<PAGE>
 
________________________________________________________________________________

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

     (MARK ONE)

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

           [NO FEE REQUIRED]

For the fiscal year ended December 31, 1998.

OR
[_]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from        to       .


                       COMMISSION FILE NUMBER:  0-25356

                          ___________________________
                                  P-Com, Inc.

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

                 Delaware                           77-0289371
         (State of Incorporation)        (IRS Employer Identification No.)

           3175 S. Winchester Boulevard, Campbell, California 95008
         (Address of principal executive offices, including zip code)

      Registrant's telephone number, including area code:  (408) 866-3666

_______________________________________________________________________________

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

          Title of each class          Name of each exchange on which registered
          -------------------          -----------------------------------------
                 None                                      None
<TABLE> 
<S>                                                           <C> 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:   Common Stock, $0.0001 par value.
                                                              Preferred stock purchase rights.
</TABLE> 

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

Indicate by a 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 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.  [X]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 18, 1999, was approximately $406,802,000 (based upon the
closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market for the last trading date prior to that date).  Shares of
Common Stock held by each executive officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates.  This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

On March 18, 1999, approximately 48,944,270 shares of the Registrant's Common
Stock, $0.0001 par value, were outstanding.

________________________________________________________________________________
<PAGE>
 
                                    PART I
                                    ------

ITEM 1.   BUSINESS
     
  The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Certain Factors Affecting the Company" and elsewhere in this Annual Report on
Form 10-K.

  P-Com was incorporated in Delaware on August 23, 1991. P-Com supplies
equipment and services for access to worldwide telecommunications and broadcast
networks. The Company's Tel-Link(R) and Airlink/Airpro systems (point-to-point
radios) are used as wireless digital links in applications that include
interconnecting base stations and mobile switching centers in microcellular and
personal communications services ("PCN/PCS") networks for providing local
telephone company ("telco") connectivity in the local loop and public and
private networks. The integrated architecture and high software content of the
Company's systems are designed to offer cost-effective, high-performance
products with a high degree of flexibility and functionality. Additionally, the
Company offers turnkey microwave relocation services, engineering, path design,
program management, installation and maintenance of communication systems to
network service providers. The Company is currently field testing and further
developing a range of point-to-multipoint radio systems for use in both the
telecommunications and broadcast industries.

  P-Com's Tel-Link(R), Point-to-Multipoint and Airlink/Airpro radio systems
utilize a common architecture for systems in multiple millimeter wave and
unlicensed spread spectrum microwave frequencies including 2.4 GHz, 5.7 GHz, 7
GHz, 13 GHz, 14 GHz, 15 GHz, 18 GHz, 23 GHz, 24 GHz, 26 GHz, 28 GHz, 31 GHz, 38
GHz and 50 GHz. The Company's systems are designed to be highly reliable, cost
effective and simple to install and maintain. Software embedded in the Company's
systems allows the user to easily configure and adjust system settings such as
frequency, power and capacity without manual tuning and mechanical adjustments.
The Company also markets a full line of Windows and SNMP- based software
products that are complementary to its systems as sophisticated diagnostic,
maintenance, network management and system configuration tools.

  The Company's radio systems are sold internationally and domestically through
strategic partners, system providers, original equipment manufacturers ("OEMs")
and distributors as well as directly to end-users. The Company's radio system
customers include Advanced Radio Telecom Corp. ("ART"), Bosch Telecom GmbH,
Lucent Technologies, Inc. (including the entities formerly known as AT&T Network
Systems Deutschland GmbH and AT&T Network Systems Nederland BV), Mercury
Communications Ltd., Mercury One-2-One Personal Communications, Orange Personal
Communications Services, Italtel S.p.A. (formerly known as Siemens (Italtel)
Limited, Ericsson, Ltd., Fujitsu Limited, Northern Telecom, Ltd. and WinStar
Communications, Inc. (collectively with its subsidiary WinStar Equipment Corp.,
"WinStar"). The Company's customers for services include AT&T Wireless, Bell
Atlantic Corp., BellSouth Corp., Mercury One-2-One Personal Communications,
Omnipoint Corporation, Orange Personal Communications Services, PrimeCo Personal
Communications, Sprint Spectrum, Tellabs Operations, Inc. and WinStar
Communications Inc.

  P-Com received in December 1993 its initial ISO 9001 registration, a standard
established by the International Organization for Standardization that provides
a methodology by which manufacturers can obtain quality certification. In
accordance with ISO 9001 requirements, the Company's ISO 9001 registration was
subsequently recertified. The Company also completed ISO 9001 registration for
its United Kingdom sales and customer support facility, Geritel facility in
Italy in 1996 and Technosystem facility in Italy in 1997. The Company is in the
process of obtaining ISO 9001 registration for its other facilities outside of
the United States.

BACKGROUND

  In recent years, there has been an increase in demand for high performance
voice, data, facsimile and video communications. This trend, coupled with
regulatory changes in the United States and abroad and technological advances,
has led to significant growth in the number of users for existing
telecommunications capacity and the emergence of new wireless services for both
mobile and fixed applications.

  In response to this increased demand, existing mobile wireless service
providers, such as cellular service providers, have begun upgrading their
networks to more effectively use their allocated frequency spectrum to
accommodate more users and provide enhanced additional features, such as paging
or facsimile service. One such method of increasing 

                                       1
<PAGE>
 
capacity involves dividing existing coverage cells into several smaller radius
cells, which allows the same frequency of the radio spectrum to be reused in
adjacent cells. At the same time, other telecommunications service providers are
beginning to establish PCN/PCS networks to provide a broad range of mobile
wireless communications similar to these enhanced cellular services. These
microcellular upgrades to existing systems and new PCN/PCS networks require the
establishment of additional, interconnected base stations.

  Additionally, there has been a worldwide trend toward privatization of public
telephone operators ("PTOs") and deregulation of local loop services. This trend
has resulted in increased competition among companies seeking to provide local
access to the Public Switched Telephone Network (PSTN), which has resulted in
increased spending by existing PTOs and the emergence of new companies providing
fixed telecommunications services. As companies enter this market, they must
establish an infrastructure to deliver local fixed telecommunications services
and interconnect that infrastructure with the PSTN. This local access and
interconnect can often be implemented using wireless technology at a cost and
time advantage to wireline alternatives.

  As competition among service providers intensifies, it is becoming
increasingly important for them to respond quickly to changes in user patterns
and preferences. This frequently involves increasing the coverage of their
networks but also involves adding additional features, functionality, and
service offerings to their customers. As time to market has become ever more
critical, network service providers have increasingly looked to outside
suppliers, including equipment suppliers, for services such as network design
and installation. These service providers have also come to expect their
equipment suppliers to develop and offer additional products for new service
offerings, such as point-to-multipoint product offerings and access devices for
connecting their networks with the customers end site. Point-to-multipoint
offerings are being driven by the need for greater flexibility and more
efficient use of spectrum allocations. Equipment providers with expertise in
these areas are becoming critical for the implementation of network upgrades and
next generation network buildout.

  Millimeter wave radio systems are increasingly utilized for short-haul
wireless connections such as base station interconnect, local fixed
telecommunications access, and interconnect to the PSTN. The lower end of the
radio frequency spectrum, encompassing the traditional microwave frequency
bands, requires the use of more expensive equipment and has become increasingly
congested as compared to the millimeter wave frequency bands. Moreover, higher
frequencies allow a greater number of channels to be allocated in the same
percentage of spectrum compared to lower frequencies. The shorter transmission
distances of higher frequencies also allow these frequencies to be reused in
adjacent geographic areas whereas lower frequencies often propagate beyond the
desired locale into nearby areas. Therefore, regulatory authorities responsible
for the allocation of the radio wave spectrum are under increasing pressure to
assign millimeter wave frequency bands to those applications that can
effectively utilize this portion of the spectrum.

  Most conventional millimeter wave radio systems have been introduced by
suppliers of microwave technology based on architectures that were originally
designed and optimized for microwave frequency bands. These conventional systems
often are expensive to install and configure, lack certain advanced features and
do not readily support remote system management and maintenance. The Company
believes that there is a significant market opportunity for short-haul
communications solutions that are optimized for millimeter wave applications and
offer high levels of functionality, ease of installation and a low cost of
ownership.

  While traditional high capacity microwave systems remain expensive, the
opening of unlicensed spread spectrum frequencies by the FCC has allowed cost
effective solutions in the ISM (industrial, scientific and medical) bands. The
Company's AirLink/Airpro product line has two primary applications. The first
application is to provide telephone connectivity to remote locations where the
limited number of users does not justify the cost of a cellular station or wired
communications link. AirLink is capable of providing point-to-point
communications and point-to-multipoint over distances up to thirty miles. The
second application is to provide a data transmission network in locations, such
as developing countries, where wired telecommunications infrastructure is either
unreliable or nonexistent.

  In addressing these two markets, the Company has positioned its AirLink
product line between the full featured, point-to-point, very high speed
microwave radio links and the high volume, low power spread spectrum wireless
devices. The Company believes that its AirLink product line responds to a market
need that exists between these two ends of the marketplace for a cost effective,
ruggedized, outdoor wireless product offering that is capable of transmitting at
medium data rates between 19.2 kbps and 2 Mbps. The Company offers over 20
different models of its AirLink/Airpro products to specifically address a wide
range of individual customer needs within this market segment.

                                       2
<PAGE>
 
  The Company's strategy for its AirLink product line is to provide last mile
and data network solutions at ranges of up to 30 miles and to continue to seek
feature improvements and cost reductions to enhance and maintain its position
within this market segment. Airlink is differentiated from Airpro by the fact
that Airlink is less expensive, without network management, while the Airpro
series incorporates network management software at a minimal cost increase.
Airpro network management allows remote configuration and diagnostics of the
Airpro network. The Company intends to maintain its strong technical position in
the wireless communications market through continued improvement of its radio
frequency designs, ASIC modem chips and software modules.

THE P-COM SOLUTION

  Existing Products and Services

  P-Com offers equipment and services necessary to access telecommunications and
broadcast networks worldwide. The Company's Tel-Link(R) millimeter wave radio
systems and proprietary software offer telecommunications service providers
wireless connections for short-haul applications. The Company also utilizes both
frequency shift keying (FSK) and spread spectrum modulation techniques in its
products. In addition, the Company is developing systems which utilize
Quadrature Phase Shift Keying (QPSK) and Quadrature Amplitude Modulation (QAM)
technologies. These systems are designed to be highly reliable, cost-effective
and simple to install and maintain, thus lowering the service provider's overall
cost of ownership. Additionally, the Company offers complete turnkey relocation
services for new licensees of radio spectrum who must first remove current users
of the frequencies before building out new networks, and also offers network
design, construction, and maintenance services. P-Com also offers frame relay
and integrated access products for network service providers to facilitate
managed connections of end users to their network. The Company markets its
systems and services to cellular and PCN/PCS service providers implementing
microcellular networks and to companies offering local loop telecommunications
services.

  The diagram set forth below illustrates the use of the Company's radio systems
to connect base stations in a cellular or PCN/PCS application; the Company's
systems are used in a similar manner in cellular networks.

                                    (logo)



  The following diagram shows the use of the Company's systems in a PTO/local
loop application to establish short-haul radio connections for telco service
utilizing the Company's point-to-point radio systems:

                                     (logo)



The following diagram shows the use of the Company's systems in a PTO/local loop
application to establish short-haul radio connections for telco service
utilizing the Company's point-to-multipoint radio systems. The Company believes
its current solutions offer the following benefits:

                                    (logo)
                                       
                                       3
<PAGE>
 
  Commonality of Architecture. The Company's Tel-Link(R) systems employ a design
architecture that is optimized for operation at millimeter wave and microwave
frequencies. In contrast to most conventional radio systems, the Company's
systems across this frequency range are identical in architecture, functionality
and features, except for the final stage of the system which determines the
transmit and receive frequencies. This degree of commonality assists P-Com in
providing a range of products to customers that operate systems in numerous
millimeter wave and microwave bands. Currently, the Company is shipping 7 GHz,
13 GHz, 14 GHz, 15 GHz, 18 GHz, 23 GHz, 26 GHz, 28 GHz, 31 GHz, 38 GHz and 50
GHz systems. The common architecture employed in the Company's systems is
designed to offer P-Com's customers lower overall cost of ownership and ease of
system implementation through such benefits as reduced spare part inventories,
common features and software across the family of systems, reduced training and
easy integration into a network management system. The Tel-Link(R) systems
employ a high level of circuit integration, with the concomitant advantages of
fewer components and connections, less heat dissipation and reduced human
involvement in production and testing.

  Ease of Installation. The Company's systems were designed to lower
installation costs by minimizing the time and effort involved in system
implementation. The two primary assemblies of the systems, the outdoor unit
("ODU"), which is typically located on a tower or a rooftop, and the indoor unit
("IDU"), are connected with a single coaxial cable. Most conventional systems
require multiple cable connections between the IDU and the ODU, are manually
tuned and require numerous mechanical adjustments. The Company's systems are
smaller and lighter than conventional systems, and are software-configurable,
requiring minimal manual tuning and mechanical adjustments during installation.

  High Level of Software Functionality. The Tel-Link(R) architecture is designed
to provide the Company's customers with a high level of functionality to
facilitate operation of the systems. The configuration of the Company's systems,
including setting the system's power and frequency and upgrading its capacity,
can be performed via the keypad located on the IDU. The Company also offers
proprietary Windows and SNMP-based software tools that permit a user to perform
system configuration from a personal computer attached directly to the IDU or
from any remote location accessed through a network management system. The
capacity of the Company's systems can be upgraded through software, providing a
greater degree of flexibility for customers. In contrast, conventional
millimeter wave systems typically require mechanical adjustments and manual
tuning on both the IDU and ODU, and their capacities cannot be upgraded using
software. To date, the Company has not sold a significant amount of software 
separately.

  Cost-effective Maintenance. The ease of maintenance of the Tel-Link(R) systems
is primarily due to the software embedded in the system and its software tools.
The Company includes a significant amount of the system's circuitry in the IDU
where system reliability is increased due to less demanding temperature extremes
and maintenance is easier to perform. Most conventional systems contain more
circuitry in the ODU, which exposes the circuitry to a wider temperature range.
This may require that more maintenance take place in the ODU, which is typically
more difficult to access. Use of the Company's proprietary maintenance software
tools can be on-site at the IDU or from any remote location through a network
management system. These tools allow the user to read the status of numerous
radio parameters and to change settings and configurations if desired.
Maintenance tools offered with the Tel-Link(R) systems include in-service
performance monitoring and analysis, system alarm reporting and IDU and ODU
temperature readings.

  Comprehensive Services. The Company provides turnkey microwave relocation,
engineering, path design, program management, installation and maintenance to
the telecommunications industry. Such service packages assist in meeting the
critical cost and timeline objectives demanded by the wireless industry. The
Company's service division is designed to be involved in the aspects of system
build-out, including such tasks as needs and objectives assessment, system and
program planning, network engineering, operations, maintenance, frequency
coordination and resolution of regulatory issues, management reporting,
training, installation, commissioning and acceptance, and preparation of
documentation. The Company provides these services either directly or through
approved subcontractors.

Products Under Development

  Point-to-Multipoint Products. The re-allocation of spectrum in many bands
ranging from 2.4 GHz to 40 GHz is enabling the development of new services such
as local multipoint distribution service (LMDS) and local multipoint
communications service (LMCS). These services address the desire of service
providers for more efficient use of spectrum within a particular service area.
Certain bandwidth demand thresholds must be met before a customer can
economically justify the cost of a dedicated point-to-point system. Point-to-
multipoint provides the flexibility for a service provider to offer customers
wireless bandwidth on demand thereby creating the concept of a wireless central

                                       4
<PAGE>
 
office. The Company is currently developing a point-to-multipoint system to
provide service to end users from a hub station in a cell typically extending
from 1 to 10 kilometers. Cell size is based on frequency, traffic requirements,
and desired availability. The hub consists of one to 24 sector subsystems that
include sectorized antennae and their associated communications equipment. Each
sector subsystem covers from 15 to 90 degrees of azimuth with additional sector
subsystems providing up to 360 degrees of coverage. The diagram below
illustrates the potential use of the Company's point-to-multipoint system to
connect end-users to a hub station:

(logo)


P-COM, INC. POINT-TO-MULTIPOINT PRODUCTS AS OF DECEMBER 31, 1998

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                  FREQUENCY                     INTERFACES   SUBSCRIBER DATA RATES     MODULATION SCHEME & 
                                                                                          ACCESS METHOD
------------------------------------------------------------------------------------------------------------------
<S>                                             <C>          <C>                      <C>
10 GHZ SYSTEMS*                                     E0       64 KBPS TO 20 MB/S              UP TO 64 QAM,
   Hub Radius:  up to 6 miles                       E1       TDM                             TDMA
                                                    E3
------------------------------------------------------------------------------------------------------------------
24 GHZ SYSTEMS                                      DS0      64 KBPS TO 155 MB/S             UP TO 64 QAM,
   HUB RADIUS:  UP TO 4 MILES                      ISDN      ATM & TDM                       FDMA, TDMA
                                                    DS1
                                                Frame Relay
                                                 MPEG - 2
                                                  10BaseT
                                                  DS - 3
                                                 155 Mbps
------------------------------------------------------------------------------------------------------------------
26 GHZ SYSTEMS*                                     E0       64 KBPS TO 20 MB/S              UP TO 64 QAM,
   Hub Radius:  up to 3.5 miles                     E1       TDM                             TDMA
                                                    E3
------------------------------------------------------------------------------------------------------------------
28/31 GHZ SYSTEMS*                                  DS0      64 KBPS TO 155 MB/S             UP TO 64 QAM,
 HUB RADIUS:  UP TO 3.5 MILES                      ISDN      ATM & TDM                       FDMA, TDMA
                                                    DS1
                                                Frame Relay
                                                 MPEG - 2
                                                  10BaseT
                                                  DS - 3
                                                 155 Mbps
------------------------------------------------------------------------------------------------------------------
38 GHZ SYSTEMS                                      DS0      64 KBPS TO 155 MB/S             UP TO 64 QAM,
 HUB RADIUS:   UP TO 3 MILES                       ISDN      ATM & TDM                       FDMA, TDMA
                                                    DS1
                                                Frame Relay
                                                 MPEG - 2
                                                  10BaseT
                                                  DS - 3
                                                 155 Mbps
------------------------------------------------------------------------------------------------------------------
</TABLE>
 
__________________
*    Not currently available for shipment; prototype under development.

                                       5
<PAGE>
 
THE P-COM STRATEGY

  The Company's goal is to become a leading supplier of high performance radio
systems (point-to-point and point-to-multipoint) operating in millimeter wave
and spread spectrum microwave frequency bands, as well as related service
offerings such as microwave relocation, installation and path design. The
following are the key elements of its strategy to achieve this objective:

  Focus on Millimeter Wave and Spread Spectrum Microwave Market. The Company is
designing its products specifically for the millimeter wave and spread spectrum
microwave frequency band. The Company's core architecture is designed to
optimize its systems for operation at millimeter wave and microwave frequencies.
The Company currently ships 2.4 GHz, 5.7 GHz, 7 GHz, 13 GHz, 14 GHz, 15 GHz, 18
GHz, 23 GHz, 26 GHz, , 28 GHz, 31 GHZ, 38 GHz and 50 GHz systems. The Company is
selling its systems primarily to cellular and PCN/PCS service providers who are
implementing microcellular networks using Code Division Multiple Access (CDMA),
Groupe Speciale Mobile (GSM), Time Division Multiple Access (TDMA) and Extended
Time Division Multiple Access (E-TDMA), PTO companies offering local loop
services and service companies providing alternative access are also users.

  Provide Ancillary Services in RF Engineering and System Construction. The
Company offers turnkey microwave relocation services. These services move
existing users of a specific radio frequency in order to clear the path for 
new users. In addition, the Company offers engineering, path design, program
management, installation and maintenance. The Company believes this service
business will provide it with many strategic advantages, including allowing it
to develop strong relationships with decision makers early and maintain these
relationships throughout the network buildout process.

  Continue to Expand Worldwide Presence. The Company is focused on expanding its
presence internationally and further establishing its market position in the
United States. To date, the market opportunities for the Company's systems have
been greater abroad, as the markets for PCN/PCS and microcellular networks and
local loop access have developed at a faster rate than in the United States. The
Company intends to continue its international focus by meeting international
telecommunications standards where appropriate and using strategic alliances to
penetrate international markets. The Company has met the standards established
by the European Telecommunications Standards Institute ("ETSI") and achieved
regulatory approval for certain of its systems in many countries including,
Australia, the Czech Republic, France, Germany, Greece, Hungary, Italy, Mexico,
Spain, the United Kingdom, and the United States. The process for additional
regulatory approvals for certain systems is underway in numerous other
countries, including Belgium, China and Switzerland. The Company's management
team consists of a group of highly-experienced telecommunications executives
from Italy, the United Kingdom and the United States. The Company maintains
offices throughout the world, has acquired numerous companies throughout the
world, and will continue to open offices in new geographic areas as needed in
order to support sales and customer support efforts.

  Build and Sustain Manufacturing Cost Advantage. The Company has designed its
system architecture to reduce the number of components incorporated in each
system and to permit the use of common components across the range of the
Company's products. The Company believes this will assist in the reduction of
its manufacturing costs by permitting volume component purchases and enabling a
standardized manufacturing process. The Company utilizes contract manufacturers
to service its volume requirements, reserving its internal manufacturing
capabilities to produce initial quantities of new products prior to commencement
of volume shipments and to respond to special customer requirements regarding
specifications or delivery.

  Leverage and Maintain Software Leadership. The Company seeks to differentiate
its systems through the proprietary software embedded in the IDU and ODU and its
Windows and SNMP-based software tools. This software is designed to allow the
Company to deliver to customers a high level of functionality in a system that
can be easily configured by the user to meet particular needs. In addition, the
embedded software enables the capacity of the Company's systems to be easily
upgraded. Software tools are also offered to facilitate network management of
the system. The Company intends to continue its focus on software development in
order to support increasing levels of functionality, ease of configuration
and use of the Company's systems.

  Position P-Com for Emerging Applications and Markets. The Company intends to
market its systems for applications other than microcellular, PCN/PCS and local
loop services and to explore emerging geographic markets. Many growing
businesses and local government organizations are choosing to install, maintain
and manage their own telecommunications infrastructures and only interface with
a PTO where a connection to the public network is required. 

                                       6
<PAGE>
 
As the voice, data and video traffic within an organization increases, this
approach becomes more cost-effective than leasing these intracompany services
from a PTO. The Company believes that additional markets may develop abroad, as
the implementation of the communications infrastructure upgrades in emerging
countries increasingly bypasses traditional wired networks and moves directly to
a cost-effective wireless network.

  Acquire Companies with Complementary Products and Services. The Company
believes that acquisitions of companies with complementary products and services
will allow the Company to expand the products and services that it offers to
both its own customer base and to the customer bases of the acquired companies.
The Company has acquired companies that offer spread spectrum radios, point-to-
multipoint distribution systems currently under development, microwave
relocation and system construction, wire-line access systems including advanced
frame relay network management products and integrated services access
platforms, engineering, program management and installation of wireless
communications, cable and fiber optic systems. On March 28, 1998, the Company
acquired substantially all of the assets of the Wireless Communications Group of
Cylink Corporation, a Sunnyvale, California-based company (the "Cylink Wireless
Group"). The Cylink Wireless Group designs, manufactures and markets spread
spectrum radio products for voice and data applications in both domestic and
international markets. In July 1998, the Company acquired the assets of Cemetel
S.r.L., an Italian company engaged in the supply of engineering services to
wireless telecommunication providers in Italy. This acquisition was not material
to the Company's financial statements.

  Ongoing Development of Point-to-Multipoint Systems. The Company is continuing
to pursue development of point-to-multipoint radio systems for use in both the
telecommunications and broadcast industries. Incorporated into networks, these
systems are being designed to deliver broadband digital services offering
telephony, high-speed two-way data, video conferencing, Internet access, and
broadband video services. The systems are being designed to allow alternative
access to local circuit, packet and cell switching facilities within
metropolitan areas. The Company believes that the point-to-multipoint solution
will provide high-bandwidth alternatives to traditional network access methods.
It is intended that this capability, along with the Company's cell modeling
capability, will allow the wireless carriers to increase traffic capacity and
revenues.

TECHNOLOGY

  The Company believes its approach to millimeter wave radio systems and spread
spectrum microwave is significantly different from most conventional approaches.
Through the use of its proprietary digital signal processing, frequency
converter and antenna interface technology, and its proprietary software and
custom application-specific integrated circuits, the Company offers a highly-
integrated, feature-rich system. This integration is designed to result in
reliability and cost advantages. The microprocessors and embedded software in
both the IDU and ODU enclosures enable flexible customization to the user's
specific telecommunications network requirements.

MILLIMETER WAVE AND MICROWAVE TECHNOLOGY

  Wireless transmission of voice, data and video traffic has become a desirable
alternative to wired solutions due to its advantages in the ease and cost of
implementation and maintenance. Since high frequency transmissions are best
suited for shorter distances, microwave radio frequencies are typically used for
communications links of 15 to 50 miles and millimeter wave radio frequencies for
transmissions of up to 15 miles. In addition, the cost of millimeter wave radio
systems and spread spectrum ISM band systems are generally less than that of
microwave radio systems.

  Most conventional millimeter wave radio systems use technology that is very
similar to microwave radio technology, except that a millimeter wave frequency
source is used at the final stage instead of a lower frequency microwave source.
As depicted below, when transmitting, the IDU, which is the radio system's
interface to the end-user's equipment, sends an unmodulated digital transmit
signal to the ODU. In the ODU, this signal directly modulates a transmit Gunn
oscillator which has its final frequency controlled by a synthesizer. The
signal, now at the desired millimeter wave frequency, is then routed to the
antenna for transmission to the millimeter wave radio system at the receiving
end. At the receiving end, the incoming signal is mixed in a receive converter
with a receive millimeter wave frequency source, typically a Gunn oscillator
which has its frequency controlled by a synthesizer. The signal is then routed
through an intermediate frequency (IF) converter, demodulated, and the resultant
signal is then sent to the IDU where it is directed to the end-user's equipment.

                                     (logo)

                                       7
<PAGE>
 
  P-Com believes that its millimeter wave technology is significantly different
from that contained in most conventional systems. When transmitting, the
Company's IDU sends an already-modulated, IF transmit signal to the ODU where it
is received by the IF processor, routed to the transmit converter and mixed with
a synthesized frequency source. This signal is then amplified and passed through
to the Company's proprietary frequency converter to establish the appropriate
millimeter wave frequency. The signal is then routed to the antenna for
transmission to the millimeter wave radio system at the receiving end. At the
receiving end, the incoming signal is routed to the frequency converter and
mixed in the downconverter with the same frequency source that was used when
transmitting. The signal is passed through the same IF processor to the IDU
where it is demodulated and sent to the end-user's equipment.

  The spread spectrum products use biphase shift keying (BPSK), minimal shift
keying (MSK), quadrature phase shift keying (QPSK) or quadrature amplitude
modulation (QAM) in the IDU. This signal is upconverted into a microwave
frequency in the ODU, or in the case of some Airlink products, a single, stand-
alone terminal can be installed indoors or outdoors. This signal is then routed
to the antenna to be transmitted. The receiving antenna captures the signal
power and routes it to the ODU. The ODU down converts the signal to be
demodulated in the IDU.

  P-Com's architecture is designed to achieve reliability, cost, installation
and maintenance benefits over conventional approaches. The Company employs a
common architecture in the ODU for all stages of the system other than the
frequency converter used to establish the millimeter wave frequency at which the
system operates. In contrast, conventional millimeter wave systems often use
different designs for several components of the ODU for each different frequency
band. Third, the final transmit and receive frequencies are electronically
tunable either from the IDU or from a remote location using a network management
system. In contrast, many conventional approaches employ a Gunn oscillator to
generate the transmit millimeter wave frequency source and a second Gunn
oscillator to receive the millimeter wave transmission from the remote end.
These devices must be manually tuned and adjusted to achieve proper operation.
The Company believes that the Gunn oscillator technology that is typically used
in conventional approaches is inherently less reliable than P-Com's proprietary
frequency converter technology. Finally, in P-Com's systems, the IDU and ODU are
connected with a single coaxial cable, in contrast to many conventional systems
that require multiple cable connections.

P-COM SYSTEM ARCHITECTURE

  The Company's millimeter wave and spread spectrum microwave radios comprise
three primary assemblies: the IDU, the ODU and the antenna. The IDU houses the
digital signal processing and the modem functions, and interfaces to the ODU via
a single coaxial cable. The ODU, a radio frequency (RF) enclosure, establishes
the specific transmit and receive frequencies and houses the proprietary P-Com
frequency converter. The antenna interfaces directly to the ODU via a
proprietary P-Com waveguide transition technology. The following diagram
illustrates a typical P-Com Tel-Link(R) radio system:

 (logo)

                                       8
<PAGE>
 
  Indoor Unit (IDU) and Software. The IDU is the interface to the user's
network. It is an indoor mounted assembly that contains baseband electronics,
including the functions of line interface, digital signal processing,
modulation/demodulation and intermediate frequency generation. The IDU also
includes the alarm and diagnostic, service channel and telecommunications
network management interfaces. Finally, the IDU contains the capability to set
the system capacity, frequency synthesizer and power output of the radio; no
access to the ODU is required.

  The configuration of the Company's systems, including the setting of the
system's power, frequency and capacity, is performed via the keypad located on
the IDU. The Company also offers proprietary Windows and SNMP-based software
tools that permit a user to perform system configuration from a personal
computer attached directly to the IDU or from any remote location accessed
through a network management system. In contrast, conventional millimeter wave
systems typically require mechanical adjustments and manual tuning, which
involves sending maintenance personnel to the radio location. The software
embedded in the Company's systems also allows the easy upgrade of system
capacity; minimal hardware changes are required.

  Outdoor Unit (ODU). The ODU consists of a lightweight, compact, integrated RF
electronics enclosure which attaches to an antenna. The RF enclosure contains
the electronics that convert and amplify the modulated signal received from the
IDU. Typically, the ODU is installed outdoors on a tower or rooftop. The RF
enclosure is connected to the antenna with the Company's proprietary waveguide
transition that requires no alignment, tools or special techniques. It is
secured to the antenna with quick release clips that typically allow an
installer to replace the complete unit in less than five minutes. In addition,
since the antenna mount is independent of the RF enclosure, replacement of the
RF enclosure requires no realignment of the antenna. Airlink products, which
operate at lower frequencies than Tel-Link systems, utilize cost-effective
coaxial connections between the antenna and terminal.

  IDU-ODU Interconnection. The single coaxial cable connecting the Company's IDU
and ODU carries transmit and receive signals as well as DC power. This cable can
reach up to 1,000 feet without requiring additional amplification or a setting
for a specific length. No specific matching is required between the ODU and IDU:
any IDU within a particular capacity range will operate to full specification
with any ODU within that capacity range, irrespective of the frequency band in
which the ODU operates. Many conventional systems require multiple cable
connections, distance-specific settings and specific matching between the IDU
and the ODU.

PRODUCTS AND SERVICES

  Current Products

  Tel-Link(R) Products. The Company's products are based on a common system
architecture and are designed to carry various combinations of voice, data and
video traffic and to be easily configurable based on the needs of its customers.
The Tel-Link(R) systems operate at both E1 and T1/T3 data rates, as well as
lower data rates. E1 is an international standard data rate operating at 2.048
megabits per second that carries 30 duplex voice circuits and T1 is a U.S.
standard data rate operating at 1.544 megabits per second that carries 24 duplex
voice circuits. T3 is a U.S. 

                                       9
<PAGE>
 
standard data rate operating at 44.736 megabits per second that carries 672
duplex voice circuits. The Company is also developing prototypes for Tel-Link(R)
systems that operate at E3 data rates. E3 is an international standard data rate
operating at 34.368 megabits per second that carries 480 duplex voice circuits.
Typical transmission distances for the Company's systems range from one to fifty
miles, depending on the specific frequency at which the system operates, antenna
size and local climate conditions.

  Airlink Products. Airlink products operate at data rates between 19.2 kbps and
2.048 Mbps at 2.4 GHz and 5.8 GHz.

  All of the Company's systems currently being shipped are designed to operate
in millimeter wave and spread spectrum microwave frequency bands. The Company's
systems have been shipped for network use or use in system trials in Australia,
Belgium, Bulgaria, Canada, Chile, China, Columbia, the Czech Republic, England,
France, Germany, Hong Kong, India, Indonesia, Ireland, Israel, Italy, Japan,
Malaysia, Mexico, Philippines, Saudi Arabia, Scotland, South Africa, Spain,
Switzerland, Taiwan, Thailand, Turkey, the United States, Venezuela and Vietnam.
The table on the following page provides certain information about the systems
currently being marketed by the Company, the list price range of such systems,
their transmission distances, the number of lines each system is designed to
offer and the maximum number of voice channels each system is designed to
support. List prices for each system are single quantity prices for one radio
link consisting of two radios. The Company typically offers substantial volume
price discounts. The higher end of the list prices represent prices for higher
capacity redundant radios. Most of these configurations are currently being
shipped to customers.

                                      10
<PAGE>
 
<TABLE>
<CAPTION>
                                           P-COM, INC. PRODUCTS AS OF DECEMBER 31, 1998
========================================================================================================================== 
                                                                      NUMBER OF LINES;             NUMBER OF
                  FREQUENCY                         STANDARD             DATA RATES             VOICE CHANNELS
-------------------------------------------------------------------------------------------------------------------------- 
SPREAD SPECTRUM:
----------------------------------------------
<S>                                             <C>                <C>                           <C> 
  2.4 GHz SYSTEMS                               E1                 1, 2*, 3*, 4*                 30, 60, 90, 120
     Distance: Up to 50 miles                   T1                 1, 2*, 3*, 4*                 24, 48, 72, 96
     List Price: $15,000-$62,000                Data               19.2 Kbps-2 Mbps
--------------------------------------------------------------------------------------------------------------------------
  5.7 GHZ SYSTEMS                               E1                 1, 2*, 3*, 4*                 30, 60, 90, 120
     Distance: Up to 35 miles                   T1                 1, 2*, 3*, 4*                 24, 48, 72, 96
     List Price: $19,000-$70,000                Data               56 Kbps-2 Mbps
--------------------------------------------------------------------------------------------------------------------------
  LICENSED FREQUENCIES:
----------------------------------------------
  7 GHz SYSTEMS                                 E1                 1, 2, 4, 8, 16                30, 60, 120, 240, 480
     Distance: Up to 35 miles                   E3*                1                             480
     List Price: $32,000-$94,000                T1+                1, 4, 8, 16                   24, 96, 192, 384
                                                T3+                1                             672
                                                Data++             3 x 64 Kbps
--------------------------------------------------------------------------------------------------------------------------
  13/14/15 GHZ SYSTEMS                          E1                 1, 2, 4, 8, 16                30, 60, 120, 240, 480
     Distance: Up to 15 miles                   E3*                1                             480
     List Price: $30,000-$93,000                T1+                1, 4, 8, 16                   24, 96, 192, 384
                                                T3+                1                             672
                                                Data++             3 x 64 Kbps
--------------------------------------------------------------------------------------------------------------------------
  18/23/26 GHZ SYSTEMS                          E1                 1, 2, 4, 8, 16                30, 60, 120, 240, 480
     Distance: Up to 10 miles                   E3*                1                             480
     List Price: $27,000-$82,000                T1                 1, 4, 8, 16                   24, 96, 192, 384
                                                T3                 1                             672
                                                Data++             3 x 64 Kbps
--------------------------------------------------------------------------------------------------------------------------
  38 GHZ SYSTEMS                                E1                 1, 2, 4, 8, 16                30, 60, 120, 240, 480
     Distance: Up to 6 miles                    E3*                1                             480
     List Price: $24,000-$73,000                T1                 1, 4, 8, 16                   24, 96, 192, 384
                                                T3                 1                             672
                                                Data               3 x 64 Kbps
-------------------------------------------------------------------------------------------------------------------------
  50 GHZ SYSTEMS                                E1                 1, 2, 4, 8*, 16*              30, 60, 120, 240, 480
     Distance: Up to 3 miles                    Data++             3 x 64 Kbps
     List Price: $30,000-$75,000
========================================================================================================================== 
</TABLE>
 
_______________________
*     Not currently available for shipment; prototypes under development.
+     Not currently available for shipment; prototypes to be developed based on
      customer demand, if any.
++    Currently available for shipment; no orders yet received.

                                      11
<PAGE>
 
  Wireline Access Products. The Company's wireline access products are designed
and manufactured by the wholly-owned subsidiary, Control Resources Corporation.
They are based on advanced architectures to provide proactive management, real
time and historic performance data capture and flexible cost effective
configurations for complex network requirements. Current NetPath products
operate from 56 Kbps DDS service through 1.544 Mbps T1 service. The NetPath
integrated access platform product can support multiple high speed access links
and can internally transfer data at up to 1 Gbps. Products are managed using
Telnet, VT100 and SNMP and have integrated ISDN interfaces and analog modems.
The following products are currently being shipped or are currently available
for shipment:

<TABLE>
<CAPTION>
               =================================================================================
                     PRODUCT                       APPLICATION                  ACCESS RATES
               ---------------------------------------------------------------------------------
                    <S>                    <C>                                 <C>  
                    NetPath 64             Managed Frame Relay Access          56 and 64 Kbps
                    NetPath 100            Managed Frame Relay Access          F/T1 to T1
                    NetPath 400            Integrated Access                   1 to 4 T1
               =================================================================================
</TABLE>

  Technosystem Products. The Company also designs, manufactures and markets
equipment transmitters and transponders for television and radio broadcasting
through its subsidiary, Technosystem, S.p.A. The range of products include
audio/video modulators, converters, amplifiers, transponders, transmitters and
microwave links.

