<PAGE>   1

<PAGE>   2

                                                                    Exhibit 13



                               ALLEN TELECOM INC.


                               ANNUAL REPORT 1998

<PAGE>   3



Board of Directors

Philip Wm. Colburn
Chairman of the Board,
Allen Telecom Inc.

J. Chisholm Lyons
Vice Chairman of the Board,
Allen Telecom Inc.,
Counsel to Smith Lyons,
Toronto, Ontario, Canada

Jill K. Conway
Visiting Scholar,
Program in Science,
Technology and Society,
Massachusetts Institute
of Technology,
Cambridge, Massachusetts

Albert H. Gordon
Advisor and Director,
Deltec, Inc.,
New York, New York

William O. Hunt
Chairman of the Board,
Intellicall Inc.
Chairman of the Board,
Internet America, Inc.
Dallas, Texas


John F. McNiff
Vice President - Finance and Director,
Dover Corporation,
New York, New York

Robert G. Paul
President and
Chief Executive Officer,
Allen Telecom Inc.

Martyn F. Roetter
Vice President,
Communications and Information Technology,
Arthur D. Little. Inc.,
Cambridge, Massachusetts

Charles W. Robinson
Chairman,
Robinson & Associates Inc.,
Santa Fe, New Mexico

Gary B. Smith
Management Consultant
Cornelius, North Carolina

William M. Weaver, Jr.
Limited Partner Emeritus,
Alex, Brown & Sons
Incorporated,
New York, New York


Management

Robert G. Paul
President and
Chief Executive Officer

Robert A. Youdelman
Executive Vice President,
Chief Financial Officer

McDara P. Folan, III
Vice President, Secretary
and General Counsel

James L. LePorte, III
Vice President and Controller

Peter de Villiers
Vice President, Strategic Development

Roger Schroeder
Treasurer and Assistant Secretary

Andrea Casini
Managing Director, Tekmar Sistemi S.r.l.

Kenton S. Day
President, Signal Science, Incorporated

Terry N. Garner
President,
Grayson Wireless

F. Kim Goryance
President,
Antenna Specialists

Peter Mailandt
President,
Decibel Products


Jack Powell
Chairman,
Telia S.A.

Douglass R. Hall
President,
Comsearch

Karl-Heinz Schmidt
President,
MIKOM Worldwide Systems

Gianpiero Villa
President,
Worldwide Site Products


<PAGE>   4

TABLE OF CONTENTS
<TABLE>
<S>                                          <C>
The Year at a Glance. . . . . . . . . . . . . . . . . . . . . .1
Letter to Shareholders . . . . . . . . . . . . . . . . . . . . 2
Business Review . . . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Financial Statements . . . . . . . . . . . . . . 12
Notes to Consolidated Financial Statements . . . . . . . . . .16
Management's Discussion and Analysis
of  Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . 27
Five-year Summary of Operations . . . . . . . . . . . . . . . 32
Directors and Management . . . . . . . . . . .Inside front cover
Shareholder Information . . . . . . . . . . . Inside back cover
</TABLE>

SAFE HARBOR CAUTIONARY STATEMENT

Statements included in this Annual Report which are not historical in nature are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
regarding the Company's future performance and financial results are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those set forth in the forward-looking statements. Allen Telecom
Inc.'s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q contain
certain detailed factors that could cause the Company's actual results to
materially differ from forward-looking statements made by the Company,
including, among others, the costs and timetable for new product development,
the health and economic stability of the world and national markets, the
uncertain level of purchases by current and prospective customers of the
Company's products and services, the impact of competitive products and pricing,
the successful discovery and correction of potential "Year 2000" computer
sensitive problems by both the Company and its key suppliers and customers, and
other transactions.


THE YEAR AT A GLANCE
<TABLE>
<CAPTION>
                                                 1998                  1997
<S>                                          <C>                  <C>          
FINANCIAL HIGHLIGHTS
Sales                                        $ 388,004,000        $ 432,508,000
Income (Loss) Before
  Income Taxes and
  Minority Interests                         ($  8,554,000)       $  46,713,000
Income (Loss) From
  Continuing Operations                      ($  5,512,000)       $  23,981,000
Net Income (Loss)                            ($ 10,222,000)       $  23,349,000
Return On Equity                                      (4.0%)                9.4%
--------------------------------------------------------------------------------
Financial position, year-end:
Stockholders' Equity                         $ 250,081,000        $ 260,822,000
Working Capital                              $ 133,465,000        $ 111,015,000
Shares Outstanding                              27,473,000           27,298,000

PER COMMON SHARE:
Basic:
  Income (Loss) From
       Continuing Operations                         ($.21)                $.89
  Net Income (Loss)                                  ($.38)                $.87
Diluted:
  Income (Loss) From
       Continuing Operations                         ($.21)                $.88
  Net Income (Loss)                                  ($.38)                $.86
Book Value per share                                 $9.10                $9.55
</TABLE>

                                       1

<PAGE>   5

LETTER TO SHAREHOLDERS

After a long period of revenue growth as a wireless telecommunications equipment
supplier, Allen Telecom suffered diminished sales and its first loss from
telecom operations since 1983. The single largest impact on revenue for the year
was the dramatic weakening in the economies of a number of the Southeast Asian
countries. Southeast Asia has represented the fastest growing market for
wireless telecommunications equipment during the last few years. The sudden
disappearance of this market impacted our shipment of product to those countries
and also contributed to a major excess inventory situation at our wireless OEM
customers, particularly in Europe. They significantly reduced their 1998
purchases of components from our site products division as they worked through
their inventory. The second half of 1998 was considerably weaker than the first
half.

     During the year, in reaction to the slowdown and significant pricing and
margin pressure resulting from industry overcapacity, the Company took major
actions to reduce costs. Employee levels were reduced to offset lower sales.
Certain products were discontinued during the year where insufficient sales or
prospects in those areas indicated that it was time to stop the development
efforts and accept the costs of that decision. As a result of these actions, the
Company took substantial restructuring write-offs during the year.

     Sales for the year were $388 million, down 10% from $433 million in 1997.
The loss from continuing operations in 1998 was $5.5 million or $.21 per share.
The net loss for the year was $10.2 million, or $.38 per share, compared to a
$23.3 million profit and $.86 per share last year. In addition to the after-tax
restructuring charges of $12.6 million incurred during the year, earnings were
hurt most significantly by lower gross profit percentages which declined from
34.9% in 1997 to 24.4% in 1998, both of which include the appropriate
restructuring costs. The Company is hopeful of making a significant improvement
in these margins in 1999.

