning from
this customer.
 
 Latin and South America
 
  Sales in Latin and South America in 1998 were to 7 customers. There were
significant sales to two customers for approximately $9,500,000 and
$3,600,000. The sales of $3,600,000 were to the Company's 49% owned joint
venture company (see note 9) which were recognized on an equity basis, whereby
the Company only recognized 51% of the value of the sale. At December 31,
1998, the accounts receivable balance from Altair was approximately
$4,400,000. The sales of $9,500,000 were to the Company's Mexican partner and
included the sale of equipment associated with the renegotiation of the
Company's long-term service agreement (see note 5). The Company's Mexican
partner is experiencing financial difficulties and it is uncertain if any
revenues will be generated from this customer in future years. In addition,
the Company has reserved all account balances receivable from its Mexican
partner.
 
 Asia
 
  Within the Asian region there was a sale to one customer in the Philippines
for approximately $4,300,000. This customer had an accounts receivable balance
of approximately $1,400,000 at December 31, 1998. In Thailand, sales to one
customer were approximately $685,000, $30,600,000 and $12,500,000 in 1998,
1997 and 1996, respectively. Accounts receivable balances from this customer
were insignificant at December 31, 1998 and 1997, respectively.
 
                                      58
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Africa & Middle East
 
  Sales in Africa and the Middle East were to six countries, none of which
represented greater than 10% of Company revenues in 1998. The increase in
revenues generated from the region reflects the Company's increased sales
coverage in all regions of the world and a refocus on its sales efforts due to
the deterioration of the Asian economies in 1998.
 
  Sales are, in general, to customers with substantial financial resources or
to public utilities that are government owned in the country to which the
product is shipped.
 
  The Company sells substantially all of its products and services
internationally on a letter of credit or similar guaranteed basis (whereby
customers post secured letters of credit to assure collection of receivables),
or pay substantial up-front deposits or on an open account basis.
 
  In 1998 and 1996, the Company established approximately $1,488,000 and
$1,931,000, respectively in accounts receivable allowances, primarily for
customer concessions and allowances that were estimated to be required.
 
(15) Employee Benefits
 
  Effective September 1991, the Company adopted a defined contribution 401(k)
savings and investment plan. The Company's contributions to the plan are
determined at the discretion of the Board of Directors. During 1997 and 1996,
the Company made contributions of $7,000 and $4,000, respectively to the Plan.
 
  In 1998, coinciding with the merger of the TI plan into the Company's plan,
the Board of Directors approved a matching contribution equal to the lesser
of, with respect to each participant (a) one-half of the amount contributed by
such participant to the plan, (b) $1,600 or (c) 1% of the participants salary
to be paid on an annual basis. An amount of approximately $70,000 was accrued
in 1998 for the Company's matching contribution and will be funded in 1999.
 
(16) Loss per common share
 
  The following table presents the computation of basic and diluted loss per
share:
 
<TABLE>
<CAPTION>
                                                       1998     1997     1996
                                                      -------  -------  -------
<S>                                                   <C>      <C>      <C>
Numerator:
  Numerator for basic and diluted loss per share--net
   loss.............................................. $(9,406) $(2,051) $(5,068)
                                                      =======  =======  =======
Denominator:
  Denominator for basic loss per share--weighted
   average number of common shares outstanding during
   the period........................................   6,936    6,384    6,318
  Incremental common shares attributable to exercise
   of outstanding options and warrants...............     --       --       --
                                                      -------  -------  -------
Denominator for diluted loss per share...............   6,936    6,384    6,318
                                                      =======  =======  =======
Basic loss per share................................. $ (1.36) $ (0.32) $ (0.80)
                                                      =======  =======  =======
Diluted loss per share............................... $ (1.36) $ (0.32) $ (0.80)
                                                      =======  =======  =======
</TABLE>
 
  The computation of diluted loss per share for 1998, 1997 and 1996 excluded
the effect of incremental common shares attributable to the exercise of
outstanding common stock options because their effect would be anti-dilutive
(see note 11).
 
                                      59
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
(17) Related Party Transaction
 
  In the normal course of business, the Company contracts with Gulf
Communications International, Inc. ("GCI") to provide installation services
for its products. GCI was formerly 50% owned by Mr. Jack Acker, a former
officer and director of the Company. Mr. Acker continues to have a financial
interest in GCI although not as a shareholder. Total purchases by the Company
from GCI were approximately $921,000, $720,000 and $469,000 in 1998, 1997 and
1996, respectively.
 
  Under the terms of its investment in DTPI (see note 10) , Pequot and DTPI
entered into a one-time, one-year consulting agreement for $100,000 to be
earned during the twelve month period succeeding the investment. During 1998,
approximately $80,000 was expensed for these services. However, no balance was
paid through December 31, 1998.
 
  In the normal course of business, the Company supplies equipment to its 49%
owned joint venture, Altair, S.A. (see note 9). Sales to Altair in 1998 were
approximately $7,250,000, of which the Company recognized approximately
$3,600,000 as revenue after elimination for transactions with affiliates due
to the Company's investment in Altair being accounted for under the equity
method. The Company also advances cash to Altair to fund its capital
expenditures and operating expenses and earns interest income at 13% on all
cash advances.
 
  Interest income earned on advances to Altair of approximately $56,000 were
recognized in 1998. At December 31, 1998 the accounts receivable balance from
Altair was approximately $4,400,000.
 
(18) Fourth Quarter Adjustments
  The results for the fourth quarter of 1998 includes charges of approximately
$7,100,000 which comprised approximately $2,500,000 for inventory obsolescence
associated with an earlier version of the Company's products, certain items
that are considered excess to requirements and reserves established for
certain inventory on long-term loan to customers, approximately $3,200,000 for
taxes comprising the write-off of deferred tax assets due to uncertainty
concerning the realizability of such assets due to continued losses by the
Company and a reserve established for certain tax exposures in Brazil,
reserves established for accounts receivable balances of approximately
$900,000 associated with the Company's Mexican partner (see notes 5 and 14)
and other overdue balances and an impairment reserve of $500,000 associated
with the carrying value of certain long-term revenue generating assets due to
the Mexican partner experiencing financial difficulties.
 