 Products Under Development

  Point-to-Multipoint Communications Systems. P-Com is currently field testing
point-to-multipoint systems to provide bandwidth management, increased spectral
efficiency, comprehensive network management, increased user and network
interfaces, and lower cost. The system is being developed to be highly scalable,
and to accommodate hub and remote site growth. The Company intends to offer cost
effective, highly efficient modulation schemes such as 32 and 64 QAM at
millimeter wave frequencies. There can be no assurance that the Company will be
able to successfully develop the point-to-multipoint systems or that such
products will achieve market acceptance. To date, no point-to-multipoint systems
have been shipped for revenue.

 Services

  P-Com, through its P-Com Network Services subsidiary ("Network Services"),
provides telecommunication service offerings covering the complete spectrum,
available as a turn-key package or as individual services.  Network Services
performs and manages every aspect of wired or wireless system build-outs, from
initial system and path planning through network optimization and maintenance.
Network services also provides tower design, fabrication and construction.  
For the switching environment, Network Services offers all the resources
necessary for the installation of central office equipment.

  Network Services' professional staff have managed the design and construction
of both wired and wireless telecommunications systems of all sizes and
complexity throughout the United States, United Kingdom, Italy and in some 25
countries around the world.  Network Services has an operational presence
throughout the United States, United Kingdom and Italy with over 350 personnel
dedicated to serving our customer requirements.  Network Services' customers are
comprised of some of the largest telecommunications companies in the world
including AT&T, BellSouth, Bell Atlantic, Sprint, Winstar, Orange PCS, Cellnet,
Mercury 1-2-1, and WIND.  Other customers also include major communications
equipment manufacturers including Alcatel, NEC, Harris, Ericsson, Tellabs and
others.

 SALES AND MARKETING

  The Company's sales and marketing efforts are headquartered in the Company's
executive offices in Campbell, California. The Company has established and
staffed a sales and customer support facility in the United Kingdom that serves
as a base for the European market. Internationally, the Company uses a variety
of sales channels, including system providers, OEMs, dealers and local agents,
as well as selling directly to its customers. The Company has sales offices or
personnel located in China, England, France, Germany, Italy, Mexico, Poland,
Turkey and United Arab Emirates, and has worldwide OEM agreements with Lucent
Technologies, Fujitsu and Italtel. In addition, the Company has established
agent relationships in numerous other countries in the Asia/Pacific region and
in South America and Europe. In the United States, the Company utilizes both
direct sales and OEM channels.

                                      12
<PAGE>
 
  The Company currently engages in a lengthy sales process that commences with
the solicitation of bids by prospective customers. If the Company is selected to
proceed further, the Company may provide systems for incorporation into system
trials or may proceed directly to contract negotiations. If system trials are
required and successfully completed, the Company then negotiates a contract with
the customer to set technical and commercial terms of sale. These terms of sale
govern the purchase orders issued by the customer as the network is deployed.
The Company anticipates that it will increasingly rely upon OEMs and system
providers during the sales process, and will therefore have less direct contact
during this process with end-users.

  The Company believes that due to the complexity of its radio systems, a high
level of technical sophistication is required on the part of the Company's sales
and marketing personnel. In addition, the Company believes that customer service
is fundamental to its success and potential for follow-on business. New
customers are provided engineering assistance for installation of the first
units as well as varying degrees of field training depending upon the customer's
technical aptitude. All customers are provided telephone support via a 24-hour
customer service help desk. The Company's customer service efforts are
supplemented by its system providers.

  The Company believes that it must continue to expand its sales and marketing
organization worldwide. Any significant sales growth will be dependent in part
upon the Company's expansion of its marketing, sales and customer support
capabilities, which will require significant expenditures to build the necessary
infrastructure.

CUSTOMERS

  The Company's principal customers currently include network operators, which
incorporate the Company's systems into networks to deliver communications
services directly to consumers, and system providers, which incorporate the
Company's systems into networks to be sold to network operators, that in turn
provide communications services directly to consumers. Certain customers may act
as both network operators and system providers depending on the circumstances.

 Network Operators

  These users include regulated and non-regulated providers of wireless voice,
data and video services to corporate and individual customers. Current and
potential applications include cellular and PCN/PCS networks (CDMA, TDMA, GSM
and E-TDMA), PTO/local loop service, network interconnections and access to long
distance networks. For cellular and PCN/PCS applications, users of P-Com's
systems in a single cellular service area may include multiple PCN/PCS
providers, wireline cellular service operators, non-wireline cellular service
operators and alternate service providers.

 System Providers

  These customers provide engineering and installation services for their
customers, which consist of cellular service providers, private corporations,
utilities and local government entities. Current and potential applications
include supervisory control systems for water, electric and gas companies, local
area networks for private corporations and educational institutions, and
voice/data/video networks for government users (police, fire, safety). These in-
country system providers accomplish the network design and provide the field
effort necessary to install, commission and maintain the Company's millimeter
wave and spread spectrum microwave systems. System providers are also
extensively used by PTOs and cellular and PCN companies in Eastern Europe,
Russia, China and other developing countries.

                                      13
<PAGE>
 
  The following list represents certain customers from which the Company has
generated revenues since the beginning of 1998:

<TABLE>
<CAPTION>
       =================================================================================================
                          INTERNATIONAL                                   DOMESTIC 
       -------------------------------------------------------------------------------------------------
         <S>                                                  <C>
         Bosch Telecom GmbH                                   Advanced Radio Telecom Corporation
         Cable and Wireless Communication                     AT&T Wireless Services
         Ericsson Limited                                     Bell Atlantic Corp.
         Esmartel House                                       Bellsouth Mobility
         Fareastone                                           FM Associates
         Ficomp System, Inc.                                  Horizon Technologies, LLC
         Fujitsu Limited                                      IBM
         Gentec                                               Larscom Incorporated
         GMA Network                                          Lucent Technologies, Inc.
         Jonmag Group                                         PrimeCo Personal Communications
         Lucent Technologies International, Inc.              Sprint Spectrum
         Mercury One-2-One Personal                           Teleport Communications Group
           Communications                                     Tellabs Operations, Inc.
         Norweb Communications                                WinStar Communications, Inc.
         Orange Personal Communications                   
           Services                                       
         Siemens (Italtel) Limited                        
         Transasia Telecommunications                     
         Teleport Communications Group                    
         TSY Poland                                       
       ================================================================================================
</TABLE>

  For the year ended December 31, 1998, approximately two hundred customers
accounted for substantially all of the Company's sales, and one customer
individually accounted for over 10% of the Company's 1998 sales. In 1997, the
Company had two customers, which individually accounted for over 10% of the
Company's sales. Sales to Orange Personal Communications Services accounted for
approximately 23% of the Company's sales in 1998, and sales to Orange Personal
Communications Services and WinStar Wireless, Inc. accounted for approximately
15% and 11% of the Company's sales, respectively, in 1997. As of December 31,
1998, six customers accounted for over 59% of the Company's backlog scheduled
for shipment in the twelve months subsequent to December 31, 1998. The breakdown
of net sales by geographic customer destination are as follows (in thousands):


<TABLE> 
<CAPTION> 
                                        1998           1997           1996
                                   ------------   -------------   ------------
     <S>                           <C>            <C>             <C> 
     Sales:
       United States                $   41,597     $    70,312     $  39,530
       United Kingdom                   71,399          69,201        52,415    
       Europe                           44,790          45,061        25,170    
       Africa                           19,104           6,323             - 
       Asia                             18,322          15,548         3,422
       Other geographic region            (268)         14,257           416
                                   -----------     -----------     ---------   
        Totals                      $  194,944     $   220,702     $ 120,953
                                   ===========     ===========     =========  
</TABLE> 

  The Company anticipates that, at least for the near term, it will continue to
sell its radio systems to an expanding, but still relatively small, group of
customers. Many of the Company's customers are implementing new networks and may
require additional capital to implement fully their planned networks, e.g.
Fareastone, Mercury One-2-One Personal Communications, Orange Personal
Communications Services and WinStar Wireless, Inc. The Company's ability to
achieve or increase its sales in the future will depend in significant part upon
its ability to obtain and fulfill orders from existing and new customers and
maintain relationships with and provide support to existing and new customers.
Equally important is its ability to manufacture systems on a timely and cost-
effective basis and to meet stringent customer performance and shipment delivery
dates. As a result, any cancellation, reduction or delay in orders by or
shipments to any customer, as a result of manufacturing difficulties or
otherwise, or the inability of any customer 

                                      14
<PAGE>
 
to finance its purchases of the Company's radio systems may have a material
adverse effect upon the Company's business, financial condition and results of
operations. There can be no assurance that the Company's sales will increase in
the future or that the Company will be able to retain and support existing
customers or to attract new customers.

  The Company's backlog was approximately $75.0 million as of December 31, 1998,
as compared to approximately $65.2 million as of December 31, 1997. The increase
is primarily due to the expansion of the Company's presence in its international
market. The Company includes in backlog only those firm customer commitments to
be shipped within the following twelve months. A significant portion of the
Company's backlog scheduled for shipment in the twelve months subsequent to
December 31, 1998 can be canceled since orders are often made substantially in
advance of shipment, and most of the Company's contracts provide that orders may
be canceled with limited or no penalties up to a specified period (generally 60
to 90 days) before shipment, and in some cases at any time. Therefore, backlog
is not necessarily indicative of future sales for any particular period. In
addition, the Company's customers have increasingly been requiring shipment of
products at the time of ordering rather than submitting purchase orders far in
advance of expected dates of product shipment.

  MANUFACTURING

  The Company's manufacturing objective is to produce systems that conform to P-
Com's specifications at the lowest possible manufacturing cost. The Company has
designed its system architecture to reduce the number of components incorporated
in each system and to permit the use of common components across the range of
the Company's products. P-Com believes this will reduce its manufacturing costs
by permitting volume component purchases and enabling a standardized
manufacturing process. Where appropriate, the Company has developed component
designs internally to seek to obtain higher performance from its systems at a
lower cost. The Company is engaged in an effort to increase the standardization
of its manufacturing process in order to permit it to more fully utilize
contract manufacturers.

  As part of its program to reduce the cost of its radio systems and to support
an increase in the volume of orders, the Company first began to utilize contract
manufacturers to produce its systems, components and subassemblies in the fourth
quarter of 1994, and expects to rely increasingly on such manufacturers in the
future. Currently, these contract manufacturers are Remec, Inc., Sanmina
Corporation, SPC Electronics Corp., Senior Systems Technology, Inc., GSS Array
Technology and Celeritek, Inc.

  The Company also relies on outside vendors to manufacture certain components
and subassemblies used in the production of the Company's radio systems. Certain
components, subassemblies and services necessary for the manufacture of the
Company's systems are obtained from a sole supplier or a limited group of
suppliers. In particular, Eltel Engineering S.r.L. and Associates, Milliwave and
Xilinx, Inc. are sole source or limited source suppliers for critical components
used in the Company's radio systems. The Company intends to reserve its internal
manufacturing capacity for new products and products manufactured in accordance
with a customer's custom specifications or expedited delivery schedule.
Therefore, the Company's internal manufacturing capability for standard products
is very limited, and the Company intends to rely on contract manufacturers for
high volume manufacturing. There can be no assurance that the Company's internal
manufacturing capacity and that of its contract manufacturers will be sufficient
to fulfill the Company's orders. Failure to manufacture, assemble and ship
systems and meet customer demands on a timely and cost effective basis could
damage relationships with customers and have a material adverse effect on the
Company's business, financial condition and operating results.

  The Company's reliance on contract manufacturers and on sole suppliers or a
limited group of suppliers and the Company's increasing reliance on
subcontractors involves several risks, including a potential inability to obtain
an adequate supply of finished radio systems and required components and
subassemblies, and reduced control over the price, timely delivery, reliability
and quality of finished radio systems, components and subassemblies. The Company
does not have long-term supply agreements with most of its manufacturers or
suppliers. In addition, the Company has from time to time experienced and may in
the future continue to experience delays in the delivery of and quality problems
with radio systems and certain components and subassemblies from vendors.
Manufacture of the Company's radio systems and certain of these components and
subassemblies is an extremely complex process, and there can be no assurance
that delays caused by contract manufacturers and suppliers will not occur in the
future. Certain of the Company's suppliers have relatively limited financial and
other resources. Although the Company intends to qualify alternative sources and
has the ability to manufacture its finished radio systems in limited quantities
and certain of such components internally, any inability to obtain timely
deliveries of components and subassemblies of acceptable quality or any other
circumstance that would require the Company to seek alternative sources of
supply, or to manufacture its 

                                      15
<PAGE>
 
finished radio systems or such components and subassemblies internally could
delay the Company's ability to ship its systems. Any such delay could damage
relationships with current or prospective customers and could therefore have a
material adverse effect on the Company's business, financial condition and
operating results.

RESEARCH AND DEVELOPMENT

  The Company has a continuing research and development program in order to
enhance its existing systems and related software tools and to introduce new
systems. The Company invested approximately $41.5 million, $29.1 million and
$20.2 million in 1998, 1997 and 1996, respectively, in research and development
efforts and expects to continue to invest significant resources in research and
development, including new product development and acquisitions.

  The Company's research and development efforts can be classified into three
distinct efforts: (1) increasing the functionality of its point-to-point radio
systems under development by adding additional frequencies and capacities to its
product portfolio, modifying its network management system software offering,
and developing other advancements to its point-to-point radio systems under
development; (2) developing new products based on its core technologies, such as
a point-to-multipoint product offering for applications such as cable or fiber
replacements; and (3) integrating new functionality to extend the reach of its
products into the customers' networks, such as access technology which allows
the customer to manage telecommunications services at its site and integrate
voice, data, video and facsimile in one offering, such as the Company's NetPath
integrated access product. There can be no assurance that the Company will
continue to focus on these areas or that current efforts will result in new
product introductions or modifications to existing products.

  The wireless communications market is subject to rapid technological change,
frequent new product introductions and enhancements, product obsolescence,
changes in end-user requirements and evolving industry standards. The Company's
ability to be competitive in this market will depend in significant part upon
its ability to develop successfully, introduce and sell new systems and
enhancements and related software tools on a timely and cost-effective basis
that respond to changing customer requirements. The Company has experienced and
may continue to experience delays from time to time in completing development
and introduction of new systems, enhancements or related software tools. There
can be no assurance that errors will not be found in the Company's systems after
commencement of commercial shipments, which could result in the loss of or delay
in market acceptance. The inability of the Company to introduce in a timely
manner new systems, enhancements or related software tools that contribute to
sales could have a material adverse effect on the Company's business, financial
condition and results of operations.

COMPETITION

  The wireless communications market is intensely competitive. The Company's
wireless-based radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media, including copper
and fiber optic cable. The Company has experienced increasingly intense
competition worldwide from a number of leading telecommunications companies that
offer a variety of competitive products and services and broader
telecommunications product lines, including Adtran, Inc., Alcatel Network
Systems, Bosch Telekom, California Microwave, Inc., Digital Microwave
Corporation, Ericsson Limited, Harris Corporation--Farinon Division, NEC, Nokia
Telecommunications, Nortel/BNI, Philips T.R.T., SIAE, Siemens and Western
Multiplex Corporation, many of which have substantially greater installed bases,
financial resources and production, marketing, manufacturing, engineering and
other capabilities than the Company. There can be no assurance that the Company
will be able to compete successfully in the future.

GOVERNMENT REGULATION

  Radio communications are subject to extensive regulation by the United States
and foreign laws and international treaties. The Company's systems must conform
to a variety of domestic and international requirements established to, among
other things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. Each country has a different regulatory process.
Historically, in many developed countries, the limited availability of frequency
spectrum has inhibited the growth of wireless telecommunications networks. In
order for the Company to operate in a foreign jurisdiction, it must obtain
regulatory approval for its systems and comply with different regulations in
each jurisdiction. Regulatory bodies worldwide are continuing the process of
adopting new standards for wireless communication products. The delays inherent
in this governmental approval process may cause the cancellation, postponement
or rescheduling of the installation of communications systems by the Company and
its customers, which in turn may have a material adverse effect on the sale of
systems by the Company to such customers. 

                                      16
<PAGE>
 
The failure to comply with current or future regulations or changes in the
interpretation of existing regulations could result in suspension or cessation
of operations. Such regulations or such changes could require the Company to
modify its products and incur substantial costs to comply with such time-
consuming regulations and changes. In addition, the Company is also affected to
the extent that domestic and international authorities regulate the allocation
and auction of the radio frequency spectrum. Equipment to support new services
can be marketed only if permitted by suitable frequency allocations, auctions
and regulations, and the process of establishing new regulations is complex and
lengthy. To the extent PCS operators and others are delayed in deploying these
systems, the Company could experience delays in orders. Failure by the
regulatory authorities to allocate suitable frequency spectrum could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, delays in the radio frequency spectrum
auction process in the United States could delay the Company's ability to
develop and market equipment to support new services. These delays could have a
material adverse effect on the Company's business, financial condition and
results of operations.

  The regulatory environment in which the Company operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact the Company's
operations by restricting development efforts by the Company's customers, making
current systems obsolete or increasing the opportunity for additional
competition. Any such regulatory changes, including changes in the allocation of
available spectrum, could have a material adverse effect on the Company's
business and results of operations. The Company might deem it necessary or
advisable to modify its systems to operate in compliance with such regulations.
Such modifications could be extremely expensive and time-consuming.

INTELLECTUAL PROPERTY

  The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and a variety of other measures to protect its intellectual property
rights. The Company currently holds eight U.S. patents.  The Company generally
enters into confidentiality and nondisclosure agreements with its service
providers, customers and others, and attempts to limit access to and
distribution of its proprietary rights. The Company also enters into software
license agreements with its customers and others.

EMPLOYEES

  As of December 31, 1998, the Company had a total of 995 employees, including
498 in operations, 176 in research and development, 135 in sales and marketing,
39 in quality assurance and 147 in administration. The Company believes its
future results of operations will depend in large part on its ability to attract
and retain highly skilled employees. None of the Company's employees are
represented by a labor union, and the Company has not experienced any work
stoppages. The Company considers its employee relations to be good.

                                      17
<PAGE>
 
ITEM 2.  PROPERTIES.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------  
 Location of Leased                     Functions               Square Footage                 Date
   Facility (1)                                                                            Lease Expires
------------------------------------------------------------------------------------------------------------- 
<S>                              <C>                            <C>                  <C>
HEADQUARTERS                         Administration
                                 Sales/Customer Support             61,000                September 2000
Campbell, CA                           Engineering
USA                                   Manufacturing
-------------------------------------------------------------------------------------------------------------
Campbell, CA                          Manufacturing                 25,000                September 2002
-------------------------------------------------------------------------------------------------------------
 
San Jose, CA                            Warehouse                   34,000                December 1999
-------------------------------------------------------------------------------------------------------------
Redditch, England                Sales/Customer Support              5,500                  June 2005
-------------------------------------------------------------------------------------------------------------
 
Watford, England                  Research/Development               7,500                  April 2008
-------------------------------------------------------------------------------------------------------------
Redditch, England                       Warehouse                    6,800                September 1999
-------------------------------------------------------------------------------------------------------------
                                     Administration
Vienna, VA                       Sales/Customer Support             15,000                  April 2002
-------------------------------------------------------------------------------------------------------------
Sterling, VA                         Administration                 15,000                September 1999
-------------------------------------------------------------------------------------------------------------
Orange, CA                              Warehouse                    3,400                  April 1999
-------------------------------------------------------------------------------------------------------------
                                     Administration
Northants, England               Sales/Customer Support              5,290                 August 2011
-------------------------------------------------------------------------------------------------------------
                                     Administration
Essex, England                   Sales/Customer Support              8,000                September 2007
-------------------------------------------------------------------------------------------------------------
                                     Administration
                                 Sales/Customer Support
                                       Engineering
Fair Lawn, NJ                         Manufacturing                 43,700                  June 2005
-------------------------------------------------------------------------------------------------------------
                                                                                          September 2000
                                                                                     (may be canceled with a
Frankfurt, Germany                      Warehouse                   11,000              six month advance
                                                                                             notice)
-------------------------------------------------------------------------------------------------------------
Melbourne, Florida                Research/Development              36,250                  June 2001
-------------------------------------------------------------------------------------------------------------
Beijing, China                   Sales/Customer Support              3,500                  March 2000
-------------------------------------------------------------------------------------------------------------
Dubai, United Arab Emirates      Sales/Customer Support              4,000                 October 1999
-------------------------------------------------------------------------------------------------------------
Mexico City, Mexico              Sales/Customer Support              4,050                   May 1999
-------------------------------------------------------------------------------------------------------------
Singapore, Singapore             Sales/Customer Support              1,050                September 2000
-------------------------------------------------------------------------------------------------------------
                                     Administration
Rome, Italy                      Sales/Customer Support             27,000                 October 2001
                                       Engineering
                                      Manufacturing
-------------------------------------------------------------------------------------------------------------
Rome, Italy                             Warehouse                    2,000                  June 2001
-------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  All locations support product sales except Vienna, VA.; Sterling, VA.;
Northants, England; and Essex, England which support service sales.

                                      18
<PAGE>
 
  P-Com Italia ("Geritel") owns and maintains its corporate headquarters in
Tortona, Italy. This facility, approx-imately 36,000 square feet, contains
design, test, manufacturing, mechanical and warehouse functions. Geritel also
maintains a sales and sales support facility in France. The French sales and
sales support facility is approximately 950 square feet.

  Cemetel S.p.A. owns and maintains its corporate headquarters in Carsoli, 
Italy. This facility, approximately 28,800 square feet, contains corporate,
administration, sales, customer support, engineering and warehousing facilities.

  The Company's facilities are fully utilized. The Company believes that these
facilities are adequate to meet its current and foreseeable requirements or that
suitable additional or substitute space will be available as needed.

ITEM 3.  LEGAL PROCEEDINGS

  On September 23, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Leonard Vernon and Gayle
M. Wing on behalf of themselves and other P-Com stockholders who purchased or
otherwise acquired its common stock between April 15, 1997 and September 11,
1998. The plaintiffs allege various state securities laws violations by P-Com
and certain of its officers and directors. The complaint seeks unquantified
compensatory, punitive and other damages, attorneys' fees and injunctive and/or
equitable relief.

  On October 16, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Terry Sommer on behalf
of herself and other P-Com stockholders who purchased or otherwise acquired
common stock between April 1, 1998 and September 11, 1998. The plaintiff alleges
various state securities laws violations P-Com and certain of its officers. The
complaint seeks unquantified compensatory and other damages, attorneys' fees and
injunctive and/or equitable relief.

  On October 20, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Leo Rubin on behalf of
himself and other stockholders who purchased or otherwise acquired its common
stock between April 15, 1997 and September 11, 1998.  This complaint is
identical in all relevant respects to that filed on September 23, 1998, which is
described above, other than the fact that the plaintiffs are different.

  On October 26, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Betty B. Hoigaard and
Steve Pomex on behalf of themselves and other P-Com stockholders who purchased
or otherwise acquired its common stock between April 15, 1997 and September 11,
1998.  This complaint is identical in all relevant respects to that filed on
September 23, 1998, which is described above, other than the fact that the
plaintiffs are different.

  On October 27, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Judith Thurman on behalf
of herself and other P-Com stockholders who purchased or otherwise acquired its
common stock between April 15, 1997 and September 11, 1998.  This complaint is
identical in all relevant respects to that filed on September 23, 1998, which is
described above, other than the fact that the plaintiffs are different.

  On December 3, 1998, the Superior Court of California, County of Santa Clara,
entered an order consolidating all of the above complaints.  On January 15,
1999, the plaintiffs filed a consolidated amended class action complaint
superceding all of the foregoing complaints.  On March 1, 1999, defendants filed
a demurrer to the consolidated amended complaint and each cause of action stated
therein.  The demurrer is set for hearing by the court on May 13, 1999.

 Federal Actions

  On November 13, 1998, a putative class action complaint was filed in the
United States District Court, Northern District of California, by Robert Schmidt
on behalf of himself and other P-Com stockholders who purchased or otherwise
acquired its common stock between April 15, 1997 and September 11, 1998. The
plaintiff alleged violations of the Securities Exchange Act of 1934 by P-Com and
certain of its officers and directors. The complaint sought unquantified
compensatory damages, attorneys' fees and injunctive and/or equitable relief. On
January 26, 1999, the plaintiff voluntarily dismissed the Schmidt action. The
court entered an order dismissing the action without prejudice on January 29,
1999.

  On December 3, 1998, a putative class action complaint was filed in the United
States District Court, Northern District of California, by Robert Dwyer on
behalf of himself and other P-Com stockholders who purchased or otherwise
acquired its common stock between April 15, 1997 and September 11, 1998. The
plaintiff alleged violations of the Securities Exchange Act of 1934 by P-Com and
certain of its officers and directors. The complaint sought unquantified
compensatory damages, attorneys' fees and injunctive and/or equitable relief. On
December 22, 1998 and 

                                      19
<PAGE>
 
February 2, 1999, the plaintiff sought to voluntarily dismiss this action. On
February 11, 1999, the court entered an order dismissing the action without
prejudice.

  All of these proceedings are at a very early stage and the Company is unable
to speculate as to their ultimate outcomes. However, the Company believes the
claims in the complaints are without merit and intend to defend against them
vigorously. An unfavorable outcome in any or all of them could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. Even if all of the litigation is resolved in the
Company's favor, the defense of such litigation may entail considerable cost and
the significant diversion of efforts of management, either of which may have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
  None.

                                      20
<PAGE>
 
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

  The executive officers and directors of the Company, their ages as of March
31, 1999, and their positions and their backgrounds are as follows:

<TABLE>
<CAPTION>
                    NAME                     AGE                                POSITION
                    ----                     ----    ----------------------------------------------------
    <S>                                      <C>     <C>
    George P. Roberts......................    66    Chairman of the Board and Chief Executive Officer
                                                  
    Pier Antoniucci........................    57    President and Chief Operating Officer
                                                  
    Michael J. Sophie......................    41    Chief Financial Officer, Vice President, Finance and
                                                     Administration
                                                  
    John R. Wood...........................    43    Senior Vice President, Advanced Technologies
                                                  
    Kenneth E. Bean, III...................    42    Senior Vice President, Quality Assurance
                                                  
    Gill Cogan.............................    47    Director
                                                  
    John A. Hawkins........................    38    Director
                                                  
    M. Bernard Puckett.....................    53    Director
 
    James J. Sobczak.......................    57    Director
</TABLE>

BACKGROUND

  The principal occupations of each executive officer and director of the
Company for at least the last five years are as follows:

  Mr. Roberts is a founder of the Company and has served as Chief Executive
Officer and Director since October 1991. From October 1991 through December
1996, Mr. Roberts served as President of the Company. Since September 1993, he
has also served as Chairman of the Board of Directors. From May 1989 to August
1991, Mr. Roberts was Chief Operating Officer for Digital Microwave Corporation,
a wireless communications company. From October 1984 to May 1989, Mr. Roberts
was President of American Satellite Company, a wholly owned subsidiary of
Contel, an independent telecommunications company. Mr. Roberts holds a B.S. in
Electrical Engineering from the University of Arizona and has completed graduate
business studies at the University of Arizona and the University of California
at Los Angeles.

  Mr. Antoniucci was appointed President of the Company in January 1997. Mr.
Antoniucci was also appointed and has served as Chief Operating Officer since
July 1996. From July 1995 to January 1997, Mr. Antoniucci served as Executive
Vice President of the Company. From December 1992 to June 1995, Mr. Antoniucci
served as Senior Vice President, Marketing and Sales of the Company. From
September 1992 to November 1992, Mr. Antoniucci was Vice President, Purchasing
for Alcatel-Telettra, a manufacturer of telecommunications products. From July
1986 to August 1992, Mr. Antoniucci was President of Granger-Telettra J.V., a
provider of digital microwave systems located in the United States that resulted
from the acquisition of Granger by Telettra. From October 1972 to June 1986, Mr.
Antoniucci served in various management positions at Telettra, including Vice
President of the E.F.I. Business Unit, Vice President of the Telecom
Infrastructure Business Unit and Project Manager at Telettra/Ford Aerospace.
Telettra was an Italian manufacturer of telecommunications products that was
subsequently acquired by Alcatel Network Systems. Mr. Antoniucci holds a
doctorate in Electrical Engineering from Bologna University in Bologna, Italy.

  Mr. Sophie was appointed Chief Financial Officer of the Company in April 1996
and has served as Vice President, Finance and Administration of the Company
since September 1993. Mr. Sophie also served as Controller from September 1993
through December 1996. From December 1989 to August 1993, Mr. Sophie was Vice
President, Finance and Administration of the Loral Fairchild Imaging Sensors
Division, a manufacturer of CCDs and cameras. From December 1982 to December
1989, Mr. Sophie served in various financial positions at Avantek, a
telecommunications company, including Division Controller and Group Controller.
Prior to December 1982, Mr. Sophie held various financial positions for IBM and
Fairchild Semiconductor and Signetics, two semiconductor 

                                      21
<PAGE>
 
manufacturers. Mr. Sophie holds an MBA from the University of Santa Clara and a
B.S. in Business Administration from California State University, Chico.

  Mr. Wood was appointed Senior Vice President of Advanced Technologies of the
Company in January 1997. From April 1993 to January 1997, Mr. Wood served as
Vice President, Engineering for the Company. From August 1992 to March 1993, Mr.
Wood served as Director of Systems Engineering for the Company. From June 1990
to July 1992, Mr. Wood was Manager of Transmission Engineering for Mercury
Personal Communications, a British telecommunications company. From September
1976 to May 1990, Mr. Wood held various technical and management positions at
Marconi Communications, a British telecommunications equipment manufacturing
company. Mr. Wood holds a B.Sc. in Physics and Electronics from Manchester
University in Manchester, England.

  Mr. Bean was appointed Senior Vice President of Quality Assurance of the
Company in January 1997. From August 1995 to January 1997, Mr. Bean served as
Vice President, Manufacturing of the Company. From September 1992 to June 1995,
Mr. Bean was Director of Quality Assurance of the Company. From June 1989 to
March 1992, Mr. Bean was a Senior Quality Field Engineer at TRW Space and
Defense, a provider of satellite communications equipment. From January 1989 to
June 1989, Mr. Bean was a Senior Quality Engineer at Eaton, a manufacturer of
microwave components for various telecommunications applications, and from
October 1987 to January 1989, Mr. Bean was a Quality Manager at Gamma Microwave,
a wireless component manufacturer. Mr. Bean holds a B.A. in Industrial Arts with
a minor in Business from San Jose State University.

  Mr. Cogan has served as a Director of the Company since November 1993.  Since
January 1994, Mr. Cogan has been a Principal of Weiss, Peck & Greer, L.L.C., an
investment company, and since 1990, he has been a general partner of Weiss, Peck
& Greer Venture Partners, L.L.C., a private venture capital investment firm.
From August 1986 to November 1990, Mr. Cogan was a partner of Adler & Company, a
venture capital group specializing in technology-related investments.  From 1983
to 1985, Mr. Cogan was Chairman and Chief Executive Officer of Formtek, an
imaging and data management computer company.  Mr. Cogan serves as a director of
Electronics for Imaging, Inc., Integrated Packaging Assembly Corporation and
several private companies.  Mr. Cogan holds a B.S. in Physics and an M.B.A. from
the Graduate School of Management at the University of California--Los Angeles.

  Mr. Puckett has served as a Director of the Company since May 1994.  From June
1995 to January 1996, he was President and Chief Executive Officer of Mobile
Telecommunication Technologies Corp. ("Mtel"), a telecommunications corporation.
From January 1994 to May 1995, Mr. Puckett was President and Chief Operating
Officer of Mtel.  From June 1993 to December 1993, Mr. Puckett was Senior Vice
President, Corporate Strategy and Development for IBM.  Between September 1967
and June 1993, Mr. Puckett served in various management and marketing positions
at IBM.  Mr. Puckett currently serves as a director of Nielson Media Research
(formerly known as Cognizant Corp.), R.R. Donnelley & Sons and Software.com.
Mr. Puckett holds a B.S. in Mathematics from the University of Mississippi.

  Mr. Hawkins has served as a Director of the Company since September 1991.
Since August 1995, Mr. Hawkins has been a General Partner of Generation Capital
Partners, L.P., a private equity firm.  From May 1992 to July 1995, he was a
general partner of certain venture capital funds associated with Burr, Egan,
Deleage & Co., a venture capital company.  From November 1987 to May 1992, Mr.
Hawkins was an Associate with Burr, Egan, Deleage & Co.  He is currently a
limited partner of certain venture capital funds associated with Burr, Egan,
Deleage & Co.  Mr. Hawkins serves as a director of PixTech, Inc., a manufacturer
of flat panel displays, and several private companies.  Mr. Hawkins holds an
M.B.A. from the Harvard Graduate School of Business Administration and a B.A. in
English Literature from Harvard University.

  Mr. Sobczak has served as a Director of the Company since April 1997.  Since
1991, Mr. Sobczak has been the President of Telecommunications Education and
Research Network, Inc. ("TERN"), a non-profit company that manages a broadband
network providing research and education support to over 35 universities.
Additionally, since 1993, Mr. Sobczak has taught graduate courses in
telecommunications at the University of Pittsburgh and, from 1993 to 1995, was a
lecturer in the Carnegie Mellon University executive education program.  Between
1970 and 1990, he served in various management and marketing positions at Bank
of America, Ford Motor Co., Contel ASC and Westinghouse Communications.  Mr.
Sobczak serves on the Board of Directors of one private company.  Mr. Sobczak
holds an M.B.A. and a B.S. in Electrical Engineering from the University of
Detroit.

                                      22
<PAGE>
 
  Board Committees and Meetings

  The Board of Directors held fifteen (15) meetings and acted by unanimous
written consent three (3) times during the fiscal year ended December 31, 1998
(the "1998 Fiscal Year").  The Board of Directors has an Audit Committee and a
Compensation Committee.  Each director attended or participated in 75% or more
of the aggregate of (i) the total number of meetings of the Board of Directors
and (ii) the total number of meetings held by all committees of the Board on
which such director served during the 1998 Fiscal Year.

  The Audit Committee currently consists of two directors, Mr. Cogan and Mr.
Puckett, and is primarily responsible for approving the services performed by
the Company's independent auditors and reviewing their reports regarding the
Company's accounting practices and systems of internal accounting controls. The
Audit Committee held four (4) meetings during the 1998 Fiscal Year.

  The Compensation Committee currently consists of two directors, Mr. Cogan and
Mr. Hawkins, and is primarily responsible for reviewing and approving the
Company's general compensation policies and setting compensation levels for the
Company's executive officers.  The Compensation Committee also has the exclusive
authority to administer the Company's Employee Stock Purchase Plan and the
Company's 1995 Stock Option/Stock Issuance Plan and to make option grants
thereunder.  The Compensation Committee acted by unanimous written consent
twenty-two (22) times during the 1998 Fiscal Year.

  Director Compensation

  Board members do not receive cash compensation for their services as
directors.

  Under the Automatic Option Grant Program contained in the Company's 1995 Stock
Option/Stock Issuance Plan (the "1995 Plan"), each individual who first joins
the Board as a non-employee director any time after February 1, 1996 will
receive, at the time of such initial election or appointment, an automatic
option grant, to purchase 40,000 shares of Common Stock, provided such person
has not previously been in the Company's employ.  In addition, on the date of
each annual stockholders meeting, each individual who continues to serve as a
non-employee Board member, whether or not such individual is standing for re-
election at that particular Annual Meeting, will be granted an option to
purchase 4,000 shares of Common Stock, provided such individual has not received
an option grant under the Automatic Option Grant Program within the preceding
six months.  Each grant under the Automatic Option Grant Program will have an
exercise price per share equal to the fair market value per share of the
Company's Common Stock on the grant date, and will have a maximum term of ten
(10) years, subject to earlier termination should the optionee cease to serve as
a Board of Directors member.

  On May 18, 1998, the date of the 1998 Annual Stockholders Meeting, each of the
non-employee Board members, Messrs. Cogan, Hawkins, Puckett and Sobczak,
received an automatic option grant to purchase 4,000 shares of Common Stock.
The exercise price per share in effect under each such option was $19.25, the
fair market value per share of Common Stock on the grant date.  Each of the
options was immediately exercisable for all the option shares, but any shares
purchased under the option would be subject to repurchase by the Company, at the
exercise price paid per share, upon the optionee's cessation of Board service
prior to vesting in those shares.  The shares subject to each option grant was
to vest in a series of eight (8) successive equal quarterly installments upon
the optionee's completion of each successive three (3)-month period of Board
service over the twenty-four (24)-month period measured from the grant date.

  On July 31, 1998, each of the option grants made under the Automatic Grant
Program on May 18, 1998 with an exercise price of $19.25 per share was
cancelled, and a new option for 4,000 shares was granted to each of the four 
non-employee Board members with an exercise price of $5.8125 per share, the fair
market value per share of Common Stock on the grant date of the new option. Each
of the new options is immediately exercisable for all the option shares, but any
shares purchased under the option will be subject to repurchase by the Company,
at the exercise price paid per share, upon the optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each new option
will vest in a series of eight (8) successive equal quarterly installments upon
the optionee's completion of each successive three (3)-month period of Board
service over the twenty-four (24)-month period measured from the July 31, 1998
grant date.