     Operating costs were reduced during the year with the full impact being
realized in 1999. In addition to these cost reductions, the Company has
streamlined its organization structure for quicker response and decision making.
Because of the global nature of wireless telecommunications, we combined three
of our previously independent operating units with common, or in a few cases,
competing products, into a single global product offering. This business is now
headquartered in Germany and offers a unified family of products for our
worldwide customers.

     We have announced, after year end, the sale of Marta, our discontinued
emissions testing business, and we expect to report a small gain when the
transaction is completed. This will end a major distraction for the Company. It
is anticipated that the restructuring actions taken during 1998, the sale of
Marta, and some expected growth in the marketplace in the second half of 1999
will all contribute to a welcome turnaround this year.

     We are quite optimistic about the future of our industry, and we believe
that we will play a significant part in its growth. Cell phones have achieved
only a 24% penetration of the population in the U.S. - far lower than in many
other countries including Finland, Sweden, Italy, Japan, Israel and Hong Kong
where the penetration rates are from 35% to 50% and are rising rapidly. In
Finland, 53% of all residents are mobile phone customers. Furthermore, the
quality of voice transmission is spotty in the U.S. and will have to improve.
Local coverage is uneven because carriers have not deployed sufficient cell
sites to achieve optimum coverage. The industry claims that only 2% of calls do
not go through, but that equates to 92 million failed calls every month!

     We believe that the incomplete cellular networks in a growing marketplace
and the many complaints of unacceptable service by users will eventually
translate into a renewed demand for our products in the U.S. Many other parts of
the world lag in wireless phone penetration far behind the U.S., not to mention
Finland, Italy, and others. The rapid or extensive deployment of wireless
communications systems in these lagging areas should lead to a greater growth
opportunity for Allen Telecom.

     Beyond these opportunities for growth, in what is called narrow band
systems, the industry is in the early stages of development of 3G or the third
generation. The 3G technology will provide more spectrum so that mobile users
can send and receive e-mail, data, video, and other services. This will require
an overlay of equipment on the

                                       2
<PAGE>   6
current network and presents many new opportunities for the deployment of Allen
Telecom equipment. Eventually, it could mean deployment of new equipment
everywhere that mobile systems now exist.

     While technology standards are still being debated, work has begun at some
Allen Telecom businesses and at our OEM customers to design 3G product. 3G is
expected to start having a meaningful impact on the Company's revenues in 2001
or 2002.

     Allen Telecom expects to benefit sooner from its Geo-location investments
than from 3G. Geolocation is the system necessary to meet the FCC requirement of
locating any mobile caller dialing 911 so as to know where to send help. The
"network solution" that we are developing involves the installation of equipment
at most every cell-site. The FCC mandate calls for this system to be deployed by
October 2001. If our technology is successful, we should begin recognizing
revenues in 2000 and booking orders in the latter part of 1999. Industry sources
predict the market for E911 equipment to be in the billions of dollars.

     It would not be appropriate to end this letter without our personal thanks
to three individuals who have contributed immensely to Allen Telecom. The
retirement of Albert Gordon and William Weaver ends a combined 56 years of
service on the Allen Board and an immeasurable amount of career experience and
knowledge, which they have unstintingly shared. William Hunt is also retiring
from the Board after more than 5 years of service. We have always respected the
counsel of Mr. Gordon, Mr. Weaver and Mr. Hunt, appreciated their support and
enjoyed their company.

/s/ Philip Wm. Colburn

Philip Wm. Colburn
Chairman of the Board


/s/ Robert G. Paul

Robert G. Paul
President and
Chief Executive Officer

[PHOTO]
Robert G. Paul (left), and Philip Wm. Colburn

[BAR GRAPH]
<TABLE>
<CAPTION>
SALES FROM CONTINUING OPERATIONS
(MILLIONS OF DOLLARS)
<S>  <C>
94   $213.5
95   $306.6
96   $369.5
97   $432.5
98   $388.0
</TABLE>

[BAR GRAPH]

<TABLE>
<CAPTION>
RESEARCH & DEVELOPMENT AND NEW
PRODUCT ENGINEERING COSTS
(MILLIONS OF DOLLARS)
<S> <C>
94  $ 8.9
95  $17.0
96  $21.0
97  $30.4
98  $30.7
</TABLE>

[BAR GRAPH]
<TABLE>
<CAPTION>
% OF SALES
<S>  <C>
94   4.2%
95   5.5%
96   5.7%
97   7.0%
98   8.0%
</TABLE>

[BAR GRAPH]

<TABLE>
<CAPTION>
INCOME BEFORE TAXES AND MINORTIY INTERESTS
(MILLIONS OF DOLLARS)
<S>   <C>
94    $31.5
95    $50.4
96    $46.5
97    $46.7
98    $(8.6)
</TABLE>

                                       3
<PAGE>   7

WORLDWIDE SITE PRODUCTS

Worldwide Site Products manufactures cell site subsystems and component parts,
and sells them to OEMs and cellular/PCS service providers. Our equipment can be
found in cell sites in almost every country where wireless systems are deployed.
I see our core expertise as the integration of filters, amplifiers and combiners
to allow a wireless system to coexist with other wireless services and not
interfere with or be interfered by other services. Our filters permit only
chosen frequencies to pass to the base station in order to enhance call clarity.
Combiners allow multiple radio frequency channels to efficiently employ fewer
antennas, while amplifiers magnify signals to and from portable phones.

During 1998, in recognition of the increasing globalization of our customers, we
merged the previously independent European and North American Worldwide Site
Products businesses under a single management. By integrating our research and
development activities and manufacturing facilities on both sides of the
Atlantic, we are able to address, we have come together as a single division
over the past year, showing a willingness to work together toward a common goal.
I believe the synergies and differences of our North American and European
operations bring significant value to our division.

The wireless electronic component market is constantly changing and
consolidating. Our goal is to remain the leading supplier of electronic base
station components and subsystems to the wireless industry. To achieve this
goal, we invest a significant amount of our net profit in research and
development.

The primary focus of our research and development effort is to develop new
products and techniques in order to better solve problems for our customers. We
emphasize research on new technologies and materials for competitive
state-of-the-art products that exceed the quality specifications of our
customers. We have developed new, flexible, manufacturing processes to improve
production schedules and product quality. We are testing new techniques for
reducing the cost of tuning and testing by utilizing full automation. To meet
our customers' future expectations, we have made extensive investments in
engineering and technical expertise to support the design and development of
highly integrated multi-function products. During the year, we also implemented
new production and logistic methods to provide prompt, cost efficient product
delivery for our customers.