(19) Subsequent Events (Unaudited)
 
  Subsequent to December 31, 1998, the following events have occurred:
 
 Intent to Merge with Remec
 
  On April 14, 1999, the Company announced that it had entered into a letter
of intent with Remec, Inc. (Nasdaq NM Symbol: REMC) ("Remec") which provides
for the merger of the Company with Remec, or a subsidiary of Remec. The merger
will be structured as a tax-free, pooling of interests transaction. Each
stockholder of the Company will receive one share of Remec Common Stock for
every 3.8 shares of STM common stock currently owned by the stockholder. The
transaction is subject to the preparation and execution of a definitive merger
agreement, final approval of the board of directors of the Company and Remec,
approval by the Company's stockholders and other customary terms and
conditions. As a result of the foregoing contingencies, there can be no
assurance that the Company will consummate the transaction.
 
 Devaluation of Brazilian Currency:
 
  At December 31, 1998, the Company had certain accounts receivable balances
and long-term receivable balances due from two Brazilian customers. In
addition, the Company had cash balances in Brazil representing
 
                                      60
<PAGE>
 
                              STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

progress payments under contracts. Arising out of the devaluation of the
Brazilian Real, the Company has realized foreign currency losses in excess of
$1,500,000 in the first quarter of 1999, on cash balances in Brazil, or
certain account receivable balances where the Company has negotiated a
settlement of its long-term receivable due to the currency devaluation and on
other accounts receivable balances where the customer has partially
compensated the Company for the reduction in the value of the Brazilian Real.
In accordance with SFAS 52, the Company will recognize these foreign exchange
losses in Quarter 1, 1999.
 
 
 Quarter 1, 1999 losses
 
  The Company will incur substantial losses in the first quarter of 1999 due
to low revenues and foreign exchange losses arising from the devaluation of
the Brazilian Real. Furthermore, the level of revenues that the Company will
earn in Quarter 2, 1999, and future quarters is uncertain. The Company has
implemented certain cost saving measures and is reviewing other alternatives
to improve the performance of the business.
 
                                      61
<PAGE>
 
                               STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                                  SCHEDULE II
 
                               STM WIRELESS, INC.
 
                 Valuation and Qualifying Accounts and Reserves
              For the years ended December 31, 1998, 1997 and 1996
 
                         Accounts Receivable Allowances
                             (dollars in thousands)
 
<TABLE>
<CAPTION>
                               Balance at  Charged to
                               Beginning    Costs and               Balance at
Year ended                     of Period    Expenses    Deductions End of Period
----------                     ---------- ------------- ---------- -------------
<S>                            <C>        <C>           <C>        <C>
December 31, 1998.............   $1,019       1,488          485      $2,022
                                 ======      ======       ======      ======
December 31, 1997.............   $2,006          91        1,078      $1,019
                                 ======      ======       ======      ======
December 31, 1996.............   $   75       1,931          --       $2,006
                                 ======      ======       ======      ======
 
                               Inventory Reserves
                             (dollars in thousands)
 
<CAPTION>
                                             Charged
                               Balance at (credited) to
                               Beginning    Costs and               Balance at
Year ended                     of Period    Expenses    Deductions End of Period
----------                     ---------- ------------- ---------- -------------
<S>                            <C>        <C>           <C>        <C>
December 31, 1998.............   $3,010       2,640          --       $5,650
                                 ======      ======       ======      ======
December 31, 1997.............   $3,466        (456)         --       $3,010
                                 ======      ======       ======      ======
December 31, 1996.............   $  738       2,728          --       $3,466
                                 ======      ======       ======      ======
</TABLE>
 
                                       62
<PAGE>
 
                               STM WIRELESS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  Not applicable.
 
                                       63
<PAGE>
 
                                   PART III
 
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The Company currently has a Board of Directors consisting of five members.
In addition to the five members listed below, the Board of Directors presently
has two vacancies resulting from the resignation of Mr. Chan Kien Sing as a
member of the Board in December of 1998 and the resignation of Mr. Jack Acker
as a member of the Board in March of 1997. The following sets forth certain
information relating to the Company's directors and executive officers:
 
  Emil Youssefzadeh, 45, is the founder of the Company. He has been a director
of the Company and has served as its President since he founded the Company in
January 1982, and has served as Chief Executive Officer from January 1982 to
June 1988 and since January 1991. From January 1979 until founding the
Company, Mr. Youssefzadeh was a satellite research engineer with Hughes
Aircraft Company where his projects included design of satellite
communications systems and satellite earth stations. He also was a member of
the team for communications system engineering for the Intelsat VI spacecraft.
 
  Frank T. Connors, 64, has been a director of the Company since June 1988,
and served as its Chairman of the Board of Directors from June 1988 to
September 1993, and as its Chief Executive Officer from June 1988 to January
1991. Since October 1, 1994, Mr. Connors has been Vice Chairman of the Board
of Directors of the Company. From October of 1994 to January 1998, Mr. Connors
was Executive Vice President of the Company. From January 1998 until his
retirement as an officer of the Company in January of 1999, Mr. Connors served
as President of Direc-To-Phone International, Inc., the Company's fixed
station satellite telephony service subsidiary. From December 1982 to January
1988, Mr. Connors was the Chief Executive Officer of Doelz Networks, a
manufacturer of packet switching equipment. From 1979 to 1981, Mr. Connors was
Group Vice President of Northern Telecom's Computer Systems Group. Mr. Connors
is currently a director of DISC, Inc. (NASDAQ NMS: DCSC; DCSCW), an optical
computer storage manufacturing Company located in northern California.
 
  Dr. Ernest U. Gambaro, 59, has been a director of the Company since March
1997. In 1988, Dr. Gambaro directed the formation of Infonet Services
Corporation and has since served as its Vice President, General Counsel and
Secretary. Infonet Services Corporation operates the world's largest value
added international data communication network with offices in 58 countries.
Prior to 1988, Dr. Gambaro was Assistant General Counsel for Computer Sciences
Corporation focusing on the Company's international, acquisition and
divestiture activities. Between 1962 and 1975, Dr. Gambaro directed programs
at The Aerospace Corporation relating to the conceptual, definition and
implementation of advanced technology systems for space.
 
  Lawrence D. Lenihan, Jr., 33, is a principal at Dawson-Samberg Capital
Management, Inc. and has been a managing member of the general partner of
Pequot Private Equity Fund, L.P. since February 1997. From August 1993 to
October 1996, Mr. Lenihan was a principal at Broadview Associates, LLC. He
currently serves as a director of Direc-To-Phone International, Inc., Digital
Generation Systems, Inc., Trikon Technologies, Inc. and Sanctuary Woods
Multimedia Corporation.
 