                                      23
<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 National Market under the
symbol PCMS. The following table sets forth the range of high and low closing
sale prices, as reported on the Nasdaq National Market for each quarter since
the consummation of the Company's initial public offering on March 3, 1995. At
March 18, 1999, the Company had approximately 550 holders of record of its
Common Stock and approximately 48,944,270 shares outstanding.

<TABLE>
<CAPTION>
                                            Price Range of
                                             Common Stock
                                           High         Low
                                           ----         ---
<S>                                        <C>          <C>
Year Ending December 31, 1996                       
      First Quarter                        $10.07      $ 7.00
      Second Quarter                        18.00        9.75
      Third Quarter                         17.94        9.44
      Fourth Quarter                        16.88       10.16
                                                       
Year Ending December 31, 1997                          
      First Quarter                        $19.44      $13.00
      Second Quarter                        17.41       12.69
      Third Quarter                         26.13       16.13
      Fourth Quarter                        29.38       13.63
                                                       
Year Ending December 31, 1998                          
      First Quarter                        $21.13      $15.56
      Second Quarter                        20.50        8.88
      Third Quarter                          8.81        2.38
      Fourth Quarter                         4.38        2.50
</TABLE>                                       

  To date, the Company has not paid any cash dividends on shares of its Common
Stock. The Company currently anticipates that it will retain any available funds
for use in the operation of its business, and does not anticipate paying any
cash dividends in the foreseeable future. In addition, the terms of several of
the Company's agreements prohibit the Company from paying any dividends without
the prior approval of the other parties named therein.

                                      24
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA.

<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:
Sales
  Product                                         $151,347           $190,545         $101,853           $ 52,856         $ 19,198  
  Service                                           43,597             30,157           19,100             11,607           10,402
                                               ---------------    ---------------   --------------    --------------    -----------
    Total sales                                    194,944            220,702          120,953             64,463           29,600
                                               ---------------    ---------------   --------------    --------------    -----------

Cost of sales                                    
  Product                                          113,498            110,267          60,362              29,949           11,517
  Service                                           30,777             18,968          13,696               7,507            7,297
                                               ---------------    ---------------   --------------    --------------    -----------
    Total cost of sales                            144,275            129,235          74,058              37,456           18,814
                                               ---------------    ---------------   --------------    --------------    -----------

  Gross profit                                      50,669             91,467          46,895              27,007           10,786
                                               ---------------    ---------------   --------------    --------------    -----------
Operating expenses:
  Research and development                          41,473             29,127           20,163            12,284             7,978
  Selling and marketing                             22,020             15,696            7,525             4,837             3,275
  General and administrative                        24,965             14,741           10,178             5,573             4,903
  Goodwill amortization                              6,692              2,207              105                 -                 -
  Restructuring charges                              4,332                  -                -                 -                 -
  Acquired in-process research and
   development                                      15,442                  -                -                 -                 -
                                               ---------------    ---------------   --------------    --------------    ----------
   Total operating expenses                        114,924             61,771           37,971            22,694            16,156
                                               ---------------    ---------------   --------------    --------------    ----------
Income (loss) from operations                      (64,255)            29,696            8,924             4,313            (5,370)
Interest and other income (expense), net            (7,903)               247              906               167              (249)
                                               ---------------    ---------------   --------------    --------------    -----------
Income (loss) before extraordinary
  item and income taxes                            (72,158)            29,943            9,830             4,480            (5,619)
Provision (benefit) for income taxes               (11,501)            11,052              956               761               338
                                               ---------------    ---------------   --------------    --------------    ----------- 
Income (loss) before extraordinary item            (60,657)            18,891            8,874             3,719            (5,957)
Extraordinary item: retirement of Notes              5,333                  -                -                 -                 -
                                               ---------------    ---------------   --------------    --------------    -----------
Net income (loss)                                  (55,324)            18,891            8,874             3,719            (5,957)
Charge related to preferred stock discount          (1,839)                 -                -                 -                 -
                                               ---------------    ---------------   --------------    --------------    -----------
Net income (loss) applicable to holders
  of Common Stock                                 $(57,163)          $ 18,891         $  8,874           $ 3,719          $ (5,957)
                                                ==============    ===============   ==============    ==============    ===========
Basic income (loss) per share (1):
  Income (loss) before extraordinary item         $  (1.44)          $   0.45         $   0.23           $  0.11          $  (1.08)
  Extraordinary item                                  0.12                  -                -                 -                 -
                                               ---------------    ---------------   --------------    --------------    -----------
  Net income (loss)                               $  (1.32)          $   0.45         $   0.23           $  0.11          $  (1.08)
                                               ===============    ===============   ==============    ==============    ===========
Diluted income (loss) per share (1):
  Income (loss) before extraordinary item         $  (1.44)          $   0.43         $   0.22           $  0.11          $  (1.08)
  Extraordinary item                                  0.12                  -                -                 -                 -
                                               ---------------    ---------------   --------------    --------------    -----------
  Net income (loss)                               $  (1.32)          $   0.43         $   0.22           $  0.11          $  (1.08)
                                               ===============    ===============   ==============    ==============    ===========
Shares used in per share computation:
Basic                                               43,254             42,175           38,762            32,645             5,521
                                               ===============    ===============   ==============    ==============    ===========
Diluted                                             43,254             44,570           40,607            34,853             5,521
                                               ===============    ===============   ==============    ==============    ===========

                                                                                        December 31,
                                                    1998             1997             1996                1995              1994
                                                  --------         --------         --------            -------           --------
                                                                                       (in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents                         $ 29,241           $ 88,145         $ 42,226           $ 8,871          $  1,593
Working capital                                     81,108            174,635           90,811            38,473             3,755
Total assets                                       314,358            305,521          155,452            62,964            18,393
Long-term debt                                      92,769            101,690              914               491             1,198
Mandatorily Redeemable Preferred Stock              13,559                  -                -                 -                 -
Retained earnings (accumulated deficit)            (38,783)            18,380             (511)           (9,360)          (13,119)
Stockholders' equity                               106,550            148,297          112,479            47,258             6,028 
</TABLE>

---------------                                        
(1)  See Note 1 of Notes to Consolidated Financial Statements for an explanation
     of the method used to determine the number of shares used to compute share
     and per share amounts.

(2)  All financial information presented in this Annual Report on Form 10-K has
     been restated to include the operating results of Control Resources
     Corporation ("CRC"), which was acquired in a pooling-of-interests
     transaction on May 29, 1997; and RT Masts Limited ("RT Masts") and
     Telematics, Inc. ("Telematics"), which were acquired in pooling-of-
     interests transactions on November 27, 1997.

                                      25
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
  
  Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "--Certain Factors Affecting the Company"
contained in this Item 7 and elsewhere in this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

The following information reflects a change in the original accounting for the
purchase price allocation for the March 1998 acquisition of the Wireless
Communications Group of Cylink Corporation (the Cylink Wireless Group) and
amortization of the related goodwill and other intangible assets purchased for
the nine months since the acquisition.

 OVERVIEW

  P-Com, Inc. (the "Company") supplies equipment and services for access to
worldwide telecommunications and broadcast networks. All financial information
presented in this Annual Report on Form 10-K has been presented to include the
operating results of Control Resources Corporation ("CRC"), which was acquired
in a pooling-of-interests transaction on May 29, 1997; and RT Masts Limited ("RT
Masts") and Telematics, Inc. ("Telematics"), which were acquired in pooling-of-
interests transactions on November 27, 1997. Currently, the Company ships 2.4
GHz and 5.7 GHz spread spectrum radio systems, as well as 7 GHz, 13 GHz, 14 GHz,
15 GHz, 18 GHz, 23 GHz, 26 GHz, 38 GHz and 50 GHz radio systems, and the Company
also provides software and related services for these products. Additionally,
the Company offers turnkey microwave relocation services, engineering, path
design, program management, installation and maintenance of communication
systems to network service providers. The Company is currently field testing and
further developing a range of point-to-multipoint radio systems for use in both
the telecommunications and broadcast industries.

  The Company was founded in August 1991 to develop, manufacture, market and
sell millimeter wave radio systems for wireless networks. The Company was in the
development stage until October 1993. From October 1993 through December 31,
1998, the Company generated sales of approximately $649.8 million, of which
$415.6 million, or 64% of such amount, was generated in the twenty-four months
ended December 31, 1998. From inception to the end of 1998, the Company had
generated an accumulated deficit of approximately $38.8 million. The decrease in
retained earnings from $18.4 million in 1997 to an accumulated deficit of $38.8
million in 1998 was due primarily to the net loss of $55.3 million in 1998 which
included restructuring and other charges of $26.6 million and acquired in-
process research and development expenses of approximately $15.4 million related
to the acquisition of the assets of the Cylink Wireless Group. For additional
information regarding the acquisition, please see "Results of Operations-
Acquisitions". In addition to these charges, the net loss was also due to a
downturn and slowdown in the telecommunications equipment industry as a whole in
the second half of the year, in part due to the economic turmoil in Asia.  The
Company experienced a sharp decrease in its sales beginning in June 1998, as
compared to prior quarters, and began a cost reduction program shortly
thereafter.  The Company laid off a portion of its work force in September,
October and November 1998 and increased its inventory reserves and allowance for
doubtful accounts and wrote down certain of its facilities, fixed assets and
goodwill in the third quarter of 1998.  

  Due to many factors, including the Company's limited operating history and
limited resources, there can be no assurance that profitability or significant
revenues on a quarterly or annual basis will occur in the future. During 1997
and the first half of 1998, both the Company's sales and operating expenses
increased rapidly. During the remainder of 1998, the Company's operating
expenses continued to increase, while the Company's sales declined sharply.
There can be no assurance that the Company's revenues will continue to remain at
or increase from the levels experienced in 1997 or in the first half of 1998 or
that sales will not decline. In fact, during the third quarter of 1998, the
Company experienced a significant decrease in sales. Although the fourth quarter
showed an improvement, the Company had not recovered from the downturn and sales
remained sluggish. In recent quarters, the Company has been experiencing higher
than normal price declines. The declines in prices have a downward impact on the
Company's gross margin. There can be no assurance that such pricing pressure
will not continue in future quarters. Though the Company is taking measures to 
reduce operating expenses, the Company intends to continue to invest in its 
operations, particularly to support product development and the marketing and 
sales of recently introduced products. As such, there can be no assurance that 
operating expenses will not continue to increase in 1999 as compared to 1998. 
If the Company's sales do not correspondingly increase, the Company's
results of operations would continue to be materially adversely affected.
Accordingly, there can be no assurance that the Company will achieve
profitability in future periods. The Company is subject to all of the risks
inherent in the operation of a new business enterprise, and there can be no
assurance that the Company will be able to successfully address these risks.

                                      26
<PAGE>
 
  During the second half of 1997 and the first half of 1998, the Company
significantly expanded the scale of its operations to support potential market
opportunities and to address critical infrastructure and other requirements.
This expansion included the opening of sales offices in the United Arab
Emirates, Singapore, China and Mexico, the acquisition of the assets of the
Cylink Wireless Group, significant investments in research and development to
support product development and services, and the hiring of additional personnel
in all functional areas, including sales and marketing, finance, manufacturing
and operations. Because the Company's sales did not correspondingly increase
during the second half of the year, the Company's results of operations were
materially adversely affected and the cost reduction program was initiated. The
Company raised gross proceeds of $15 million through the issuance of convertible
preferred stock and warrants in December 1998. The Company retired approximately
$40 million of its 4 1/4% convertible promissory notes between December 1998 and
February 1999 through the issuance of 5,279,257 shares of Common Stock.

YEARS ENDED 1998, 1997 AND 1996

  Sales. Sales consist of revenues from radio systems and bundled software tools
and service offerings. The Company generated revenues from the sale of its 38
GHz radio systems commencing in October 1993, 50 GHz radio systems commencing in
September 1994, 23 GHz radio systems commencing in January 1995, 15 GHz radio
systems commencing in June 1996, 2.4 and 5.7 GHz spread spectrum radio systems
commencing in September 1996, 13 GHz radio systems commencing in November 1996,
26 GHz radio system commencing in July 1997, 7 and 18 GHz radio systems
commencing in September 1997 and service offerings in March 1997. In 1998, the
Company generated revenues from the sale of its 1U (one unit, approximately
1.75 inches in height) enhanced IDU and 28 GHz radio system commencing in
April 1998, Cluster Network Manager commencing in May 1998, SNMP commencing in
June 1998, Airpro commencing in October 1998, and NMS Proxy Controller
commencing in November 1998.

  In 1998, 1997 and 1996, sales were approximately $194.9 million, $220.7
million, and $121.0 million, respectively. The 12% decrease in sales from 1997
to 1998 was primarily due to the market slowdown for the Company's Tel-Link
product line and a downturn and slowdown in the telecommunication equipment
industry segment, due in particular to the economic turmoil in Asia and surplus 
capacity in the industry. The increase in sales from 1996 to 1997 was primarily
due to increased volume of 38 and 23 GHz radio systems to new and existing
customers and, to a lesser extent, sales from products acquired in recent
acquisitions, and from service offerings. In 1998, one customer accounted for
23% of sales. In 1997, two customers accounted for an aggregate of 26% of sales.

  Product sales for 1998 decreased approximately $39.2 million or 21% during the
year as compared to an increase of approximately $88.7 million or 87% during
1997. Product sales represented approximately 78%, 86% and 84% of sales in 1998,
1997 and 1996, respectively. The decrease in product sales in 1998 was primarily
due to the slowdown in the telecommunication equipment industry in the second
half of the year and declining prices as a result of the Pacific Rim currency
crisis and surplus capacity in the industry. Product sales growth in 1997 was
attributable to strong year-over-year growth of the 38 and 23 GHz radio systems
and to the Company's acquisitions. Service sales for 1998 increased
approximately $13.4 million or 45% over the prior year as compared to
approximately $11.1 million or 58% during 1997. Service sales represented 22%,
14% and 16% of sales in 1998, 1997 and 1996 respectively. The increase in
service sales in 1998 was primarily due to increased presence in international
markets through acquisitions in the United Kingdom and Italy and from
introductions to new customers by the sales force. The increase in service sales
in 1997 was due to the acquisition of CSM. All service sales in 1996 were from 
acquisitions in 1997 and 1998 which were accounted for as poolings-of-interest. 
Under the pooling-of-interest method of accounting, the consolidated financial 
statements are restated to present the results of the combined companies as if 
they had been combined since inception.

  Historically, the Company has generated a majority of its sales outside of the
United States. During 1998, the Company generated 21%, 37%, 23%, 10% and 9% of
its sales in the US, the UK, Europe, Africa, and Asia, respectively. During
1997, the Company generated 32%, 31%, 20%, 3% and 7% of its sales in the US, the
UK, Europe, Africa, and Asia, respectively. The Company expects to generate a
majority of its sales in international markets in the future.

  Many of the Company's largest customers use the Company's product and services
to build telecommunication network infrastructures. These purchases are
significant investments in capital equipment and are required for a phase of the
rollout in a geographic areas or a market. Consequently, the customer may have
different requirements from year to year and may vary its purchases from the
Company accordingly.

  The decrease in sales to US customers from approximately $70 million in 1997
to approximately $42 million in 1998 is due primarily to lower sales to three
customers who purchased an aggregate of approximately $43 million in 1997 and
approximately $4 million in 1998. This was partially offset by sales to other
new and existing customers in the US during the year primarily due to the
sales generated from acquisitions made in 1997 and 1998. Sales to customers in
the UK of $71 million in 1998 and to customers in Europe of $45 million in
1998 were relatively flat from 1997 to 1998. However, lower sales from one
customer in the UK were offset by increased sales from several other customers
in the UK. The increase in sales to customers in Africa in 1998 from
approximately $19 million as compared to approximately $6 million in 1997 is
due to increased demand by one customer. Sales to customers in Asia increased
by approximately 18% to $18 million from $15 million due to the acquisition of
the Cylink Wireless Group and to new customers in the area. Sales to customers 
in Asia during the second half of 1998 decreased by 35% as compared to the first
half of the year.

  There can be no assurance that sales of the Company's radio systems or
services will increase or that such systems or services will achieve market
acceptance. The Company provides to its customers significant volume price
discounts, which are expected to lower the average selling price of a
particular product line as more units are sold. In addition, the Company
expects that the average selling price of a particular product line will also
decline as such product matures, and as competition increases in the future.
Accordingly, the Company's ability to maintain or increase sales will depend
upon many factors, including its ability to increase unit sales volumes of its
systems and to introduce and sell systems at prices sufficient to compensate
for reduced revenues resulting from declines in the average selling price of
the Company's more mature products. To date, most of the Company's sales have
been made to customers located outside the United States. For risk factors
associated with customer concentration, declining average selling prices,
results of operations and international sales, please see "Certain Factors
Affecting Operating Results--Significant Customer Concentration," "--Declining
Average Selling Prices," "--Significant Fluctuations in Results of Operations"
and "--International Operations; Risks of Doing Business in Developing
Countries."

                                      27
<PAGE>
 
  Gross Profit. The Company's cost of sales consists primarily of costs related
to materials, labor and overhead, and freight and duty. In 1998, 1997 and 1996,
gross profits were $50.7 million, $91.5 million and $46.9 million, respectively,
or 26.0%, 41.4% and 38.8% of sales, respectively. The decline in gross profit as
a percentage of sales from 1997 to 1998 was primarily due to declining average
selling prices, increased service sales which generated lower margins than
product sales, and one-time inventory write-downs of approximately $16.9
million. The improvement in gross profit as a percentage of sales from 1996 to
1997 was primarily due to product design improvements, such as reducing the
number of components incorporated into each system and the use of common
components across the range of the Company's products, which increased
manufacturing efficiencies and economies of scale.

  Product gross profit as a percentage of product sales was approximately
25.0%, 41.7% and 40.9% in 1998, 1997 and 1996, respectively. The decrease in
product gross profit percentage in 1998 was due to declining average selling
prices, lower sales volumes, and one-time inventory write-downs of approximately
$16.9 million (including $14.5 million in inventory write downs related to the
Company's existing core business and $2.4 million in other one-time charges to
inventory relating to the elimination of product lines). The increase in
product gross profit percentage in 1997 was due to product design improvements
and economies of scale. Service gross profit as a percentage of service sales
were approximately 29.4%, 39.8% and 28.3% in 1998, 1997, and 1996,
respectively. The decrease in service gross profit percentage in 1998 was due
to increased price competition and changes in the service offering mix. The
increase in service gross profit service in 1997 was due to a unique one-time
project opportunity.

  The Company has an ongoing program to reduce the costs of manufacturing its
radio systems. As part of this program, the Company has been attempting to
achieve cost reductions principally through engineering and manufacturing
improvements, production economies and utilization of third party subcontractors
for the manufacture of the Company's radio systems and certain components and
subassemblies used in the systems. The Company is also implementing other cost
reduction programs in an effort to maintain gross margins in the future. There
can be no assurance that the Company's ongoing or future programs can be
accomplished or that they will increase gross profits. For risk factors
associated with gross profit, please see "Certain Factors Affecting Operating
Results--Significant Fluctuations in Results of Operations," "--Declining
Average Selling Prices" and "--No Assurance of Product Quality, Performance and
Reliability."

  Research and Development.  Expenses consist primarily of costs associated
with personnel and equipment. The Company's research and development
activities include the development of additional frequencies and varying
operating features and related software tools. The Company's software products
are integrated into its hardware products. Software development costs incurred
prior to the establishment of technological feasibility are expensed as
incurred. Software development costs incurred subsequent to the establishment of
technological feasibility and before general release to customers are
capitalized, if material. To date, all software development costs incurred
subsequent to the establishment of technological feasibility have been
immaterial.

  In 1998, 1997 and 1996, research and development expenses were approximately
$41.5 million, $29.1 million and $20.2 million, respectively. As a percentage of
sales, research and development expenses increased from 13% in 1997 to 21% in
1998. The increase in research and development expenses as a percentage of sales
from 1997 to 1998 was primarily due to the Company's sales decline and the
significant investment in research and development to support product
development and services, including the costs associated with new product
development due to the acquisition of the Cylink Wireless Group in March of 1998
and the Company's engineering efforts to develop a point-to-multipoint product.
The increase in research and development expenses from 1996 to 1997 was
primarily due to increased staffing as the Company concentrated on new product
development, including costs associated with new product development by CRC
beginning in 1996. Though the Company is taking measures to reduce expenses 
where appropriate, the Company intends to continue investing resources for the 
development of new systems and enhancements (including additional frequencies 
and various operating features and related software tools). As such, there can 
be no assurance that research and development expenses will not continue to 
increase in 1999 as compared to 1998.

  Selling and Marketing. Expenses consist of salaries, investments in
international operations, sales commissions, travel expenses, customer service
and support expenses and costs related to advertising and trade shows. In 1998,
1997 and 1996, sales and marketing expenses were $22.0 million, $15.7 million
and $7.5 million, respectively. As a percentage of sales, selling and marketing
expense increased from 7% in 1997 to 11% in 1998, primarily due to a lower level
of sales in 1998 and the expansion and start-up of the Company's international
sales and marketing organization, including opening sales offices in the United
Arab Emirates, Singapore, China, and Mexico. As a percentage of sales, selling
and marketing expenses increased from 6% of sales in 1996 to 7% of sales in
1997. Of this 108% increase in absolute dollars, approximately 60% was due to
the expansion of the Company's international sales force, primarily in the UK,
and customer support in the US. The remaining 40% increase in selling and
marketing expenses from 1996 to 1997 was due to the increase in selling and
marketing expenses resulting from the 1997 acquisitions of Technosystem, CSM and
CRC. Though the Company is taking measures to reduce expenses where appropriate,
the Company intends to continue investing resources to expand its sales and
marketing efforts, including the hiring of additional personnel, and to
establish the infrastructure necessary to support future operations. As such,
there can be no assurance that sales and marketing expenses will not continue to
increase in 1999 as compared to 1998.

  General and Administrative. Expenses consist primarily of salaries and other
expenses for management, finance, accounting, and legal and other professional
services. In 1998, 1997 and 1996, general and administrative expenses

                                      28
<PAGE>
 
were $25.0 million, $14.7 million and $10.2 million, respectively. As a
percentage of sales, general and administrative expense increased from 7% in
1997 to 13% in 1998, primarily due to a lower level of sales in 1998, increased
staffing and other costs resulting from the Company's international expansion, 
acquisitions, and a $5.4 million increase in accounts receivable reserves that
were charged to general and administrative expenses as a result of the Company
recording restructuring and other one-time charges during the third quarter of
1998. The increase in general and administrative expenses from 1996 to 1997 is
related to the expansion of the Company's business associated with the
acquisitions of Geritel S.p.A., Atlantic Communication Sciences, Inc.,
Technosystem S.p.A. ("Technosystem"), and Columbia Spectrum Management, L.P.
("CSM"). In addition, the Company also incurred and expects to continue to incur
additional significant ongoing expenses as a publicly owned company related to
legal, accounting and other administrative services and expenses, including its
class action litigation. The Company expects general and administrative expenses
to continue to increase in absolute dollars in 1999 as compared to 1998.

  Goodwill Amortization. Goodwill represents the excess of the purchase price
over the fair value of the net assets of acquired companies accounted for as
purchase business combinations. Goodwill is amortized based on the expected
revenue stream or on a straight-line basis over the period of expected
benefit, ranging from 3 to 20 years. In 1998, 1997 and 1996, goodwill
amortization was approximately $6.7 million, $2.2 million, and $105,000,
respectively. The increase in goodwill amortization from 1997 to 1998 was due
to the Company recording a full year of amortization expense for the
acquisitions of Technosystem, a Rome, Italy-based company and the assets of
CSM, a Vienna, Virginia-based partnership, which were acquired in February
1997 and March 1997, respectively, and recording nine months of amortization
for the acquisition of the Cylink Wireless Group which took place in March 1998.

  Acquired In-Process Research and Development. On March 28, 1998, the Company
acquired substantially all of the assets, and on April 1, 1998, the accounts
receivable of the Wireless Communications Group of Cylink Corporation ("Cylink
Wireless Group"), a Sunnyvale, California-based company, for $46.0 million in
cash and $14.5 million in a short-term, non-interest bearing unsecured
subordinated promissory note due July 6, 1999. The Cylink Wireless Group
designs, manufactures and markets spread spectrum radio products for voice and
data applications in both domestic and international markets. The acquisition of
the accounts receivable on April 1, 1998 was recorded in the second quarter of
1998. The Company accounted for this acquisition based on the purchase method of
accounting. The results of the Cylink Wireless Group have been included since
the date of acquisition. 

  Subsequent to the acquisition, in a letter dated September 15, 1998 to the
American Institute of Certified Public Accountants, the Chief Accountant of the
Securities and Exchange Commission ("SEC") raised the concern that U.S.
reporting companies were classifying an ever-growing portion of the acquisition
price for acquisitions as purchased in-process research and development.
Although the Company believes that its original accounting treatment, based on
an independent appraisal, was in accordance with generally accepted accounting
principles, it has accepted the SEC's view with respect to these matters and
voluntarily adopted the application of the recent SEC guidance. As such, the
Company has restated its first, second, and third quarters in the 1998
consolidated financial statements to reflect this significant decrease in its
IPR&D charge and related increase in goodwill and other intangible assets. As a
result, the first quarter charge for acquired IPR&D was decreased from $33.9
million previously recorded to $15.4 million, a decrease of $18.5 million with a
corresponding increase in goodwill and other intangible assets and related
amortization in subsequent quarters.

  Among the factors considered in determining the amount of the allocation of
the purchase price to in-process research and development were various factors
such as estimating the stage of development of each in-process research and
development project at the date of acquisition, estimating cash flows resulting
from the expected revenues generated from such projects, and discounting the net
cash flows. In addition, other factors were considered in determining the value
assigned to purchased in-process technology such as research projects in areas
supporting products which address the growing third world markets by offering a
new point-to-multipoint product, a faster, less expensive more flexible 
point-to-point product, and the development of enhanced Airlink products
acquired from the Cylink Wireless Group, consisting of a Voice Extender, Data
Metro II, and RLL Encoding products. At the time of acquisition, these projects
were estimated to be 60%, 85%, and 50% complete, respectively. The Company
expects to begin to benefit from these projects in early 1999. If none of these
projects is successfully developed, the Company's sales and profitability may be
materially adversely affected in future periods. Additionally, the failure of
any particular individual project in-process could impair the value of other
intangible assets acquired. In process research and development had no future
use at the date of acquisition and technological feasibility had not been
established.

  During the second quarter of 1998, due to limited staff and facilities, the 
company delayed the research project for the new narrowband point-to-multipoint 
project acquired from the Cylink Wireless Group and focused available resources 
on the broadband point-to-multipoint project which is targeted for a larger 
addressable market. The narrowband point-to-multipoint project has a total 
remaining expected development cost of approximately $2.4 million and, due to 
the allocation of resources discussed above, is not expected to be completed 
prior to the year 2000. Currently, the narrowband point-to-multipoint project is
approximately 60% complete. The point-to-point project, discussed above, which
was acquired from the Cylink Wireless Group, was completed during the third
quarter of 1998 at an estimated total cost of $2.0 million. The enhanced Airlink
projects were completed during the first quarter of 1999 at an estimated total
cost of $0.6 million.

  Restructuring and other One-Time Costs. During 1998, the Company incurred
restructuring and other one-time charges of $4.3 million, consisting of
severance benefits, and impairments of facilities, fixed assets, and goodwill.
These restructuring and other one-time charges resulted from the consolidation
of certain of the Company's facilities.

                                      29
<PAGE>
 
In addition, the Company recorded inventory reserves of $16.9 million
(including $14.5 million in inventory write downs related to the Company's
existing core business and $2.4 million in other one-time charges to inventory
relating to the elimination of product lines) which were charged to costs of
goods sold, and accounts receivable reserves of $5.4 million which were
charged to general and administrative expenses. The Company recorded these
charges in the third quarter of 1998 primarily in response to a marked
slowdown in the telecommunications industry as a whole during the third
quarter of 1998.

The $4.3 million restructuring charge consisted primarily of severance and
benefits of approximately $0.6 million, facilities and fixed assets impairments
of approximately $0.9 million, and goodwill write-offs of approximately $2.9
million.

To attempt to offset the decrease in sales, the Company laid off approximately
121 employees from the Campbell facilities and 16 employees from its Redditch,
UK facilities during September and October 1998, incurring costs of
approximately $0.6 million. All employees were properly notified of the
impending layoff in advance and were given severance pay. Each functional vice
president submitted a list of eligible employees for the reduction in force to
the Human Resources Department where a summary list was prepared. Between
November 1998 and February 1999, the Company laid off approximately 35
additional employees from the Campbell facilities.

Due to the slowdown in sales, the Company combined certain operations and
closed its Telesys and Advanced Wireless facilities, incurring costs of
approximately $0.9 million. Some of the employees were transferred to other
business units while others were included in the reduction in force.
Facilities expenses, such as rent expense, were expensed, and certain fixed
assets at closed locations were written down. In addition, goodwill created
through acquisitions of these business units was written off in the
restructuring charge. During 1998, the Company's operations in Florida were
moved into more suitable facilities and the Company expensed the remaining
lease payments on the original building.

The Company sold a segment of its Geritel operations to a former owner and wrote
off the remaining goodwill created in the original purchase, approximately
$1.6 million. The Company continues to operate its Geritel facility, but does
not use the technology originally purchased during the acquisition. The
Company also wrote off the remaining goodwill of ACS of approximately $1.2
million because the designs were superseded by the overlap of product families
acquired in the Cylink Wireless Group acquisition.

The Company responded to a weakness in sales for the industry at the end of the
second quarter by reviewing its inventory and increasing its reserve by
approximately $16.9 million. The inventory reserve included an excess and
obsolete reserve of approximately $4.5 million, $2.0 million reserve for the
write-off relating to the overlap of product families resulting from the Cylink
Wireless Group acquisition, rework charges of approximately $4.3 million for the
rework of excess semi-custom finished goods that were configured for specific
customers or for frequencies developed for specific geographical regions,
approximately $1.1 million for products that have been redesigned and are old
revisions, and a general inventory reserve of approximately $5.0 million for
potential excess inventory caused by a slowdown in the industry.

During the second half of 1998, the Company experienced cancelled purchase
orders due to currency fluctuations, and the stronger dollar caused the
Company's customers to delay payments on equipment that had already been
shipped. As such, the Company increased its accounts receivable reserves by $5.4
million during the third quarter of 1998.

The Company expects to benefit from these restructuring and other one-time
charges in future quarters by reducing fixed costs and future cash
requirements.

   Interest and Other Income (Expense). For 1998, interest expense, consisted
primarily of interest and fees incurred on borrowings under the Company's bank
line of credit, interest on the principal amount of the Company's subordinated 4
1/4% convertible promissory notes due 2002 (the "Notes"), equipment leases and
finance charges related to the Company's receivables purchase agreements. For
1998, 1997 and 1996, interest income consisted primarily of income generated
from the Company's cash investments. For 1997 and 1996, interest expense
consisted primarily of interest accrued on the Company's bank line of credit and
equipment lease lines. In 1998, 1997 and 1996, interest income and other income
(expense), were $1.1 million, $2.6 million and $2.5 million, respectively. In
1998, 1997, and 1996, interest expense was $9.0 million, $2.3 million and $1.6
million, respectively. During 1998, contracts negotiated in foreign currencies
were limited to British pound sterling contracts and Italian lira contracts, and
any impact to date due to currency fluctuations has been insignificant. However,
the Company may in the future be exposed to the risk of foreign currency gains
or losses depending upon the magnitude of a change in the value of a local
currency in an international market. The Company has entered into foreign
currency hedging transactions to reduce exposure to foreign exchange risks. As
of December 31, 1998, the Company had forward exchange contracts valued at
approximately $26.1 million. The forward contracts generally have maturities of
six months or less.

   Extraordinary Item. In December 1998, the Company exchanged an aggregate of
$14.3 million of its Notes for an aggregate of 2,467,000 shares of its Common
Stock with a fair market value of $9.0 million. These transactions resulted in
an extraordinary gain of $5.3 million. In January and February of 1999, the
Company exchanged an additional aggregate of $25.5 million of these Notes for
an aggregate of 2,792,257 shares of its Common Stock with a fair market value
of $18.3 million and will record an additional extraordinary gain of $7.3
million in the first quarter of 1999.

   Charge related to preferred stock discount. In December 1998, the Company
completed a private placement of 15,000 shares of a newly designated Series B
convertible participating preferred stock and warrants to purchase up to
1,242,257 shares of Common Stock for $15 million. As such, in the fourth quarter
of 1998, the Company's earnings (loss) per share calculation included the fair
value of the warrants issued and the accretion of the Series B preferred stock
to its fair value. During the period of conversion of the Series B preferred
stock, the Company is required to recognize in its earnings (loss) per share
calculation any accretion of the Series B preferred stock to its redemption
value as a dividend to the holders of the Series B preferred stock.
Consequently, the Company recorded a charge of approximately $1.8 million to its
accumulated deficit for the fourth quarter of fiscal 1998 as a result of the
accounting treatment for issuance of the related warrants.

   Provision (Benefit) for Income Taxes. The Company's effective tax rates for
1998, 1997 and 1996 were 16.9%, 36.9% and 9.7% respectively. The Company's
effective tax rate is less than the combined federal and state statutory rate
due principally to net operating losses and loss credit carry forwards
available to offset taxable income. Though most of the Company's sales are to
foreign customers, the majority of the Company's pre-tax income is domestic as
most sales take place in the United States and then title transfers to the
foreign customers.

LIQUIDITY AND CAPITAL RESOURCES

   Since its inception in August 1991, the Company has financed its operations
and met its capital requirements through net proceeds of approximately $89.5
million from the Company's initial and two follow-on public offerings of its
Common Stock, four preferred stock financings aggregating approximately $32.2
million, including a $15 million preferred stock financing in 1998, Notes with
net proceeds of approximately $97.5 million in 1997 and borrowings under its
bank lines of credit and equipment lease arrangements.

   In 1998, the Company used approximately $37.8 million in operating
activities, primarily due to the net loss (excluding non-cash charges for
acquired in-process research and development of $15.4 million offset by an
extraordinary gain on the retirement of the Notes of $5.3 million) of
approximately $45.2 million and increases in deferred taxes, inventory and
prepaid expense of $8.0 million, $15.0 million and $9.0 million, respectively,
and by decreases in accounts payable and income taxes payable of $1.4 million
and $6.4 million, respectively, offset by depreciation and goodwill
amortization of $11.5 million and $6.8 million, respectively, an increase in
other accrued liabilities of $2.7 million and a decrease in accounts
receivable and other assets of $24.8 million and 2.7 million, respectively.

                                      30
<PAGE>
 
   During 1998, the Company used approximately $90.6 million in investing
activities consisting of approximately $58.2 million on acquisitions,
including the assets of the Cylink Wireless Group, and $29.2 million to
acquire property and equipment.

   In 1998, the Company generated approximately $67.6 million from financing
activities. The Company received approximately $46.1 million from borrowings
under its bank line of credit, approximately $2.0 million under other banking
relationships, principally with the Company's subsidiaries in Italy,
approximately $1.6 million from the proceeds of a sale leaseback transaction,
approximately $13.6 million from the sale of preferred stock and warrants, net
of expenses, and approximately $4.5 million from issuing Common Stock pursuant
to the Company's stock option and employee stock purchase plans.

   At December 31, 1998, the Company had working capital of approximately $81.1
million. In recent quarters, most of the Company's sales have been realized near
the end of each quarter, resulting in a significant investment in accounts
receivable at the end of the quarter. The Company expects that its investments
in accounts receivable and inventories will continue to represent a significant
portion of working capital. Significant investments in accounts receivable and
inventories have subjected and may continue to subject the Company to increased
risks which could materially adversely affect the Company's business, financial
condition and results of operations.

   The Company's principal sources of liquidity as of December 31, 1998
consisted of approximately $29.2 million of cash and cash equivalents. At
December 31, 1997, the Company had approximately $88.1 million in cash and cash
equivalents. In addition, the Company entered into a new revolving line of
credit agreement on May 15, 1998 as amended that provides for borrowings of up
to $50.0 million. At December 31, 1998, the Company had borrowed or had used as
security for letters of credit approximately $50 million under the line of
credit. The maturity date of the line of credit agreement is April 30, 2001.
Borrowings under the line are secured and bear interest at either a base
interest rate or a variable interest rate. The agreement requires the Company to
comply with certain financial covenants including the maintenance of specified
minimum ratios. Amendments during the year allowed the Company to remain in 
compliance with the debt covenants. The Company was in compliance with such
covenants as of December 31, 1998. However, the Company expects to require
additional amendments to the agreement to be in compliance with the covenants
for the first quarter of 1999, and is in negotiations with the banks to secure
such amendments to allow the Company to remain in compliance in the normal
course of business. There can be no assurance that the Company will be able to 
secure such amendments to remain in compliance with the covenants under its 
bank line of credit. Failure to adequately remedy such non-compliance through 
amendments or otherwise may cause the Company to be in default under its bank 
line of credit and if declared by the lenders, such defaults will trigger cross 
defaults in its outstanding 4 1/4% Convertible Subordinated Notes and other debt
instruments, accelerate repayment of such debts, and give rise to rights of 
holders of all outstanding Series B Preferred Stock to have their stock redeemed
by the Company. In addition, the Company could lose its eligibility to use its
Registration Statement on Form S-3 and could be delisted by the Nasdaq National
Market. Such events could materially adversely affect the Company's business,
financial condition and results of operations. Management has implemented plans
designed to reduce the Company's cash requirements through a combination of
reductions in components of working capital, equipment purchases and operating
expenditures. However, there can be no assurance that the Company will be able
to implement these plans or that it will be able to do so without a material
adverse effect on the Company's business, financial condition or results of
operations.