Worldwide Site Products has a significant share of the global component market
for all protocols (AMPS, CDMA, GSM, DCS, and PCS). Although most OEMs over the
past several years have reduced the number of their suppliers, we continue to
supply most of the major OEMs, including Motorola, Nokia, Nortel, Alcatel,
Lucent and Siemens. Each of these OEM's has selected Allen Telecom's Worldwide
Site Products as a strategic supplier for present and future product
generations.

The product lines, which show the greatest potential for future growth, are
integrated combiners with very selective filters, and low noise and
multi-carrier power amplifiers (MCPA) with sophisticated control systems and
powerful software. The most exciting new business opportunity lies in the
introduction of the next generation of wireless systems for high data rate
Internet applications. In the future, we will work toward achieving three
critical goals: worldwide presence, strong market share and leading technology.

Born in Milan, Italy, Gianpiero Villa's career has focused on the electronics
industry. He worked with Forem for nine years prior to Allen Telecom's initial
purchase of FOREM S.p.A. in 1994. He was named President of Worldwide Site
Products in 1998. He resides in Milan, Italy.

                                       5


<PAGE>   8

DECIBEL PRODUCTS DIVISION

Decibel Products participates in several complementary wireless component market
segments. From low band, VHF, UHF, cellular and PCS/DCS to trunking and paging,
we design and manufacture base station antennas, cable connectors and
accessories for public service providers, carriers and OEMs. Our equipment, when
combined with OEM base station and switching equipment, provides a total
wireless system solution.

Decibel Products, along with our sister mobile antenna company, Antenna
Specialists, has been a primary supplier to the wireless industry for over 50
years. Recently, our market has become highly competitive as many new, though
smaller companies, have entered the business in anticipation of a larger United
States and international market than has actually materialized. There are now at
least 28 base station antenna manufacturers and over 100 mobile antenna
manufacturers competing on a worldwide basis. As a result of this significant
increase in competition, the industry is suffering from overcapacity and unit
price declines.

My challenge for 1999 is to grow our business in this tough operating
environment. Over the years, we have established ourselves as a reliable, high
quality producer. Now our goal is to be among the lowest cost producers
worldwide. To achieve our goal of strenuously reducing costs, we have
streamlined our production process. We are working to maintain the current
volume level and focusing on global manufacturing in multiple locations.

The unit growth rate for base station antennas worldwide is projected to be
single digits over the next several years. However, in China and Latin America
demand is expected to grow between 20-25% during the same time frame. Our plants
in China and Brazil will provide for growth opportunities in our antenna
business over the next five years. Our production costs are lower at these
facilities, which allows us to provide local service with quick turnaround time
for our OEM customers, meet local content requirements and add value in the
local market. In addition, our manufacturing facilities in China and Brazil
provide distribution to neighboring countries in Asia and Latin America at a
reduced cost.

I am proud of the technology enhancements we've implemented to increase the
functionality of our products. The new advanced antennas - such as our new dual
band/dual pole antennas, which allow a single antenna to transmit and receive on
digital, cellular and PCS frequencies independently - have a higher utility
value to our customers particularly with the added field adjustable electrical
downtilt. Adding features and functions to our products gives us better pricing
flexibility. We have moved quickly to implement these changes. They are
important to what I believe is our greatest opportunity for growth over the next
three to five years, the new third generation wideband data services, which are
expected to be implemented in 2000 and beyond.

I strongly believe Decibel Products' greatest strength comes primarily from
our people and the quality reputation we have in the marketplace with carriers
and OEMs worldwide. Short term we anticipate a shakeout in our industry, and we
definitely will be a survivor. The framework is in place for us to be among the
lowest cost producers. Global manufacturing gives us the ability to offer our
customers high quality and reliable products at a reasonable price anywhere in
the world. We have the technology, the strategy, the vision and the drive to
prosper in this industry.

Dr. Peter Mailandt, born in Berlin, Germany, has been President of Decibel
Products for 15 years. He received his M.B.A. from the University of Minnesota
and a Ph.D. in Nuclear Physics in 1972. He currently lives in Dallas, TX.

                                       6
<PAGE>   9
MIKOM

In wireless mobile systems, repeaters are an integral part of an efficient and
effective network. Outdoors they provide coverage for rural and isolated areas,
extend coverage or fill holes between sites. Indoors they provide excellent
coverage for large buildings and major facilities, such as subways and airports
at a fraction of the cost of new cell sites.

Our wireless in-building coverage systems are predominantly fiber-based. Fiber
offers a number of technical advantages over typical cable distribution systems,
such as simple network design, extremely high dynamic range, routing flexibility
and multiple frequency band options. Most importantly, our system is easy to
upgrade to support new technologies, regardless of what they are, because of
fiber's broadband characteristics. The need for sufficient capacity, seamless
coverage in indoor areas and limited frequency resources will trigger the growth
of more fiber-based active coverage systems.

For outdoor signal coverage, the implementation of any repeater requires a
minimum margin of antenna isolation. The most common method of achieving antenna
isolation today is physical separation. However, this solution has become more
difficult to implement as local zoning laws and smaller cell sites prohibit
towers tall enough to provide the required antenna isolation. To solve this
problem MIKOM developed Interference Cancellation Equipment (or ICE(TM))
equipped repeaters. These specially equipped repeaters are designed to provide
electronic isolation within the repeater. This feature allows our repeaters to
be installed at sites where it was previously not possible due to physical
constraints. ICE(TM) equipped repeaters make installation and operation easier
for our customers.

Product line and performance improvements are the main focus of our research and
development efforts. We will introduce a variety of new products over the next
several years, including equipment in TDMA, CDMA, GSM900 and 1800 specifically
designed for improved tunnel and subway coverage, new low power optical
distribution systems for base station integration and improved products for our
cable booster line.

Longer term we expect in-building coverage systems to grow faster than the
outdoor repeater market. We believe that the in-building market will become more
project oriented in the future, providing MIKOM with the opportunity to combine
our advanced repeater technology with our full-service capabilities. Our goal is
to provide customers with a complete wireless in-building communication system
from system design, planning and implementation to equipment, optimization and
installation. Additionally, the upcoming third generation technology (Wideband
CDMA), as well as current narrowband CDMA, offer excellent opportunities for our
outdoor repeaters because base stations will have very high capacity and
repeaters can increase the efficiency of each cell site.

Today there is no truly regional market left: repeaters have become a global
business. It's my job to ensure that we remain well positioned to take advantage
of this global opportunity. We have manufacturing facilities in the United
States and Europe. We presently have the expertise and research capability to
grow in this highly competitive environment, and we also plan to reduce
production costs each year for the next three years. We will continue our focus
on international sales through our own internal international sales
organization. My long-term goal is to build a global service network with
turnkey solutions for in-building and outdoor coverage systems with multiple
standards and frequency bands.