  Guy Numann, 66, was the President of the Communications Sector of Harris
Corporation from 1989 until his retirement in 1997. From 1962 to 1989, Mr.
Numann served in various capacities in the Communications Sector and Two Way
Radio Division of Harris Corporation.
 
  Mohammad H. Farzin, 47, has been Executive Vice President of the Company
since January 1998. From January 1993 to January 1998, Mr. Farzin was the
Company's Vice President for Technology and Business Development. From January
1990 to January 1993, Mr. Farzin was the Company's Manager of Systems
Engineering.
 
  Michael Lindsay, 41, has been a corporate officer and Chief Operating
Officer of Direc-To-Phone International, Inc., the Company's fixed station
satellite telephony services provider since January 1998. Mr. Lindsay was
Chief Operating Officer of the Company from July 1994 until January 1998. From
January
 
                                      64
<PAGE>
 
1993 to March 1994, Mr. Lindsay served as Chief Operating Officer of Numedia
Corporation, a software developer. From September 1988 to October 1992, Mr.
Lindsay held various officer positions at Dowty Communications, Inc., a
company specializing in data communications, including President, Executive
Vice President and Vice President Finance Operations.
 
  Joseph J. Wallace, 39, has been Vice President-Finance and Chief Financial
Officer of the Company since March 1997. From April 1994 to March 1997, Mr.
Wallace was Corporate Controller of MAI Systems Corporation, a publicly held
worldwide provider of total information system solutions. From 1990 to 1993,
Mr. Wallace was Controller and Chief Financial Officer of Simmons Magee, PLC,
a British based value added reseller of computer products and services.
 
  There are no family relationships between any director, executive officer or
person nominated or chosen by the Registrant to become a director or executive
officer.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
  Based solely upon its review of the copies of reporting forms furnished to
the Registrant, or written representations that no annual Form 5 reports were
required, the Company believes that all filing requirements under Section
16(a) of the Exchange Act applicable to its directors, executive officers and
any persons holding 10% or more of the Registrant's common stock with respect
to the Registrant's year ended December 31, 1998, were satisfied, except as
follows: Guy Numann filed a late Form 4 with respect to the grant to him by
the Company of options to purchase 40,000 shares of the Company's common stock
on November 5, 1998; Jack Acker filed a late form 3 with respect to becoming
an officer of the Company on January 21, 1998; Mohammad Farzin filed a late
form 3 with respect to becoming an officer of the Company on January 21, 1998;
and Diane Walker filed a late form 4 with respect to the sale of 6,000 shares
of the Company's common stock on May 26, 1998.
 
                                      65
<PAGE>
 
ITEM 11--EXECUTIVE COMPENSATION
 
  The following table sets forth compensation received for the three years
ended December 31, 1998, by the Company's Chief Executive Officer, and the
four other most highly compensated executive officers of the Company serving
at December 31, 1998 (collectively, the "Named Executive Officers"):
 
                          Summary Compensation Table
 
<TABLE>
<CAPTION>
                                   Annual
                                Compensation
                              -----------------
Name and Principle            Salary
Position                 Year   ($)   Bonus ($)   Other ($)(5) Awards Options (#)
------------------       ---- ------- ---------   ------------ ------------------
<S>                      <C>  <C>     <C>         <C>          <C>
Emil Youssefzadeh....... 1998 310,547        0       33,020               0
 President and Chief     1997 239,698        0       33,020          10,000(6)
 Executive Officer       1996 219,448        0       33,020          10,000(7)
 
Jack Acker(1)........... 1998 214,783        0            0         100,000
 President STM
 Network Systems &
  Director
 
Mohammad H. Farzin...... 1998 205,492  500,000(4)         0         100,000
 Executive VP            1997 176,049        0            0               0
                         1996 126,402        0            0               0
 
Frank Connors(2)........ 1998 206,092        0            0               0(8)
 Executive VP            1997 165,577        0            0          15,000(9)
 Vice Chairman &         1996 150,000        0            0          10,000(7)
  President, DTPI        
 
Michael Lindsay......... 1998 179,981        0            0               0(8)
 Corporate Officer &     1997 160,169        0            0               0
 Chief Operating         1996 148,440        0            0               0
  Officer, DTPI         
 
Joseph Wallace(3)....... 1998 149,811   30,000(4)         0               0
 VP, Finance &           1997  95,673        0            0          25,000
 Chief Financial Officer
</TABLE>
--------
(1) Mr. Acker commenced employment with the Company in December 1997. Mr.
    Acker resigned as an officer of the Company and from the board of
    directors of the Company in March of 1999.
 
(2) Mr. Connors retired as an officer of the Company in January of 1999.
 
(3) Mr. Wallace commenced employment with the Company in March 1997.
 
(4) The bonus was paid in connection with the sale of substantially all of the
    assets of Telecom Multimedia Systems, Inc., the Company's subsidiary, to
    Inter-Tel, Incorporated in June of 1998.
 
(5) During 1998, 1997 and 1996 amounts represent $33,020, $33,020 and $33,020,
    respectively, of automobile allowance and expenses paid by the Company for
    the benefit of the Chief Executive Officer.
 
(6) Includes regrant of 10,000 options on March 20, 1997 in connection with
    the Company's option cancellation/regrant program.
 
(7) These options were cancelled on March 20, 1997 in connection with the
    Company's option cancellation/regrant program.
 
(8) During 1998, Mr. Connors and Mr. Lindsay were not granted any options to
    purchase shares of the Company's common stock. However, Mr. Connors and
    Mr. Lindsay were granted options to purchase common stock of Direc-To-
    Phone International, Inc. ("DTPI"), the Company's majority owned
    subsidiary. Mr. Connors and Mr. Lindsay were granted options to purchase
    50,000 shares and 120,000 shares, respectively, of DTPI common stock.
 
(9) Includes regrant of 15,000 options on March 20, 1997 in connection with
    the Company's option cancellation/regrant program.
 