   On November 5, 1997, the Company issued $100 million in 4 1/4% Convertible
Subordinated Notes (the "Notes") due November 1, 2002. The Notes are convertible
at the option of the holder into shares of the Company's Common Stock at an
initial conversion price of $27.46 per share at any time. The Notes are
redeemable by the Company, beginning on November 5, 2000, upon 30 days notice,
subject to a declining redemption price. Interest on the Notes will be paid 
semi-annually on May 1 and November 1 of each year. On December 30 and 31, 1998,
the Company issued 2,467,000 shares of Common Stock in exchange for $14.4
million of Notes and recorded an extraordinary gain of $5.3 million. On January
4 and February 2, 1999, the Company issued an additional 2,792,257 shares of
Common Stock in exchange for $25.5 million of Notes and will record an
extraordinary gain of $7.3 million in the first quarter of 1999.

 At present, the Company does not have any material commitments for capital
equipment purchases. However, the Company's future capital requirements will
depend upon many factors, including the development of new radio systems and
related software tools, potential acquisitions, the extent and timing of
acceptance of the Company's radio systems in the market, requirements to
maintain adequate manufacturing facilities, working capital requirements for the
Company's acquired entities, the progress of the Company's research and
development efforts, expansion of the Company's marketing and sales efforts, the
Company's results of operations and the status of competitive products. The
Company believes that cash and cash equivalents on hand, cash flow from
operations, if any, and funds available from the Company's bank line of credit
are adequate to fund its operations in the ordinary course of business for at
least the next twelve months. There can be no assurance, however, that the
Company will not require additional financing prior to such date to fund its
operations. The Company has in the past and may from time to time in the future
sell its receivables, as part of an overall customer financing program, with
immaterial recourse to the Company. There can be no assurance that the Company
will be able to locate parties to purchase such receivables on acceptable terms,
or at all. To the extent that the Company's financial resources are insufficient
to fund the Company's activities, additional funds will be required. There can
be no assurance that any additional financing will be available to the Company
on acceptable terms, or at all, when required by the Company. If additional
funds are raised by issuing equity securities, further dilution to the existing
stockholders will result. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate one or more of its research and
development or manufacturing programs, cease its acquisition activities or
obtain funds through arrangements with partners or others that may require the
Company to relinquish rights to certain of its technologies or potential
products or other assets that the Company would not otherwise relinquish.
Accordingly, the inability to obtain such financing could have a material
adverse effect on the

                                      31
<PAGE>
 
Company's business, financial condition and results of operations. For risk
factors associated with the Company's future capital requirements, please see
"Certain Factors Affecting Operating Results--Future Capital Requirements."

ACQUISITIONS

   On March 28, 1998, the Company acquired substantially all of the assets,
and on April 1, 1998, the accounts receivable, of the Wireless Communications
Group of Cylink Corporation (the Cylink Wireless Group). The acquisition was
accounted for as a purchase business combination in accordance with Accounting
Principles Board ("APB") Opinion No. 16. Under the purchase method of
accounting, the purchase price was allocated to the net tangible and 
identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values at the date of the acquisition with any excess recorded as
goodwill. Results of operations for the Cylink Wireless Group have been included
with those of the Company for periods subsequent to the date of acquisition.

   The total purchase price of the acquisition was $58.2 million including
acquisition expenses of $2.5 million. Of the purchase price, $15.4 million has
been assigned to in-process research and development and expensed upon the
consummation of the acquisition. The Company initially recorded a $33.9 million
charge for purchased in-process research and development in March 1998 based
upon an independent valuation. In September 1998, subsequent to the filing of
the Form 10-Q in May 1998 covering the Company's quarter ended on March 31,
1998, the Securities and Exchange Commission raised the concern that U.S.
reporting companies were classifying an ever-growing portion of the acquisition
price for acquisitions as purchased in-process research and development.
Although the Company believes that its original accounting treatment, based on
an independent appraisal, was in accordance with generally accepted accounting
principles, it has accepted the SEC's view with respect to these matters and
adopted the application of the recent SEC guidance. As such, the Company has
adjusted the allocation of the purchase price related to the acquisition of the
Cylink Wireless Group. The result is a lesser charge to income for in-process
technology and a higher recorded value of goodwill and other intangible assets.

   Among the factors considered in determining the amount of the allocation of
the purchase price to in-process research and development were various factors
such as estimating the stage of development of each in-process research and
development project at the date of acquisition, estimating cash flows resulting
from the expected revenues generated from such projects, and discounting the net
cash flows, in addition to other assumptions. Developed technology will be
amortized over the period of the expected revenue stream of the developed
products of approximately four years. The value of the acquired workforce will
be amortized on a straight-line basis over three years, and the remaining
identified intangibles, including goodwill and core technology will be amortized
on a straight-line basis over ten years. Amortization expense related to the
acquisition of the Cylink Wireless Group was $3.7 million for 1998.

   In addition, other factors were considered in determining the value assigned
to purchased in-process technology such as research projects in areas supporting
products which address the growing third world markets by offering a new point-
to-multi-point product, a faster, less expensive more flexible point-to-point
product, and the development of enhanced Airlink products, consists of a Voice
Extender, Data Metro II, and RLL Encoding products.

   If none of these projects are successfully developed, the Company's sales
and profitability may be materially adversely affected in future periods.
Additionally, the failure of any particular individual project in process
could impair the value of other intangible assets acquired. The Company
expects to begin to benefit from the purchased in-process technology in 1999.

CERTAIN FACTORS AFFECTING THE COMPANY

   History of Losses

   From the Company's inception to the end of fiscal 1998, the Company generated
a cumulative net loss of approximately $38.8 million. From the end of 1997
through the end of 1998, the Company's net loss was due primarily to (i) an
acquired in-process research and development charge of approximately $15.4
million recorded in the first quarter of 1998 related to the acquisition of the
Cylink Wireless Group and (ii) a net loss of $39.2 million in the third quarter
of 1998, which included restructuring and other one-time charges of $26.6
million consisting of a $16.9 million charge to cost of goods sold (including
$14.5 million in inventory write downs related to the Company's existing core
business and $2.4 million in other one-time charges to inventory relating to the
elimination of product lines), a $5.4 million charge to general and
administrative expenses for increased accounts receivable reserves and a $4.3
million charge (including severance benefits, facilities and fixed assets
impairments and goodwill impairments) to restructuring and other one-time
charges.

                                      32
<PAGE>
 
   From October 1993 through December 31, 1998, the Company generated sales of
approximately $649.8 million, of which $415.6 million or 65.0% was generated
in the two years ended December 31, 1998. However, the Company does not
believe such growth rates are indicative of future operating results. During
the third and fourth quarter of 1998, the Company experienced a significant
decrease in sales. This decrease in revenue was principally the result of the
market slowdown for the Company's Tel-Link product line and for the industry
segment in general, in particular the economic turmoil in Asia. Net sales in
1998 decreased by $25.8 million from the prior year. Sales for P-COM
(excluding companies acquired in 1997 and 1998) decreased from approximately
$157 million in 1997 to approximately $93 million in 1998 due to lower demand
in the last half of 1998 for its Tel-Link product line. This sales decrease
was partially offset by sales increases in companies acquired in 1998 and
1997. During 1998, the Company acquired Cylink which contributed approximately
$25 million to 1998 sales. Neither company contributed to sales in 1997.
During 1997, the Company acquired Technosystem which contributed approximately
$26 million to 1998 sales and $21 million to 1997 sales, and CSM, which
contributed approximately $44 million to 1998 sales and $30 million to 1997
sales. CRC, which was acquired in 1997, showed a sales decrease from
approximately $12 million in 1997 to approximately $7 million in 1998. The
Company expects sales growth in the near future to be significantly below
recent comparable periods of growth. In recent quarters, the Company also
experienced higher than historical product price declines. The decline in
prices, along with one-time inventory write-downs, has had a significant
downward impact on its gross margin. The Company expects pricing pressures to
continue for the next several quarters and also expects gross margins as a
percentage of revenues to continue to be below comparable periods for the next
several quarters.

   During 1997 and 1998, operating expenses increased more rapidly than the
Company had anticipated, and these increases also contributed to net losses.
The Company plans to continue the Company's investments in operations,
particularly to support product development and the marketing and sales of
recently introduced products. In parallel, the Company has undertaken cost-
cutting efforts in other areas. However, if sales do not increase, the Company's
results of operations, business and financial condition may continue to be
materially adversely affected. Accordingly, the Company may not achieve
profitability for the next several quarters.

CUSTOMER CONCENTRATION

In 1998, one customer, Orange Personal Communications Ltd., accounted for 23% of
the Company's 1998 sales. During 1998, four customers accounted for
approximately 42% of the Company's sales and as of December 31, 1998, six
customers accounted for approximately 59% of the backlog scheduled for shipment
in the twelve months subsequent to December 31, 1998. Many of the Company's
major customers are located in foreign countries, primarily in the United
Kingdom and Europe. The Company anticipates continuing to sell products and
services to existing customers and adding new customers, many of which the
Company expects to continue to be located outside of the United States.

   Similarly, several of the Company's subsidiaries are dependent on a few
customers. Some of these customers are implementing new networks and are
themselves in the early stages of development. They may require additional
capital to fully implement their planned networks, which may be unavailable to
them on an as-needed basis.

   If the Company's customers cannot finance their purchases of the Company's or
its subsidiaries products or services, then this may materially adversely affect
the Company's business, operations and financial condition. Financial
difficulties of existing or potential customers may also limit the overall
demand for the Company's products and services. Specifically, both current
customers and potential future customers in the telecommunications industry have
reportedly undergone financial difficulties and may therefore limit their future
orders. The Company's ability to achieve sales in the future will depend in
significant part upon the Company's ability to:

   .   obtain and fulfill orders from, maintain relationships with and provide
       support to existing and new customers;
   .   manufacture systems in volume on a timely and cost-effective basis; and
   .   meet stringent customer performance and other requirements and shipment
       delivery dates.

   The Company's success will also depend in part on the financial condition,
working capital availability and success of the Company's customers. As a
result, any cancellation, reduction or delay in orders or shipments, for
example, as a result of manufacturing or supply difficulties or a customer's
inability to finance its purchases of the Company's products or services, may
materially adversely affect the Company's business. Some difficulties of this
nature have occurred in the past and the Company believes they will occur in the
future.

   Finally, acquisitions in the communications industry are common, which
further concentrates the customer base and may cause some orders to be delayed
or cancelled. No assurance can be given that the Company's sales will increase
in the future or that the Company will be able to support or attract customers.

                                      33
<PAGE>
 
FLUCTUATIONS IN OPERATING RESULTS

   The Company has experienced and will continue to experience significant
fluctuations in sales, gross margins and operating results. The procurement
process for most of its current and potential customers is complex and lengthy.
As a result, the timing and amount of sales is often difficult to predict
reliably. The sale and implementation of its products and services generally
involves a significant commitment of senior management, as well as its sales
force and other resources. The sales cycle for its products and services
typically involves technical evaluation and commitment of cash and other
resources and delays often occur. Delays are frequently associated with, among
other things:

   .   customers' seasonal purchasing and budgetary cycles;
   .   education of customers as to the potential applications of its products
       and services, as well as related product-life cost savings;
   .   compliance with customers' internal procedures for approving large
       expenditures and evaluating and accepting new technologies;
   .   compliance with governmental or other regulatory standards;
   .   difficulties associated with customers' ability to secure financing;
   .   negotiation of purchase and service terms for each sale; and
   .   price decreases required to secure purchase orders.

   Customer concentration

   A single customer's order scheduled for shipment in a quarter can represent a
large portion of the Company's potential sales for such quarter. The Company has
at times failed to receive expected orders, and delivery schedules have been
deferred as a result of changes in customer requirements and commitments, among
other factors. As a result, the Company's operating results for a particular
period have been and could in the future be materially adversely affected by a
delay, rescheduling or cancellation of even one purchase order.  In addition,
the Company's operating results may be affected by an inability to obtain such
large orders from single customers in the future.

   Uncertainty in Telecommunications Industry

   Although much of the anticipated growth in the telecommunications
infrastructure is expected to result from the entrance of new service providers,
many new providers do not have the financial resources of existing service
providers. If these new service providers are unable to adequately finance their
operations, they may cancel or delay orders. Moreover, purchase orders are often
received and accepted far in advance of shipment and, as a result, the Company
typically permits orders to be modified or canceled with limited or no
penalties. Indeed, most of the backlog scheduled for shipment in the twelve
months subsequent to December 31, 1998 can be cancelled. As a result, backlog
does not necessarily indicate future sales for any particular period. In
addition, any failure to reduce actual costs to the extent anticipated when an
order is received substantially in advance of shipment or an increase in
anticipated costs before shipment could materially adversely affect the
Company's gross margin for such orders.

   Inventory

   The Company's customers have also increasingly been requiring product
shipment upon ordering rather than submitting purchase orders far in advance of
expected shipment dates. This practice requires the Company to keep inventory on
hand for immediate shipment. Given the variability of customer need and
purchasing power, it is hard to predict the amount of inventory needed to
satisfy customer demand. If the Company over- or under-estimates inventory
requirements, its results of operations could continue to be adversely affected.
In particular, increases in inventory could materially adversely affect
operations if such inventory is not used or becomes obsolete.

                                      34
<PAGE>
 
   Shipment delays

   Most of the Company's sales in recent quarters have been realized near the
end of each quarter. Accordingly, a delay in a shipment near the end of a
particular quarter for any reason may cause sales in a particular quarter to
fall significantly below the Company's expectations. Such delays have occurred
in the past due to, for example, unanticipated shipment rescheduling, pricing
concessions to customers, cancellations or deferrals by customers, competitive
and economic factors, unexpected manufacturing or other difficulties, delays in
deliveries of components, subassemblies or services by suppliers and failure to
receive anticipated orders. The Company cannot determine whether similar or
other delays might occur in the future, but expect that some or all of such
problems might recur.

   Expenses

   Magnifying the effects of any revenue shortfall, a material portion of the
Company's expenses are fixed and difficult to reduce should revenues not meet
expectations.  The failure to reduce actual costs to the extent anticipated, or
an increase in anticipated costs before shipment of an order or orders could
affect the gross margins for such orders.  If the Company or its competitors
announce new products, services and technologies, it could cause customers to
defer or cancel purchases of its systems and services. Additional factors have
caused and will continue to cause the Company's performance to vary
significantly from period to period.  These factors include:

   .   new product introductions and enhancements and related costs;  
   .   weakness in Asia and Latin America, resulting in overcapacity; 
   .   ability to manufacture and produce sufficient volumes of systems and meet
       customer requirements;
   .   manufacturing efficiencies and costs;                      
   .   customer confusion due to impact of actions of competitors;
   .   variations in mix of sales through direct efforts or through distributors
       or other third parties;
   .   variations in mix of systems and related software tools sold and services
       provided as margins from service revenues are typically lower than 
       margins from product sales;
   .   operating and new product development expenses;    
   .   product discounts;                                 
   .   accounts receivable collection, in particular those acquired in recent
       acquisitions;
   .   changes in its pricing or customers' or suppliers' pricing;           
   .   inventory write-downs and obsolescence;                               
   .   market acceptance by customers and timing of availability of new products
       and services provided by the Company or its competitors;
   .   acquisitions, including costs and expenses;                           
   .   use of different distribution and sales channels;                     
   .   fluctuations in foreign currency exchange rates;                      
   .   delays or changes in regulatory approval of systems and services;     
   .   warranty and customer support expenses;                               
   .   severance costs;                                                      
   .   consolidation and other restructuring costs;                          
   .   the pending stockholder class action lawsuits;                        
   .   need for additional financing;                                        
   .   customization of systems;                                             
   .   general economic and political conditions; and                        
   .   natural disasters.                                                    

   The Company's results of operations have been and will continue to be
influenced by competitive factors, including pricing, availability and demand
for other competitive products and services. All of the above factors are
difficult for the Company to forecast, and could materially adversely affect
its business, financial condition and results of operations. The Company
believes that period-to-period comparisons are thus not necessarily meaningful
and should not be relied upon as indications of future performance.

   Because of all of the foregoing factors, in some future quarter or quarters
the Company's operating results may continue to be below those projected by
public market analysts, and the price of its common stock may continue to be
materially adversely affected. Because of lack of order visibility and the
current trend of order delays, deferrals and 

                                      35
<PAGE>
 
cancellations, the Company cannot assure you that it will be able to achieve or
maintain its current or recent historical sales levels.

   The Company incurred a net loss for each of the quarters in 1998. Should
current market conditions continue to deteriorate, the Company may also incur
operating and net losses in subsequent periods. Additionally, management
continues to evaluate market conditions in order to assess the need to take
further action to more closely align the Company's cost structure with
anticipated revenues. Any subsequent actions could result in restructuring
charges, inventory write-downs and provisions for the impairment of long-lived
assets, which could materially adversely affect the Company's business,
financial condition and results of operations.

ACQUISITION RELATED RISKS

  The Company may be unable to realize the full value of its past acquisitions

  Since April 1996, the Company has acquired nine complementary companies and
businesses. Integration and management of these companies into the Company's
business is ongoing.  The Company has encountered or expects to encounter the
following problems relating to such transactions:

   .   difficulty of assimilating operations and personnel of combined
       companies;
   .   potential disruption of ongoing business;
   .   inability to retain key technical and managerial personnel;
   .   inability of management to maximize financial and strategic position
       through integration of acquired businesses;
   .   additional expenses associated with amortization of acquired intangible
       assets;
   .   dilution to existing stockholders;
   .   maintenance of uniform standards, controls, procedures and policies;
   .   impairment of relationships with employees and customers as result of
       integration of new personnel;
   .   risks of entering markets in which it has no or limited direct prior
       experience; and
   .   operation of companies in different geographical locations with different
       cultures.

   The Company may not be successful in overcoming any or all of these risks or
any other problems encountered in connection with such acquisitions, and such
transactions may materially adversely affect its business, financial condition
and results of operations or require divestment of one or more business units or
a charge due to impairment of assets, in particular, goodwill.

   The Company may have to acquire new businesses

   As part of its overall strategy, the Company plans to continue acquisitions
of or investments in complementary companies, products or technologies and to
continue entering into joint ventures and strategic alliances with other
companies. Its success in future acquisition transactions may, however, be
limited. The Company competes for acquisition and expansion opportunities
against many entities that have substantially greater resources. The Company may
not be able to successfully identify suitable candidates, pay for or complete
acquisitions, or expand into new markets. Once integrated, acquired businesses
may not achieve comparable levels of revenues, profitability, or productivity to
its existing business, or the stand alone acquired company, or otherwise perform
as expected. Also, as commonly occurs with mergers of technology companies
during the pre-merger and integration phases, aggressive competitors may also
undertake formal initiatives to attract customers and to recruit key employees
through various incentives. Moreover, if the Company proceeds with acquisitions
in which the consideration consists of cash, a substantial portion of its
limited cash could be used to consummate its acquisitions, as was the case with
the acquisition of the Cylink Wireless Group. The occurrence of any of these
events could have a material adverse effect on the Company's workforce,
business, financial condition and results of operations. See "-Management of
Growth."

ACCOUNTING ISSUES RELATED TO ACQUISITIONS

   In addition, many business acquisitions must be accounted for under the
purchase method of accounting for financial reporting purposes. Many of the
attractive acquisition candidates are technology companies which tend to have
insignificant amounts of tangible assets and significant intangible assets,
and the acquisition of these businesses would typically result in substantial
charges related to the amortization of such intangible assets. For example,
all of the Company's past acquisitions to date, except the acquisitions of
Control Resources Corporation, RT Masts Limited and Telematics, Inc.

                                      36
<PAGE>
 
have been accounted for under the purchase method of accounting, and as a
result, a significant amount of goodwill is being amortized. This amortization
expense may have a significant effect on the Company's financial results.

   The Company recognized an in-process research and development charge of
approximately $33.9 million in March 1998 as a result of the acquisition of the
assets of the Cylink Wireless Group. In September, subsequent to the filing of
the Quarterly Report on Form 10-Q for the first quarter of 1998, the Securities
and Exchange Commission raised the concern that U.S. reporting companies were
classifying an ever-growing portion of the acquisition price for acquisitions as
purchased in-process research and development. Although the Company, with the
concurrence of its independent accountants, believes that its original
accounting treatment, based on an independent appraisal, was in accordance with
generally accepted accounting principles and the Company's appraisal, it has
accepted the SEC's view with respect to these matters and voluntarily adopted
the application of the recent SEC guidance. As such, the Company has adjusted
the allocation of the purchase price related to the acquisition of the Cylink
Wireless Group, which included decreasing the in-process research and
development charge from $33.9 million to $15.4 million. The result is a lesser
charge to income for in-process technology and a higher recorded value of
goodwill and other intangible assets.

CONTRACT MANUFACTURERS AND LIMITED SOURCES OF SUPPLY

   The Company's internal manufacturing capacity is very limited. The Company
uses contract manufacturers to produce its systems, components and subassemblies
and expects to rely increasingly on these manufacturers in the future. The
Company also relies on outside vendors to manufacture certain other components
and subassemblies. Its internal manufacturing capacity and that of its contract
manufacturers may not be sufficient to fulfill its orders. The Company's failure
to manufacture, assemble and ship systems and meet customer demands on a timely
and cost-effective basis could damage relationships with customers and have a
material adverse effect on its business, financial condition and results of
operations.

   In addition, certain components, subassemblies and services necessary for the
manufacture of its systems are obtained from a sole supplier or a limited group
of suppliers. In particular, Eltel Engineering S.r.L. and Associates, Milliwave
and Xilinx, Inc. are sole source or limited source suppliers for critical
components used in its radio systems.

   The Company's reliance on contract manufacturers and on sole suppliers or a
limited group of suppliers and increasing reliance on contract manufacturers and
suppliers involves risks. The Company has experienced an inability to obtain an
adequate supply of finished products and required components and subassemblies.
As a result, the Company has reduced control over the price, timely delivery,
reliability and quality of finished products, components and subassemblies. The
Company does not have long-term supply agreements with most of its manufacturers
or suppliers. The Company has experienced problems in the timely delivery and
quality of products and certain components and subassemblies from vendors. Some
suppliers have relatively limited financial and other resources. Any inability
to obtain timely deliveries of components and subassemblies of acceptable
quality or any other circumstance would require the Company to seek alternative
sources of supply, or to manufacture finished products or components and
subassemblies internally. As manufacture of its products and certain of its
components and subassemblies is an extremely complex process, finding and
educating new vendors could delay the Company's ability to ship its systems,
which could damage relationships with current or prospective customers and
materially adversely affect its business, financial condition and results of
operations.

MANAGEMENT OF GROWTH

   Recently, in response to market declines and poor performance in its sector
generally and its lower than expected performance over the last several
quarters, the Company introduced measures to reduce operating expenses,
including reductions in its workforce in July, September and November 1998.
However, prior to such measures, the Company had significantly expanded the
scale of its operations to support then anticipated continuing increased sales
and to address critical infrastructure and other requirements. This expansion
included leasing additional space, opening branch offices and subsidiaries in
the United Kingdom, Italy, Germany, Mexico, United Arab Emirates, China and
Singapore, opening design centers in the United Kingdom and the United States,
acquiring a large amount of inventory and funding accounts receivable, and
acquiring nine businesses. The Company had also invested significantly in
research and development to support product development and services. Further,
the Company had hired additional personnel in all functional areas, including
in sales and marketing, manufacturing and operations and finance. The Company
experienced significantly higher operating expenses than in prior years as a
result of this expansion. A material portion of these expenses remain
significant fixed costs.

                                      37
<PAGE>
 
   In addition, to prepare for the future, the Company is required to continue
to invest resources in its acquired and new businesses. Currently, the Company
is devoting significant resources to the development of new products and
technologies and are conducting evaluations of these products. The Company will
continue to invest additional resources in plant and equipment, inventory,
personnel and other items, to begin production of these products and to provide
any necessary marketing and administration to service and support these new
products. Accordingly, in addition to the effect its recent performance has had
on gross profit margin and inventory levels, its gross profit margin and
inventory levels may be further adversely impacted in the future by start-up
costs associated with the initial production and installation of these new
products. Start-up costs may include additional manufacturing overhead,
additional allowance for doubtful accounts, inventory and warranty reserve
requirements and the creation of service and support organizations. Additional
inventory on hand for new product development and customer service requirements
also increases the risk of inventory write-downs. Based on the foregoing, if its
sales do not increase, its results of operations will continue to be materially
adversely affected.

   Expansion of its operations and acquisitions have caused and continue to
impose a significant strain on the Company's management, financial,
manufacturing and other resources and have disrupted its normal business
operations. The Company's ability to manage any possible future growth may
depend upon significant expansion of its manufacturing, accounting and other
internal management systems and the implementation of a variety of systems,
procedures and controls, including improvements relating to inventory control.
In particular, the Company must successfully manage and control overhead
expenses and inventories, the development, introduction, marketing and sales of
new products, the management and training of its employee base, the integration
and coordination of a geographically and ethnically diverse group of employees
and the monitoring of third party manufacturers and suppliers. The Company
cannot be certain that attempts to manage or expand its marketing, sales,
manufacturing and customer support efforts will be successful or result in
future additional sales or profitability. The Company must also more efficiently
coordinate activities in its companies and facilities in Rome and Milan, Italy,
France, Poland, the United Kingdom, Mexico, United Arab Emirates, New Jersey,
Florida, Virginia, Washington and elsewhere. For a number of reasons, the
Company has in the past experienced and may continue to experience significant
problems in these areas. For example, the Company has experienced difficulties
due to the acquired businesses utilizing differing business and accounting
systems, currencies, and a variety of unique customs, culture, and language
barriers. Additionally, the products and associated marketing and sales
processes differ for each acquisition. As a result of the foregoing, as well as
difficulty in forecasting revenue levels, the Company will continue to
experience fluctuations in revenues, costs, and gross margins.

   Any failure to implement efficiently, coordinate and improve systems,
procedures and controls, including improvements relating to inventory control
and coordination with its subsidiaries, at a pace consistent with its business,
could cause continued inefficiencies, additional operational complexities and
expenses, greater risk of billing delays, inventory write-downs and financial
reporting difficulties.  Such problems could have a material adverse effect on
its business, financial condition and results of operations.

   A significant ramp-up of production of products and services could require
the Company to make substantial capital investments in equipment and inventory,
in recruitment and training additional personnel and possibly in investment in
additional manufacturing facilities. If undertaken, the Company anticipates
these expenditures would be made in advance of increased sales. In such event,
gross margins would be adversely affected from time-to-time due to short-term
inefficiencies associated with the addition of equipment and inventory,
personnel or facilities, and cost categories may periodically increase as a
percentage of revenues.

DECLINE IN SELLING PRICES

   The Company believes that average selling prices and possibly gross margins
for its systems and services will decline in the long term.  Reasons for such
decline may include the maturation of such systems, the effect of volume price
discounts in existing and future contracts and the intensification of
competition. To offset declining average selling prices, the Company believes it
must take a number of steps, including:

   .   successfully introducing and selling new systems on a timely basis;
   .   developing new products that incorporate advanced software and other
       features that can be sold at higher average selling prices; and
   .   reducing the costs of its systems through contract manufacturing, design
       improvements and component cost reduction, among other actions.

   If the Company cannot develop new products in a timely manner, fails to
achieve customer acceptance or does not generate higher average selling prices,
then the Company would be unable to offset declining average selling prices. If
the Company is unable to offset declining average selling prices, its gross
margins will decline.

                                      38
<PAGE>
 
ACCOUNT RECEIVABLES

   The Company is subject to credit risk in the form of trade account
receivables. The Company may in certain circumstances be unable to enforce a
policy of receiving payment within a limited number of days of issuing bills,
especially for customers in the early phases of business development. In
addition, many of its foreign customers are granted longer payment terms than
those typically existing in the United States.  The Company typically does not
require collateral or other security to support customer receivables, but in
some instances the Company has required down payments or letters of credit from
a customer before booking their order.  The Company has had difficulties in the
past in receiving payment in accordance with its policies, particularly from
customers awaiting financing to fund their expansion and from customers outside
of the United States. The days sales outstanding of receivables have also
recently increased. Such difficulties may continue in the future, which could
have a material adverse effect on its business, financial condition and results
of operations.

   The Company's bank line of credit currently permits the Company to sell up to
$25 million of its receivables at any one time to a limited group of purchasers
on a non-recourse basis.  The Company has in the past utilized such sales and
may continue from time to time to sell its receivables, as part of an overall
customer financing program.  However, the Company may not be able to locate
parties to purchase such receivables on acceptable terms or at all.

PRODUCT QUALITY, PERFORMANCE AND RELIABILITY

   The Company has limited experience in producing and manufacturing systems and
contracting for such manufacture. customers require very demanding
specifications for quality, performance and reliability. As a consequence,
problems may occur with respect to the quality, performance and reliability of
its systems or related software tools. If such problems occur, the Company could
experience increased costs, delays or cancellations or reschedulings of orders
or shipments, delays in collecting accounts receivable and product returns and
discounts. If any of these events occur, it would have a material adverse effect
on its business, financial condition and results of operations.

   In addition, to maintain its ISO 9001 registration, the Company must
periodically undergo certification assessment. Failure to maintain such
registration could materially adversely affect its business.  The Company
completed ISO 9001 registration for its United Kingdom sales and customer
support facility in 1996, its Geritel facility in Italy in 1996, and its
Technosystem facility in Italy in 1997.  Other facilities are also attempting to
obtain ISO 9001 registration.  Such registrations may not be achieved and the
Company may be unable to maintain those registrations the Company has already
completed.  Any such failure could have a material adverse effect on its
business, financial condition and results of operations.

CHANGES IN FINANCIAL ACCOUNTING STANDARDS

   The Company prepare its financial statements in conformity with generally
accepted accounting principles ("GAAP").  GAAP is subject to interpretation by
the American Institute of Certified Public Accountants, the Securities and
Exchange Commission and various bodies formed to interpret and create
appropriate accounting policies.  A change in these policies can have a
significant effect on its reported results, and may even affect its reporting of
transactions completed before a change is announced.  Accounting policies
affecting many other aspects of its business, including rules relating to
software and license revenue recognition, purchase and pooling-of-interests
accounting for business combinations, employee stock purchase plans and stock
option grants have recently been revised or are under review by one or more
groups.  Changes to these rules, or the questioning of current practices, may
have a material adverse effect on its reported financial results or in the way
the Company conducts its business.

   In addition, the preparation of financial statements in conformity with GAAP
requires the Company to make estimates and assumptions that affect the recorded
amounts of assets and liabilities, disclosure of those assets and liabilities at
the date of the financial statements and the recorded amounts of expenses during
the reporting period.  A change in the facts and circumstances surrounding these
estimates could result in a change to the estimates and impact future operating
results.

MARKET ACCEPTANCE

   The Company's future operating results depend upon the continued growth and
increased availability and acceptance of microcellular, PCN/PCS and wireless
local loop access telecommunications services in the United States and
internationally.  The volume and variety of wireless telecommunications services
or the markets for and acceptance of such services may not continue to grow as
expected.  The growth of such services may also fail to create anticipated
demand for its systems.  Because these markets are relatively new, predicting
which segments of these markets will 

                                      39
<PAGE>
 
develop and at what rate these markets will grow is difficult. In addition to
its other products, the Company has recently invested significant time and
resources in the development of point-to-multipoint radio systems. If the
licensed millimeter wave, spread spectrum microwave radio or point-to-multipoint
microwave radio market and related services for its systems fails to grow, or
grows more slowly than anticipated, its business, financial condition and
results of operations will be materially adversely affected.

     Certain sectors of the communications market will require the development
and deployment of an extensive and expensive communications infrastructure. In
particular, the establishment of PCN/PCS networks will require very large
capital expenditures. Communications providers may not make the necessary
investment in such infrastructure, and the creation of this infrastructure may
not occur in a timely manner. Moreover, one potential application of the
Company's technology--use of its systems in conjunction with the provision of
alternative wireless access in competition with the existing wireline local
exchange providers--depends on the pricing of wireless telecommunications
services at rates competitive with those charged by wireline telephone
companies. Rates for wireless access must become competitive with rates charged
by wireline companies for this approach to be successful. If wireless access
rates are not competitive, consumer demand for wireless access will be
materially adversely affected. If the Company allocates resources to any market
segment that does not grow, it may be unable to reallocate resources to other
market segments in a timely manner, ultimately curtailing or eliminating its
ability to enter such segments.

     Certain current and prospective customers are delivering services and
features that use competing transmission media such as fiber optic and copper
cable, particularly in the local loop access market. To successfully compete
with existing products and technologies, the Company must offer systems with
superior price/performance characteristics and extensive customer service and
support. Additionally, the Company must supply such systems on a timely and 
cost-effective basis, in sufficient volume to satisfy such prospective
customers' requirements and otherwise overcome any reluctance on the part of
such customers to transition to new technologies. Any delay in the adoption of
the Company's systems may result in prospective customers using alternative
technologies in their next generation of systems and networks.

     Prospective customers may not design their systems or networks to include
its systems. Existing customers may not continue to include its systems in their
products, systems or networks in the future. The Company's technology may not
replace existing technologies and achieve widespread acceptance in the wireless
telecommunications market. Failure to achieve or sustain commercial acceptance
of its currently available radio systems or to develop other commercially
acceptable radio systems would materially adversely affect us. Also, industry
technical standards may change or, if emerging standards become established, the
Company may not be able to conform to these new standards in a timely and cost-
effective manner.

INTENSELY COMPETITIVE INDUSTRY

     The wireless communications market is intensely competitive. The Company's
wireless-based radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media, including copper
and fiber optic cable. The Company is experiencing intense competition worldwide
from a number of leading telecommunications companies. Such companies offer a
variety of competitive products and services and broader telecommunications
product lines, and include Adtran, Inc., Alcatel Network Systems, Bosch Telekom,
California Microwave, Inc., Digital Microwave Corporation (which has recently
acquired other competitors, including Innova International Corp. and MAS
Technology, Ltd.), Ericsson Limited, Harris Corporation-Farinon Division, Larus
Corporation, Lucent T.R.T., NEC, Nokia Telecommunications, Nortel/BNI, Philips
T.R.T., SIAE, Siemens, Utilicom and Western Multiplex Corporation.

     Many of these companies have greater installed bases, financial resources
and production, marketing, manufacturing, engineering and other capabilities
than the Company does. In early 1998, the Company acquired the Cylink Wireless
Group which competes with a large number of companies in the wireless
communications markets, including U.S. local exchange carriers and foreign
telephone companies. The most significant competition for Cylink Wireless
Group's products in the wireless market is from telephone companies that offer
leased line data services. The Company faces actual and potential competition
not only from these established companies, but also from start-up companies that
are developing and marketing new commercial products and services.

     The Company may also compete in the future with other market entrants
offering competing technologies. Some of the Company's current and prospective
customers and partners have developed, are currently developing or could

                                      40
<PAGE>
 
manufacture products competitive with the Company's. Nokia and Ericsson have
recently developed new competitive radio systems.

     The principal elements of competition in its market and the basis upon
which customers may select the Company's systems include price, performance,
software functionality, ability to meet delivery requirements and customer
service and support. Recently, certain competitors have announced the
introduction of new competitive products, including related software tools and
services, and the acquisition of other competitors and competitive technologies.
The Company expects competitors to continue to improve the performance and lower
the price of their current products and services and to introduce new products
and services or new technologies that provide added functionality and other
features. New product and service offerings and enhancements by its competitors
could cause a decline in sales or loss of market acceptance of its systems. New
offerings could also make the Company's systems, services or technologies
obsolete or non-competitive. In addition, the Company are experiencing
significant price competition and expect such competition to intensify.

     The Company believes that to be competitive, the Company will need to
expend significant resources on, among other items, new product development and
enhancements. In marketing the Company's systems and services, the Company will
compete with vendors employing other technologies and services that may extend
the capabilities of their competitive products beyond their current limits,
increase their productivity or add other features.  The Company may not be able
to compete successfully in the future.

RAPID TECHNOLOGICAL CHANGE

     Rapid technological change, frequent new product introductions and
enhancements, product obsolescence, changes in end-user requirements and
evolving industry standards characterize the communications market. The
Company's ability to compete in this market will depend upon successful
development, introduction and sale of new systems and enhancements and related
software tools, on a timely and cost-effective basis, in response to changing
customer requirements. Recently, the Company has been developing point-to-
multipoint radio systems. Any success in developing new and enhanced systems,
including point-to-multipoint systems, and related software tools will depend
upon a variety of factors. Such factors include:

     .  new product selection;
     .  integration of various elements of complex technology;
     .  timely and efficient implementation of manufacturing and assembly
        processes and cost reduction programs;
     .  development and completion of related software tools, system
        performance, quality and reliability of systems;
     .  development and introduction of competitive systems; and
     .  timely and efficient completion of system design.

     The Company has experienced and continues to experience delays in customer
procurement and in completing development and introduction of new systems and
related software tools, including products acquired in acquisitions. Moreover,
the Company may not be successful in selecting, developing, manufacturing and
marketing new systems or enhancements or related software tools. Also, errors
could be found in the Company's systems after commencement of commercial
shipments. Such errors could result in the loss of or delay in market
acceptance, as well as expenses associated with re-work of previously delivered
equipment. The Company's inability to introduce in a timely manner new systems
or enhancements or related software tools that contribute to sales could have a
material adverse effect on its business, financial condition and results of
operations.