Karl-Heinz Schmidt started MIKOM G.m.b.H. in May 1985. Allen Telecom acquired
its first ownership position in MIKOM in 1994. Allen Telecom appointed
Karl-Heinz President of the Company's worldwide systems division and renamed it
MIKOM in 1998. Karl-Heinz was born and still resides in Nordlingen, Germany.

                                       9
<PAGE>   10

TERRY N. GARNER

PRESIDENT

GRAYSON WIRELESS

Grayson Wireless operates in the Personal Communications Systems (PCS),
cellular, paging and the Specialized Mobile Radio (SMR) markets. We design,
develop and produce hardware platforms and software applications for data
collection and analysis in the planning, deployment, optimization and
maintenance of telecom networks. We are also working on completing the
development of our wireless network solution for the FCC's emergency calling
system (E911). Industry growth in the test and measurement business is driven
largely by technology issues and changes in technology, such as converting from
AMPS systems to CDMA systems, in addition to subscriber growth and network
expansion.

Our new 2700 Digital Platform is the most advanced testing technology to reach
the market. This platform contains dual-band receivers, digital signal
processing and accommodates decoding of all digital and analog standards.
Available applications, such as CellWatcher and MarketWatcher, allow users to
perform specialized network measurements, such as interference detection and
analysis and detailed network traffic statistics.

The overall strength of our E911 geolocation offering lies not just in our
technology or cost advantages but also in our total systems capability. We are
one of the few suppliers that can offer manufacturing, engineering, installation
and network planning. We can deliver superior quality, highly reliable products
with better cost control because we do the manufacturing in-house. We are
currently conducting engineering field trials for the analog AMPS standard and
the digital TDMA standard. Furthermore, we were the first company to announce
success in field trials with the CDMA standard. Industry estimates place the
cost of implementing E911 in excess of $2.0 billion, and we believe a large part
of this market will be available to us.

Excluding geolocation, our single greatest opportunity for immediate growth is
to take advantage of the international marketplace for test and measurement
equipment. The most significant change in direction for 1999 is the realignment
of our sales resources to better focus on the international market and to
improve our technical support resources.

Over the next five years, I expect to see significant changes in the test and
measurement business. Changes in the way data is collected and analyzed will
require us to develop autonomous products and more sophisticated analysis
packages. Continuously changing technologies will require new test and
measurement equipment to verify the integrity of systems, such as wideband CDMA
and satellite systems. These changes, along with geolocation, will provide
opportunities for Grayson Wireless. I know we will be ready to meet these
challenges.

Terry Garner started Grayson Wireless with three partners in 1986, after 15
years in the mobile radio industry with General Electric. Allen Telecom acquired
a majority interest in 1990. Terry has an electrical engineering degree from
Louisiana State University and lives in Lynchburg, VA.

<PAGE>   11

DOUGLASS HALL

PRESIDENT

COMSEARCH

1998 was a very disappointing year for Comsearch. The decline in the domestic
PCS market, following the initial build-out by A and B block licensees, caused
our consulting and engineering businesses to experience tough price competition
and reduced deployment rates. I believe 1999 will be different. We began a
significant restructuring program at the end of 1998, streamlining management
and our administrative infrastructure and placing the focus on leveraging our
unique strengths in the industry to improve profitability. Our reorganization
plan emphasized growth in our core businesses where we have significant market
share and higher margins, stressed improved flexibility, converted cost centers
into revenue generating businesses and focused on reducing our reaction time to
market changes.

Despite the problems we faced in 1998, Comsearch has maintained a strong
leadership position in our core frequency planning and protection services,
where our comprehensive database and engineering tools are key to this
profitable business. In the spectrum sharing and microwave relocation area, we
see additional opportunities in the new generation mobile satellite services. We
are migrating away from the traditional time and materials consulting in our RF
engineering services to packaging our services and selling solutions for the
design and optimization of mobile wireless networks. We also will continue to
provide software products for engineering design, spectrum sharing and RF
planning services. Finally, in addition to using direct and distributed means
for selling our products and services domestically and internationally, these
offerings will be packaged for access and sale through the Internet.

I intend to grow Comsearch over the next five years by packaging our strengths
in microwave frequency coordination and spectrum sharing to provide broader,
more effective solutions to the marketplace. We will focus on electronic
commerce, data provisioning and data warehousing to satisfy the need for
accurate and timely information, which is often the bottleneck to providing
effective solutions. Lastly, we will pursue relationships necessary to broaden
our portfolio of products and services, including international spectrum
management. Our future is limited only by our ability to be creative, to think
out of the box. These strategies will refocus Comsearch on our core strengths
and build a solid foundation for future growth.

Born in Atlantic City, NJ, Doug Hall started his career in the U.S. Air Force
where he specialized in microwave and troposcatter wideband communications
systems. Doug joined Comsearch in 1981, was named President in January 1999 and
resides in Manassas, VA.


<PAGE>   12


                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the years ended December 31, 1998, 1997 & 1996                            1998              1997             1996
<S>                                                                       <C>              <C>               <C>
Sales                                                                       $ 388,004        $ 432,508        $ 369,498
Costs and Expenses:
    Cost of sales                                                             293,404          281,591          238,401
    Selling, general and administrative expenses                               71,672           72,671           59,053
    Research and development and product engineering costs                     30,742           30,367           21,023
    Write-off of acquired in-process research and development costs              --               --              2,662
Other Income, net                                                               6,065            1,885              952
Interest and Financing Expenses:
    Interest expense                                                           (8,276)          (4,505)          (3,773)
    Interest income                                                             1,471            1,454              988
-----------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Taxes and Minority Interests                              (8,554)          46,713           46,526
Benefit (Provision) for Income Taxes                                            5,310          (17,723)         (19,665)
-----------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Minority Interests                                        (3,244)          28,990           26,861
Minority Interests                                                             (2,268)          (5,009)          (6,305)
-----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS                                       (5,512)          23,981           20,556
=======================================================================================================================
Discontinued Operations:
    Loss from discontinued emissions testing business                            --               --             (3,766)
    Loss for disposal of emissions testing business                            (4,710)            --             (3,724)
-----------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Item                                       (10,222)          23,981           13,066
Extraordinary Item - Extinguishment of Debt                                      --               (632)            --
-----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)                                                           ($ 10,222)       $  23,349        $  13,066
=======================================================================================================================
EARNINGS (LOSS) PER COMMON SHARE
Basic:   Income (loss) from continuing operations                             ($  .21)       $     .89        $     .78
         Discontinued operations:
           Loss from discontinued emissions testing business                     --               --               (.14)
           Loss for disposal of emissions testing business                       (.17)            --               (.14)
         Extraordinary item - extinguishment of debt                             --               (.02)            --
-----------------------------------------------------------------------------------------------------------------------
         Net Income (Loss)                                                   ($ .38 )        $     .87        $     .50
=======================================================================================================================
Diluted:Income (loss) from continuing operations                             ($  .21)       $     .88        $     .76
         Discontinued operations:
           Loss from discontinued emissions testing business                     --               --               (.14)
           Loss for disposal of emissions testing business                       (.17)            --               (.14)
         Extraordinary item - extinguishment of debt                             --               (.02)            --
-----------------------------------------------------------------------------------------------------------------------
         Net Income (Loss)                                                  ($    .38)       $     .86        $     .48
=======================================================================================================================
Weighted average common shares outstanding:
         Basic                                                                 27,220           26,920           26,470
-----------------------------------------------------------------------------------------------------------------------
         Diluted                                                               27,370           27,340           27,060
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