                                      66
<PAGE>
 
                       Option Grants in Last Fiscal Year
 
  The following table sets forth information concerning individual grants of
STM Wireless, Inc. stock options made during the fiscal year ended December
31, 1998, to each of the Named Executive Officers:
 
<TABLE>
<CAPTION>
                                                                             Potential
                                                                        Realizable Value at
                                                                              Assumed
                                                                          Annual Rates of
                                                                            Stock Price
                                 % Total Options                         Appreciation for
                         Options    Granted to    Exercise                Option Term(3)
                         Granted    Employees       Price   Expiration  -------------------
Name                      (No.)  In Fiscal Yr.(1) ($/share)  Date(2)     5% ($)   10% ($)
----                     ------- ---------------- --------- ----------  -------- ----------
<S>                      <C>     <C>              <C>       <C>         <C>      <C>
Jack Acker.............. 100,000       18.9%        $9.00     6/8/08(4) $566,005 $1,434,368
Mohammad H. Farzin...... 100,000       18.9%        $9.00     6/8/08    $566,005 $1,434,368
</TABLE>
--------
(1) Options to purchase an aggregate of 528,000 shares of Common Stock were
    granted to employees, including the named Executive Officers, during the
    year ended December 31, 1998.
 
(2) Options granted have a term of ten years, subject to earlier termination
    on certain events related to termination of employment or service to the
    Company.
 
(3) The potential realizable value is calculated based on the term of the
    option at its time of grant (10 years). It is calculated by assuming that
    the stock price appreciates at the indicated annual rate compounded
    annually for the entire term of the option and that the option is
    exercised and sold on the last day of its term for the appreciated stock
    price. No gain to the option holder is possible unless the stock price
    increases over the option term.
 
(4) Mr. Acker resigned as an employee of the Company and from the Board of
    Directors of the Company in March 1998. Under the terms of Mr. Acker's
    option grant, all options terminated on the date of his resignation and
    he, therefore, will not be entitled to exercise such options.
 
  The following table sets forth information concerning individual grants of
Direc-To-Phone International, Inc. ("DTPI") stock options made during the
fiscal year ended December 31, 1998, to each of the Named Executive Officers:
 
<TABLE>
<CAPTION>
                                                                    Potential
                                                                   Realizable
                                                                    Value at
                                                                     Assumed
                                                                 Annual Rates of
                                                                   Stock Price
                                                                  Appreciation
                           % Total Options                         for Option
                   Options    Granted to    Exercise                 Term(3)
                   Granted    Employees       Price   Expiration ---------------
Name                (No.)  In Fiscal Yr.(1) ($/share)  Date(2)   5% ($)  10% ($)
----               ------- ---------------- --------- ---------- ------- -------
<S>                <C>     <C>              <C>       <C>        <C>     <C>
Frank Connors....   50,000       41.1%        $0.50    11/04/08  $15,723 $39,844
Michael Lindsay..  120,000       17.1%        $0.50    11/04/08  $37,734 $95,625
</TABLE>
--------
(1) Options to purchase an aggregate of 291,800 shares of DTPI common stock
    were granted to employees, including the named Executive Officers, during
    the year ended December 31, 1998.
(2) Options granted have a term of ten years.
(3) The potential realizable value is calculated based on the term of the
    option at its time of grant (10 years). It is calculated by assuming that
    the stock price appreciates at the indicated annual rate compounded
    annually for the entire term of the option and that the option is
    exercised and sold on the last day of its term for the appreciated stock
    price. No gain to the option holder is possible unless the stock price
    increases over the option term.
 
                                      67
<PAGE>
 
                Aggregated Option Exercises in Last Fiscal Year
                       and Fiscal Year-end Option Values
 
  The following table sets forth information concerning exercises of stock
options during the fiscal year ended December 31, 1998, by each of the named
executive officers and the year-end value of unexercised options:
 
<TABLE>
<CAPTION>
                                                           Number of       Values of
                                                          Unexercised     Unexercised
                                                           Options at     In-the-Money
                                                         Fiscal Yearend    Options at
                            Shares Acquired                  (No.)       Fiscal End ($)
                              on Exercise      Value      Exercisable/    Exercisable/
          Name                   (No.)      Realized ($) Unexercisable  Unexercisable(1)
          ----              --------------- ------------ -------------- ----------------
   <S>                      <C>             <C>          <C>            <C>
   Emil Youssefzadeh.......        0             0        6,667/  3,333      $0/$0
   Jack Acker..............        0             0            0/100,000      $0/$0
   Mohammad H. Farzin......        0             0       78,667/123,333      $0/$0
   Frank Connors...........        0             0       11,667/  3,333      $0/$0
   Michael Lindsay.........        0             0       80,000/ 20,000      $0/$0
   Joseph Wallace..........        0             0        6,250/ 17,750      $0/$0
</TABLE>
--------
(1) Value is based on fair market value of Common Stock as of December 31,
    1998 stock market close minus the exercise price or base price of "in-the-
    money" options. The closing sales price for the Company's Common Stock as
    of December 31, 1998 on the NASDAQ Stock Market was $4.75
 
 Directors' Fees
 
  The Chairman of the Board of Directors (if an outside director) receives an
annual retainer at the rate of $48,000, and each of the outside directors
receives an annual retainer at the rate of $15,000 for services rendered in
his or her capacity as a director of the Company. Accordingly, during 1998,
Mr. Dennis Elliott received $36,000 (as he was Chairman of the Board of
Directors until the annual meeting of stockholders in September of 1998, at
which time he did not stand for reelection); Ms. Diane Walker received $11,250
(as she was an outside director until the annual meeting of stockholders in
September of 1998, at which time she did not stand for reelection); Mr. Chan
Kien Sing received $7,500 (as he served on the Board from March of 1998 until
his resignation in December of 1998); Mr. K.P. Tan received $3,750 (as he
served on the Board until his death in January of 1998); Mr. Gambaro received
$15,000; and Mr. Numann received $3,250 (as he joined the Company's Board in
September of 1998) for their services as outside directors of the Company. The
Company's outside directors also receive options to purchase 20,000 shares of
the Company's common stock upon joining the Company's board, with an exercise
price equal to the fair market value of the common stock at the time of grant.
The Company's outside directors were also reimbursed for expenses incurred for
meetings of the Board of Directors which they attended.
 
 Consulting Agreements
 
  In November of 1998, the Company entered into a Consulting Agreement with
Mr. Numann, pursuant to which, Mr. Numann provides the Company with up to 40
hours of consulting services per month related to identifying and facilitating
introductions with potential customers, strategic partners and financing
institutions, and working on strategic transactions on behalf of the Company.
The consulting agreement is terminable by either party upon 30 days notice. In
consideration for his consulting services, Mr. Numann received options to
purchase 40,000 shares of the Company's common stock. Such options vest
ratably over four years (provided that no options shall vest upon termination
of the consulting agreement) and have an exercise price equal to the fair
market value of the Company's common stock at the time of grant, which was
$5.6875.
 