UNCERTAINTY IN INTERNATIONAL OPERATIONS

     In doing business in international markets, the Company faces economic,
political and foreign currency fluctuations that are more volatile than those
commonly experienced in the United States and other areas. Most of the Company's
sales to date have been made to customers located outside of the United States.
The Company has also acquired three Italy-based companies, two United Kingdom-
based companies and four U.S. companies with substantial international
operations. These companies sell their products and services primarily to
customers in Europe, the Middle East and Africa. The Company anticipates that
international sales will continue to account for a majority of its sales for the
foreseeable future.

                                      41
<PAGE>
 
     Historically, the Company's international sales have been denominated in
British pounds sterling or United States dollars. With recent acquisitions of
foreign companies, certain of the Company's international sales are denominated
in other foreign currencies, including Italian Lira. A decrease in the value of
foreign currencies relative to the United States dollar could result in
decreased margins from those transactions. For international sales that are
United States dollar-denominated, such a decrease could make its systems less
price-competitive and could have a material adverse effect upon its financial
condition. The Company has in the past mitigated currency exposure to the
British pound sterling through hedging measures. However, any future hedging
measures may be limited in their effectiveness with respect to the British pound
sterling and other foreign currencies. Additional risks are inherent in the
Company's international business activities. Such risks include:

     .  changes in regulatory requirements;
     .  costs and risks of localizing systems in foreign countries;
     .  delays in receiving components and materials;
     .  availability of suitable export financing;
     .  timing and availability of export licenses, tariffs and other trade
        barriers;
     .  difficulties in staffing and managing foreign operations, branches and
        subsidiaries;
     .  difficulties in managing distributors;
     .  potentially adverse tax consequences;
     .  foreign currency exchange fluctuations;
     .  the burden of complying with a wide variety of complex foreign laws and
        treaties;
     .  the difficulty in accounts receivable collections; and
     .  political and economic instability.

     In addition, many of the Company's customer purchase and other agreements
are governed by foreign laws, which may differ significantly from U.S. laws.
Therefore, the Company may be limited in its ability to enforce its rights under
such agreements and to collect damages, if awarded.

     In many cases, local regulatory authorities own or strictly regulate
international telephone companies. Established relationships between government
owned or controlled telephone companies and their traditional indigenous
suppliers of telecommunications often limit access to such markets. The
successful expansion of the Company's international operations in certain
markets will depend on its ability to locate, form and maintain strong
relationships with established companies providing communication services and
equipment in targeted regions. The failure to establish regional or local
relationships or to successfully market or sell its products in international
markets could limit its ability to expand operations. The Company's inability to
identify suitable parties for such relationships, or even if identified, to form
and maintain strong relationships could prevent the Company from generating
sales of products and services in targeted markets or industries. Moreover, even
if such relationships are established, the Company may be unable to increase
sales of products and services through such relationships.

     Some of the Company's potential markets include developing countries that
may deploy wireless communications networks as an alternative to the
construction of a limited wired infrastructure. These countries may decline to
construct wireless telecommunications systems or construction of such systems
may be delayed for a variety of reasons. If such events occur, any demand for
its systems in these countries will be similarly limited or delayed. Also, in
developing markets, economic, political and foreign currency fluctuations may be
even more volatile than conditions in other developed areas. Such volatility
could have a material adverse effect on its ability to develop or continue to do
business in such countries.

     Countries in the Asia/Pacific and Latin American regions have recently
experienced weaknesses in their currency, banking and equity markets. These
weaknesses have adversely affected and could continue to adversely affect demand
for products, the availability and supply of product components to the Company
and, ultimately, its consolidated results of operations.

EXTENSIVE GOVERNMENT REGULATION

     Radio communications are extensively regulated by the United States,
foreign laws and international treaties. The Company's systems must conform to a
variety of domestic and international requirements established to, among other
things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. Historically, 

                                      42
<PAGE>
 
in many developed countries, the limited availability of radio frequency
spectrum has inhibited the growth of wireless telecommunications networks.

     Each country's regulatory process differs. To operate in a jurisdiction,
the Company must obtain regulatory approval for its systems and comply with
differing regulations. Regulatory bodies worldwide continue to adopt new
standards for wireless communications products. The delays inherent in this
governmental approval process may cause the cancellation, postponement or
rescheduling of the installation of communications systems by the Company and
its customers. The failure to comply with current or future regulations or
changes in the interpretation of existing regulations could result in the
suspension or cessation of operations. Such regulations or such changes in
interpretation could require the Company to modify products and services and
incur substantial costs to comply with such regulations and changes.

     In addition, the Company is also affected by domestic and international
authorities' regulation of the allocation and auction of the radio frequency
spectrum. Equipment to support new systems and services can be marketed only if
permitted by governmental regulations and if suitable frequency allocations are
auctioned to service providers. Establishing new regulations and obtaining
frequency allocation at auction is a complex and lengthy process. If PCS
operators and others are delayed in deploying new systems and services, the
Company could experience delays in orders. Similarly, failure by regulatory
authorities to allocate suitable frequency spectrum could have a material
adverse effect on its results. In addition, delays in the radio frequency
spectrum auction process in the United States could delay its ability to develop
and market equipment to support new services.

     The Company operate in a regulatory environment subject to significant
change. Regulatory changes, which are affected by political, economic and
technical factors, could significantly impact its operations by restricting its
development efforts and those of its customers, making current systems obsolete
or increasing competition. Any such regulatory changes, including changes in the
allocation of available spectrum, could have a material adverse effect on its
business, financial condition and results of operations. The Company may also
find it necessary or advisable to modify its systems and services to operate in
compliance with such regulations. Such modifications could be extremely
expensive and time-consuming.

ADDITIONAL CAPITAL REQUIREMENTS

     Future capital requirements will depend upon many factors, including the
development of new products and related software tools, potential acquisitions,
maintenance of adequate manufacturing facilities and contract manufacturing
agreements, progress of research and development efforts, expansion of marketing
and sales efforts, and the status of competitive products. Additional financing
may not be available in the future on acceptable terms, or at all. The continued
existence of a substantial amount of indebtedness incurred through the issuance
of the Company's Notes, the incurrence of debt under the Company's bank line
of credit and the rights of the holders of the Series B Preferred Stock may
affect the Company's ability to raise additional financing. Given the recent
price for its Common Stock, if additional funds are raised by issuing equity
securities, significant dilution to its stockholders could result.

     The Company has, however, recently retired approximately $40 million of its
Notes in exchange for approximately 5.3 million shares of its Common Stock. As
the Company's Notes were exchanged for an average of approximately 68% of face
value between December 30, 1998 and February 2, 1999, certain holders of these 
Notes desired to exchange the notes for Common Stock. By retiring the debt at a
significant discount from its face value, the Company realized an immediate
improvement to its balance sheet, and expects to improve future earnings and
cash flow by reducing interest expense. The Company may exchange additional
Notes for shares of Common Stock or, alternatively, refinance or exchange the
remainder of the Notes and/or the bank debt or exchange the Notes for other
forms of securities. The Company has also recently issued 15,000 shares of
Series B Preferred Stock and warrants to purchase up to 1,242,257 shares of its
Common Stock in exchange for a $15 million investment. These transactions have
had and may continue to have a substantial dilutive effect on its stockholders
and may make it difficult for the Company to obtain additional future financing,
if needed.

     If adequate funds are not available, the Company may be required to
restructure or refinance its debt or delay, scale back or eliminate research and
development, acquisition or manufacturing programs. The Company may also need to
obtain funds through arrangements with partners or others that may require the
Company to relinquish rights to certain of its technologies or potential
products or other assets.

                                      43
<PAGE>
 
CLASS ACTION LITIGATION

     State Actions

     On September 23, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Leonard Vernon and Gayle
M. Wing on behalf of themselves and other P-Com stockholders who purchased or
otherwise acquired its Common Stock between April 15, 1997 and September 11,
1998. The plaintiffs allege various state securities laws violations by P-Com
and certain of its officers and directors. The complaint seeks unquantified
compensatory, punitive and other damages, attorneys' fees and injunctive and/or
equitable relief.

     On October 16, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Terry Sommer on behalf
of herself and other P-Com stockholders who purchased or otherwise acquired its
Common Stock between April 1, 1998 and September 11, 1998. The plaintiff alleges
various state securities laws violations P-Com and certain of its officers. The
complaint seeks unquantified compensatory and other damages, attorneys' fees and
injunctive and/or equitable relief.

     On October 20, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Leo Rubin on behalf of
himself and other stockholders who purchased or otherwise acquired its Common
Stock between April 15, 1997 and September 11, 1998. This complaint is identical
in all relevant respects to that filed on September 23, 1998, which is described
above, other than the fact that the plaintiffs are different.

     On October 26, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Betty B. Hoigaard and
Steve Pomex on behalf of themselves and other P-Com stockholders who purchased
or otherwise acquired its Common Stock between April 15, 1997 and September 11,
1998. This complaint is identical in all relevant respects to that filed on
September 23, 1998, which is described above, other than the fact that the
plaintiffs are different.

     On October 27, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Judith Thurman on behalf
of herself and other P-Com stockholders who purchased or otherwise acquired its
Common Stock between April 15, 1997 and September 11, 1998. This complaint is
identical in all relevant respects to that filed on September 23, 1998, which is
described above, other than the fact that the plaintiffs are different.

     On December 3, 1998, the Superior Court of California, County of Santa
Clara, entered an order consolidating all of the above complaints. On January
15, 1999, the plaintiffs filed a consolidated amended class action complaint
superseding all of the foregoing complaints. On March 1, 1999, defendants filed
a demurrer to the consolidated amended complaint and each cause of action stated
therein. The demurrer is set for hearing by the court on May 13, 1999.

     Federal Actions

     On November 13, 1998, a putative class action complaint was filed in the
United States District Court, Northern District of California, by Robert Schmidt
on behalf of himself and other P-Com stockholders who purchased or otherwise
acquired its Common Stock between April 15, 1997 and September 11, 1998. The
plaintiff alleged violations of the Securities Exchange Act of 1934 by P-Com and
certain of its officers and directors. The complaint sought unquantified
compensatory damages, attorneys' fees and injunctive and/or equitable relief. On
January 26, 1999, the plaintiff voluntarily dismissed the Schmidt action. The
court entered an order dismissing the action without prejudice on January 29,
1999.

     On December 3, 1998, a putative class action complaint was filed in the
United States District Court, Northern District of California, by Robert Dwyer
on behalf of himself and other P-Com stockholders who purchased or otherwise
acquired its Common Stock between April 15, 1997 and September 11, 1998. The
plaintiff alleged violations of the Securities Exchange Act of 1934 by P-Com and
certain of its officers and directors. The complaint sought unquantified
compensatory damages, attorneys' fees and injunctive and/or equitable relief. On
December 22, 1998 and February 2, 1999, the plaintiff sought to voluntarily
dismiss this action. On February 11, 1999, the court entered an order dismissing
the action without prejudice.

     All of these proceedings are at a very early stage and the Company is
unable to speculate as to their ultimate outcomes. However, the Company believes
the claims in the complaints are without merit and intends to defend against
them vigorously. An unfavorable outcome in any or all of them could have a
material adverse effect on its 

                                      44
<PAGE>
 
business, prospects, financial condition and results of operations. Even if all
of the litigation is resolved in its favor, the defense of such litigation may
entail considerable cost and the significant diversion of efforts of management,
either of which may have a material adverse effect on its business, prospects,
financial condition and results of operations.

PROTECTION OF PROPRIETARY RIGHTS

     The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and other measures to protect its intellectual property rights.  The
Company generally enters into confidentiality and nondisclosure agreements with
service providers, customers and others to limit access to and distribution of
proprietary rights. The Company also enters into software license agreements
with customers and others. However, such measures may not provide adequate
protection for its trade secrets or other proprietary information for a number
of reasons. For example, its trade secrets or proprietary technology may
otherwise become known or be independently developed by competitors, and the
Company may not be able to otherwise meaningfully protect intellectual property
rights.

     Any of the Company's patents could be invalidated, circumvented or
challenged, or the rights granted thereunder may not provide competitive
advantages to us. Any of the Company's pending or future patent applications
might not be issued with the scope of the claims sought, if at all. Furthermore,
others may develop similar products or software or duplicate its products or
software. Similarly, others might design around the patents owned by us, or
third parties may assert intellectual property infringement claims against us.
In addition, foreign intellectual property laws may not adequately protect its
intellectual property rights abroad. A failure or inability to protect
proprietary rights could have a material adverse effect on its business,
financial condition and results of operations.

     Even if the Company's intellectual property rights are adequately
protected, litigation may also be necessary to enforce patents, copyrights and
other intellectual property rights, to protect its trade secrets, to determine
the validity of and scope of proprietary rights of others or to defend against
claims of infringement or invalidity. The Company has, through its acquisition
of the Cylink Wireless Group, been put on notice from a variety of third parties
that the Group's products may be infringing the intellectual property rights of
other parties. Any such intellectual property litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on its business, financial condition and results of operations.
Litigation, even if wholly without merit, could result in substantial costs and
diversion of resources, regardless of the outcome. Infringement, invalidity,
right to use or ownership claims by third parties or claims for indemnification
resulting from infringement claims could be asserted in the future and such
assertions may materially adversely affect us. If any claims or actions are
asserted against us, the Company may seek a license under a third party's
intellectual property rights. However, such a license may not be available under
reasonable terms or at all.

DEPENDENCE ON KEY PERSONNEL

     The Company's future operating results depend in significant part upon the
continued contributions of key technical and senior management personnel, many
of whom would be difficult to replace. Future operating results also depend upon
ability to attract and retain such specially qualified management,
manufacturing, quality assurance, engineering, marketing, sales and support
personnel. Competition for such personnel is intense, and the Company may not be
successful in attracting or retaining such personnel. Only a limited number of
persons with the requisite skills to serve in these positions may exist and it
may be increasingly difficult for the Company to hire such personnel.

     The Company has experienced and may continue to experience employee
turnover due to several factors, including an expanding economy within the
geographic area in which the Company maintains its principal business offices.
Such turnover could adversely impact its business. The Company is presently
addressing these issues and intend to pursue solutions designed to provide
performance incentives and thereby retain employees. The loss of any key
employee, the failure of any key employee to perform in his or her position, its
inability to attract and retain skilled employees as needed or the inability of
its officers and key employees to expand, train and manage its employee base
could all materially adversely affect its business.

YEAR 2000

     Numerous computer systems and software products are coded to accept only
two digit entries in the date code field. Beginning in the year 2000, these date
code fields will have to distinguish 21st Century dates from 20th Century dates.
As a result in less than a year, computer systems and/or software used by many
companies may need to be upgraded to comply with such Year 2000 ("Y2K")
requirements.

     P-Com's compliance efforts to date have emphasized product and
infrastructure compliance. Vendor compliance has been addressed at several
locations.

     Products

     The inability of any of the Company's products to properly manage and
manipulate data in the Year 2000 could result in increased warranty costs,
customer satisfaction issues, potential lawsuits and other material costs and
liabilities.  P-Com has completed testing of all products in its radio products
operations.  There can be no assurance that its testing procedures detect every
potential Y2K complication.  Products were tested according to various product-
specific standards.  Based on these tests, all products in the Tel Link, Air
Link, and Spread Spectrum product lines have been found to be compliant in all
material respects.  At the CRC facility, all products in the current line of Net
Path, Rivets, Network Series and Recovery Series product lines have been tested
and found to be compliant in all material respects.  There can be no assurance,
however, that its testing procedures detect every potential Y2K complication.
CRC supports several older modem systems.  These systems have not been tested
for Y2K compliance; therefore, P-Com cannot make any representations with
respect to the Y2K readiness of these products.  Any complications which arise
as a result of an untested modem system's potential Y2K failures could result in
increased warranty costs, customer satisfaction issues, potential lawsuits and
other material costs and liabilities.  Products produced at the Technosystem
facility, the radio & TV broadcast products and the one way point to multipoint
products under development, have been tested and are Y2K compliant in all
material respects.  There can be no assurance that our testing procedures detect
every potential Y2K complication.  The equipment manager utilized by the
products manufactured at Technosystem is not Y2K compliant.  Any complications
which arise as a result of the equipment manager's potential Y2K failures could
result in increased warranty costs, customer satisfaction issues, potential
lawsuits and other material costs and liabilities.  In 1998, the sales of radio
products represented approximately 60% of P-Com's net sales while CRC and
Technosystem's products represented approximately 4% and 14%, respectively.  The
Company's network services division in Virginia represented approximately 22% of
P-Com's net sales in 1998.  The Virginia division does not manufacture any
products; it provides services to networks.  Y2K failures in the Company's
products could materially adversely affect the Company's results of operations.

     Infrastructure.


     The failure of any internal system to achieve Y2K readiness could
result in material disruption to the Company's operations. While we have
completed evaluations of several of our internal systems and are in the process
of completing internal system review, we cannot be assured that our testing
procedures will detect every potential Y2K related failure at each of the
facilities listed below.

     CA, FL, Italy, UK, Germany, Italy


     In November of 1998, the Company installed in its corporate headquarters a
new internal business system that is Y2K ready. The cost of the upgrade
was approximately $250,000. Since then, P-Com has completed an evaluation of
many of its internal systems. Most of its internal systems have been found to be
compliant, however we cannot guarantee that Y2K related complications will not
arise. The HP UX operating system should receive a Y2K patch by the end of June
1999. The Server Operating Systems (Novell) should receive Y2K patches by the
end of September 1999. Y2K verification procedures are currently underway to
determine the compliance status of phone systems, ATE stations and personal
computers. Verification of phone systems and ATE stations is estimated to be
completed by the end of June 1999. Verification of personal computers is
estimated to be completed by the end of September 1999. The MRP Business System
in Tortona, Italy at the Company's Geritel facility is noncompliant. Subject to
Board approval, the proposed Y2K project management office will revise and
implement a plan to address this situation. The Company's customer service
database and QA Database are noncompliant; upgrades of these two systems is
scheduled to be completed by the end of June 1999. Any unforeseen circumstances
which cause delay in upgrading any of the above systems could result in
increased warranty costs, potential customer dissatisfaction, delayed production
and/ or supply, lawsuits and other material costs and liabilities.

     Network Services (Vienna, VA)


     With the exception of personal computers, the internal systems at Network
Services in Vienna, Virginia have been tested and found to be compliant in all
material respects, however there can be no assurance that Y2K related
complications will not arise. Verification of the Y2K status of personal
computers is currently in progress and is estimated to be completed by the end
of June 1999. Any unforeseen circumstances which cause delay in upgrading any of
the above systems could result in increased warranty costs, potential customer
dissatisfaction, delayed production and/ or supply, lawsuits and other material
costs and liabilities.

     CRC Control Resources (Fair Lawn, NJ)


     Most of CRC's internal systems have been tested and many have been found to
be compliant, however there can be no assurance that Y2K related complications
will not arise. The MRP Business System Proprietary Server OS Novell 3.11, and
Corporate Server, Mail System are noncompliant and are scheduled to be replaced
by the end of September 1999. The Defect Control System is noncompliant and is
scheduled to be replaced by the end of December 1999. Verification of the
compliance status of personal computers is in progress and is scheduled to be
completed by the end of June 1999. Any unforeseen circumstances which cause
delay in upgrading any of the above systems could result in increased warranty
costs, potential customer dissatisfaction, delayed production and/or supply,
lawsuits and other material costs and liabilities.

     Technosystem (Rome, Italy)


     The ERP business system has been found to be compliant, however there can
be no assurance that Y2K related complications will not arise. The financial
administration system is noncompliant and replacement is scheduled to be
completed by the end of September 1999. Verification of the Y2K compliance
status of all other internal systems is currently underway and is estimated to
be completed by the end of June 1999. Any unforeseen circumstances which cause
delay in upgrading any of the above systems could result in increased warranty
costs, potential customer dissatisfaction, delayed production and/ or supply,
lawsuits and other material costs and liabilities.

     Vendors.


          The Company is cognizant of the risk posed by single source or large
volume suppliers that may not be addressing their Y2K readiness. Even if
assurances are received from third parties, there remains a risk that failure of
systems and products of other companies on which the Company relies could have a
material adverse effect on the Company's business, condition and results of
operations. We cannot be assured that reasonable alternative suppliers or
contractors will be available. Even if assurances are received from third
parties, a risk remains that failures of systems and products of other companies
on which we rely could have a material adverse effect on our business, condition
and results of operations.

          Critical suppliers are currently being identified at the California,
Florida, United Kingdom, Germany and Italy sites. Six critical suppliers have
been identified at Network Services in Vienna, Virginia. Three have been
evaluated and found to be compliant, however we cannot be certain that Y2K
failures will not affect these suppliers. The remaining suppliers are scheduled
to be evaluated by the end of June 1999. CRC has identified its critical
suppliers. Evaluations are scheduled to be completed by the end of September
1999. There are three critical suppliers for the Technosystem product line.
Evaluation of these suppliers is scheduled to be completed by the end of
September 1999. Subject to Board approval, the proposed Y2K project management
office should establish and implement a vendor management strategy to ensure
compliance of its vendors. The plan should provide for onsite audits of critical
suppliers and creation and execution of compliance agreements.

     Year 2000 Project Management Plan


     P-Com has utilized Y2K consultants to audit its revenue generating
facilities which are located in California, and Tortona, Italy, and its
subsidiaries CRC in New Jersey and Technosystem in Rome, Italy. The consultants'
both reviewed P-Com's Y2K compliance efforts to date and identified areas
warranting further review. Based on the consultants' recommendations, P-Com has
embarked on a global program to address its readiness for the century change.
The Company will create a Y2K project management office. A project manager will
direct the office and supervise its functions. The Y2K project manager and the
office's staff will be responsible for among other tasks, business and
continuity planning, vendor compliance management, creating and maintaining an
inventory of Y2K action items, establishing and publishing standards, and
maintaining a document archive. The Y2K project management office will also be
responsible for creating and managing a contingency plan which is scheduled to
be established and implemented by the end of June 1999. P-Com has not yet
established a comprehensive contingency plan, however with the help of our
consultants, we have identified the issues which such a plan must address.

     The Company's budget for the Y2K Program is approximately $2 million and
will be submitted to the Board of Directors for approval. In addition, P-Com
will incur material expenses associated with onsite audits of its critical
suppliers. The foregoing statements are based upon management's best estimates
at the present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the rate and magnitude of related labor and consulting costs
and the success of the Company's external customers and suppliers in addressing
the Y2K issue. The Company's evaluation is on-going and it expects that new and
different information will become available to it as that evaluation continues.
Consequently, there is no guarantee that all material elements will be Y2K ready
in time.

                                      45
<PAGE>
 

VOLATILITY OF STOCK PRICE

     In recent years, the stock market in general, and the market for shares of
small capitalization and technology stocks in particular, have experienced
extreme price fluctuations. Such fluctuations have often been unrelated to the
operating performance of affected companies. The Company believes that factors
such as announcements of developments related to its business, announcements of
technological innovations or new products or enhancements by the Company or its
competitors, developments in the Asia/Pacific region, sales by competitors,
including sales to its customers, sales of its common stock into the public
market, including by members of management, developments in its relationships
with customers, partners, lenders, distributors and suppliers, shortfalls or
changes in revenues, gross margins, earnings 

                                      46
<PAGE>
 
or losses or other financial results that differ from analysts' expectations (as
recently experienced), regulatory developments, fluctuations in results of
operations and general conditions in its market or markets served by its
customers or the economy, could cause the price of its common stock to
fluctuate, sometimes reaching extreme and unexpected lows. The market price of
its Common Stock may continue to decline substantially, or otherwise continue to
experience significant fluctuations in the future, including fluctuations that
are unrelated to its performance. Such fluctuations could continue to materially
adversely affect the market price of its Common Stock.

SUBSTANTIAL AMOUNT OF DEBT

     In November 1997, through a private placement of the Company's Notes, the
Company incurred $100 million of indebtedness. In December 1998, January 1999
and February 1999, the Company retired approximately $40 million of such
indebtedness in exchange for approximately 5.3 million shares of its Common
Stock. As of December 31, 1998, its total indebtedness including current
liabilities was approximately $192.4 million and its stockholders' equity was
approximately $106.6 million.

     The Company's bank line of credit provides for borrowings of approximately
$50 million, which as of December 31, 1998 had been almost fully utilized. The
line of credit requires the Company to comply with several financial covenants,
including the maintenance of specific minimum ratios. At periods in time since
June 30, 1998, the Company has amended its existing bank line of credit to
prevent defaults with respect to several covenants. Had these amendments not
been made, the Company would have defaulted on those covenants in its bank line,
which would have triggered cross defaults in the Notes, preferred stock
instruments and other debt. The Company expects to require additional amendments
to its existing bank line of credit to be in compliance with these covenants for
the first quarter of 1999. If the Company is unable to adequately remedy such
non-compliance through amendments or otherwise, the Company may be in default
under its bank line of credit. Such defaults, if declared by the lenders, will
trigger cross defaults in its outstanding 4 1/4% Convertible Subordinated Notes
and other debt instruments, accelerate repayment of such debts, and give rise to
rights of holders of all outstanding Series B Preferred Stock to have their
stock redeemed by the Company. In addition, the Company could lose its
eligibility to use its Registration Statement on Form S-3 and could be delisted
by the Nasdaq National Market. Such events could materially adversely affect the
Company's business, financial condition and results of operations.

     The Company's ability to make scheduled payments of the principal and
interest on indebtedness will depend on future performance, which is subject in
part to economic, financial, competitive and other factors beyond its control.
There can be no assurance that the Company will be able to make payments on or
restructure or refinance its debt in the future, if necessary.

DIVIDENDS

     Since the Company's incorporation in 1991, the Company has not declared or
paid cash dividends on its common stock, and the Company anticipates that any
future earnings will be retained for investment in the business. The Company is,
however, required to pay a 6% per year premium on the Series B preferred stock,
payable in cash or common stock at its option. Any payment of cash dividends in
the future will be at the discretion of the Company's board of directors and
will depend upon, among other things, its earnings, financial condition, capital
requirements, extent of indebtedness and contractual restrictions with respect
to the payment of dividends.

CHANGE OF CONTROL

     Members of the Company's board of directors and executive officers,
together with members of their families and entities that may be deemed
affiliates of or related to such persons or entities, beneficially own
approximately 6% of the outstanding shares of common stock. Accordingly, these
stockholders are able to influence the election of the members of its board of
directors and influence the outcome of corporate actions requiring stockholder
approval, such as mergers and acquisitions.

     This level of ownership, together with the stockholder rights agreement,
certificate of incorporation, privileges of the Series B preferred stock, equity
incentive plans, bylaws and Delaware law, may have a significant effect in
delaying, deferring or preventing a change in control of P-Com and may adversely
affect the voting and other rights of other holders of common stock.

     The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of the Series B preferred stock
and any other preferred stock that may be issued in the future, including the
Series A junior participating preferred stock that may be issued pursuant to the
stockholder rights agreement upon the occurrence of certain triggering events.
In general, the stockholder rights agreement provides a mechanism by which its
board of directors and stockholders may act to substantially dilute the share
position of any takeover bidder that acquires 15% or more of its Common Stock.
The issuance of the Series B preferred stock or the future issuance of the
Series A preferred stock or any additional preferred stock could have the effect
of making it more difficult for a third party to acquire a majority of its
outstanding voting stock.

                                      47
<PAGE>
 
SERIES B PREFERRED STOCK FINANCING

     In December 1998, the Company raised gross proceeds of $15 million through
the issuance of 15,000 shares of a newly designated Series B convertible
participating preferred stock and warrants to purchase up to 1,242,257 shares of
Common Stock. The issuance of the Series B preferred stock and warrants provided
the Company with additional working capital required to fund continuing
operations. However, the agreements with the purchasers of the Series B
preferred stock and warrants contain terms and covenants that could result in
substantial dilution to its stockholders, could render future financings and
loans and merger and acquisition activities more difficult and could require the
Company to expend substantial amounts of cash, even if unavailable at the time
such expenditure was required.

     Certain covenants that the Company made in connection with the issuance of
the Series B preferred stock may also have the effect of limiting its ability to
obtain additional financing and issue other securities. The Company has agreed,
until December 22, 1999, not to issue or agree to issue any equity securities at
a price less than fair market value or any variably priced securities, subject
to limited exceptions. In addition, the terms of the Series B preferred stock
financing agreements prohibit the Company from, among other things, altering,
changing or otherwise adversely affecting the terms of the Series B preferred
stock; creating or issuing any senior or pari passu securities; or redeeming or
paying any dividend on any junior securities.

     The terms of the Series B preferred stock financing agreements also include
mandatory redemption features and payment provisions that are triggered in the
event the Company fails to satisfy certain obligations. Holders of the Series B
preferred stock may require redemption of their shares at a substantial premium,
plus a default interest rate, if applicable, upon the occurrence of certain
events deemed within its control.  Upon the occurrence of certain other events
deemed outside of its control, including among others, its failure to obtain
stockholder approval (which the Company must solicit at its expense) of the
potential issuance of more than 20% of the Common Stock outstanding on December
22, 1998, or 8,707,488 shares, at a price less than the greater of book value or
fair market value may be required to make significant payments to the holders of
Series B preferred stock and warrants. All such payments are capped at
$4,950,000 plus a default interest rate, if applicable, and are in lieu of
redemption for these provisions. If the holders of Series B preferred stock
demand redemption or if the Company is required to make significant payments to
such stockholders, the Company may not be able to fund such redemption or
payments, and even if funding is available, the expenditures required to fund
such redemption or payments could have a material adverse effect on its
financial condition.

     The Series B preferred stock is convertible into shares of its Common Stock
at variable rates based on future trading prices of its Common Stock and events
that may occur in the future. The number of shares of Common Stock that may
ultimately be issued upon conversion is therefore presently indeterminable and
could fluctuate significantly based on the issuance by the Company of other
securities. Also, the warrants are subject to anti-dilution protection and thus
may require the issuance of more shares than originally anticipated. These
factors may result in substantial future dilution to the holders of its Common
Stock.

     In addition to the foregoing, the redemption rights, liquidated damages
provisions, cross default provisions to its debt instruments and other terms
of the Series B preferred stock, under certain circumstances, could lead to a
significant accounting charge to earnings and could materially adversely
affect its business, results of operations and financial condition. The Series
B preferred stock will be classified as mandatorily redeemable preferred
stock. As a result, in the fourth quarter of 1998, the Company recognized in
its earnings (loss) per share calculation the fair value of warrants issued
and the accretion of the Series B preferred stock to its fair value. During
the period of conversion of the Series B preferred stock, the Company will be
required to recognize in its earnings (loss) per share calculation any
accretion of the Series B preferred stock to its redemption value as a
dividend to the holders of the Series B preferred stock. Consequently, the
Company took a charge of approximately $1.8 million to its accumulated deficit
for the fourth quarter of fiscal 1998 as a result of the accounting treatment
for issuance of the related warrants. Such charge and potential other future
charges relating to the provisions of the Series B preferred stock financing
agreements may adversely affect its earnings (loss) per share and the market
price of its Common Stock and may continue to do so. The convertibility
features of such Series B preferred stock and subsequent sales of the Common
Stock underlying both it and the warrants could materially adversely affect
its valuation and the market trading price of its shares of Common Stock.

                                      48
<PAGE>
 
ITEM 7A.

     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK DISCLOSURE

     The Company has international sales and facilities and is, therefore,
subject to foreign currency rate exposure. Historically, its international sales
have been denominated in British pounds sterling or United States dollars. With
recent acquisitions of foreign companies, certain of its international sales are
denominated in other foreign currencies, including Italian lira. The Company
enters into foreign forward exchange contracts to reduce the impact of currency
fluctuations of anticipated sales to British customers. The objectives of these
contracts is to neutralize the impact of foreign currency exchange rate
movements on the Company's operating results. The gains and losses on forward
exchange contracts are included in earnings when the underlying foreign currency
denominated transaction is recognized.

     The foreign exchange forward contracts described above generally require
the Company to sell foreign currencies for U.S. dollars at rates agreed to at
the inception of the contracts. The forward contracts generally have maturities
of six months or less. These contracts generally do not subject the Company to
significant market risk from exchange rate movements because the contracts are
designed to offset gains and losses on the balances and transactions being
hedged. At December 31, 1998 and 1997, the Company had forward contracts to sell
approximately $26.1 million and $13.3 million in British pounds, respectively.
The fair value of forward exchange contracts approximates cost. The Company does
not anticipate any material adverse effect on its financial position resulting
from the use of these instruments.

     The functional currency of the Company's wholly owned and majority-owned
foreign subsidiaries are the local currencies. Assets and liabilities of these
subsidiaries are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Income and expense items are translated at average exchange
rates for the period. Accumulated net translation adjustments are recorded in
stockholders' equity. Foreign exchange transaction gains and losses are included
in the results of operations, and were not material for all periods presented.
Based on our overall currency rate exposure at December 31, 1998, a near-term 
10% appreciation or depreciation of the U.S. dollar would have an insignificant 
effect on our financial position, results of operations and cash flows over the 
next fiscal year. In 1997, a near-term 10% appreciation or depreciation of the
U.S. dollar was also determined to have an insignificant effect. The Company 
does not use derivative financial instruments for speculative or trading 
purposes.

INTEREST RATE RISK

     The Company's convertible subordinated Notes bear interest at a fixed
rate, therefore, the Company's financial condition and results of operations
would not be affected by interest rate changes in this regard. The Company's
revolving line of credit is subject to interest at either a base interest rate
or a variable interest rate that is within 200 basis points of the base
interest rate. A 200 basis point increase over the base interest rate would
not be material to the Company's financial condition or results of operations.

                                      49
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS

                                  P-COM, INC.
  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
                                                                                         Page
                                                                                        ----
<S>                                                                                     <C>
FINANCIAL STATEMENTS:
   Report of Independent Accountants..................................................  51
   Consolidated Balance Sheets at December 31, 1998 and 1997..........................  52
   Consolidated Statements of Operations for the years ended December 31, 1998,           
     1997, and 1996...................................................................  53
   Consolidated Statements of Stockholders' Equity for the years ended December 31,       
     1998, 1997, and 1996.............................................................  54
   Consolidated Statements of Cash Flows for the years ended December 31, 1998,           
     1997 and 1996....................................................................  55
   Notes to Consolidated Financial Statements.........................................  56 
FINANCIAL STATEMENT SCHEDULE:
   Schedule II - Valuation and Qualifying Accounts....................................  73
</TABLE>

     All other schedules have been omitted because they are not required, are
not applicable, or the information is included in the consolidated financial
statements or notes thereto.
 

                                      50
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
                       ---------------------------------



                                  Forthcoming




                                      51
<PAGE>
 
                                  P-COM, INC.