THE NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

                                       12

<PAGE>   13



CONSOLIDATED BALANCE SHEETS
                             (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
As of December 31, 1998 & 1997                                              1998              1997
<S>                                                                      <C>                  <C>
ASSETS
    Current Assets:
       Cash and cash equivalents                                         $  19,900            $  30,775
       Accounts receivable, less allowance for
          doubtful accounts - 1998, $3,189; 1997, $1,934                    83,739              105,714
       Inventories                                                          84,735               93,768
       Current assets of discontinued emissions testing business               848                1,034
       Deferred income taxes                                                 7,989                7,244
       Other current assets                                                  5,752                3,501
-------------------------------------------------------------------------------------------------------
    Total Current Assets                                                   202,963              242,036
-------------------------------------------------------------------------------------------------------
       Property, Plant and Equipment, net                                   61,582               60,543
       Other Assets:
       Excess of cost over net assets of businesses acquired               131,939              126,923
       Assets of discontinued emissions testing business                    24,950               32,329
       Deferred income taxes                                                16,186                 --
       Other                                                                27,965               52,602
-------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                             $ 465,585            $ 514,433
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
    Current Liabilities:
       Notes payable and current maturities of long-term obligations     $  11,556            $   6,119
       Accounts payable                                                     25,501               75,195
       Accrued expenses (including accrued wages and commissions -
          1998, $14,108; 1997, $13,980)                                     29,998               35,261
       Income taxes payable                                                    837               13,197
       Deferred income taxes                                                 1,606                1,249
-------------------------------------------------------------------------------------------------------
    Total Current Liabilities                                               69,498              131,021
-------------------------------------------------------------------------------------------------------
    Long-Term Debt                                                         128,677               97,915
    Deferred Income Taxes                                                      429                6,818
    Other Liabilities                                                       16,900               17,857
-------------------------------------------------------------------------------------------------------
    Total Liabilities                                                      215,504              253,611
-------------------------------------------------------------------------------------------------------
    Commitments and Contingencies (Note 5)                                    --                   --
-------------------------------------------------------------------------------------------------------
    Stockholders' Equity:
       Common Stock, par value $1.00; authorized - 50,000 shares;
         issued - 1998, 29,759; 1997, 29,746; outstanding -
         1998, 27,473; 1997, 27,298                                         29,759               29,746
       Paid-in capital                                                     180,604              180,538
       Retained earnings                                                    59,869               70,091
       Accumulated other comprehensive income (loss)                        (2,255)                 207
       Less:  Treasury stock - common shares, at cost,
              1998, 2,286; 1997, 2,448 shares                              (15,985)             (16,992)
              Unearned compensation                                         (1,911)              (2,768)
-------------------------------------------------------------------------------------------------------
    Total Stockholders' Equity                                             250,081              260,822
-------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $ 465,585            $ 514,433
=======================================================================================================
</TABLE>

THE NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

                                       13
<PAGE>   14

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)

For the years ended December 31, 1998, 1997 & 1996

                                                                                   1998           1997           1996
<S>                                                                             <C>           <C>           <C>     
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations                                         ($ 5,512)      $ 23,981       $ 20,556
Extraordinary item - extinguishment of debt                                          --             (632)          --
-----------------------------------------------------------------------------------------------------------------------
                                                                                   (5,512)        23,349         20,556
Adjustments to reconcile income (loss) to net cash flow:
         Depreciation                                                              15,615         12,808         11,666
         Amortization of goodwill                                                   6,295          3,404          2,432
         Amortization of capitalized software                                       2,038          2,950          2,383
         Other amortization                                                           685            571          2,006
         Deferred income taxes                                                    (10,315)        (8,157)        (2,849)
         Non-cash charge for acquired in-process research and development            --             --   
         Non-cash loss on write-off of capital assets                              17,010          6,337           --
         Gain on sale of investments                                              (16,486)        (1,696)          --
Changes in operating assets and liabilities:
         Receivables                                                               24,496        (14,309)       (13,362)
         Inventories                                                                9,928        (23,954)           (85)
         Accounts payable and accrued expenses                                    (26,902)        16,627          7,879
         Income taxes payable                                                     (19,287)        (1,712)        17,095
         Other, net                                                                   169          1,814          3,229
-----------------------------------------------------------------------------------------------------------------------
Cash provided (used) by operating activities                                       (2,266)        18,032         53,612
=======================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in telecommunications companies                                       (42,103)       (46,135)       (16,909)
Capital expenditures                                                              (18,094)       (22,247)       (17,457)
Capitalized software product costs                                                 (3,942)        (5,307)        (4,745)
Sales and retirements of fixed assets                                                 334            845             62
Sale of investments                                                                16,833          1,709           --
-----------------------------------------------------------------------------------------------------------------------
Cash used by investing activities                                                 (46,972)       (71,135)       (39,049)
=======================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayment of) long-term borrowings                                  36,676         65,381         (2,129)
Repayment of long-term notes                                                         --          (15,000)          --
Exercise of stock options                                                             342          1,428            239
Treasury stock sold to employee benefit plans                                       1,531          1,651          1,572
-----------------------------------------------------------------------------------------------------------------------
Cash provided (used) by financing activities                                       38,549         53,460           (318)
=======================================================================================================================
Net cash provided (used) by discontinued operations                                (2,081)         7,808         (6,072)
=======================================================================================================================
NET CASH PROVIDED (USED)                                                          (12,770)         8,165          8,173
Effect of exchange rate changes on cash                                             1,895         (1,269)          --
Cash and cash equivalents at beginning of year                                     30,775         23,879         15,706
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                         $ 19,900       $ 30,775       $ 23,879
=======================================================================================================================
</TABLE>