  In March 1998, the Company completed a $10 million equity offering of shares
of STM and Direc-To-Phone International, Inc. ("DTPI"), the Company's
subsidiary, to Pequot Private Equity Fund L.P. ("Pequot"), the private
investment vehicle of Pequot Capital Management, Inc. Through the transaction,
Pequot acquired
 
                                      68
<PAGE>
 
571,429 shares in the Company. Pequot Capital Management, Inc. is the
beneficial owner of these shares. Coinciding with the equity offering, two
officers of Pequot, including Mr. Lenihan, were appointed to DTPI's Board of
Directors. In connection with the offering, Pequot Capital Management, Inc.
entered into an one year consulting agreement with DTPI, pursuant to which
Pequot Capital Management, Inc. provides consulting services to DTPI in
consideration for a fee of $100,000. The consulting services consisted of (a)
arranging introductions to investment banking firms, financial institutions
and assisting in identification of potential investors; (b) assisting DTPI in
the recruitment of senior management; and (c) performing analyses of potential
strategic partners and partnering relationships.
 
 Retirement of Mr. Connors
 
  In January of 1999, Mr. Connors retired from his position as an executive
officer of the Company, at which time, the Company granted Mr. Connors a
retirement package which consists of (a) $100,000, half of which was paid in
January of 1999 and the other half of which will be paid in June of 1999 and
(b) retention, at the Company's expense, of medical and health benefits for
Mr. Connors and his dependents through 1999. In addition, as long as Mr.
Connors remains on the Company's Board of Directors, he will be entitled to
the same remuneration as the other outside directors.
 
 Compensation Committee Interlocks and Insider Participation
 
  The Compensation Committee of the Company's Board of Directors consists of
three members. During the year ended December 31, 1998, Mr. Elliot, Ms. Walker
and Mr. Gambaro were members of the Compensation Committee until the annual
meeting of the stockholders of the Company in September of 1998, at which time
Mr. Elliot and Ms. Walker did not stand for reelection to the Company's board
of directors. Following the annual meeting of the stockholders of the Company,
the Compensation Committee was comprised of Mr. Lenihan, Mr. Numann and Mr.
Gambaro.
 
             REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE
 
  The following report is submitted by the Compensation and Stock Option
Committee of the Board of Directors with respect to the executive compensation
policies established by the Compensation and Stock Option Committee and
recommended to the Board of Directors and compensation paid or awarded to
executive officers for the fiscal year ended December 31, 1998.
 
  The Compensation and Stock Option Committee determines the annual salary,
bonus and other benefits, including incentive compensation awards, of the
Company's senior management and recommends new employee benefit plans and
changes to existing plans to the Company's Board of Directors. The
Compensation Committee of the Company's Board of Directors consists of three
members. During the year ended December 31, 1998, Mr. Elliot, Ms. Walker and
Mr. Gambaro were members of the Compensation Committee until the annual
meeting of the stockholders of the Company in September of 1998, at which time
Mr. Elliot and Ms. Walker did not stand for reelection to the Company's board
of directors. Following the annual meeting of the stockholders of the Company,
the Compensation Committee was comprised of Mr. Lenihan, Mr. Numann and Mr.
Gambaro.
 
Compensation Policies and Objectives
 
  In establishing and evaluating the effectiveness of compensation programs
for executive officers, as well as other employees of the Company, the
Compensation and Stock Option Committee is guided by three basic principles:
 
  .  The Company must offer competitive salaries to be able to attract and
     retain highly-qualified and experienced executives and other management
     personnel.
 
  .  Annual executive compensation in excess of base salaries should be tied
     to individual and Company performance.
 
                                      69
<PAGE>
 
  .  The financial interests of the Company's executive officers should be
     aligned with the financial interest of the stockholders, primarily
     through stock option grants which reward executives for improvements in
     the market performance of the Company's Common Stock.
 
  Salaries and Employee Benefit Programs. In order to retain executives and
other key employees, and to be able to attract additional well-qualified
executives when the need arises, the Company strives to offer salaries, and
health care and other employee benefit programs, to its executives and other
key employees that are comparable to those offered to persons with similar
skills and responsibilities by competing businesses in the local geographic
area.
 
  In recommending salaries for executive officers, the Compensation and Stock
Option Committee (i) reviews the historical performance of the executives and
(ii) informally reviews available information, including information published
in secondary sources, regarding prevailing salaries and compensation programs
offered by competing businesses that are comparable to the Company in terms of
size, revenue, financial performance and industry group. Many, though not all,
of these competing businesses, that have securities which are publicly traded,
are included in the S&P Communication--Equipment Manufacturer Index used in
the Stock Performance Graph below. Another factor which is considered in
recommending salaries of executive officers is the cost of living in Southern
California where the Company is headquartered, as such cost generally is
higher than in other parts of the country.
 
  In order to retain qualified management personnel, the Company has followed
the practice of seeking to promote executives from within the Company whenever
practicable. The Board of Directors believes that this policy enhances
employee morale and provides continuity of management. Typically, modest
salary increases are made in conjunction with such promotions.
 
  Performance-Based Compensation. The Board of Directors believes that the
motivation of executives and key employees increases as the market value of
the Company's Common Stock increases. Nevertheless, the Company provides a
merit bonus in cash or stock options to executives and key employees which is
dependent on the Company's achievements and the direct contributions made by
each executive and other key employees. Accordingly, at the beginning of each
fiscal year, the Company establishes short term and long term plans, and at
the end of the fiscal year, the collective and individual contributions of the
executives to the Company's achievements are evaluated. Cash bonuses are
awarded if the Company achieves or exceeds the earnings goal established for
the fiscal year and are limited, subject to extraordinary exceptions, to
amounts ranging from five percent (5%) to fifty percent (50%) of an
executive's base salary.
 
  The earnings goal is established on the basis of the annual operating plan
developed by management and approved by the Board of Directors. The annual
operating plan, which is designed to maximize profitability within the
constraints of economic and competitive conditions, some of which are outside
the control of the Company, is developed on the basis of (i) the Company's
performance for the prior fiscal year; (ii) estimates of sales revenue for the
plan year based upon recent market conditions, trends and competition and
other factors which, based on historical experience, or expected to affect the
level of sales that can be achieved; (iii) historical operating costs and cost
savings that management believes can be realized; (iv) competitive conditions
faced by the Company; and (v) additional expenditures beyond prior fiscal
years in expansion or research and development toward growth of the Company's
business in future fiscal years. By taking all of these factors into account,
including market conditions, the earnings goal in the annual operating plan is
determined.
 