                          CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,              
                                                                    1998                1997                            
                                                                -----------          -----------                        
<S>                                                             <C>                  <C>                                
ASSETS                                                                                                                  
Current assets:                                                                                                         
  Cash and cash equivalents                                      $  29,241            $  88,145                         
  Accounts receivable, net of allowance for doubtful                                                                    
   accounts of $9,591 in 1998 and $2,521 in 1997                    50,533               70,883                         
  Inventory                                                         79,026               58,003                         
  Prepaid expenses and notes receivable                             21,949               12,534                         
                                                                 ---------            ---------                         
    Total current assets                                           180,749              229,565                         
Property and equipment, net                                         52,086               32,313                         
Deferred income taxes                                                9,678                1,697                         
Goodwill and other assets                                           71,845               41,946                         
                                                                 ---------            ---------                         
                                                                 $ 314,358            $ 305,521                         
                                                                 =========            =========                         
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                    
Current liabilities:                                                                                                    
  Accounts payable                                               $  39,618            $  38,043                         
  Accrued employee benefits                                          3,345                3,930                         
  Other accrued liabilities                                         10,318                6,255                         
  Income taxes payable                                                  --                6,409                         
  Notes payable                                                     46,360                  293                         
                                                                 ---------            ---------                         
    Total current liabilities                                       99,641               54,930                         
                                                                 ---------            ---------                         
                                                                                                                        
Long-term debt                                                      92,769              101,690                         
                                                                 ---------            ---------                         
                                                                                                                        
Minority interest                                                       --                  604                         
                                                                 ---------            ---------                         
                                                                                                                        
Series B Mandatorily Redeemable Convertible Preferred Stock         13,559                   --                         
                                                                 ---------            ---------                         
Mandatorily Redeemable Common Stock Warrants                         1,839                   --                         
                                                                 ---------            ---------                         
Commitments (Note 8)                                                                                                    
                                                                                                                        
Stockholders' equity:                                                                                                   
  Series A Preferred Stock                                              --                   --                         
  Common Stock, $0.0001 par value; 95,000,000 shares                                                                    
    authorized; 45,869,777 and 42,664,077 shares                                                                        
    issued and outstanding at December 31, 1998 and                                                                     
    1997, respectively                                                   5                    4                         
Additional paid-in capital                                         145,246              131,735                         
Retained earnings (accumulated deficit)                            (38,783)              18,380                         
Accumulated other comprehensive income                                  82               (1,822)                        
                                                                 ---------            ---------                         
    Total stockholders' equity                                     106,550              148,297                         
                                                                 ---------            ---------                         
                                                                 $ 314,358            $ 305,521                         
                                                                 =========            =========                
</TABLE> 


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

                                      52
<PAGE>
 
                                  P-COM, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                     1998             1997             1996    
                                                  ----------        ---------        --------- 
<S>                                               <C>               <C>              <C>       
Sales                                                                                          
 Product                                           $151,347         $190,545         $101,853  
 Service                                             43,597           30,157           19,100  
                                                   --------         --------         --------  
   Total sales                                      194,944          220,702          120,953  
                                                   --------         --------         --------  
                                                                                               
Cost of sales                                                                                  
 Product                                            113,498          110,267           60,362  
 Service                                             30,777           18,968           13,696  
                                                   --------         --------         --------  
   Total cost of sales                              144,275          129,235           74,058  
                                                   --------         --------         --------  
 Gross profit                                        50,669           91,467           46,895  
                                                   --------         --------         --------  
                                                                                               
Operating expenses:                                                                            
 Research and development                            41,473           29,127           20,163  
 Selling and marketing                               22,020           15,696            7,525  
 General and administrative                          24,965           14,741           10,178  
 Goodwill amortization                                6,692            2,207              105  
 Restructuring charge                                 4,332                -                -  
 Acquired in-process research and                                                              
   development                                       15,442                -                -  
                                                   --------         --------         --------  
   Total operating expenses                         114,924           61,771           37,971  
                                                   --------         --------         --------  
Income (loss) from operations                       (64,255)          29,696            8,924  
Interest expense                                     (9,031)          (2,315)          (1,579) 
Interest income                                       1,626            1,557            1,328  
Other income (expense)                                 (498)           1,005            1,157  
                                                   --------         --------         --------  
Income (loss) before extraordinary item                                                        
   and income taxes                                 (72,158)          29,943            9,830  
Provision (benefit) for income taxes                (11,501)          11,052              956  
                                                   --------         --------         --------  
Income (loss) before extraordinary item             (60,657)          18,891            8,874  
Extraordinary item: retirement of Notes               5,333                -                -  
                                                   --------         --------         --------  
Net income (loss)                                   (55,324)          18,891            8,874  
Charge related to Preferred Stock discount           (1,839)               -                -  
                                                   --------         --------         --------  
Net income (loss) applicable to                                                                
   holders of Common Stock                         $(57,163)        $ 18,891         $  8,874  
                                                   ========         ========         ========  
                                                                                               
Basic income (loss) per share:                                                                 
   Income (loss) before extraordinary item         $  (1.44)        $   0.45         $   0.23  
   Extraordinary item                                  0.12                -                -  
                                                   --------         --------         --------  
   Net income (loss)                               $  (1.32)        $   0.45         $   0.23  
                                                   ========         ========         ========  
Diluted income (loss) per share:                                                               
   Income (loss) before extraordinary item         $  (1.44)        $   0.43         $   0.22  
   Extraordinary item                                  0.12                -                -  
                                                   --------         --------         --------  
   Net income (loss)                               $  (1.32)        $   0.43         $   0.22  
                                                   ========         ========         ========  
                                                                                               
Shares used in per share computations
   Basic                                             43,254           42,175           38,762  
                                                   ========         ========         ========  
   Diluted                                           43,254           44,570           40,607  
                                                   ========         ========         ========   
</TABLE>

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

                                       53
<PAGE>
 
                                  P-COM, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (In thousands, except share data)


<TABLE> 
<CAPTION> 
                                                                                                               Accumulated 
                                                                                                Retained       Other 
                                                         Common Stock         Additional        Earnings       Compre-     Compre-
                                                        --------------         Paid-In        (Accumulated     hensive     hensive
                                                     Shares        Amount      Capital          Deficit)       Income      Income
                                                     ------        ------      -------          -------       ----------   --------
<S>                                                  <C>           <C>        <C>              <C>            <C>          <C> 
Balance at December 31, 1995                         35,527,028  $      3     $   56,614       $  (9,360)     
                                                                              
Issuance of Common Stock in public offerings,                                                                             
  net of issuance costs                               4,196,970         1         52,531                 -    
Issuance of Common Stock for the purchase of                                  
  ACS                                                   140,000         -          1,698                 -    
                                                                              
Issuance of Common Stock upon exercise of stock                               
  options and warrants                                  784,408         -          1,353                 -         
Issuance of Common Stock under employee stock                                 
  purchase plan                                         188,800         -            717                 -         
Cumulative translation adjustment                             -         -              -                 -    $       73   $     73
Distribution of retained earnings                                                                      (25)
Net income                                                    -         -              -             8,874                    8,874
                                                                                                                           --------
Comprehensive income                                                                                                       $  8,947
                                                    -----------  --------     ----------       -----------    ----------   ========
Balance at December 31, 1996                         40,837,206         4        112,913              (511)           73      
                                                                              
Conversion of shareholders' loan to equity by                                 
  Geritel                                                     -         -            368                 -              
Issuance of Common Stock for the purchase of                                  
  CSM                                                   796,612         -         14,500                 -              
Issuance of Common Stock upon exercise of stock                               
  options and warrants                                  878,385         -          2,912                 -              
Cumulative translation adjustment                             -         -              -                 -        (1,895)  $ (1,895)
Issuance of Common Stock under employee stock                                 
  purchase plan                                         151,874         -          1,042                 -              
Net income                                                    -         -              -            18,891                   18,891
                                                                                                                           --------
Comprehensive income                                                                                                       $ 16,996
                                                    -----------  --------     ----------       -----------    ----------   ========
Balance at December 31, 1997                         42,664,077         4        131,735            18,380        (1,822)    
                                                                                                                        
Issuance of Common Stock upon exercise of stock                               
  options and warrants                                  498,670         -          2,651                 -              
Issuance of Common Stock under employee stock                                 
  purchases plan                                        240,030         -          1,842                 -              
Issuance of Common Stock upon retirement of                                   
  Convertible Subordinated Notes due 2002             2,467,000         1          9,018                 -              
Charge related to Preferred Stock discount                    -         -              -            (1,839)             
Cumulative translation adjustment                             -         -              -                 -         1,904   $  1,904
Net loss                                                      -         -              -           (55,324)                 (55,324)
                                                                                                                           --------
Comprehensive income                                                                                                       $ 53,420
                                                    -----------  --------     ----------       -----------    ----------   ========
Balance at December 31, 1998                         45,869,777  $      5     $  145,246       $   (38,783)   $       82   
                                                    ===========  ========     ==========       ===========    ==========  
</TABLE> 

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

                                      54
<PAGE>
 
                                  P-COM, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                               1998          1997           1996
                                                                               ----          ----           ----
<S>                                                                          <C>            <C>            <C>
Cash flows from operating activities:
     Net income (loss)                                                       $ (55,324)     $  18,891      $   8,874
     Adjustments to reconcile net income (loss) to net cash used in
         operating activities, net of effect of acquisitions:
       Depreciation                                                             11,544          6,013          5,152
       Amortization of goodwill and other intangible assets                      6,827          2,207            105
       Change in minority interest                                                (604)           (15)           619
       Deferred income taxes                                                    (7,981)            14         (1,711)
       Acquired in-process research and development expenses                    15,442             --             --
       Non-cash effect of retirement of Notes                                   (5,333)            --             --
     Change in assets and liabilities:                                          
       Accounts receivable                                                      24,764        (19,375)       (24,663)
       Inventory                                                               (15,016)       (20,807)       (14,773)
       Prepaid expenses and notes receivable                                    (9,109)           110         (4,544)
       Other assets                                                              2,684         (5,111)         1,850
       Accounts payable                                                         (1,390)         4,443         14,499
       Accrued employee benefits                                                  (585)         1,967            526
       Other accrued liabilities                                                 2,709         (4,746)         5,549
       Income taxes payable                                                     (6,409)         3,915          2,590
                                                                             ---------      ---------      --------- 
    Net cash used in operating activities                                      (37,781)       (12,494)        (5,927)
                                                                             ---------      ---------      --------- 
Cash flows from investing activities:
     Acquisition of property and equipment                                     (29,187)       (16,922)       (14,078)
     Acquisitions, net of cash acquired                                        (61,398)       (10,855)        (2,714)
                                                                             ---------      ---------      --------- 
    Net cash used in investing activities                                      (90,585)       (27,777)       (16,792)
                                                                             ---------      ---------      --------- 
Cash flows from financing activities:
     Proceeds (payments) of notes payable                                       46,067        (12,651)         1,425
     Proceeds from issuance of Common Stock, net of expenses                     4,493          3,955         54,576
     Proceeds (payments) from long-term debt                                     2,016           (719)            --
     Proceeds from convertible debt offering, net                                   --         97,500             --
     Proceeds from issuance of Preferred Stock and warrants, net                13,559             --             --
     Proceeds from sale-leaseback transaction                                    1,557             --             --
     Payment of sale-leaseback obligation                                         (134)            --             --
                                                                             ---------      ---------      --------- 
    Net cash provided by financing activities                                   67,558         88,085         56,001
                                                                             ---------      ---------      ---------  

Effect of exchange rate changes on cash                                          1,904         (1,895)            73
                                                                             ---------      ---------      --------- 
Net increase (decrease) in cash and cash equivalents                           (58,904)        45,919         33,355
 
Cash and cash equivalents at the beginning of the period                        88,145         42,226          8,871
                                                                             ---------      ---------      --------- 
Cash and cash equivalents at the end of the period                           $  29,241      $  88,145      $  42,226
                                                                             =========      =========      ========= 
Supplemental cash flow disclosures:
     Cash paid for income taxes                                              $   3,900      $   5,610      $     217
                                                                             =========      =========      ========= 
     Cash paid for interest                                                  $   8,717      $     656      $     133
                                                                             =========      =========      ========= 
     Stock issued in connection with the acquisitions of CSM & ACS           $      --      $  14,500      $   1,698
                                                                             =========      =========      ========= 
     Conversion of shareholder's loan to equity by Geritel                   $      --      $     368      $      --
                                                                             =========      =========      ========= 
     Exchange of Convertible Subordinated Notes for Common Stock             $  14,350      $      --      $      --
                                                                             =========      =========      ========= 
     Promissory note issued in connection with the acquisition of Cylink     $   9,682      $      --      $      --
                                                                             =========      =========      =========
</TABLE>

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

                                      55
<PAGE>
 
                                  P-COM, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE COMPANY

  P-Com, Inc. (the "Company") was incorporated in Delaware on August 23, 1991 to
engage in the design, manufacture and marketing of millimeter wave radio systems
for use in the worldwide wireless telecommunications market. 

  The Company expects to require additional amendments to the covenants of its 
existing line of credit (see Note 3) to be in compliance with such covenants in 
1999.  The Company has in the past, and is currently, in negotiation with its 
banks to amend the covenants in its line of credit agreement to allow them to be
in compliance. Management expects to be successful in its negotiations. If the
Company is unable to adequately remedy such non-compliance through amendments or
otherwise, the Company may be in default under its line of credit. Such
defaults, if declared by the lenders, will trigger cross defaults in its
outstanding 4 1/4% Convertible Subordinated Notes and other debt instruments,
may accelerate repayment of such debts, and give rise to rights of holders of
all outstanding Series B Preferred Stock to have their stock redeemed by the
Company.

  Effective May 29, 1997, the Company acquired Control Resources Corporation
("CRC"). Effective November 28, 1997, the Company acquired RT Masts Limited
("RT Masts") and Telematics, Inc. ("Telematics"), see Note 5. These
transactions were accounted for as poolings-of-interests and accordingly, the
consolidated financial statements for all periods presented include the
results of these acquired companies as if they had been combined since
inception.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  The following is a summary of the Company's significant accounting policies:

  Management's use of estimates and assumptions

  The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

  Principles of consolidation

  The consolidated financial statements include the accounts of the Company and
its majority-owned and wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

 Foreign currency translation

  The functional currency of the Company's wholly owned and majority-owned
foreign subsidiaries are the local currencies. Assets and liabilities of these
subsidiaries are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Income and expense items are translated at average exchange
rates for the period.  Accumulated net translation adjustments are recorded in
stockholders' equity. Foreign exchange transaction gains and losses are included
in the results of operations, and were not material in all periods presented.

  Fair Value of Financial Instruments

  The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. The estimated fair value of the
Company's Convertible Subordinated Notes was approximately 63% of par or $53.8
million at December 31, 1998. The estimated fair value of all other financial
instruments at December 31, 1998 and 1997 approximated cost.

                                     56
<PAGE>
 
  Cash and cash equivalents

  The Company considers all highly liquid debt instruments with a maturity when
acquired of three months or less to be cash equivalents.

  Revenue recognition

  Revenue from product sales is recognized upon shipment of the product provided
no significant obligations remain and collectibility is probable. Provisions for
estimated warranty repairs, returns and allowances are recorded at the time
products are shipped. Revenue from service sales is recognized ratably over the 
contractual period or as the service is performed.

  Inventory

  Inventory is stated at the lower of cost or market, cost being determined on a
first-in, first-out basis.

  Property and equipment

  Property and equipment are stated at cost. Depreciation is computed using the
straight-line method based upon the useful lives of the assets ranging from
three to seven years. Leasehold improvements are amortized using the straight-
line method based upon the shorter of the estimated useful lives or the lease
term of the respective assets.

  Software development costs

  The Company's software products are integrated into its hardware products.
Software development costs incurred prior to the establishment of technological
feasibility are expensed as incurred. Software development costs incurred
subsequent to the establishment of technological feasibility and before general
release to customers are capitalized, if material. To date, all software
development costs incurred subsequent to the establishment of technological
feasibility have been immaterial.

  Goodwill

  Goodwill represents the excess of the purchase price over the fair value of
the net assets of acquired companies accounted for as purchase business
combinations. Goodwill is amortized based on the expected revenue stream or on
a straight-line basis over the period of expected benefit ranging from three
to twenty years. The carrying value of goodwill is reviewed periodically based
on the undiscounted cash flows of the entity acquired over the remaining
amortization period. Should this review indicate that goodwill will not be
recoverable, the Company's carrying value of the goodwill will be reduced to
its discounted cash flows value.

  In-process research and development

  The Company recorded a charge for purchased in-process research and
development ("IPR&D") in March 1998 based upon an independent valuation
relating to the acquisition of the Cylink Wireless Group. Subsequent to the
acquisition, in a letter dated September 15, 1998 to the American Institute of
Certified Public Accountants, the Chief Accountant of the Securities and
Exchange Commission ("SEC") raised the concern that U.S. reporting companies
were classifying an ever-growing portion of the acquisition price for
acquisitions as purchased in-process research and development. Although the
Company believes that its original accounting treatment, based on an
independent appraisal, was in accordance with generally accepted accounting
principles, it has accepted the SEC's view with respect to these matters and
adopted the application of the recent SEC guidance. As such, the Company has
restated its first, second, and third quarter 1998 consolidated financial
statements. As a result, the first quarter charge for acquired IPR&D was
decreased from $33.9 million previously recorded to $15.4 million, a decrease
of $18.5 million with a corresponding increase in goodwill and other
intangible assets and related amortization in subsequent quarters.
Technological feasibility was not established for the expensed IPR&D, and the
expensed IPR&D had no alternative future use. The portion of the purchase
price allocated to goodwill and other intangible assets includes $6.3 million
of developed technology, $2.7 million of core technology, $1.8 million of
assembled workforce, and $23.5 million of goodwill. The purchase price of the
acquisition was determined by an independent appraisal.

  Impairment of long-lived assets

  In the event that facts and circumstances indicate that the cost of assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to market value or discounted cash flow value is required.

                                      57
<PAGE>
 
  Income taxes

  The Company accounts for income taxes under the liability method, which
recognizes deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, the Company can not determine will more
likely than not be realized.

  Concentration of credit risk

  Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents, trade accounts receivable, and derivative financial instruments
used in hedging activities. The Company places its cash and cash equivalents
in a variety of financial instruments such as market rate accounts and U.S.
Government agency debt securities. The Company, by policy, limits the amount
of credit exposure to any one financial institution or commercial issuer.

  To date, the Company has sold most of its products in international markets.
Sales to seven customers have been denominated in British pounds, and at
December 31, 1998 and 1997 amounts due from these customers represented 49% and
30%, respectively, of accounts receivable. Any gains and/or losses incurred on
the settlement of these receivables are included in the financial statements as
they occur.

  The Company extends credit terms to international customers of up to 120 days,
which is consistent with local business practices. The Company performs on-going
credit evaluations of its customers' financial condition to determine the
customer's credit worthiness. Sales are then made either on 30 to 90 day payment
terms, COD or letters of credit.

  At December 31, 1998 and 1997, approximately 75% and 47%, respectively, of
trade accounts receivable represents amounts due from four customers. The
Company has an agreement with certain banks to sell, without recourse, certain
of its trade accounts receivable. During 1998 and 1997, the Company sold
approximately $57 million and $12 million, respectively, of its trade accounts
receivable. For this service, the banks received a fee of between 0.5% and 1.0%
plus interest of between 6% and 10% per annum. In 1998, 1997, and 1996, there
were no material gains or losses on accounts receivable sold without recourse.

The following table summarizes the percentage of sales accounted for by the
Company`s significant customers with sales of 10% or more:

<TABLE>
<CAPTION>
                                               Year ended December 31,
                                         1998            1997            1996
                                       -------         -------       ----------
               <S>                    <C>             <C>           <C>
               Customer A                 23%             15%              11%
               Customer B                 --              11               11
               Customer C                 --              --               11
               Customer D                 --              --               11
               Customer E                 --              --               11
</TABLE>

  Off-balance sheet risk

  The Company enters into foreign forward exchange contracts to reduce the
impact of currency fluctuations of sales to British customers. The objective
of these contracts is to neutralize the impact of foreign currency exchange
rate movements on the Company's operating results. The foreign forward
exchange contracts generally require the Company to sell foreign currencies
for U.S. dollars at rates agreed to at the inception of the contracts. The
forward contracts generally have maturities of six months or less.

  The Company considers purchase orders from customers to be firm commitments 
for purposes of designating foreign forward exchange contracts as hedges. As 
such, gains or losses on a contract are deferred and included in other income 
(expense) when the underlying contract is recognized. Losses are not deferred, 
however, if it is estimated that deferral would lead to recognizing losses in 
later periods. The Company does not enter into speculative forward exchange 
contracts. 

  At December 31, 1998 and 1997, the Company had forward exchange contracts to
sell approximately $26.1 million and $13.3 million in British pounds,
respectively. The fair value of forward exchange contracts, which was
determined based on a comparison of the exchange rate per the contract and the
market exchange rate on December 31, 1998, approximates cost. The Company does
not anticipate any material adverse effect on its financial position resulting
from the use of these instruments.

                                      58
<PAGE>
 
  Net income (loss) per share

   Basic net income (loss) per share is computed by dividing net income
applicable to holders of Common Stock (numerator) by the weighted average
number of shares of Common Stock outstanding (denominator) during the period.
Diluted net income (loss) per share, gives effect to all potentially dilutive
Common Stock outstanding during a period such as those relating to stock
options, Notes, Preferred Stock and warrants. In computing diluted net income
(loss) per share, the average stock price for the period is used in
determining the number of shares assumed to be purchased from exercise of
stock options. The weighted average effect of unexercised stock options to
purchase 813,596 shares of Common Stock were excluded from the computation of
diluted net loss per share in 1998 as the effect would be antidilutive.

  Following is a reconciliation of the numerators and denominators of the Basic
and Diluted net income (loss) per share computations for the periods presented
(in thousands):

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                               -----------------------
                                                                        1998            1997             1996
                                                                      ----------      ---------        --------    
<S>                                                                   <C>             <C>              <C>           
                                                                         (in thousands, except per share data)
Income (loss) before extraordinary item                                $(60,657)        $18,891         $ 8,874                
Charge related to preferred stock discount                               (1,839)              -               - 
                                                                      ----------      ---------        --------    
Income (loss) before extraordinary item applicable to holders 
   of Common Stock                                                      (62,496)         18,891           8,874                
Extraordinary item                                                        5,333               -               -
                                                                      ----------      ---------        --------    
Net income <loss> applicable to holders of Common Stock                 (57,163)         18,891           8,874 

Effect of dilutive securities:                                                                                                 
   Interest expense on Convertible Subordinated Notes                         -             397               -                
                                                                      ----------      ---------        --------    
Numerator for diluted net income (loss) per common share               $(57,163)        $19,288         $ 8,874                
                                                                      ==========      =========        ========     
                                                                                                                               
Denominator for basic net income (loss) per common share                 43,254          42,175          38,762                
Effect of dilutive securities:                                                                                                 
   Stock options and warrants                                                 -           1,826           1,845                
   Convertible Subordinated Notes                                             -             569               -
                                                                      ----------      ---------        --------    
Denominator for diluted net income (loss) per common share               43,254          44,570          40,607                
                                                                      ==========      =========        ========                
Basic income (loss) per share:                                  
   Income (loss) before extraordinary item                             $  (1.44)        $  0.45         $  0.23                
   Extraordinary Item                                                      0.12               -               -                
                                                                      ----------      ---------        --------    
   Net income (loss)                                                   $  (1.32)        $  0.45         $  0.23                
                                                                      ==========      =========        ========                

Diluted income (loss) per share:     
   Income (loss) before extraordinary item                             $  (1.44)        $  0.43         $  0.22                
   Extraordinary item                                                      0.12               -               -                
                                                                      ----------      ---------        --------    
   Net income (loss)                                                   $  (1.32)        $  0.43         $  0.22                 
                                                                      ==========      =========        ========     
</TABLE> 
  Stock-based Compensation

  The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and complies with the disclosure
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). Under APB 25, compensation cost is
recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the consideration received.

                                      59
<PAGE>
 
 Comprehensive Income

  The Company has adopted SFAS 130, "Reporting Comprehensive Income". Under
SFAS 130, the Company is required to display comprehensive income and its
components as part of the Company's full set of financial statements. The
measurement and presentation of net income did not change. Comprehensive
income comprises net income and other comprehensive income. Other
comprehensive income includes certain changes in equity of the Company that
are excluded from net income. Specifically, SFAS 130 requires unrealized gains
and losses on the Company's foreign currency translation, which were reported
separately in stockholders' equity, to be included in accumulated other
comprehensive income. Comprehensive income in 1998, 1997, and 1996 has been
reflected in the Consolidated Statements of Stockholders' Equity.

 Recently Issued Accounting Pronouncements

  In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," effective
beginning in the first quarter of 2000.  SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.  It
requires companies to recognize all derivatives as either assets or liabilities
on the balance sheet and measure those instruments at fair value.  Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting under SFAS 133.  The Company is currently evaluating the
impact of SFAS 133 on its financial position and results of operations.

  In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires that entities capitalize certain costs related to internal-use
software once certain criteria have been met. The Company is required to
implement SOP 98-1 for the year ending December 31, 1999. Adoption of SOP 98-1
is not expected to have a material impact on the Company's financial position or
results of operations.

  In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The Company has expensed these
costs historically, therefore, the adoption of this standard is not expected
to have a material impact on the Company's financial position or results of
operations.

NOTE 2 -- BALANCE SHEET COMPONENTS (in thousands):

<TABLE>
<CAPTION>
                                                                              December 31,
                                                                          1998                 1997
                                                                          ----                 ----
<S>                                                                    <C>                  <C> 
Inventory:
  Raw materials                                                        $   16,395           $   9,695
  Work-in-process                                                          42,995              32,472
  Finished goods                                                           19,636              15,836
                                                                       ----------           --------- 
                                                                       $   79,026           $  58,003
                                                                       ==========           =========
 
Property and equipment:
  Tooling and test equipment                                           $   52,718           $  31,603
  Computer equipment                                                        9,210               4,950
  Furniture and fixtures                                                    7,220               4,979
  Land and buildings                                                        3,506               1,389
  Construction-in-process                                                   4,878               3,294
                                                                       ----------           --------- 
                                                                           77,532              46,215
Less accumulated depreciation                                             (25,446)            (13,902)
                                                                       ----------           ---------
                                                                       $   52,086           $  32,313
                                                                       ==========           =========
Goodwill and other assets:
Goodwill:
  ACS                                                                  $        -           $   1,347
  Geritel                                                                       -               1,306
  Technosystem                                                             15,850              15,850
  CSM                                                                      22,295              22,295
  Cylink                                                                   34,261                   -
  Cemetel                                                                   4,360                   -
                                                                       ----------           --------- 
                                                                           76,766              40,798
Less accumulated amortization                                              (8,424)             (2,620)
                                                                       ----------           --------- 
    Net goodwill                                                           68,342              38,178
Other assets:                                                               3,503               3,768
                                                                       ----------           ---------               
                                                                       $   71,845           $  41,946
                                                                       ==========           =========
</TABLE>

  During 1998, the Company incurred a restructuring charge, which included an
impairment write down of goodwill related to the acquisition of ACS and
Geritel of approximately $2.9 million, included above.

                                      60
<PAGE>

NOTE 3 -- DEBT ARRANGEMENTS:

  On November 5, 1997, the Company issued $100 million in 4 1/4% Convertible
Subordinated Notes (the "Notes") due November 1, 2002. The Notes are convertible
at the option of the holder into shares of the Company's Common Stock at an
initial conversion price of $27.46 per share at any time. The Notes are
redeemable by the Company, beginning on November 5, 2000, upon 30 days notice,
subject to a declining redemption price. Interest on the Notes will be paid
semi-annually on May 1 and November 1 of each year. On December 30 and 31, 1998,
the Company issued 2,467,000 shares of Common Stock in exchange for $14.4
million of Notes and recorded an extraordinary gain of $5.3 million. On
December 30, and December 31, 1998, the closing price of the Company's Common
Stock was $3.50 and $3.98, respectively. On January 4 and February 2, 1999,
the Company issued an additional 2,792,257 shares of Common Stock in exchange
for $25.5 million of Notes and will record an extraordinary gain of $7.3
million. On January 4, 1999 and February 2, 1999, the closing price of the
Company's Common Stock was $3.53 and $8.88, respectively.

  The Company entered into a new revolving line-of-credit agreement on May 15,
1998, as amended during the year, that provides for borrowings of up to $50
million. At December 31, 1998, the Company had been advanced approximately
$46.4 million and had used the remaining $3.6 million to secure letters of
credit under such line. The maturity date of the line-of-credit agreements is
April 30, 2001. Borrowings under the line are secured by the assets of the
Company and bear interest at either a base interest rate or a variable
interest rate. The agreement requires the Company to comply with certain
financial covenants, including the maintenance of specific minimum ratios.
Amendments during the year allowed the Company to remain in compliance with
the debt covenants, and the Company was in compliance with such covenants as
of December 31, 1998. However, the Company expects to require additional 
amendments to the agreement to be in compliance with the covenants for the 
first quarter of 1999, and is in negotiations with the banks to secure such 
amendments to allow the Company to remain in compliance in the normal course 
of business.

  The remaining borrowings consist of bank loans and notes payable of $2.2 
million, and amounts drawn under lines of credit available to the Company's 
foreign subsidiaries, with interest rates ranging from 8% to 12%. The 
Company's foreign subsidiaries had lines of credit available from various 
financial institutions. At December 31, 1998, $3.8 million had been drawn down
under these facilities. Generally, these foreign credit lines do not require 
commitment fees or compensating balances and are cancelable at the option of 
the Company or the financial institutions.

NOTE 4 -- CAPITAL STOCK:

  The authorized capital stock of the Company consists of 95 million shares of
Common Stock, $0.0001 par value (the "Common Stock"), and 2 million shares of
preferred stock, $0.0001 par value (the "Preferred Stock"), including 500,000
shares of which have been designated Series A Junior Participating Preferred
Stock (the "Series A") pursuant to the Stockholder Rights Agreement (see
discussion below) and 20,000 shares of which have been designated Series B
Convertible Participating Preferred Stock (the "Series B"), 15,000 shares of
which are issued and outstanding.

  Common Stock. In May 1996, the Company received net proceeds of $52.5 million
from the sale of 4,196,970 shares of Common Stock in a follow-on public
offering.

  Preferred Stock. The Board of Directors has the authority to issue the
remaining shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the holders of Common Stock; however, the Board may not create or issue any
additional shares of Series B or of the remaining authorized but unissued shares
of preferred stock without the consent of the initial purchasers of the Series
B.

  The Series A is not redeemable. Each share of Series A will be entitled to an
aggregate dividend of 10,000 times any dividend declared per share of Common
Stock. In the event of liquidation, the holders of Series A will be entitled to
the greater of a $10,000 per share payment, plus any accrued and unpaid
dividends, or an aggregate payment of 10,000 times any payment to be made per
share of Common Stock, prior to any payment to any holder of Common Stock. Each
share of Series A will have 10,000 votes, voting together with the Common Stock.
In the event of any merger, consolidation or other transaction in which Common
Stock is exchanged, each share of Series A will be entitled to receive 10,000
times the amount received per share of Common Stock.

  Mandatorily Redeemable Convertible Preferred Stock and Warrants. In December
1998, the Company completed a private placement of 15,000 shares of Series B
Mandatorily Redeemable Convertible Preferred Stock (the "Series B") for $1,000
per share and Warrants to purchase up to 1,242,257 shares of Common Stock. A
portion of the proceeds were allocated to the warrants based on their fair value
and accounted for as a discount to the Series B. The remainder of the proceeds
were allocated to the Series B. Because Series B is immediately convertible
into shares of Common Stock, the discount was amortized as a reduction of
income available to holders of Common Stock upon the issuance of Series B. The
Company did not record a beneficial conversion feature related to Series B
because the conversion price, using the conversion terms that are most
beneficial to the holder, was greater than the market price of the Common
Stock on the date of issuance. The Series B is immediately convertible into
shares of Common Stock at variable rates based on future trading prices of the
Common Stock and events that may occur in the future. The number of shares of
Common Stock that may ultimately be issued upon conversion is therefore
presently indeterminable and could fluctuate significantly based on the
issuance of other securities. Assuming certain conditions are met, the Series
B will automatically convert into Common Stock on December 22, 2001.

                                      61
<PAGE>
 
  The Series B is senior to Series A and Common Stock with respect to the
right to receive dividend payments and liquidation preferences. Series B
accrues a 6% per year premium, payable in cash or Common Stock, at the
Company's option. Series B has no voting power, except as otherwise provided
by applicable law or pursuant to certain contractual protections described in
the Certificate of Designations.

  Upon the occurrence of certain events deemed within the Company's control,
each then outstanding share of Series B is redeemable at the holder's option at
the greater of $1,330 per share, plus a 6% per year premium and any default
amounts, or a predetermined redemption formula based on the average of the
closing bid prices for the Company's Common Stock during the period beginning
on the date of the holder's redemption notice and ending on the date of
redemption. In certain circumstances, the Company may be able to avoid
redemption if they cure such events prior to the redemption election by a
holder.

  Upon the occurrence of certain other events deemed outside of the Company's
control ("Override Election Events"), the Company is required to make
significant cash payments to the holders of Series B. All cash payments required
to be made as a result of an Override Election Event, together with all cash
payments required to be made under the other Series B financing agreements, are
capped at an aggregate of $1,330 per share plus a default interest rate, if
applicable.

  As long as an event pursuant to which the holders of Series B are entitled to
redeem or an Override Election Event has not occurred (or if such event has
occurred in the past, it has been cured for at least the six immediately
preceding consecutive months without the occurrence of any other such event),
Series B is redeemable at the Company's option in certain limited circumstances
at premiums varying from 115% to 160% of the original issue price of Series B,
plus a 6% premium per year and a default interest rate, if applicable.

  If the Company merges with a public company meeting certain threshold 
criteria, the holders of Series B will be entitled to receive in the merger the 
consideration they would have received had they converted their stock the day 
before the public announcement of the merger.  If the Company merges with a 
private company or a public company not meeting the threshold criteria, the 
holders of Series B will be entitled, at their option, (1) to retain their 
preferred stock, which will thereafter convert into common stock of the 
surviving company, or (2) receive either the consideration they would have 
received had they converted their stock the day before the public announcement 
of the merger or receive $1,250 per share of Series B then outstanding, up to an
aggregate of $18.7 million in cash, plus any accrued and unpaid premium and a 
default interest rate, if applicable.

  The warrants issued in connection with Series B were valued at $1,839,000
using the Black-Scholes option-pricing model with the following assumptions 
used:  expected volatility of 65%; a weighted-average risk-free interest rate 
of 4.5% and a weighted-average expected life of 5 years. The initial exercise
price for the Common Stock underlying the Warrant is $3.47. The Warrants are
immediately exercisable until the earlier of: (1) December 22, 2003 or (2) the
date on which the closing of a consolidation, merger of other business
combination with or into another entity pursuant to which the Company does not
survive. In the event the Company merges or consolidates with any other company,
the warrant holders are entitled to similar choices as to the consideration they
will receive in such merger or consolidation as are provided to the holders of
Series B. In addition, the number of shares issuable upon exercise of the
Warrants is subject to anti-dilution adjustment if the Company sells Common
Stock or securities convertible into or exercisable for Common Stock (excluding
certain issuances such as Common Stock issued under employee, director or
consultant benefit plans) at a price per share less than $3.47 (subject to
adjustment).

  Stockholder Rights Agreement. On September 26, 1997, the Board of Directors of
the Company adopted a Stockholder Rights Agreement (the "Agreement"). Pursuant
to the Agreement, rights (the "Rights") will be distributed as a dividend on
each outstanding share of its Common Stock held by stockholders of record as of
the close of business on November 3, 1997. Each Right will entitle stockholders
to buy Series A Preferred at an exercise price of $125.00 upon certain events.
The Rights will expire ten years from the date of the Agreement.

  In general, the Rights will be exercisable only if a person or group acquires
15% or more of the Company's Common Stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15% or
more of the Company's Common Stock. If, after the Rights become exercisable, 
the Company is acquired in a merger or other business combination transaction,
or sells 50% or more of its assets or earning power, each unexercised Right
will entitle its holder to purchase, at the Right's then-current exercise
price, a number of the acquiring company's common shares having a market value
at the time of twice the Right's exercise price. In addition, if a person or
group acquires 15% or more of the Company's common Stock (or cash, other
securities or property, at the discretion of the Board of Directors) having a
market value of twice the Right's exercise price. At any time within ten days
after the public announcement that a person or group has acquired beneficial
ownership of 15% or more of the Company's Common Stock, the Board, in its sole
discretion, may redeem the Rights for $0.0001 per Right.

                                      62
<PAGE>
 

NOTE 5 -- ACQUISITIONS:

  On March 28, 1998, the Company acquired substantially all of the assets, and
on April 1, 1998, the accounts receivable of the Wireless Communications Group
of Cylink Corporation ("Cylink Wireless Group"), a Sunnyvale, California-based
company, for $46.0 million in cash and $14.5 million in a short-term, non-
interest bearing unsecured subordinated promissory note due July 6, 1999. The
Company has withheld approximately $4.8 million of the short-term promissory
note due to the Company's belief that Cylink Corporation breached various
provisions of the acquisition agreement. In the Asset Purchase Agreement between
the Company and Cylink Corporation, Cylink Corporation agreed to sell certain
assets to the Company, including a specific list of accounts receivable.
Subsequent to the purchase and before the $14.5 million note was due, the
Company determined that approximately $4.8 million of accounts receivable were
uncollectible. Such amount has been excluded from the amount allocated to
accounts receivable purchased. The remaining amount due on the note of $9.7
million was paid in July 1998.

The Cylink Wireless Group designs, manufactures and markets spread spectrum
radio products for voice and data applications in both domestic and
international markets. The acquisition of the accounts receivable on April 1,
1998 was recorded in the second quarter of 1998.

  The Company accounted for this acquisition as a purchase business 
combination. The results of the Cylink Wireless Group have been included since
the date of acquisition.

  The total purchase price of the acquisition was as follows (in thousands):

<TABLE>
          <S>                                                   <C>     
          Cash payment                                          $46,000  
          Short-term promissory note                              9,682
          Expenses                                                2,483  
                                                                -------  
               Total                                            $58,165
                                                                =======   
</TABLE>

     The allocation of the purchase price, restated for the revision of the
amount allocated to in-process research and development as discussed below,
and as previously reported, was as follows (in thousands):

<TABLE>
          <S>                                                   <C>    
          Accounts receivable, net                              $ 4,247
          Inventory                                               5,109
          Property and equipment, net                               461
          In-process research and development expense            15,442
          Current liabilities assumed                            (1,355)
          Intangible Assets:  
           Goodwill                                              23,482
           Developed technology                                   6,291
           Acquired workforce                                     1,781
           Core technology                                        2,707
                                                                -------
               Total                                            $58,165
                                                                =======
</TABLE>

                                      63
<PAGE>

  The following unaudited pro forma information combines the historical sales
and net income (loss) and net income (loss) per share of P-Com and Cylink for
the three months ended March 31, 1998 and the year ended December 31, 1997 in
each case as if the acquisition had occurred at the beginning of the earliest
period presented. The results include amortization of goodwill and other
intangible assets related to the Cylink acquisition, as restated for the
revision of the amount of purchase price allocated to in-process research and
development as discussed below, and as previously reported.