THE NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS 


<PAGE>   15


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                      Accumulated
FOR THE YEARS ENDED                                      Common     Paid-in Comprehensive Retained Comprehensive Treasury  Unearned
DECEMBER 31, 1998, 1997 & 1996:              Total        Stock     Capital Income(Loss)  Earnings Income (Loss) Stock Compensation
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>         <C>         <C>       <C>       <C>        <C>       <C>        <C>
BALANCE, JANUARY 1, 1996:                      $ 210,377   $  29,595   $ 168,632           $ 34,948   $ (258)   $ (18,746) $(3,794)
Comprehensive income:
 Net income                                       13,066        --          --   $ 13,066    13,066     --           --       --
                                                                                 --------
 Other comprehensive loss:
   Minimum pension liability adjustment              154        --          --        154      --       --           --       --
   Foreign currency translation adjustments         (406)       --          --       (406)     --       --           --       --
                                                                                 --------         
   Other comprehensive loss                         --          --          --       (252)     --       (252)        --       --
                                                                                 --------
    Comprehensive income                            --          --          --   $ 12,814      --       --           --       --
                                                                                 ========    
Exercise of stock options                            239          36         293               --       --            (90)    --
Treasury stock reissued, 94,339 common shares      1,572        --           883               --       --            689     --
Restricted stock, net                                (16)        (17)       (270)              --       --           --        271
Stock option tax benefits                             82        --            82               --       --           --       --
Common stock issued in acquisitions                1,590        --         1,325               --       --            265     --
TransPro dividend adjustment                      (1,272)       --          --                (1,272)   --           --       --
Other                                                (50)       --          --                 --       --            (50)    --
Amortization of unearned compensation                615        --          --                 --       --           --        615
===================================================================================================================================
BALANCE, DECEMBER 31, 1996                       225,951      29,614     170,945              46,742    (510)     (17,932)  (2,908)
Comprehensive income:
 Net income                                       23,349        --          --   $ 23,349     23,349    --           --       --
                                                                                 --------         
 Other comprehensive income:
  Unrealized gain on securities                    9,588        --          --      9,588      --       --           --       --
  Less tax on unrealized gain on securities       (4,027)       --          --     (4,027)     --       --           --       --
                                                                                 --------
    Net unrealized gain on securities               --          --          --      5,561      --       --           --       --
  Minimum pension liability adjustment               206        --          --        206      --       --           --       --
  Foreign currency translation adjustments        (5,050)       --          --     (5,050)     --       --           --       --
                                                                                 --------
 Other comprehensive income                         --          --          --        717      --        717         --       --
                                                                                 --------
  Comprehensive income                              --          --          --   $ 24,066      --       --           --       --
                                                                                 ========
Exercise of stock options                          1,428         110       1,889               --       --           (571)    --
Stock option tax benefits                            653        --           653               --       --           --       --
Treasury stock reissued, 92,268 common shares      1,651        --           969               --       --            682     --
Restricted stock, net                               (126)         22         393               --       --           --       (541)
Amortization of unearned compensation                681        --          --                 --       --           --        681
Common stock issued in acquisitions                6,514        --         5,716               --       --            798     --
Other                                                  4        --           (27)              --       --             31     --
===================================================================================================================================
BALANCE, DECEMBER 31, 1997                       260,822      29,746     180,538             70,091      207      (16,992)  (2,768)
Comprehensive loss:
 Net loss                                        (10,222)       --          --   $(10,222)  (10,222)    --           --       --
                                                                                 --------
 Other comprehensive loss:
  Unrealized gain on securities in income         (9,588)       --          --     (9,588)     --       --           --       --
  Less tax on unrealized gain in income            4,027        --          --      4,027      --       --           --       --
                                                                                 --------
    Net unrealized gain on securities in income     --          --          --     (5,561)     --       --           --       --
  Minimum pension liability adjustment              (240)       --          --       (240)     --       --           --       --
  Foreign currency translation adjustments         3,339        --          --      3,339      --       --           --       --
                                                                                 --------
 Other comprehensive loss                           --          --          --     (2,462)     --     (2,462)        --       --
                                                                                 --------
    Comprehensive loss                              --          --          --   $(12,684)     --       --           --       --
                                                                                 ========
Exercise of stock options                            342          56         286               --       --           --       --
Stock option tax benefits                            138        --           138               --       --           --       --
Treasury stock reissued, 163,073 common shares     1,531        --           288               --       --          1,243     --
Restricted stock, net                               (557)        (43)       (646)              --       --           (236)     368
Amortization of unearned compensation                489        --          --                 --       --           --        489
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998                     $ 250,081   $  29,759   $ 180,604           $ 59,869 $ (2,255)   $ (15,985) $(1,911)
===================================================================================================================================
</TABLE>

THE NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


<PAGE>   16


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Accounting policies followed by the Company that materially affect the
determination of financial position, results of operations and cash flow are
described below.

Accounting Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Basis of Consolidation: The Company's consolidated financial statements include
the accounts of all wholly owned and majority owned subsidiaries. Intercompany
accounts and transactions have been eliminated. To facilitate preparation of
financial statements, the Company's principal European operations are included
in the consolidated financial statements on a two-month delayed basis.

Revenue Recognition: Revenues are recorded at the time products are shipped or
services are performed. Revenues from software licenses for the Company's
Wireless Engineering Services business are recognized upon delivery of the
software if vendor obligations are insignificant and if collectibility is
probable. Revenues from post-contract support that are significant and/or
unbundled with regards to the initial licensing fee are recognized ratably over
the post-contract period.

Cash and Cash Equivalents: Cash equivalents consist of temporary bank deposits
and money market instruments with an original maturity of three months or less
at the date of purchase. The Company invests its domestic excess cash in bank
deposits, money market and tax-exempt securities, which are afforded one of the
two highest ratings by nationally recognized ratings firms. Cash held at the
Company's foreign subsidiaries is principally invested in bank deposits and
money market instruments with maturities less than one month.

Valuation of Inventories: The Company values inventories including materials,
labor and overhead at the lower of cost (first-in, first-out) or market.
Inventories consisted of the following at December 31, 1998 and 1997 (amounts in
thousands):
<TABLE>
<CAPTION>
                           1998                       1997
<S>                       <C>                       <C>
Raw material              $45,936                   $49,583
Work-in-process            19,634                    24,505
Finished goods             19,165                    19,680
                           --------------------------------
                          $84,735                   $93,768
</TABLE>

Certain of these inventories pertain to the production of sophisticated
equipment that could be subject to technological obsolescence. The Company
maintains and periodically revises reserves for excess inventory based on the
most current information available of anticipated usage requirements.