  In certain instances, bonuses are awarded not only on the basis of the
Company's overall profitability, but also on the achievement by an executive
of specific objectives within his or her area of responsibility. For example,
a bonus may be awarded for any executive's efforts in achieving greater than
anticipated cost savings, or completing a new product on target.
 
  As a result of this performance-based merit bonus program, executive
compensation, and the proportion of each executive's total cash compensation
that is represented by incentive or bonus income, may increase in those years
in which the Company's profitability increases.
 
                                      70
<PAGE>
 
  Stock Options and Equity-Based Programs. In order to align the financial
interests of executive officers and other key employees with those of the
stockholders, the Company grants stock options to its executive officers and
other key employees on a periodic basis, taking into account the size and
terms of previous grants of equity-based compensation and stock holdings in
determining awards. Stock option grants, in particular, reward executive
officers and other key employees for performance that results in increases in
the market price of the Company's Common Stock, which directly benefit all
stockholders. Moreover, the Compensation and Stock Option Committee generally
has followed the practice of granting options on terms which provide that the
options become exercisable in cumulative annual installments, generally over a
three to five-year period. The Compensation and Stock Option Committee
believes that this feature of the option grants not only provides an incentive
for executive officers to remain in the employ of the Company, but also makes
longer term growth in share prices important for the executives who receive
stock options.
 
Fiscal Year 1998 Compensation
 
  The salaries of the Named Executive Officers increased over the salaries
paid in fiscal 1997, primarily as a result of the greater competitive
environment in which the Company operates. Since the Company did not meet the
earnings goals established for the year, no bonus payments were made to any of
the Named Executive Officers for the year ended December 31, 1998, with the
following exceptions. Mr. Farzin and Mr. Wallace each received special merit
bonuses in connection with their role in the sale of substantially all of the
assets of Telecom Multimedia Systems, Inc., the Company's subsidiary, to
Inter-Tel Incorporated for approximately $25 million in June of 1998.
 
  The Company is required to disclose its policy regarding qualifying
executive compensation deductibility under Section 162(m) of the Internal
Revenue Code of 1986, as amended, which provides that, for purposes of the
regular income tax and the alternative minimum tax, the otherwise allowable
deduction for compensation paid or accrued with respect to a covered employee
of a public corporation is limited to no more than $1 million per year. It is
not expected that the compensation to be paid to the Company's executive
officers for fiscal 1998 will exceed the $1 million limit per officer. The
Company's Incentive Stock Option, Non-Qualified Stock Option and Restricted
Stock Purchase Plan--1992 is structured so that any compensation deemed paid
to an executive officer when he exercises an outstanding option under the
plan, with an exercise price equal to the fair market value of the option
shares on the grant date, will qualify as performance-based compensation that
will not be subject to the $1 million limitation.
 
                                          The Compensation Committee of the
                                          Board of Directors
 
                                          Dr. Ernest U. Gambaro
                                          Lawrence D. Lenihan, Jr.
                                          Guy W. Numann
 
                                      71
<PAGE>
 
                            STOCK PERFORMANCE GRAPH
 
  Set forth below is a line graph comparing the cumulative stockholder return
on the Company's Common Stock with the cumulative total return of the S&P
Communications-Equipment/Manufacturer Index and the NASDAQ Stock Market--US
Index for the period commencing December 31, 1992 and ended on December 31,
1998.
 
                             [GRAPH APPEARS HERE]
 
                                      72
<PAGE>
 
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  Set forth below is certain information as of March 31, 1998, regarding the
beneficial ownership of the Company's common stock by (i) any person who was
known by the Company to own more than 5% of the voting securities of the
Company, (ii) each of the directors, (iii) each of the Named Executive
Officers and (iv) all directors and executive officers as a group. Except as
otherwise indicated, the Company believes, based on information furnished by
such owners, that the beneficial owners of the Registrant's Common Stock
listed below have sole investment and voting power with respect to such
shares, subject to applicable community property laws.
 
<TABLE>
<CAPTION>
     Five Percent Shareholders,
             Directors,
    Named Executive Officers and
           Directors and                                 Amount and Nature of
   Executive Officers as a Group                         Beneficial Ownership Percent of Class
   -----------------------------                         -------------------- ----------------
   <S>                                                   <C>                  <C>
   Emil Youssefzadeh(1)................................       1,336,755             18.4%
    STM Wireless, Inc.
    One Mauchly
    Irvine, California 92618
 
   Berjaya Group (Cayman), Ltd.(2).....................       1,221,294             16.8%
    Level 17, Shahzan Prudential Tower
    30 Jalan Sultan Ismail
    50250 Kuala Lumpur, Malaysia
 
   Pequot Capital Management, Inc.(3)..................         778,929             10.7%
    c/o David J. Malat
    500 Nyala Farm Road, Westport, CT 06880
 
   Lawrence D. Lenihan, Jr.(3).........................         778,929             10.7%
 
   Guy W. Numann.......................................               0                *
 
   Jack F. Acker.......................................         264,458              3.6%
 
   Frank T. Connors(4).................................         193,080              2.7%
 
   Dr. Ernest U. Gambaro(5)............................          10,000                *
 
   Mohammad H. Farzin(6)...............................         102,215              1.4%
 
   Michael Lindsay(7)..................................          80,000              1.1%
 
   Joseph Wallace(8)...................................          12,500                *
 
   All Directors and Executive Officers
    as a group (9 persons)(1)(3)(4)(5)(6)(7)(8)........       2,777,937             38.2%
</TABLE>
--------
 *  Less than 1%
 
(1) Includes 249,000 and 244,020 shares held by Kamil Youssefzadeh and Shafigh
    Youssefzadeh, respectively, who are brothers of Emil Youssefzadeh, for
    which Emil Youssefzadeh has voting rights. Accordingly, Emil Youssefzadeh
    is deemed to share beneficial ownership of these shares. Further, includes
    10,000 shares issuable upon exercise of stock options exercisable within
    60 days of March 31, 1999.
 