<TABLE>
<CAPTION>
                            Twelve Months Ended                                                Twelve Months Ended
                              December 31, 1998                                                  December 31, 1997
                 ---------------------------------------------------------      ------------------------------------------------
                   (In thousands, except per share data)                              (In thousands, except per share data)
                            P-Com             Cylink            Pro Forma            P-Com           Cylink          Pro Forma
                 -------------------      ------------      --------------      -------------     -----------     --------------
<S>                        <C>                <C>               <C>                  <C>              <C>             <C>
Sales                      $ 194,944          $  4,508           $ 199,452           $220,702         $27,957         $248,659
Net income (loss)            (57,163)           (4,706)            (61,869)            18,891          (3,443)          15,448
Net Income (loss) per
 share:
 Basic                         (1.32)            (0.11)              (1.43)              0.45           (0.08)            0.37
 Diluted                       (1.32)            (0.11)              (1.43)              0.43           (0.08)            0.35
</TABLE>

  After consideration of recent guidance from the SEC, the Company has adjusted
the allocation of the purchase price related to the acquisition of the Cylink
Wireless Group, which included decreasing the in-process research and
development charge from $33.9 million as reported in the Company's Quarterly
Report on Form 10-Q for its quarter ended March 31, 1999 to $15.4 million. The
result of this restatement is a lesser charge to income for in-process
research and development and a higher recorded value of goodwill and other
intangible assets, resulting in increased amortization of such goodwill and
other intangible assets in future periods.

  In-process research and development had no future use at the date of 
acquisition and technological feasibility had not been established.

  Among the factors considered in determining the amount of the allocation of
the purchase price to in-process research and development were various factors
such as estimating the stage of development of each in-process research and
development project at the date of acquisition, estimating cash flows resulting
from the expected revenues generated from such projects, and discounting the net
cash flows, in addition to other assumptions. Developed technology of $6.3
million, will be amortized over the period of the expected revenue stream of the
developed products of approximately four years. The value of the acquired
workforce, $1.8 million, will be amortized on a straight-line basis over three
years, and the remaining identified intangible assets, including core technology
of $2.7 million and goodwill of $23.5 million will be amortized on a straight-
line basis over ten years. Amortization expense related to the acquisition of
Cylink was $3.7 million for fiscal year 1998.

  In addition, other factors were considered in determining the value assigned
to purchased in-process technology such as research projects in areas supporting
products which address the growing third world markets by offering a new point
to multi-point product, a faster, less expensive more flexible point-to-point
product, and the development of enhanced Airlink products, consisting of a Voice
Extender, Data Metro II, and RLL Encoding products.

  If none of these projects are successfully developed, the Company's sales and
profitability may be adversely affected in future periods. Additionally, the
failure of any particular individual project in-process could impair the value
of other intangible assets acquired. The Company expects to begin to benefit
from the purchased in-process technology in 1999.

  During the second quarter of 1998, due to limited staff and facilities, the
Company delayed the research project for the new narrowband point-to-
multipoint project acquired from the Cylink Wireless Group and focused
available resources on the broadband point-to-multipoint project which is
targeted for a larger addressable market. The narrowband point-to-multipoint
project is not expected to be completed prior to the Year 2000. Currently, the
narrowband point-to-multipoint project is approximately 60% complete. The
point-to-point project, discussed above, which was acquired from the Cylink
Wireless Group, was completed during the third quarter of 1998 at an estimated
total cost of $2.0 million. The enhanced Airlink projects are expected to be
completed during the first quarter of 1999.

  During 1998, the Company acquired the remaining interest in Geritel and the 
assets of Cemetel S.p.A., a service company located in Carsoli, Italy. These 
acquisitions were not material to the consolidated financial statements or the
results of operations of the Company.

  On February 24, 1997, the Company acquired 100% of the outstanding stock of
Technosystem S.p.A. ("Technosystem"), a Rome, Italy-based company, with
additional operations in Poland, for aggregate payments of $3.3 million and the
assumption of long-term debt of approximately $12.7 million in addition to

                                      65
<PAGE>
 
other liabilities. The Company initially paid $2.6 million in cash, and an
additional payment of $0.7 million was made on March 31, 1998, which was subject
to certain indemnification obligations of the former Technosystem security
holders, as set forth in the securities purchase agreement. Technosystem
designs, manufactures and markets equipment for transmitters and transponders
for television and radio broadcasting. The range of products include audio/video
modulators, converters, amplifiers, transponders, transmitters and microwave
links.

  On March 7, 1997, the Company acquired substantially all of the assets of
Columbia Spectrum Management, L.P. ("CSM"), a Vienna, Virginia-based company,
for $7.8 million in cash and 796,612 shares of Common Stock valued at
approximately $14.5 million. CSM provides turnkey relocation services for
microwave paths over spectrum allocated by the Federal Communications Commission
for Personal Communications Services and other emerging technologies.

  The Company accounted for its acquisitions of Technosystem and CSM based on
the purchase method of accounting. The results of these acquired entities are
included from the date of acquisition. Goodwill and other intangible assets
recorded as a result of the purchase of CSM and Technosystem are being
amortized over twenty and ten years, respectively, using the straight-line
method.

  On May 29, 1997, the Company acquired all of the outstanding shares of capital
stock of CRC a provider of integrated network access devices to network
service providers, in exchange for 1,502,956 shares of the Company's Common
Stock that were issued or are issuable to former CRC security holders in a
stock-for-stock merger. CRC, located in Fair Lawn, New Jersey, manufactures
products used by the communications industry to connect end-user sites to a
range of communications services. CRC's NetPath product line enables network
service providers to offer their customers a migration path from entry-level
data services to cost-effective integrated delivery of voice, video and
Internet access. The NetPath product line also supports the network service
provider's introduction of new technologies including asynchronous transfer
mode and frame relay.

  On November 27, 1997, the Company acquired all of the outstanding shares of
capital stock of RT Masts and Telematics in exchange for 766,151 and 248,215
shares of the Company's Common Stock, respectively. RT Masts, located in
Wellingborough, Northhamptonshire, U.K. and Telematics, located in Herndon,
Virginia, supply, install and maintain telecommunications systems and structure
including antennas covering high frequency, medium frequency and microwave
systems. Both companies manage the construction of radio system sites,
construction of towers and installation of radios and antennas at system sites.

  The Company accounted for its acquisitions of CRC, RT Masts and Telematics as
poolings-of-interests and, therefore, all prior period financial statements
presented include the results of these acquired companies as if they had been
combined since inception. Sales and net income below show the separate
historical sales and net income of P-Com, CRC, RT Masts and Telematics, prior to
their combination, for the years ended December 31, 1997, and 1996.

<TABLE> 
<CAPTION> 
                                              Year Ended December 31
                                                  (In thousands)

                                               1997            1996
                                               ----            ----
               <S>                          <C>             <C>  
               Sales:                
                 P-Com                      $202,757        $ 97,515
                 CRC                             713           4,338
                 RT Masts                     12,035          15,472
                 Telematics                    5,197           3,628
                                            --------        --------
                                            $220,702        $120,953
                                            ========        ========
                                     
                                     
               Net income:    
                 P-Com                      $ 20,375        $ 14,068
                 CRC                          (1,254)         (5,196) 
                 RT Masts                       (537)            101
                 Telematics                      307             (99)
                                            --------        --------
                                            $ 18,891        $  8,874
                                            ========        ========
</TABLE> 
   
NOTE 6 -- EMPLOYEE BENEFIT PLANS:

  Stock Option Plans. On January 11, 1995, the Company's Board of Directors
adopted the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan") as a
successor to its 1992 Stock Option Plan (the "1992 Plan"). As of January 11,
1995, no further option grants or stock issuances were made under the 1992 Plan,
and all option grants and stock issuances made during the remainder of 1995 were
made under the 1995 Plan. All outstanding options under the 1992 Plan were
incorporated into the 1995 Plan. The 1995 Plan authorizes the issuance of up to
13,434,459 shares of Common Stock as of December 31, 1998.

  Options granted under the 1992 Plan are generally exercisable for a period not
to exceed ten years, and generally must be issued with exercise prices not less
than 100% and 85%, for incentive and non-qualified stock options, respectively,
of the estimated fair market value of the Common Stock on the date of grant as
determined by the Board of Directors. Options granted under the 1992 Plan are
exercisable immediately upon grant. Options granted under the 1992 Plan
generally vest 25% on the first anniversary from the date of grant, and ratably
each month over the remaining thirty-six month period. Unvested shares purchased
through the exercise of stock options are subject to repurchase by the Company.

  The 1995 Plan contains three equity incentive programs: a Discretionary Option
Grant Program, a Stock Issuance Program for officers and employees of the
Company and independent consultants and advisors to the Company and an Automatic
Option Grant Program for non-employee members of the Company's Board of
Directors.

                                      66
<PAGE>
 
  Options under the Discretionary Option Grant Program may be granted at not
less than 85% of the fair market value per share of Common Stock on the grant
date with exercise periods not to exceed ten years. The Plan Administrator is
authorized to issue tandem stock appreciation rights and limited stock
appreciation rights in connection with the option grants.

  The Stock Issuance Program provides for the sale of Common Stock at a price
not less than 85% of fair market value. Shares may also be issued solely for
services. The administrator has discretion as to vesting provisions, including
accelerations, and may institute a loan program to assist participants with
financing stock purchases. The program also provides certain alternatives to
satisfy tax liabilities incurred by participants in connection with the program.

  Under the Automatic Option Grant Program, as amended at the May 1997 Annual
Meeting of Stockholders, participants will automatically receive an option to
purchase 40,000 shares of Common Stock upon initially joining the Board of
Directors and will receive an additional automatic grant each year at each
annual stockholders' meeting for 4,000 shares. Each option will have an exercise
price per share equal to 100% of the fair market value of the Common Stock on
the grant date. The shares subject to the initial share option and the annual
4,000 share option will vest in eight successive equal quarterly installments
upon the optionee's completion of each successive 3-month period of Board
service over the 24-month period measured from the grant date.

  The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants in 1998, 1997 and 1996, respectively: expected volatility of 72%, 57%
and 57%; weighted-average risk-free interest rates of 5.1%, 6.1% and 6.0%, and
weighted-average expected lives of 2.76, 3.16 and 4.11 years.

 The following table summarizes stock option activity under the Company's 1992
and 1995 Plans.


<TABLE>
<CAPTION>
                                           1998                                1997                               1996
                                ----------------------------         --------------------------     ------------------------------
                                                    Weighted                          Weighted                          Weighted
                                      Shares        Average             Shares        Average             Shares         Average
                                                    Exercise                          Exercise                          Exercise
                                                     Price                             Price                              Price
 
 
<S>                                  <C>            <C>                <C>            <C>                <C>            <C>
Outstanding at beginning of year      6,006,039         $12.65          3,778,688         $ 7.14          2,854,872           $3.08
Granted                               6,480,495           6.20          3,317,712          16.73          2,164,500            9.97
Exercised                              (498,670)          5.32           (878,385)          3.31           (784,408)           1.73
Forfeited                            (4,126,144)         14.59           (211,976)         11.41           (456,276)           4.74
                                     -----------                        ----------                        ----------
Outstanding at end of year            7,861,720                         6,006,039                         3,778,688
                                      ==========                        ==========                        ==========
Options exercisable at year-end       2,482,939                         2,970,244                         3,524,284
 
Weighted-average fair value of            $2.24                            $ 7.54                             $4.78
  options granted during the year
</TABLE>

                                      67
<PAGE>
 
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1998:

<TABLE>
<CAPTION>
                                         Options Outstanding                                  Options  Exercisable
                              --------------------------------------                     ------------------------------
                                                      Weighted-
     Range of                                         Average                Weighted-                               Weighted   
     Exercise Prices                 Shares           Remaining                Average                Shares         Average    
                                                      Life                  Exercise Price                           Exercise Price
                                              
<S>          <C>                 <C>                  <C>                   <C>               <C>                    <C>
$  0.10  -    0.10                      278                 4.7                 $ 0.10                278            $ 0.10
   0.45  -    0.56                  107,213                 5.5                   0.56            107,213              0.56
   0.94  -    0.94                    6,658                 5.8                   0.94              6,658              0.94
   1.80  -    2.10                  103,020                 6.2                   1.88             93,490              1.86
   2.88  -    4.31                2,489,397                 9.6                   3.04            110,997              3.57
   4.63  -    6.56                2,836,100                 8.4                   5.76            495,879              5.51
   7.00  -   10.25                1,347,395                 7.2                   8.78            894,855              8.43
  12.38  -   18.28                  924,526                 8.6                  17.41            752,607             17.66
  19.25  -   23.22                   47,133                 8.8                  21.23             20,962             21.20
                                 ----------                                                    ------------
                                  7,861,720                                                     2,482,939
                                 ==========                                                    ============  
</TABLE>

  Repricing. On July 15, 1998, the Plan Administrator implemented an option
cancellation/regrant program for all employees of the Company, excluding the
Company's executive officers and directors. Pursuant to that program, each
participant was given the opportunity to surrender his or her outstanding
options under the 1995 Plan with exercise prices in excess of $5.813 per share
in return for a new option grant for the same number of shares but with an
exercise price of $5.813 per share, the closing selling price per share of
Common Stock as reported on the Nasdaq National Market on July 31, 1998, the
grant date of the new option. Options for a total of 2,746,000 shares with a
weighted average exercise price of $16.45 per share were surrendered for
cancellation, and new options for the same number of shares were granted with an
exercise price of $5.813 per share. The new options granted to employees did not
vest or become exercisable unless the participant continued in the Company's
employ through January 31, 1999. On that date, the option became exercisable for
(i) the number of shares for which the cancelled higher-priced option was
exercisable on July 31, 1998 plus (ii) the number of shares for which the 
higher-priced option would have become exercisable over the period from August
1, 1998 to January 31, 1999 had that option not been cancelled. The new option
will become exercisable for the balance of the option shares in a series of
installments, with each such installment to become exercisable on the same date
that installment would have become exercisable under the cancelled higher-priced
option. In addition, each new option will vest and become exercisable on an
accelerated basis in the event the Company were to be acquired by a merger or
asset sale in which those options were not assumed by the successor entity.

  On July 31, 1998, each of the option grants made under the Automatic Option
Grant Program on May 18, 1998 with an exercise price of $19.25 per share was
cancelled, and a new option for 4,000 shares was granted to each of the four
non-employee Board members with an exercise price of $5.8125 per share, the
fair market value per share of Common Stock on the grant date of the new
option. Each of the new options is immediately exercisable for all the option
shares, but any shares purchased under the option will be subject to
repurchase by the Company, at the exercise price paid per share, upon the
optionee's cessation of Board service prior to vesting in those shares. The
shares subject to each new option will vest in a series of eight (8)
successive equal quarterly installments upon the optionee's completion of each
successive three (3)-month period of Board service over the twenty-four (24)-
month period measured from the July 31, 1998 grant date.

  Employee Stock Purchase Plan. On January 11, 1995, the Company's Board of
Directors adopted the Employee Stock Purchase Plan (the "Purchase Plan"), which
was approved by stockholders in February 1995. The Purchase Plan permits
eligible employees to purchase Common Stock at a discount through payroll
deductions during successive offering periods with a maximum duration of 24
months. Each offering period shall be divided into consecutive semi-annual
purchase periods. The price at which the Common Stock is purchased under the
Purchase Plan is equal to 85% of the fair market value of the Common Stock on
the first day of the offering period or the last day of the purchase period,
whichever is lower. The initial offering period commenced on the effectiveness
of the Offering. A total of 1,150,000 shares of Common Stock has been reserved
for issuance under the Purchase Plan, as amended at the May 1997 and 1998 Annual
Meetings of Stockholders. Awards and terms are established by the Company's
Board of Directors. The Purchase Plan may be canceled at any time at the
discretion of the Company's Board of Directors prior to its expiration in
December 2004. Under the Plan, the Company sold 240,030, 151,874 and 188,800
shares in 1998, 1997 and 1996, respectively.

  The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following assumptions for 1998, 1997, and 1996,
respectively: expected volatility of 72%, 57% and 57% weighted-average risk-free
interest rates of 5.3%, 5.3%, and 5.0% and weighted-average expected lives of
0.5,

                                      68
<PAGE>
 
0.7, and 0.7 years. The weighted-average fair value of those purchase rights
granted in 1998, 1997, and 1996 was $1.99, $3.65, and $1.55, respectively.

  Because the Company has adopted the disclosure-only provision of SFAS No. 123,
no compensation expense has been recognized for its stock option plan or for its
stock purchase plan. Had compensation costs for the Company's two stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans, consistent with the method of SFAS 123, the
Company's net income (loss) and net income (loss) per share would have been
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                1998               1997             1996
                                                               ---------         ----------        --------
 
<S>                                    <C>                     <C>               <C>               <C>
Net income (loss) applicable to
  holders of Common Stock              As reported             $(57,163)           $18,891           $8,874
                                       Pro forma               $(66,473)           $11,221           $4,883
 
Net income (loss) per share            As reported - Basic     $  (1.32)           $  0.45           $ 0.23
                                       As reported - Diluted   $  (1.32)           $  0.43           $ 0.22
 
                                       Pro forma - Basic       $  (1.54)           $  0.27           $ 0.13
                                       Pro forma - Diluted     $  (1.54)           $  0.25           $ 0.12
</TABLE>

NOTE 7 -- INCOME TAXES:

  Income (loss) before extraordinary item and income taxes consists of the
following (in thousands):

<TABLE>
<CAPTION>
                                         Year ended December 31,
                                 1998         1997             1996
                                 ----         -----            ----       
       <S>                   <C>              <C>             <C>
       Domestic              $ (74,146)       $26,390         $9,962
       Foreign                   1,988          3,553           (132)
                             ----------       -------         -------
                             $ (72,158)       $29,943         $9,830
                             ==========       =======         =======   
</TABLE>

 The provision (benefit) for income taxes comprises the following (in
thousands):

<TABLE>
<CAPTION>
                                         Year ended December 31,
                                 1998                1997              1996
                                 ----                ----              ----  
   <S>                           <C>                <C>                <C>
   Current:
       Federal                  $ (4,727)           $ 7,850            $  2,543
       State                         (37)               268                  27
       Foreign                     1,244              2,920                  97
                                 --------           -------            --------
                                  (3,520)            11,038               2,667
                                 --------           -------            --------
   Deferred:
       Federal                    (7,410)              (217)             (1,617)
       State                        (571)               231                 (94)
                                 --------           --------           --------
                                  (7,981)                14              (1,711)
                                 --------           --------           --------
               Total            $(11,501)           $11,052            $    956
                                 ========           ========           ========
</TABLE>

                                      69
<PAGE>
 
 Deferred tax assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                              December 31,
                                                        1998               1997          
                                                        ----               ----          
         <S>                                           <C>               <C>             
         Net operating loss carryforwards              $  7,030           $  2,032       
         Credit carryforwards                             1,833                615       
         In-process research and development              5,527                 --       
         Start-up costs                                      99                202       
         Reserves and other                               5,988              1,495       
                                                       --------           --------       
                                                         20,477              4,344       
         Valuation allowance                            (10,799)            (2,647)      
                                                       --------           --------       
                                                       $  9,678           $  1,697       
                                                       ========           ========       
</TABLE>
  The Company's net operating loss carryforwards included as a deferred tax 
asset above are approximately $19 million and do not include stock option 
deductions of $5.1 million and $9.4 million for 1998 and 1997, respectively, 
which will be credited to paid in capital when realized.

  Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:

<TABLE>
<CAPTION>
                                                                            Year ended December 31,
                                                                         1998            1997         1996
                                                                         ----            ----         ----
           <S>                                                          <C>             <C>         <C>
           U.S. federal statutory rate                                   (35.0%)          35.0%       35.0%
           State income taxes, net of federal tax benefit                 (0.3)            1.1         6.0
           Change in valuation allowance                                  11.9              --       (36.6)
           Benefit from foreign sales corporation                           --            (2.3)         --
           Research and development tax credit                              --            (7.3)         --
           Foreign income taxed at different rate                          0.8             4.8          --
           Other, net                                                      6.7             5.6         5.3
                                                                         -----            -----       -----    
                                                                         (15.9%)          36.9%        9.7%
                                                                         ======           =====       =====    
</TABLE>

NOTE 8 -- COMMITMENTS:

OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES

  In August 1998, the Company entered into a capital lease for equipment in the
amount of $1.6 million with interest accruing at the rate of 6.3%. The lease is
accounted for as a sale-leaseback transaction, which expires in January 2003.
Future minimum lease payments required under the lease are as follows (in
thousands):

<TABLE>
           Year ending December 31,
           <S>                                                <C>
            1999.........................................     $  396
            2000.........................................        396
            2001.........................................        396
            2002.........................................        396
            2003.........................................         33
                                                              ------
            Total minimum lease payments.................      1,617
            Less: amount representing interest...........        194
                                                              ------
            Present value of net minimum lease payments..     $1,423
                                                              ======
</TABLE>

  The present value of net minimum lease payments is reflected in the December
31, 1998 balance sheet as components of other accrued liabilities and long-
term debt of $315,000 and $1,108,000, respectively.

                                      70
<PAGE>
 
  The Company leases its facilities under non-cancelable operating leases. The
leases require the Company to pay taxes, maintenance and repair costs. Future
minimum lease payments under the Company`s non-cancelable operating leases at
December 31, 1997 are as follows (in thousands):

          Year ending December 31,

          1999........................   $ 3,853
          2000........................     3,189
          2001........................     2,267
          2002........................     1,569
          Thereafter..................       860
                                         -------
                                         $11,738
                                         =======

  Rent expense for all operating leases was approximately $3,218,000,
$2,205,000 and $1,369,000 in 1998, 1997, and 1996, respectively.

NOTE 9 -- SEGMENT REPORTING:

  In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. Operating segments are defined as components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision-maker directs the allocation of resources to operating segments based
on the profitability and cash flows of each respective segment. Operating
segments are the individual reporting units within the Company. These units are
managed separately, and it is at this level where the determination of resource
allocation is made.

  The units have been aggregated based on operating segments that have similar
economic characteristics and meet the aggregation criteria of SFAS 131. The
Company has determined that there are two reportable segments: Product Sales and
Service Sales. The Product Sales segment consists of organizations located
primarily in the United States, the United Kingdom, and Italy which develop,
manufacture, and/or market network access systems for use in the worldwide
wireless telecommunications market. The Service Sales segment consists of an
organization primarily located in the United States, the United Kingdom, and
Italy which provides comprehensive network services including system and program
planning and management, path design, and installation for the wireless
communications market.

  The accounting policies of the operating segments are the same as those
described in the "Summary of Significant Accounting Policies" in Note 1. The
Company evaluates performance based on operating income. Capital expenditures
for long-lived assets are not reported to management by segment and are excluded
as presenting such information is not practical. Additionally, service sales
were not introduced until 1997. As such, the Company's operations by segment are
not shown for 1996. The following tables show the operations of the Company's
operating segments (in thousands):

                                      71
<PAGE>
 
<TABLE>
<CAPTION>
For the year ended                                 Product           Service
December 31, 1998                                   Sales             Sales           Total
--------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>              <C> 
Sales                                             $151,347          $43,597          $194,944
Income (loss) from operations                      (68,031)           3,776           (64,255)
Depreciation                                        11,162              382            11,544
Total assets                                       314,333               25           314,358
Interest expense                                    (8,897)            (134)           (9,031)

<CAPTION>                                                    
For the year ended                                 Product           Service
December 31, 1997                                   Sales             Sales           Total
--------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>              <C> 
Sales                                             $190,545          $30,157          $220,702
Income from operations                              24,496            5,200            29,696
Depreciation                                         5,735              278             6,013
Total assets                                       305,505               16           305,521
Interest expense                                    (2,168)            (147)           (2,315)
</TABLE>

<TABLE> 
<CAPTION>                                                    
For the year ended                                 Product           Service
December 31, 1996                                   Sales             Sales           Total
--------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>              <C> 
Sales                                             $101,853          $19,100          $120,953
Income from operations                               8,773              151             8,924
Depreciation                                         4,938              214             5,152
Total assets                                       147,525            7,927           155,452
Interest expense                                    (1,354)            (225)           (1,579)
</TABLE> 

  A reconciliation of Income (loss) from operations to Income (loss) before
extraordinary item and income taxes (in thousands):


<TABLE>
<CAPTION>
                                                                    1998             1997              1996
                                                                 ------------      ----------        ----------    
<S>                                                              <C>               <C>               <C>           
Income (loss) from operations                                       $(64,255)         $29,696           $ 8,924       
  Interest expense                                                    (9,031)          (2,315)           (1,579)   
  Interest income                                                      1,626            1,557             1,328    
  Other income (expense), net                                           (498)           1,005             1,157    
                                                                 ------------      ----------        ----------    
Income (loss) before extraordinary item and income taxes            $(72,158)         $29,943           $ 9,830       
                                                                 ============      ==========        ==========    
</TABLE>

  The Company's product and service sales by category are as follows (in
  thousands):

<TABLE>
<CAPTION>
                                                                       1998              1997              1996
                                                                   ----------        ----------        ----------     
<S>                                                                <C>               <C>               <C>            
Microwave radio tranmission equipment                                $119,259          $156,768          $ 97,515     
Broadcast equipment                                                    25,258            21,092                 -     
Network monitoring equipment                                            6,830            12,685             4,338     
Service                                                                43,597            30,157            19,100     
                                                                   ----------        ----------        ----------
  Sales                                                              $194,944          $220,702          $120,953       
                                                                   ==========        ==========        ==========     
    </TABLE>
    
  The breakdown of sales by geographic customer destination and property, plant
and equipment, net are as follows (in thousands):

                                      72
<PAGE>
 
<TABLE>
<CAPTION>
                                                                        1998               1997               1996
                                                                    -------------      -------------      -------------
<S>                                                                 <C>                <C>                <C>           
Sales:    
  United States                                                         $  41,597          $  70,312           $ 39,530     
  United Kingdom                                                           71,399             69,201             52,415
  Europe                                                                   44,790             45,061             25,170
  Africa                                                                   19,104              6,323                  -
  Asia                                                                     18,322             15,548              3,422
  Other geographic region                                                    (268)            14,257                416
                                                                    -------------      -------------      -------------
    Totals                                                              $ 194,944          $ 220,702           $120,953     
                                                                    =============      =============      =============

<CAPTION>  
                                                                         1998               1997               1996
                                                                    -------------      -------------      -------------
<S>                                                                 <C>                <C>                <C> 
Property, plant, and equipment, net:
  United States                                                         $  30,726          $  20,785           $ 17,082         
  United Kingdom                                                            9,845              7,632                 88         
  Italy                                                                    11,317              3,773              3,399         
  Other geographic region                                                     198                123                 17         
                                                                     -------------      -------------      -------------     
   Totals                                                               $  52,086          $  32,313           $ 20,585          
                                                                     =============      =============      =============     
</TABLE>

NOTE 10 - RESTRUCTURING AND OTHER ONE-TIME CHARGES:

During 1998, the Company incurred restructuring and other one-time charges of
$4.3 million, consisting of severance benefits, and impairments of facilities,
fixed assets, and goodwill. These restructuring and other one-time charges
resulted from the consolidation of certain of the Company's facilities.
 
In addition, the Company recorded inventory reserves of $16.9 million
(including $14.5 million in inventory write downs related to the Company's
existing core business and $2.4 million in other one-time charges to inventory
relating to the elimination of product lines) which were charged to costs of
goods sold, and accounts receivable reserves of $5.4 million which were
charged to general and administrative expenses. The Company recorded these
charges in the third quarter of 1998 primarily in response to a marked
slowdown in the telecommunications industry as a whole during the third
quarter of 1998.

The $4.3 million restructuring charge consisted primarily of severance and
benefits of approximately $0.6 million, facilities and fixed assets impairments
of approximately $0.9 million, and goodwill write-offs of approximately $2.9
million.

To attempt to offset the decrease in sales, the Company laid off approximately
121 employees from the Campbell facilities and 16 employees from its Redditch,
UK facilities during September and October 1998, incurring costs of
approximately $0.6 million. All employees were properly notified of the
impending layoff in advance and were given severance pay. Each functional vice
president submitted a list of eligible employees for the reduction in force to
the Human Resources Department where a summary list was prepared. Between
November 1998 and February 1999, the Company laid off approximately 35
additional employees from the Campbell facilities. These layoffs affected most
business functions and job classes.

Due to the slowdown in sales, the Company combined certain operations and closed
its Telesys and Advanced Wireless facilities, incurring costs of approximately 
$0.9 million. Some of the employees were transferred to other business units 
while others were included in the reduction force. Facilities expenses, such as 
rent expense, were expensed, and certain fixed assets at closed locations were 
written down. In addition, goodwill created through acquisitions of these 
business units was written off in the restructuring charge. During 1998, the 
Company's operations in Florida were moved into more suitable facilities and the
Company expensed the remaining lease payments on the original building.

The Company sold a segment of its Geritel operations to a former owner and wrote
off the remaining goodwill created in the original purchase, approximately $1.6 
million. The Company continues to operate its Geritel facility, but does not use
the technology originally purchased during the acquisition. The Company also 
wrote off the remaining goodwill of ACS because the designs were superseded by 
the overlap of product families acquired in the Cylink Wireless Group 
acquisition. The remaining goodwill created in the ACS acquisition, 
approximately $1.2 million, was written off.

The Company responded to a weakness in sales for the industry at the end of the 
second quarter by reviewing its inventory and increasing its reserve by 
approximately $16.9 million. The inventory reserve included an excess and 
obsolete reserve of approximately $4.5 million, $2.0 million reserve for the 
write-off relating to the overlap of product families resulting from the Cylink 
Wireless Group acquisition, rework charges of approximately $4.3 million for the
rework of excess semi-custom finished goods that were configured for specific 
customers or for frequencies developed for specific geographical regions, 
approximately $1.1 million for products that have been redesigned and are old 
revisions, and a general inventory reserve of approximately $5.0 million for 
potential excess inventory caused by a slowdown in the industry.

During the second half of 1998, the Company experienced cancelled purchase 
orders due to currency fluctuations, and the stronger dollar caused the 
Company's customers to delay payments on equipment that had already been 
shipped. As such, the Company increased its accounts receivable reserves by $5.4
million during the third quarter of 1998.

The Company expects to benefit from these restructuring and other one-time 
charges in future quarters by reducing fixed costs and future cash requirements.

The accrued restructuring and other one-time charges and amounts charged against
the accrual as of December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                         Beginning         Expenditures      Remaining        
                                                                          Accrual          and Write-offs     Accrual       
          <S>                                                            <C>               <C>               <C>            
          Severance and benefits                                         $   568            $   (568)        $     -        
          Facilities and fixed asset impairments                             879                (519)            360        
          Goodwill impairment                                              2,884              (2,884)              -        
          Inventory reserve                                               16,922              (7,360)          9,562        
          Accounts receivable reserve                                      5,386              (3,609)          1,777        
                                                                         -------            --------         -------        
          Total accrued restructuring and other one-time charges         $26,639            $(14,940)        $11,699    
                                                                         =======            ========         =======         
</TABLE>
NOTE 11 - CONTINGENCIES

The Company is a defendant in several class action lawsuits in which the
plaintiffs are alleging various federal and state securities laws violations by
the Company and certain of its officers and directors. The plaintiffs seek
unspecified damages based upon the decrease in market value of shares of the
Company's Common Stock. While management believes the actions are without merit
and intends to defend them vigorously, all of these proceedings are at the very
early stage and the Company is unable to speculate on their ultimate outcomes.
However, the ultimate results of the matters described above could have a
material adverse effect on the Company's results of operations or financial
position either through the defense or results of such litigation.

NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

  The Company believes that its measurement of the charge related to the fair
value of the in-process research and development ("IPR&D") acquired in its
acquisition of the assets of the Cylink Wireless Group and that was recorded at
the time of the acquisition was made in a manner consistent with widely
recognized appraisal practices that were being utilized at the time of
acquisition. Subsequent to the acquisition, in a letter dated September 15, 1998
to the American Institute of Certified Public Accountants, the Chief Accountant
of the Securities and Exchange Commission ("SEC") expressed views of the SEC
staff that took issue with certain appraisal practices employed by companies in
the determination of the fair value of the IPR&D that was the basis for the
Company's measurement of its IPR&D charge. Accordingly, the Company has resolved
to adjust the amount originally allocated to acquired IPR&D in a manner to
reflect the SEC staff's views and to restate its first, second, and third
quarter 1998 consolidated financial statements. As a result, the first quarter
charge for acquired IPR&D was decreased from $33.9 million previously recorded
to $15.4 million, a decrease of $18.5 million ($12.2 million, net of applicable
income taxes) with a corresponding increase in goodwill and other intangibles
and related amortization in subsequent quarters. Amortization of goodwill and
other intangible assets increased $841,000 ($556,000, net of applicable income
taxes) per quarter for the second, third and
fourth quarters of 1998.

  In addition to the IPR&D adjustment, in the third quarter of 1998, the 
Company recorded an adjustment to its income tax benefit of $2.3 million to 
reflect, based on facts and circumstances available as of September 30, 1998, 
a revised effective tax rate.

  As a result of the Company's decision to restate its first, second and third
quarter 1998 consolidated financial statements, quarterly financial data is
presented as originally reported and as restated below (in thousands, except per
share data):

<TABLE> 
<CAPTION> 
                                                            Three Months Ended
                             ----------------------------------------------------------------------------------------
                               Sep. 30        Sept. 30       June 30        June 30        March 31       March 31
                                 1998           1998           1998           1998           1998           1998
                             (As Restated)  (As Reported)  (As Restated)  (As Reported)  (As Restated)  (As Reported)
                             -------------  -------------  -------------  -------------  -------------  -------------
<S>                          <C>            <C>            <C>            <C>            <C>            <C> 
Sales                             $ 30,240       $ 30,240        $63,459        $63,459        $58,637       $ 58,637
                                                                                                             
Gross profit (deficit)            $(11,461)      $(11,461)       $24,719        $24,719        $25,125       $ 25,125
                                                                                                             
Net income (loss)                 $(40,696)      $(42,122)       $  (210)       $   346        $(5,097)      $(17,249)
                                                                                                             
Income (loss) per share:                                                                                     
     Basic                        $  (0.94)      $  (0.97)       $  0.00        $  0.01        $ (0.12)      $ (0.40)
     Diluted                      $  (0.94)      $  (0.97)       $  0.00        $  0.01        $ (0.12)      $ (0.40)
</TABLE> 

<PAGE>
SCHEDULE II
                                  P-COM, INC.
                       VALUATION AND QUALIFYING ACCOUNTS
                 Years ended December 31, 1996, 1997, and 1998
                                (in thousands)
<TABLE> 
<CAPTION> 

                                                      Additions
                                                      Charged to
                                       Balance at     Statement       Deductions    Balance at
                                       Beginning      of              from          end of
                                       of Period      Operations      Reserves      Period
                                       -----------    -----------     -----------  -----------    
<S>                                    <C>            <C>             <C>           <C>                                   
Allowance for doubtful accounts:
  Year ended December 31, 1996                257          1,658            -           1,915

  Year ended December 31, 1997              1,915            810           (204)        2,521
                                                                                
  Year ended December 31, 1998              2,521         10,892         (3,822)        9,591


Sales returns reserves:
  Year ended December 31, 1996                  0          1,042            -           1,042

  Year ended December 31, 1997              1,042          3,743            -           4,785

  Year ended December 31, 1998              4,785         13,298         (8,583)        9,500
</TABLE> 

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND   
          FINANCIAL DISCLOSURE.                                             
                                                                            
        Not applicable.                                                     
                                                                            
                                      73                                    
 
<PAGE>
 
                                   PART III
                                   --------

ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT.

   The information required by this item relating to the Company's executive
officers and directors is included under the caption "Executive Officers and
Directors" in Part I of this Form 10-K Annual Report.

ITEM 11.  EXECUTIVE COMPENSATION AND RELATED INFORMATION.

   The following table provides certain information summarizing the compensation
earned, by (i) the Company's Chief Executive Officer and (ii) each of the
Company's other four executive officers whose salary and bonus for the fiscal
year ended December 31, 1998 (the "1998 Fiscal Year") was in excess of $100,000
(collectively, the "Named Executive Officers"), for services rendered in all
capacities to the Company and its subsidiaries for each of the last three fiscal
years. No other executive officer who would otherwise have been included in such
table on the basis of salary and bonus earned for the 1998 Fiscal Year resigned
or terminated employment during that fiscal year.

                          SUMMARY COMPENSATION TABLE

<TABLE> 
<CAPTION>
                                                                                             Number of
                                                                  Annual                     Securities
                                                                                            ------------
                                                               Compensation                   Long-Term  
                                                       --------------------------------       
                                                                                            Compensation
           Name and Principal Position                 Year   Salary($)/(1)/   Bonus($)        Awards
           ---------------------------                 ----   --------------   --------     ------------
    <S>                                                <C>    <C>              <C>          <C>
    George P. Roberts............................      1998       366,600            0         450,000
     Chief Executive Officer                           1997       330,069      358,000         300,000
     and Chairman of the Board of Directors            1996       250,000      162,500         570,000

    Pier Antoniucci..............................      1998       270,855            0         200,000
     President and Chief                               1997       244,962      165,000         200,000
     Operating Officer                                 1996       165,769       81,900         300,000

    Michael Sophie...............................      1998       195,000            0         200,000
     Chief Financial Officer,                          1997       175,673      109,000         150,000
     Vice President, Finance and                       1996       117,308       48,750         220,000
     Administration

    John Wood....................................      1998       141,278            0          45,000
     Senior Vice President, Technology                 1997       147,421       28,980          10,000
                                                       1996       138,000       44,850          10,000
 
    Kenneth E. Bean, II..........................      1998       107,250            0          90,000
     Senior Vice President, Quality Assurance          1997       109,462       25,000          60,000
                                                       1996        93,000       30,225               0
</TABLE>

_____________________
/(1)/  Includes amounts deferred under the Company's 401(k) Plan.

                                      74
<PAGE>
 
OPTION GRANTS IN 1998 FISCAL YEAR

   The following table contains information concerning the stock option grants
made to each of the executive officers named in the Summary Compensation Table
for the 1998 Fiscal Year. No stock appreciation rights were granted to these
individuals during such fiscal year.