Property, Plant and Equipment: Property, plant and equipment is recorded at
cost, less accumulated depreciation and amortization. Land improvements,
buildings and machinery and equipment are depreciated over their estimated
useful lives under the straight-line method. The provision for amortization of
leasehold improvements is based on the term of the related lease or the
estimated useful lives, whichever is shorter. Property, plant and equipment
consisted of the following at December 31, 1998 and 1997 (amounts in thousands):

<TABLE>
<CAPTION>
                                     1998         1997
<S>                             <C>          <C>      
Land and improvements           $   2,806    $   2,702
Buildings                          27,447       26,658
Machinery and equipment            83,701       73,000
Leasehold improvements              6,921        4,904
------------------------------------------------------
                                  120,875      107,264
Less accumulated depreciation
   and amortization               (59,293)     (46,721)
------------------------------------------------------
                                $  61,582    $  60,543
</TABLE>

Computer Software Costs: The Company's policy is to capitalize costs incurred in
creating computer software products once technological feasibility is
established and to amortize such costs over periods ranging from three to ten
years. The Company also capitalizes costs incurred in the development of
computerized databases, which are amortized over periods of three to twenty
years. The Company reviews the amounts capitalized for impairment whenever
events or changes in circumstances indicate that the carrying amounts of the
assets may not be recoverable. In 1998, 1997 and 1996, approximately $3,658,000,
$5,307,000, and $4,745,000, respectively, of these costs were capitalized and
approximately $1,630,000, $2,950,000, and $2,383,000, respectively, were
amortized (excluding impairment writedowns of $5,359,000 in 1998 and $5,955,000
in 1997). In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". This Statement provides guidance on the accounting treatment for
certain costs incurred in developing or purchasing software for internal use.
The Company will adopt the standard on January 1, 1999, requiring the Company to
expense certain costs and capitalize others incurred on a prospective basis. The
Company has determined the Statement will not have a material impact on results
of operations, financial position or cash flow.

Excess of Cost Over Net Assets of Businesses Acquired (Goodwill): The excess of
investments in consolidated subsidiaries over the net asset value at acquisition
is being amortized on a straight-line basis over periods not exceeding forty
years. The Company's policy is to evaluate goodwill for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss, if required, would be recorded in the period
such determination is made based on the fair value of the related businesses.
Goodwill is net of accumulated amortization of $18,057,000 and $11,747,000 as of
December 31, 1998 and 1997, respectively.

Foreign Currency Translation: Assets and liabilities of the Company's foreign
subsidiaries are translated into U.S. dollars at the current rate of exchange,
while revenues and expenses are translated at the average exchange rate during
the year. Adjustments from translating foreign subsidiaries' financial
statements are excluded from the results of operations and are reported as a
component of Accumulated other comprehensive income (loss).

Research and Development Costs: Expenditures relating to the development of new
products and processes, including significant improvements to existing products,
are expensed as incurred. Research and development expenses were

                                       16
<PAGE>   17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$28,812,000, $26,137,000, and $18,059,000 in 1998, 1997, and 1996, respectively.
In addition, the Company incurred other engineering expenses relating to new
product development (that do not meet the accounting definition of "Research and
Development") in the amount of $1,930,000, $4,230,000, and $2,964,000, in 1998,
1997, and 1996, respectively.

Stock Based Compensation: The Company accounts for stock based compensation
awards pursuant to Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related interpretations which prescribe the
use of the intrinsic value based method. Accordingly, no compensation cost has
been recognized for its fixed stock option plans. However, the Company has
adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation." See Note 4 for
additional information.

Income Taxes: Deferred income taxes are recorded to reflect the tax consequences
in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end.

Earnings Per Common Share: Basic earnings per share are based on the weighted
average number of common shares outstanding during the period. Diluted earnings
per share are based on the weighted average number of common shares outstanding
during the period plus, if dilutive, the incremental number of common shares
issuable on a pro forma basis upon the exercise of employee stock options,
assuming the proceeds are used to repurchase outstanding shares at the average
market price during the year. A reconciliation of the Basic and Diluted per
share computations are provided below (in thousands):

<TABLE>
<CAPTION>
                                1998     1997     1996
<S>                         <C>       <C>        <C>
Common Shares:
Weighted average common
  shares outstanding - Basic   27,220   26,920   26,470
Additional common shares
  issuable for stock options      150      420      590
-------------------------------------------------------
Common shares - Diluted        27,370   27,340   27,060
</TABLE>

Derivatives Financial Instruments: The Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," in June 1998. This Statement is
effective for financial statements issued for all fiscal quarters of fiscal
years beginning after June 15, 1999. Accordingly, the Company will adopt the
provisions of the standard on January 1, 2000. The Company utilizes hedging
activities primarily in its foreign subsidiaries to limit foreign currency
exchange rate risk. The Company's preliminary assessment is that the adoption of
this Statement will not have a significant impact on the Company's results of
operations, financial position or cash flow.

Other: The 1997 and 1996 consolidated financial statements have been
reclassified to conform to the 1998 presentation. In addition, the Company
adopted SFAS No. 130, "Reporting Comprehensive Income." Accordingly, prior year
financial statements have been reclassified to conform to the provisions of this
Statement.

<TABLE>
<CAPTION>

NOTE 2:  FINANCING

Long-term obligations consisted of the following (amounts in thousands):

                                        1998         1997
<S>                                <C>          <C>      
Credit agreement borrowings        $  39,282    $   7,081
Floating rate industrial revenue
  bonds due 2012 - 2025               15,500       15,500
Senior notes payable
  due 2001 - 2007                     65,000       65,000
Capital lease obligation              12,659       13,934
Other                                    706          564
Unamortized debt expense              (1,400)      (1,137)
---------------------------------------------------------
                                     131,747      100,942
Less current maturities               (3,070)      (3,027)
---------------------------------------------------------
                                   $ 128,677    $  97,915
</TABLE>

In 1998, the Company entered into a new domestic revolving credit agreement in
the aggregate amount of $100,000,000 expiring December 31, 2001. This agreement
replaced the Company's domestic revolving credit agreement which was to expire
in December, 1999. Of the total $100,000,000 commitment, $17,200,000 has been
utilized for the issuance of letters of credit relating principally to the
Company's industrial revenue bonds. The outstanding borrowings under this
domestic revolving credit agreement totalled $33,500,000 at December 31, 1998.
The balance of funds available under the revolving credit agreement may be
utilized for borrowings or other letters of credit; however, a maximum of
$25,000,000 may be allocated to such letters of credit. At December 31, 1998,
$49,300,000 was available under this agreement. This obligation is
collateralized by substantially all domestic assets. The Company has also
pledged 65% of the stock of applicable foreign subsidiaries in support of this
obligation. Interest may be determined on a LIBOR or prime rate basis at the
Company's option. The Company has agreed to pay a facility fee of .4% per annum
on the total amount of the commitment. During 1998, the average interest rate
for all domestic credit agreement borrowings was 6.9%.