(2) According to a report filed with the Securities and Exchange Commission,
    Berjaya Group (Cayman), Ltd. ("Berjaya Cayman") is a wholly-owned
    subsidiary of, and is controlled by, Berjaya Group Berhad ("Berjaya"), a
    Malaysian corporation, whose principal offices are located at Level 17,
    Shahzan Prudential Tower, 30 Jalan Sultan Ismail, 50250 Kuala Lumpur,
    Malaysia. Accordingly, Berjaya may be deemed to beneficially own such
    shares. However, Berjaya disclaims such beneficial ownership pursuant to
    Rule 13d-4 under the Securities Exchange Act of 1934, as amended.
 
(3) At March 31, 1999, Pequot Capital Management, Inc. beneficially owned
    778,929 shares in the Company. 571,429 shares were acquired through its
    Pequot Private Equity Fund L.P. in an equity offering of shares. (See Item
    13.)
 
                                      73
<PAGE>
 
(4) Inclusive of 15,000 shares issuable upon exercise of stock options
    exercisable within 60 days of March 31, 1999.
 
(5) Inclusive of 10,000 shares issuable upon exercise of stock options
    exercisable within 60 days of March 31, 1999.
 
(6) Inclusive of 102,000 shares issuable upon exercise of stock options
    exercisable within 60 days of March 31, 1999.
 
(7) Consists of 80,000 shares issuable upon exercise of stock options
    exercisable within 60 days of March 31, 1999.
 
(8) Consists of 12,500 shares issuable upon exercise of stock options
    exercisable within 60 days of March 31, 1999.
 
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  In June 1994, the Registrant sold 693,188 shares of newly issued common
stock at a price of $10.00 per share to Berjaya Cayman, a wholly-owned
subsidiary of Berjaya Group Berhad. In addition, Berjaya Cayman purchased an
additional 528,106 shares of common stock from the open market and from
certain former shareholders of the Company, COM.NET S.p.A. ("COMNET") and IMI
Capital Markets USA Corporation. A major shareholder and the Chairman of the
Board of Directors of Berjaya Group Berhad is also a major shareholder and a
director of Mutiara Telecommunications SDN ("Mutiara") a customer of the
Company. The Registrant believes that the terms and conditions of sales to
Mutiara were negotiated at arm's length and are no less favorable than those
that could be entered into with independent parties. Mr. Kien Sing Chan, Group
Executive Director of Berjaya Group Berhad, was a director of the Company
until his resignation in December of 1998.
 
  In 1997 and 1996, the Company contracted with Gulf Communications
International, Inc. ("GCI") in the normal course of business to provide
installation services. Until June 1998, Jack Acker served as the Chairman of
the Board and was a 50% owner of GCI. Mr Acker continues to have a financial
interest in GCI, although not as a Shareholder. Total purchases by the Company
from GCI were approximately $921,000, $720,000 and $469,000 in 1998, 1997 and
1996, respectively.
 
  In December 1997, the Company entered into an Agreement and Plan of Merger
with Telecom International, Inc. ("TI") pursuant to which TI merged with and
into a wholly-owned subsidiary of the Company. Under the terms of the
acquisition, the Company issued 480,000 shares of its Common Stock to TI's
former stockholders, including Jack Acker, who received 260,458 shares of the
Company's Common Stock as a result of the acquisition.
 
  In March 1998, the Company completed a $10 million equity offering of shares
of STM and Direc-To-Phone International, Inc. ("DTPI"), the Company's
subsidiary, to Pequot Private Equity Fund L.P. ("Pequot"), the private
investment vehicle of Pequot Capital Management, Inc. Through the transaction,
Pequot acquired 571,429 shares in the Company. Pequot Capital Management, Inc.
is the beneficial owner of these shares. Coinciding with the equity offering,
two officers of Pequot, including Mr. Lenihan, were appointed to DTPI's Board
of Directors. In connection with the offering, Pequot Capital Management, Inc.
entered into an one year consulting agreement with DTPI, pursuant to which
Pequot Capital Management, Inc. provides consulting services to DTPI in
consideration for a fee of $100,000. The consulting services consisted of (a)
arranging introductions to investment banking firms, financial institutions
and assisting in identification of potential investors; (b) assisting DTPI in
the recruitment of senior management; and (c) performing analyses of potential
strategic partners and partnering relationships.
 
                                      74
<PAGE>
 
                                    PART IV
 
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
 
  (a) Financial Statements, Financial Statement Schedule and Exhibits
 
     (1) Financial Statements: The following Consolidated Financial
  Statements of the Company, are incorporated by reference under Part II,
  Item 8 herein.
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
  Consolidated Balance Sheets as of December 31, 1998 and 1997............
  Consolidated Statements of Operations for the Years Ended December 31,
   1998, 1997 and 1996....................................................
  Consolidated Statements of Stockholders' Equity for the Years Ended
   December 31, 1998, 1997 and 1996.......................................
  Consolidated Statements of Cash Flows for the Years Ended December 31,
   1998, 1997 and 1996....................................................
  Notes to Consolidated Financial Statements..............................
  Independent Auditors' Report............................................
</TABLE>
 
  The following schedule is filed herewith:
 
     Schedule II--Valuation and Qualifying Accounts and Reserves are
  incorporated by reference under Part II, Item 8 herein.
 
     Selected Quarterly Financial Data are incorporated by reference under
  Part II, Item 6 herein.
 
     All other schedules are omitted because they are not required, are not
  applicable or the information is included in the consolidated financial
  statements or notes thereto.
 
  (3) Exhibits
 
<TABLE>
<CAPTION>
   Exhibit
   No.                               Description                         Report
   -------                           -----------                         ------
   <C>        <S>                                                        <C>
    3.1****   Restated Certificate of Incorporation of the Company
    3.2****   Bylaws of the Company
   10.1*      Satellite Technology Management, Inc. Incentive Stock
               Option, Nonqualified Stock Option and Restricted Stock
               Purchase Plan--1992 (the "Plan")
   10.2*      Form of Incentive Stock Option Agreement pertaining to
              the Plan
   10.3*      Form of Nonqualified Stock Option agreement pertaining
              to the Plan
   10.4*      Form of Indemnification Agreement between Registrant and
              its directors
   10.16**    Federal Communication Commission authorization and
               order. File Nos. 2061/2062-DSE-P/L84 and 3379/3380-DSE-
               P/L84.
   10.18**    Stock Purchase Agreement, dated April 1, 1994, by and
               among the Company, Berjaya Group (Cayman), Ltd. and
               Emil Youssefzadeh and Albert Youssefzadeh
   10.19***   Agreement for Purchase and Sales of Real Property and
               Escrow Instructions dated June 1, 1994, by and between
               Thomas M. Zapara, Violet Zapara, trustees of the Zapara
               Family Trust W/D/T dated March 4, 1982 and the Company
   10.21****  1994 Stock Option Plan for Non-Employee Directors
   10.22***** Stock Purchase Agreement between STM Wireless, Inc. and
               REMEC, Inc. dated March 31, 1996
</TABLE>
 