<TABLE>
<CAPTION>
                                                                    Individual Grant
                                 ------------------------------------------------------------------------------------------
                                     Number of    % of Total                                                    
                                    Securities     Options                                     Potential Realizable
                                    Underlying    Granted to                               Value at Assumed Annual Rates       
                                      Options     Employees      Exercise                 of Stock Price Appreciation for         
                                      Granted     in Fiscal       Price     Expiration           Option Term /(1)/
                                                                                              ----------------------
             Name                      (#)           Year         ($/Sh)       Date             5%($)        10%($) 
             ----                   ----------    ----------     --------   ----------        ---------    ---------
   <S>                           <C>              <C>            <C>        <C>           <C>              <C> 
   George P. Roberts ..........    416,667/(2)/       6.49         3.00      09/17/08          786,118     1,992,179 
                                    33,333/(2)/        .52         3.00      09/17/08           62,889       259,372
   Pier Antoniucci ............    166,667/(2)/       2.59         3.00      09/17/08          314,448       796,873
                                    33,333/(2)/        .52         3.00      09/17/08           62,889       259,372
   Michael Sophie .............    166,667/(2)/       2.59         3.00      09/17/08          314,448       796,873
                                    33,333/(2)/        .52         3.00      09/17/08           62,889       259,372
   John R. Wood ...............     33,245/(2)/        .52         3.00      09/17/08           62,733       158,952
                                    11,755/(2)/        .18         3.00      09/17/08           22,178        56,203
   Kenneth E. Bean, II ........     42,667/(2)/        .66         3.00      09/17/08           80,499       204,001
                                    47,333/(2)/        .74         3.00      09/17/08           89,302       226,310 
</TABLE>
                                                                               
____________________
/(1)/  There can be no assurance provided to any executive officer or any other
       holder of the Company's securities that the actual stock price
       appreciation over the ten-year option term will be at the assumed 5% and
       10% levels or at any other defined level. Unless the market price of the
       Common Stock appreciates over the option term, no value will be realized
       from the option grants made to the executive officers.
/(2)/  Each option is immediately exercisable for all the option shares, but any
       shares purchased under the option will be subject to repurchase by the
       Company, at the option exercise price paid per share, should the
       individual cease service with the Company prior to vesting in those
       shares. Twenty-five percent (25%) of the option shares will vest upon the
       optionee's continuation in service through one year following the grant
       date and the balance of the shares will vest in thirty-six (36)
       successive equal monthly installments upon the optionee's completion of
       each of the next thirty-six (36) months of service thereafter. The shares
       subject to the option will immediately vest in full should (i) the
       Company be acquired by merger or asset sale in which the option is not
       assumed or replaced by the acquiring entity or (ii) the optionee's
       employment be involuntarily terminated within eighteen (18) months after
       certain changes in control or ownership of the Company. The grant date
       for all of these options to purchase shares of the Company's Common Stock
       was September 18, 1998.

                                      75
<PAGE>
 
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES

   The table below sets forth certain information with respect to the Company's
Chief Executive Officer and the other executive officers named in the Summary
Compensation Table concerning the exercise of options during the 1998 Fiscal
Year and unexercised options held by such individuals as of the end of such
fiscal year.  No SARs were exercised during the 1998 Fiscal Year, nor were any
SARs outstanding at the end of such fiscal year.

<TABLE>
<CAPTION> 
                                        Aggregate          Number of Securities                  Value of Unexercised 
                             Shares       Value           Underlying Unexercised                in-the-Money Options at     
                          Acquired on    Realized          Options at FY-End(#)                      FY-End(1) 
                                                     --------------------------------     ---------------------------------
       Name               Exercise(#)    ($)(2)      Exercisable(3)    Unexercisable     Exercisable($)   Unexercisable($) 
    ----------            -----------   ---------    ----------------   -------------     --------------   ----------------
<S>                       <C>           <C>          <C>                <C>               <C>              <C> 
George P. Roberts            60,000     1,171,875       1,206,457          206,875            712,635              0
Pier Antoniucci             120,000     1,668,296         507,793          121,875            208,207              0
Michael Sophie               79,759       781,632         417,770           70,000            201,243              0
John R. Wood                 53,332     1,075,240          98,541            6,459             44,280              0
Kenneth E. Bean, II           8,194        92,956         137,014           37,918             89,036              0
</TABLE>

__________________
(1)   Based on the fair market value of the option shares at the 1998 Fiscal
      Year-end ($3.984 per share based on the closing selling price on the
      Nasdaq National Market as of December 31, 1998) less the exercise price.
(2)   Based on the fair market value of the shares on the exercise date less the
      exercise price paid for those shares.
(3)   The exercisable options are immediately exercisable for all the option
      shares. However, any shares purchased under the options are subject to
      repurchase by the Company, at the original exercise price paid per share,
      upon the optionee's cessation of service prior to vesting in such shares.
      As of December 31, 1998, the following number of shares were unvested: Mr.
      Roberts--892,292 shares; Mr. Antoniucci--478,126 shares; Mr. Bean--138,542
      shares; Mr. Sophie--405,206 shares; and Mr. Wood--59,586 shares.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE OF
CONTROL AGREEMENTS

   The Compensation Committee of the Board of Directors, as Plan Administrator
of the 1995 Stock Option/Stock Issuance Plan, has the authority to provide for
accelerated vesting of the shares of Common Stock subject to any outstanding
options held by the Chief Executive Officer and any other executive officer or
any unvested share issuances actually held by such individual, in connection
with certain changes in control of the Company or the subsequent termination of
the officer's employment following the change in control event.

   The Company has entered into severance agreements (the "Agreements") with
George Roberts, Chairman of the Board of Directors and Chief Executive Officer,
Pier Antoniucci, President and Chief Operating Officer, and Michael Sophie,
Chief Financial Officer and Vice President, Finance and Administration
(individually, the "Officer" and collectively the "Officers"), each dated
December 15, 1997.  Each of these Agreements provides for the following benefits
should the Officer's employment terminate, either voluntarily or involuntarily,
for any reason within twenty-four (24) months following a Change in Control: (a)
a severance payment in an amount equal to two (2) times his annual rate of base
salary; (b) a bonus in an amount equal to the greater of either (i) two (2)
times the full amount of the Officer's target bonus for the fiscal year in which
the termination occurs or (ii) two (2) times the full amount of his target bonus
for the fiscal year in which a Change in Control occurs; (c) the shares subject
to each outstanding option held by the Officer (to the extent not then otherwise
fully vested) will automatically vest so that each such option will become
immediately exercisable for all the option shares as fully-vested shares
(notwithstanding anything in this Proxy Statement to the contrary); and (d) the
Company will, at its own expense, provide (i) both Messrs. Sophie and Antoniucci
and their respective dependents with continued health care coverage for a period
of up to twenty-four (24) months following their termination of employment, and
(ii) Mr. Roberts and his dependents continued health care coverage for life. A
Change in Control will be deemed to occur under the Agreements upon: (a) a
merger or consolidation in which securities possessing fifty percent (50%) or
more of the total combined voting power of the Company's outstanding securities
are transferred to person or persons different from the persons holding those
securities immediately prior to such transaction, (b) the sale, transfer or
other disposition of all or substantially all of the assets of the Company in
complete liquidation or dissolution of the Company; (c) a hostile take-over of
the Company, whether effected through a tender offer for more than twenty-five
percent (25%) of the Company's outstanding voting securities or a change in the
majority of the Board by one or more contested elections for Board membership;
or (d) the 

                                      76
<PAGE>
 
acquisition, directly or indirectly by any person or related group of persons
(other than the Company or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Company), of beneficial
ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934) of securities possessing more than thirty percent (30%) of the total
combined voting power of the Company's outstanding securities pursuant to a
tender or exchange offer made directly to the Company's stockholders. In
addition, each Officer will be entitled to a full tax gross-up to the extent one
or more of the severance benefits provided under his Agreement are deemed to
constitute excess parachute payments under the federal income tax laws.

   The Company does not have any existing agreements with the Chief Executive
Officer or any other executive officer named in the Summary Compensation Table
that establish a specific term of employment for them, and their employment may
accordingly be terminated at any time at the discretion of the Board of
Directors.  The Compensation Committee of the Board of Directors has the
authority as Plan Administrator of the 1995 Plan to provide for the accelerated
vesting of the shares of Common Stock subject to outstanding options held by the
Company's executive officers, whether granted under that plan or any predecessor
plan, in the event their employment were to be terminated (whether involuntarily
or through a forced resignation) following certain changes in control or
ownership of the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

   The Compensation Committee of the Company's Board of Directors currently
consists of Mr. Cogan and Mr. Hawkins.  Neither of these individuals was an
officer or employee of the Company at any time during the 1998 Fiscal Year or at
any other time.

   No current executive officer of the Company has ever served as a member of
the board of directors or compensation committee of any other entity that has or
has had one or more executive officers serving as a member of the Company's
Board of Directors or Compensation Committee.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

   The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of February
28, 1999, by (i) all persons who are beneficial owners of five percent (5%) or
more of the Company's Common Stock, (ii) each director and nominee for director,
(iii) the executive officers named in the Summary Compensation Table of the
Executive Compensation and Related Information section of this Annual Report on
Form 10-K and (iv) all current directors and executive officers as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned, subject to
community property laws, where applicable.

                                      77
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                      Percentage   
                                                                                 Shares               of Shares    
                                                                              Beneficially           Beneficially  
                            Beneficial Owner                                    Owned (#)             Owned (1)    
                            ----------------                                  -------------         -------------- 
<S>                                                                           <C>                   <C>            
Wellington Management Company, L.L.C./2/ .................................       2,272,400                5.22     
       75 State Street                                                                                             
       Boston, MA 02109                                                                                            
Pilgrim Baxter & Associates, Ltd /3/......................................       3,109,860                7.14     
       825 DuPortail Road                                                                                          
       Wayne, PA  19087                                                                                            
State of Wisconsin Investment Board /4/...................................       2,659,200                6.11     
       P.O. Box 7842                                                                                               
       Madison, WI 53707                                                                                           
Entities deemed to be affiliated with                                                                              
Putnam Investments, Inc. /5/..............................................       3,353,661                7.70     
       One Post Office Square                                                                                      
       Boston, MA 02109                                                                                            
George P. Roberts /6 .....................................................       1,473,009                3.29     
Pier Antoniucci /7/.......................................................         591,808                1.34     
Michael J. Sophie /8/.....................................................         431,750                  *      
John R. Wood /9 ..........................................................         164,769                  *      
Kenneth E. Bean, II /10/..................................................         143,623                  *      
M. Bernard Puckett /11/...................................................         101,332                  *      
Gill Cogan /12/...........................................................          58,564                  *      
John A. Hawkins /13/......................................................          30,000                  *      
James J. Sobczak /14/.....................................................          44,000                  *      
All current directors and executive officers as a group (9 persons) /15/..       3,034,055                6.58      
</TABLE>

_____________________                                        
*    Less than one percent of the outstanding Common Stock
(1)  Percentage of ownership is based on 43,532,000 shares of Common Stock
     outstanding on February 28, 1999. Shares of Common Stock subject to stock
     options that are currently exercisable or will become exercisable within 60
     days after February 28, 1999 are deemed outstanding for computing the
     percentage of the person or group holding such options, but are not deemed
     outstanding for computing the percentage of any other person or group.
(2)  Pursuant to a Schedule 13G dated January 24, 1998 filed with the Securities
     and Exchange Commission, Wellington Management Company, L.L.C. has reported
     that as of January 24, 1998 it had shared power to vote or to direct the
     vote of 972,400 shares and shared power to dispose or to direct the
     disposition of all of the shares.
(3)  Pursuant to a Schedule 13G/A dated February 13, 1998, filed with the
     Securities and Exchange Commission, Pilgrim Baxter & Associates, Ltd.
     reported that as of December 31, 1997 it had sole voting power over
     2,487,960 shares, shared voting power over all 3,109,860 shares and sole
     dispositive power over all 3,109,860 shares.
(4)  Pursuant to a Schedule 13G dated February 1, 1999, filed with the
     Securities and Exchange Commission, the State of Wisconsin Investment Board
     reported that as of February 1, 1999 it had sole voting power over all
     2,659,200 shares and sole dispositive power over all shares.
(5)  Pursuant to a Schedule 13G/A dated January 16, 1998, filed with the
     Securities and Exchange Commission, Putnam Investments, Inc., on its own
     behalf and on behalf of Marsh & McLennan Companies, Inc., Putnam Investment
     Management, Inc. and the Putnam Advisory Company, Inc. reported that as of
     January 16, 1998 it had shared voting power over 91,100 shares and shared
     dispositive power over all 3,353,661 shares.
(6)  Includes 1,247,707 shares issuable upon exercise of options that are
     currently exercisable or will become exercisable within 60 days after
     February 28, 1999.
(7)  Includes 530,732 shares issuable upon exercise of options that are
     currently exercisable or will become exercisable within 60 days after
     February 28, 1999.

                                      78
<PAGE>
 
(8)  Includes 429,436 shares issuable upon exercise of options that are
     currently exercisable or will become exercisable within 60 days after
     February 28, 1999.
(9)  Includes 99,374 shares issuable upon exercise of options that are currently
     exercisable or will become exercisable within 60 days after February 28,
     1999.
(10) Includes 142,430 shares issuable upon exercise of options that are
     currently exercisable or will become exercisable within 60 days after
     February 28, 1999.
(11) Includes 81,332 shares issuable upon exercise of options that are currently
     exercisable or will become exercisable within 60 days after February 28,
     1999.
(12) Includes 8,000 shares issuable upon exercise of options that are currently
     exercisable or will become exercisable within 60 days after February 28,
     1999.
(13) Includes 30,000 shares issuable upon exercise of options that are currently
     exercisable or will become exercisable within 60 days after February 28,
     1999.
(14) Includes 44,000 shares issuable upon exercise of options that are currently
     exercisable or will become exercisable within 60 days after February 28,
     1999.
(15) Includes 2,613,011 shares issuable upon exercise of options that are
     currently exercisable or will become exercisable within 60 days after
     February 28, 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

  In addition to the indemnification provisions contained in the Company's
Restated Certificate of Incorporation and Bylaws, the Company has entered into
separate indemnification agreements with each of its directors and officers.
These agreements require the Company, among other things, to indemnify such
director or officer against expenses (including attorneys' fees), judgments,
fines and settlements (collectively, "Liabilities") paid by such individual in
connection with any action, suit or proceeding arising out of such individual's
status or service as a director or officer of the Company) other than
Liabilities arising from the willful misconduct or conduct that is knowingly
fraudulent or deliberately dishonest) and to advance expenses incurred by such
individual in connection with any proceeding against such individual with
respect to which such individual may be entitled to indemnification by the
Company.

  Mr. Roberts' adult son and Mr. Antoniucci's adult daughter each holds a
minority interest in a private company that supplies synthesizers to the Company
for use in its products. To date, the Company has purchased approximately $10.2
million of synthesizers from such supplier, including approximately $965,000 in
1998 which is down from $2.3 million in 1997. Sales of synthesizers to the
Company, for fiscal year 1998, accounted for 62% of the sales of such supplier,
the terms of the Company's purchase agreement with such supplier are no less
favorable to the Company than could be obtained from an unaffiliated third party
supplier. The Company also purchases synthesizers from Geritel, S.p.A.,
Communication Techniques, Inc. and SPC Electronics Corp. at competitive prices
approximately equal to those of such suppler. Each such adult is financially
independent of his or her parent and resides at a different address from his or
her parent.

  All future transactions between the Company and its officers, directors,
principal stockholders and affiliates will be approved by a majority of the
independent and disinterested members of the Board of Directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.

                                      79
<PAGE>
 
                                    PART IV
                                    -------

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)  The following documents are filed as part of this Annual Report on Form 10-
     K:

     1.  Financial Statements. The following Consolidated Financial Statements
     of P-Com, Inc. and its subsidiaries are included in Item 9 of this Annual
     Report on Form 10-K:

<TABLE> 
<CAPTION> 
     Form 10K                                                                           Page Number
                                                                                        -----------
<S>                                                                                     <C> 
FINANCIAL STATEMENTS:
     Report of Independent Accountants...............................................       51
     Consolidated Balance Sheets at December 31, 1998 and 1997.......................       52
     Consolidated Statements of Operations for the years ended December 31,
      1998, 1997 and 1996............................................................       53
     Consolidated Statements of Stockholders' Equity for the years ended
      December 31, 1998, 1997, and 1996..............................................       54
     Consolidated Statements of Cash Flows for the years ended December 31,
      1998, 1997 and 1996............................................................       55
     Notes to Consolidated Financial Statements......................................       56
FINANCIAL STATEMENT SCHEDULE:
     Schedule II - Valuation and Qualifying Accounts.................................       73
</TABLE> 

     All other schedules have been omitted since they are either not required,
     are not applicable, or the required information is shown in the financial
     statements or related notes.

(b)  Reports on Form 8-K

     Report on Form 8-K dated October 5, 1998, regarding the Company's amendment
     to the Rights Agreement between the Company and BankBoston, N.A., as Rights
     Agent, as filed with the Securities and Exchange Commission on October 15,
     1998.

     Report on Form 8-K dated October 22, 1998, regarding the Company's press
     release announcing its earnings for the quarter ended September 30, 1998,
     as filed with the Securities and Exchange Commission on October 23, 1998.

     Report on Form 8-K dated December 21, 1998, regarding the Company's press
     release announcing its agreement to sell a $15 million equity investment to
     three investors, Castle Creek Partners, L.L.C., Marshall Capital Management
     and Heights Capital Management, as filed with the Securities and exchange
     Commission on December 23, 1998.

     Report on Form 8-K dated December 21, 1998, regarding the Company's sale of
     $15 million equity investment to three investors, Castle Creek Partners,
     L.L.C., Marshall Capital Management and Heights Capital Management and the
     departure of one of the Company's executive officers, as filed with the
     Securities and Exchange Commission on December 24, 1998.

     Report on Form 8-K dated December 30, 1998, regarding the Company's
     exchange of an aggregate of $9,150,000 of its 4 1/4% Convertible
     Subordinated Notes due 2002 for an aggregate of 1,670,000 shares of common
     stock, as filed with the Securities and Exchange Commission on December 31,
     1998.

     Report on Form 8-K dated December 31, 1998, regarding the Company's
     exchange of an aggregate of $5,200,000 of its 4 1/4% Convertible
     Subordinated Notes due 2002 for an aggregate of 797,000 shares of common
     stock, as filed with the Securities and exchange commission on January 4,
     1999.

                                      80
<PAGE>
 
(c)  Exhibits - See Exhibit list below.

       NUMBER            DESCRIPTION
       ------            ----------- 
       2.1(6)      Agreement dated April 15, 1996, by and among the Company, Mr.
                   Giovanni Marciano and certain other parties named thereunder.
            
       2.2(7)      Asset Purchase Agreement dated as of August 2, 1996, by and
                   between the Company, Atlantic Communication Sciences, Inc.
                   and Edward c. Gerhardt, L. Roger Sanders, Charles W.
                   Richards, IV, Grover W. Brower, William M. Koos, Jr., Larry
                   W. Koos, Koos Technical Services, Inc., the Edward C.
                   Gerhardt Trust. U/A dated June 22, 1988 and the L. Roger
                   Sanders Revocable Trust, U/A dated June 18, 1991.
            
       2.2A(8)     Asset Purchase Agreement revised as of August 23, 1996 by and
                   between the Company, Atlantic Communication Sciences, Inc.
                   and Edward C. Gerhardt, L. Roger Sanders, Charles W.
                   Richards, IV, Grover W. Brower, William M. Koos, Jr., Larry
                   W. Koos, Koos Technical Services, Inc., the Edward C.
                   Gerhardt Trust, U/A dated June 22, 1988 and the L. Roger
                   Sanders Revocable Trust, U/A dated June 18, 1991.
            
       2.3(19)     Escrow Agreement dated November 28, 1997, by and among P-Com,
                   Inc., P-Com Field Services Inc., Telematics Inc. and Daniel
                   N. Carter.
            
       2.4(19)     Registration Rights Agreement, dated November 17, 1997, by
                   and among P-Com Field Services Inc., Telematics Inc. and
                   Daniel N. Carter.
            
       2.5(19)     Escrow Agreement, dated November 28, 1997, by and among P-
                   Com, Inc., P-Com Services (UK) Limited and R T Masts Limited.

       2.6(19)     Securities Purchase Agreement, dated November 17, 1997, by
                   and among P-Com, Inc., P-Com Field Services Inc., Telematics
                   Inc. and Daniel N. Carter.
            
       2.7(19)     Share Purchase Agreement, dated October 14, 1997, by and
                   among P-Com, Inc., P-Com Services (UK) Limited and R T Masts
                   Limited.
            
       2.8(20)     Asset Purchase Agreement dated March 13, 1998, by and between
                   P-Com, Inc. and Cylink Corporation
            
       2.8A(20)    Amendment to the Asset Purchase Agreement dated March 13,
                   1998 by and between P-Com, Inc. and Cylink Corporation.
            
       2.8B(20)    Amendment No. 2 to the Asset Purchase Agreement dated March
                   27, 1998 by and between P-Com, Inc. and Cylink Corporation.
            
       2.8C(20)    Unsecured Subordinated Promissory Note
            
       3.2(3)      Restated Certificate of Incorporation filed on March 9, 1995.
            
       3.2A(14)    Certificate of Amendment of Restated Certificate of
                   Incorporation filed on June 16, 1997.
            
      *3.2B(16)    Certificate of Designation for the Series A Junior
                   Participating Preferred Stock, as filed with the Delaware
                   Secretary of State on October 8, 1997.

       3.2C(23)    Certificate of Designation of the Series A Junior
                   Participating Preferred Stock, as filed with the Delaware
                   Secretary of State on December 21, 1998.
            
       3.2D(23)    Certificate of Designation for the Series B Convertible
                   Participating Preferred Stock, as filed with the Delaware
                   Secretary of State on December 21, 1998.
            
       3.2E(23)    Certificate of Correction of Certificate of Designations for
                   the Series B Convertible Participating Preferred Stock, as
                   filed with the Delaware Secretary of State on December 23,
                   1998.
            
       *3.3(1)     Bylaws of the Company.

                                      81
<PAGE>
 
   NUMBER            DESCRIPTION
   ------            ----------- 
   4.1(1)      Form of Common Stock Certificate.
             
   4.2(18)     Indenture, dated as of November 1, 1997, between the Registrant
               and State Street Bank and Trust Company of California, N.A., as
               Trustee.
             
   4.4(18)     Registration Rights Agreement, dated as of November 1, 1997 by
               and among the Registrant and PaineWebber Incorporated,
               BancAmerica Robertson Stephens, NationsBanc Montgomery
               Securities, Inc. and Pacific Growth Equities, Inc.
             
   4.5(17)     Rights Agreement, dated as of October 1, 1997, between the
               Company and BankBoston, N.A., which includes the form of
               Certificate of Designation for the Series A Junior Participating
               Preferred Stock as Exhibit A, the form of Right Certificate as
               Exhibit B and the Summary of Rights to Purchase Preferred Shares
               as Exhibit C.
             
   4.6(22)     First Amendment to the Rights Agreement, dated as of October 5,
               1998, between the Company and BankBoston, N.A.
             
   4.7(23)     Amended and Restated Rights Agreement, dated as of December 18,
               1998 between the Company and BankBoston, N.A.
             
   4.8(23)     Amended and Restated Rights Agreement, dated as of December 21,
               1998 between the Company and BankBoston, N.A.
             
   *10.1(1)    Purchase Order issued by AT&T Network Systems Deutschland GmbH,
               dated December 7, 1994.
             
   *10.2(1)    Purchase Order issued by AT&T Network Systems Deutschland GmbH,
               dated December 19, 1994.
             
   *10.3(1)    Master OEM Agreement dated January 1, 1995, by and between the
               Company and AT&T Corp.
             
   *10.4(1)    Purchase Order issued by AT&T Network Systems Nederland BV, dated
               December 9, 1994.
             
   *10.5(1)    Amendment to Purchase Order issued by AT&T Network Systems
               Nederland BV, dated December 22, 1994.
             
   *10.6(1)    NSD Master Purchase Order issued by AT&T Network Systems
               Deutschland GmbH, dated December 23, 1994.
             
   *10.7(1)    Purchase Agreement dated August 29, 1994, by and between the
               Company and Harris Corporation--Farinon Division.
             
   *10.8(1)    Contract for Supply of 50 GHz Radio dated June 4, 1994, by and
               between the Registrant and Mercury Communications Ltd.
             
   *10.9(1)    Manufacturing Agreement dated July 13, 1994, by and between the
               Company and SPC.
             
   *10.10(1)   Manufacturing Agreement dated April 20, 1994, by and between the
               Company and Comptronix Corporation (assigned to Sanmina
               Corporation).
             
   *10.11(1)   Agreement dated November 11, 1994, by and between the Company and
               WinStar Wireless, Inc.
             
   10.12(1)    Master Lease Agreement dated November 9, 1992, by and between the
               Company and Dominion; First Amendment to Master Lease Agreement
               dated June 23, 1993, by and between the Company and Dominion.
             
   10.13(1)    Master Equipment Lease entered into by and between the Company
               and Phoenix Leasing Incorporated on August 10, 1994.
             
   *10.14(1)   Commitment Letter dated January 10, 1995, by and between the
               Company and Applied Telecommunications Technologies, Inc.
               ("ATTI"), including form of Master Lease to be entered into
               between the Company and ATTI.

                                      82
<PAGE>
 
  NUMBER            DESCRIPTION
  ------            ----------- 
  *10.15D      Accounts Receivable Purchase Agreement dated December 31, 1997 by
               and between the Company and Wells Fargo MCBC Trade Bank N.A.
            
  10.16(21)    1995 Stock Option/Stock Issuance Plan, as amended.
            
  10.16A(7)    1995 Stock Option/Stock Issuance Plan, including forms of Notices
               of Grant of Automatic Stock Option for initial grant and annual
               grants and Automatic Stock Option Agreement, as amended.
            
  10.16B(13)   1995 Stock Option/Stock Issuance Plan, including forms of Notices
               of Grant of Automatic Stock Option for initial grant and annual
               grants and Automatic Stock Option Agreement, as amended.
            
  *10.17(21)   Employee Stock Purchase Plan, as amended.
            
  *10.18(1)    Form of Indemnification Agreement by and between the Company and
               each of its officers and directors and a list of signatories.
            
  10.19A       Service Agreement dated December 15, 1997 by and between the
               Company and Mr. George P. Roberts.
            
  10.19B       Service Agreement dated December 15, 1997 by and between the
               Company and Mr. Michael J. Sophie.
            
  10.19C       Service Agreement dated December 15, 1997 by and between the
               Company and Mr. Pier Antoniucci.
            
  *10.21(1)    Real Property Lease dated December 10, 1993, by and between the
               Company and Bryan T.D. Trust, pertaining to 3175 S. Winchester
               Boulevard, Campbell, California 95008.
            
  *10.22(1)    Low Capacity Digital Radio Product Agreement dated February 13,
               1995 by and between the Company and Siemens.
            
  *10.22A      Low Capacity Digital Radio Agreement dated February 13, 1995 by
               and between the Company and Itatel.
            
  *10.23(3)    Sublease dated May 1, 1995 by and between the Company and
               Medallion Mortgage Company.
            
  *10.24(4)    Lease dated August 4, 1995 by and between P-COM United Kingdom,
               Inc. and Capital Counties plc; Rent Deposit Deed dated August 4,
               1995, by and between P-Com United Kingdom, Inc. and Capital
               Counties plc.
            
  *10.25(2)    Underwriting Agreement dated March 2, 1995 by and between the
               Company and the underwriters named therein.
            
  *10.26(5)    Underwriting Agreement dated August 17, 1995 by and between the
               Company and the underwriters named therein.
            
  *10.27(9)    Lease dated November 11, 1995 by and between the Company, Inc.
               and Johann Birkart, Internationale Spedition GmbH & Co.
            
  10.30A(11)   Loan Agreement dated March 3, 1997 by and between the Company and
               Union Bank of California, N.A.
            
  10.30B(11)   Amendment dated May 7, 1997 to the Loan Agreement dated March 3,
               1997 by and between the Company and Union Bank of California,
               N.A.
            
  10.30C(13)   Amended and Restated Loan Agreement dated September 17, 1997 by
               and between the Company and Union Bank of California, N.A.
            
  10.31(21)    Credit Agreement among P-Com, Inc. as the Borrower, Union Bank of
               California N.A., as Administrative Agent, Bank of America
               National Trust and Savings Association as Syndication Agent and
               the Lenders party hereto dated as of May 15, 1998.
            
  10.32(21)    Revolving Promissory Note in the principal amount of $25,000,000
               dated May 15, 1998.

                                      83
<PAGE>
 
     NUMBER            DESCRIPTION
     ------            ----------- 
     10.33(21)   Revolving Promissory Note in the principal amount of
                 $25,000,000 dated May 15, 1998.

     10.34(21)   Subsidiary Guarantee dated as of May 15, 1998.
              
     10.35(21)   Joint Development and License Agreement between Siemens
                 Aktiengesellschaft and P-Com, Inc. dated June 30, 1998.
              
     10.36(21)   International Employee Stock Purchase Plan
              
     1037(22)    First Amendment to Credit Agreement by and among P-Com, Inc.,
                 as the Borrower, Union Bank of California N.A., as
                 Administrative Agent, Bank of America National Trust and
                 Savings Association, as Syndication Agent, and the Lenders
                 party thereto, dated as of July 31, 1998.
              
     10.38(23)   Securities Purchase Agreement dated as of December 21, 1998 by
                 and among the Company and the purchasers listed therein.
              
     10.39(23)   Registration Rights Agreement dated as of December 21, 1998 by
                 and among the Company and the purchasers listed therein.
              
     10.40(23)   Form of Warrant to purchase shares of Common Stock
              
     10.40A(24   Warrant to purchase shares of Common Stock, dated as of
                 December 21, 1998, issued by the Company to Castle Creek
                 Technology Partners LLC

     10.40B(24)  Warrant to purchase shares of Common Stock, dated as of
                 December 21, 1998, issued by the Company to Capital Ventures
                 International.

     10.40C(24)  Warrant to purchase shares of Common Stock, dated as of
                 December 21, 1998, issued by the Company to Marshall Capital
                 Management, Inc..
              
     10.41(23)   Second Amendment to Credit Agreement and First Amendment to
                 Security Agreement by and among the Registrant, as the
                 Borrower, Union Bank of California, N.A., as Administrative
                 Agent, Bank of America National Trust and Savings Association,
                 as Syndication Agent, and the lenders party thereto dated as of
                 October 21, 1998.
              
     10.42(23)   Third Amendment to Credit Agreement by and among the
                 Registrant, as the Borrower, Union Bank of California, N.A., as
                 Administrative Agent, Bank of America National Trust and
                 Savings Association, as Syndication Agent, and the lenders
                 party thereto dated as of December 17, 1998.
              
     10.43       Fourth Amendment to Credit Agreement and First Amendment to
                 Security Agreement by and among the Registrant, as the
                 Borrower, Union Bank of California, N.A., as Administrative
                 Agent, Bank of America National Trust and Savings Association,
                 as Syndication Agent, and the lenders party thereto dated as of
                 December 28, 1998.
              
     10.44       Fifth Amendment to Credit Agreement by and among the
                 Registrant, as the Borrower, Union Bank of California, N.A., as
                 Administrative Agent, Bank of America National Trust and
                 Savings Association, as Syndication Agent, and the lenders
                 party thereto dated as of January 29, 1999.
              
     11.1        Computation of Pro Forma Net Income (Loss) Per Share.
              
     21.1        List of subsidiaries of the Registrant.
              
     23.1        Consent of PricewaterhouseCoopers LLP, Independent Accountants.
                 (forthcoming)
              
     24.1        Power of Attorney (see page 87).

     27.1        Financial Data Schedule
              
                                      84
<PAGE>
 
(1)  Incorporated by reference to identically numbered exhibits included in the
     Company's Registration Statement on Form S-1 (File No. 33-88492) declared
     effective with the Securities and Exchange Commission on March 2, 1995.

(2)  Incorporated by reference to Exhibit 1.1 to the Company's Registration
     Statement on Form S-1 (File No. 33-88492) declared effective with the
     Securities and Exchange Commission on March 2, 1995.

(3)  Incorporated by reference to identically numbered exhibits included in the
     Company's Registration Statement on Form S-1 (File No. 33-95392) declared
     effective with the Securities and Exchange Commission on August 17, 1995.

(4)  Incorporated by reference to identically numbered exhibits included in the
     Company's Quarterly Report on Form 10-Q filed with the Securities and
     Exchange Commission on November 1, 1996.

(5)  Incorporated by reference to Exhibit 1.1 to the Company's Registration
     Statement on Form S-1 (File No. 33-95392) declared effective with the
     Securities and Exchange Commission on August 17, 1995.

(6)  Incorporated by reference to identically numbered exhibits included in the
     Company's Registration Statement on Form S-3 declared effective with the
     Securities and Exchange Commission on May 16, 1996 (File No. 333-3558).

(7)  Incorporated by reference to identically numbered exhibits to the Company's
     Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996.

(8)  Incorporated by reference to identically numbered exhibits to the Company's
     Quarterly Report on Form 10-Q for the quarterly period ended September 30,
     1996.

(9)  Incorporated by reference to identically numbered exhibits to the Company's
     Annual Report on Form 10-K for the annual period ended December 31, 1995.

(10) Incorporated by reference to Exhibit 1.1 to the Company's Registration
     Statement on Form S-3 declared effective with the Securities and Exchange
     Commission on May 16, 1996 (File No. 333-3558).

(11) Incorporated by reference to identically numbered exhibits to the Company's
     Quarterly Report on Form 10-Q for the quarterly period ended March 31,
     1996.

(12) Incorporated by reference to identically numbered exhibits to the Company's
     Quarterly Report on Form 10-Q for the quarterly period ended March 31,
     1997.

(13) Incorporated by reference to identically numbered exhibits to the Company's
     Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997.

(14) Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended June 30, 1996.

(15) Incorporated by reference to identically numbered exhibits to the Company's
     Quarterly Report on Form 10-Q for the quarterly period ended September 30,
     1997.

(16) Incorporated by reference to Exhibit 3 to the Company's Quarterly Report on
     Form 10-Q for the quarterly period ended September 30, 1997.

(17) Incorporated by reference to Exhibit 4 to the Company's Quarterly Report on
     Form 10-Q for the quarterly period ended September 30, 1997.

(18) Incorporated by reference to identically numbered exhibits included in the
     Company's Registration Statement on Form S-3 (File No. 333-45463) filed
     with the Securities and Exchange Commission on February 2, 1998.

(19) Previously filed as an exhibit to the Company's Current Report on Form 8-K
     dated December 10, 1997 as filed with the Securities and Exchange
     Commission on November 28, 1997 (File No. 001-13475).

(20) Incorporated by reference to identically numbered exhibits included in the
     Company's Quarterly Report on Form 10-Q filed with the Securities and
     Exchange Commission on May 15, 1998.

(21) Incorporated by reference to identically numbered exhibits included in the
     Company's Quarterly Report on Form 10-Q filed with the Securities and
     Exchange Commission on August 14, 1998

(22) Incorporated by reference to identically numbered exhibits included in the
     Company's Quarterly Report on Form 10-Q filed with the Securities and
     Exchange Commission on November 13, 1997.

(23) Previously filed as an exhibit to the Company's Current Report on Form 8-K
     dated December 22, 1998 as filed with the Securities and Exchange
     Commission on December 24, 1998 (File No. 000-25356).

(24) Incorporated by reference to identically numbered exhibits included in the
     Company's Registration Statement on Form S-3 (File No. 333-70937) filed
     with the Securities and Exchange Commission on January 21, 1999.

*    Confidential treatment granted as to certain portions of these exhibits.

                                      85
<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, on April 15, 1999.

     P-COM, INC.
                                      /s/ George P. Roberts 
     Date: April 15, 1999         By  ___________________________
                                      George P. Roberts
                                      Chairman of the Board and
                                      Chief Executive Officer
                                      
                                      /s/ Michael J. Sophie
     Date: April 15, 1999         By  ___________________________
                                      Michael J. Sophie
                                      Chief Financial Officer, Vice President,
                                      Finance and Administration

                                      86
<PAGE>
 
POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints George P. Roberts and Michael Sophie and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

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.

                                        /s/ George P. Roberts
Date:   April 15, 1999              By  ____________________________
                                        George P. Roberts
                                        Chairman of the Board and
                                        Chief Executive Officer
 
                                        /s/ Michael J. Sophie
Date:   April 15, 1999             By   ____________________________
                                        Michael J. Sophie
                                        Chief Financial Officer, Vice President,
                                        Finance and Administration

                                        /s/ Gill Cogan 
Date:   April 15, 1999             By   ____________________________
                                        Gill Cogan
                                        Director of the Company

                                        /s/ John A. Hawkins   
Date:   April 15, 1999             By   ____________________________
                                        John A. Hawkins
                                        Director of the Company

                                        /s/ M. Bernard Puckett   
Date:   April 15, 1999             By   ____________________________
                                        M. Bernard Puckett
                                        Director of the Company

                                        /s/ James J. Sobczak  
Date:   April 15, 1999             By   ____________________________
                                        James J. Sobczak
                                        Director of the Company

                                      87