                                      75
<PAGE>
 
<TABLE>
<CAPTION>
   Exhibit No.                        Description                        Report
   -----------                        -----------                        ------
   <C>           <S>                                                     <C>
   10.23******   Credit Agreement entered into as of 31st day of May,
                  1996, by and between STM Wireless, Inc. ("Borrower")
                  and Wells Fargo HSBC Trade Bank N.A. ("Bank")
   10.24*******  Stock Purchase Agreement, dated March 5, 1998, by and
                  among the Company, Direct-To-Phone International,
                  Inc., Pequot Private Equity Fund, L.P. and Pequot
                  Offshore Private Equity Fund, Inc.
   10.25*******  Series B Preferred Stock Purchase Agreement, dated
                  March 5, 1998, by and among the Company and Direct-
                  To-Phone International, Inc.
   10.26*******  Stock Purchase Agreement, dated March 5, 1998, by and
                  among the Company, Pequot Private Equity Fund, L.P.
                  and Pequot Offshore Private Equity Fund, Inc.
   10.27*******  Stockholders Agreement, dated March 5, 1998, by and
                  among Direct-To-Phone International, Inc. and its
                  stockholders.
   10.28*******  Registration Rights Agreement, dated March 5, 1998,
                  by and among Direct-To-Phone International, Inc. and
                  its stockholders.
   10.29******** Asset Purchase Agreement by and among Inter-Tel,
                  Incorporated, Telecom Multimedia Systems, Inc., STM
                  Wireless, Inc., Ramin Sadr and Farshad Meshkinpour,
                  dated May 10, 1998.
   10.30******** Escrow Agreement, dated June 18, 1998, by and among
                  STM Wireless, Inc., Telecom Multimedia Systems,
                  Inc., Ramin Sadr, Farshad Meshkinpour, Inter-Tel
                  Incorporated and Bank One, Arizona, NA.
   21.           Subsidiaries of Registrant
   23.1          Consent of KPMG LLP
   27.1          Financial Data Schedule
                 Year Ended 1998
</TABLE>
--------
       * Incorporated herein by reference to the referenced exhibit number to
         the Company's Registration Statement on Form S-1, Reg. No. 33-45694.
 
      ** Incorporated by reference to the referenced exhibit number to the
         Company's Form 10-Q for the Quarter ended June 30, 1994.
 
     *** Incorporated by reference to the referenced exhibit number to the
         Company's Form 10-Q for the Quarter ended September 30, 1994.
 
    **** Incorporated by reference to the Company's Form 10-K filed for the
         year ended December 31, 1995.
 
   ***** Incorporated by reference to the referenced exhibit to the Company's
         Form 10-Q for the Quarter ended March 31, 1996.
 
  ****** Incorporated by reference to the referenced exhibit to the Company's
         Form 10-Q for the Quarter ended June 30, 1996.
 
 ******* Incorporated by reference to the referenced exhibit to the Company's
         Form 10-Q/A filed on May 19, 1998 for the Quarter ended March 31,
         1998.
 
******** Incorporated by reference to the referenced exhibit to the Company's
         Form 10-Q for the Quarter ended June 30, 1998.
 
                                      76
<PAGE>
 
Executive Compensation Plans and Arrangements
 
<TABLE>
<CAPTION>
 Exhibit
   No.                            Description                            Report
 -------                          -----------                            ------
 <C>     <S>                                                             <C>
 10.1    Satellite Technology Management, Inc. Incentive Stock Option,
          Nonqualified Stock Option and Restricted Stock Purchase Plan
          --1992 (the "Plan").*

 10.2    Form of Incentive Stock Option Agreement pertaining to the 
          Plan.*

 10.3    Form of Nonqualified Stock Option Agreement pertaining to the
          Plan.*

 10.21   1994 Stock Option Plan for Non-Employee Directors****
</TABLE>
 
  (b) Reports on Form 8-K
 
    None.
 
                                       77
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
Dated: April 15, 1999                     STM WIRELESS, INC.
 
                                                 /s/ Emil Youssefzadeh
                                          By: _________________________________
                                                     Emil Youssefzadeh
                                                Chief Executive Officer and
                                                   Chairman of the Board
 
                                                  /s/ Joseph Wallace
                                          By: _________________________________
                                                       Joseph Wallace
                                               Vice President, Finance, Chief
                                                         Financial
                                              Officer and Principal Accounting
                                                          Officer
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each person whose
signature to this report on Form 10-K appears below hereby appoints Emil
Youssefzadeh and Joseph Wallace, or either of them, to act severally as
attorneys-in-fact and agents, with power of substitution and resubstitution,
for each of the undersigned, for any and all capacities, to sign on his
behalf, individually and in the capacities stated below, and to file any and
all amendments to this report on Form 10-K, which amendment or amendments may
make changes and additions as such attorneys-in-fact may deem necessary.
 
<TABLE>
<CAPTION>
               Signature                          Title                   Date
               ---------                          -----                   ----
 <C>                                  <S>                            <C>
     /s/ Emil Youssefzadeh            Chief Executive Officer and    April 14, 1999
 ____________________________________  Chairman of the Board
         Emil Youssefzadeh

     /s/ Joseph J. Wallace            Vice President, Finance,       April 14, 1999
 ____________________________________  Chief Financial Officer and
        Joseph J. Wallace              Principal Accounting
                                       Officer

       /s/ Frank T. Connors           Vice Chairman of the Board     April 14, 1999
 ____________________________________
           Frank T. Connors

   /s/ Lawrence D. Lenihan, Jr.       Director                       April 14, 1999
 ____________________________________
       Lawrence D. Lenihan, Jr.

        /s/ Guy W. Numann             Director                       April 14, 1999
 ____________________________________
            Guy W. Numann

     /s/ Dr. Ernest U. Gambaro        Director                       April 14, 1999
 ____________________________________
        Dr. Ernest U. Gambaro
</TABLE>
 
                                      78