The Company also has short-term credit lines utilized by its European
subsidiaries. At year-end, direct borrowings under these agreements totaled
$8,486,000, an additional $37,614,000 remained unused. These credit lines bear
interest based on LIBOR. Foreign long-term debt includes long-term arrangements
at fixed and variable rates with the Industry Ministry of Italy totaling
$1,483,000 (due 1999 - 2008), and variable rate borrowings with various
international banks of $4,299,000 (due 1999 - 2005). Further, two of the
aforementioned arrangements are mortgage notes, under which the Company has
pledged the respective land and buildings as collateral. These collateralized
assets had an aggregate net book value of $9,781,000 at year-end 1998. During
1998, the average interest rate for all foreign credit arrangements approximated
5.89%.

The floating rate industrial revenue bonds bear interest at rates based upon a
short-term tax exempt bond index, as defined in the bonds, which approximated
3.99% at December 31, 1998. The average interest rate for all industrial revenue
borrowings approximated 3.59% during 1998.

In 1997, the Company issued $65,000,000 of notes in a private placement
transaction. These notes have a weighted average life of 7 1/2 years and a
weighted average interest rate of 6.65%.

                                       17
<PAGE>   18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The notes are collateralized and rank equally with the Company's other
collateralized indebtedness. A portion of the proceeds was used to prepay a
$15,000,000 note payable. As a result of such prepayment, the difference between
the call premium and costs of reacquisition and the net carrying amount of the
debt in the amount of $996,000, or $.02 per basic and diluted share after
related tax benefit, has been reported as an "Extraordinary Item" in the
Consolidated Statements of Operations.

In connection with one of its discontinued emissions testing business programs,
the Company had a lease agreement under which it leased the land and inspection
facilities for an initial lease term equal to the program life expiring on
December 31, 2005. For financial reporting purposes the lease has been
classified as a capital lease; accordingly, an obligation (and related asset
with a net book value of approximately $13,373,000) is recorded at December 31,
1998. See also Note 9 for information concerning the sale of this business.

The aggregate maturities of long-term obligations for the years 1999 through
2003 are as follows (amounts in thousands):

<TABLE>
<CAPTION>

  1999     2000      2001      2002      2003
---------------------------------------------
<S>      <C>      <C>       <C>       <C>    
$3,070   $3,224   $39,174   $13,279   $13,288
</TABLE>

The Company's borrowing agreements include various restrictive covenants as to
the amount and type of indebtedness, investments and guarantees, maintenance of
net worth, working capital, earnings before interest, taxes, depreciation and
amortization, the purchase or redemption of the Company's shares and the
disposition of assets of the Company not in the ordinary course of business.

NOTE 3:  OTHER ASSETS,
LIABILITIES AND INCOME

Other assets consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
                                   1998       1997
<S>                             <C>     <C>
Capitalized computer software
  and database files            $ 8,894  $  10,949
Investments in
  telecommunication companies       501     23,337
Other                            18,570     18,316
--------------------------------------------------
                                $27,965  $  52,602
</TABLE>

Other liabilities consisted of the following (amounts in thousands):

<TABLE>
<CAPTION>

                                  1998        1997
<S>                             <C>     <C>
Minority interests             $  6,297  $   7,253
Long-term pension and
  post-retirement liabilities     6,212      5,879
Other                             4,391      4,725
--------------------------------------------------
                               $ 16,900  $  17,857
</TABLE>

The components of Other income, net pertains principally to various
telecommunication investments and is comprised of the following (amounts in
thousands):

<TABLE>
<CAPTION>
                             1998        1997       1996
<S>                      <C>         <C>        <C>   
RF Micro Devices, Inc.   $ 14,400    $    300   $   --
NextWave Telecom Inc.      (6,638)       --         --
Other                      (1,697)      1,585        952
--------------------------------------------------------
                         $  6,065    $  1,885   $    952
</TABLE>

In 1998, the Company sold its investment in RF Micro Devices, Inc. This
investment was accounted for pursuant to Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, in 1997, such investment was adjusted to fair value
with the resultant unrealized appreciation, net of related income tax effects
included in Stockholders Equity as "Accumulated other comprehensive income
(loss)."

In 1998, the Company recognized an impairment in the entire carrying value of
its investment in and receivable from NextWave (a C-Block wireless
communications carrier) as NextWave and certain of its subsidiaries filed for
relief under Chapter 11 of the United States Bankruptcy code. (See Note 5 for
additional information.) Also in 1998, the Company wrote off its investment in
Windata Inc. as a result of that company's decision to liquidate with no
recovery to the Company. Other income in 1997 relates primarily to a gain from
the sale of an investment in a telecommunications company. Other income in 1996
pertains principally to royalty payments received in connection with a
previously sold operation.

NOTE 4:  CAPITAL STOCK AND
STOCK COMPENSATION PLANS

The Company is authorized to issue up to 50,000,000 shares of common stock,
$1.00 par value, and 3,000,000 shares of preferred stock, without par value, in
one or more series. In addition, the Company can fix the powers, designations,
preferences and rights of each of the preferred stock series.

The Company has adopted the "disclosure-only" provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"), but applies Accounting Principles Board Opinion
No. 25 ("APB 25") and related interpretations for the accounting of its Stock
Plans. The Company has two active plans, the 1992 Stock Plan and the 1994
Non-Employee Directors Stock Option Plan. The 1982 Stock Plan, under which
options still remain outstanding, was terminated in 1992.

The Company's 1992 Stock Plan provides for the granting of options (and
restricted shares as discussed below) to key employees as determined by the
Management Compensation Committee of the Board of Directors. The total number of
options for which the Company may grant options and award restricted shares of
common stock under the 1992 Stock Plan cannot exceed 3,528,221 shares, subject
to certain adjustments. Options are awarded at a price not less than the fair
market value on the date the option is granted, have a ten-year term whereby 50%
of the option shares vest after two years and an additional 25% in each of years
three and four. Options may contain stock appreciation rights under which the
Company, upon request of the optionee, may, at its discretion, purchase the
exercisable portion of an option for cash and/or shares at a price equal to the
difference between the option price and the market price of the shares covered
by such portion of the option in lieu of issuing shares upon exercise. There
were no exercises of stock appreciation rights in 1998, 1997 and 1996.

                                       18
<PAGE>   19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pursuant to the 1994 Non-Employee Directors Stock Option Plan, the total number
of shares to be issued may not exceed 278,528 shares. Each Non-Employee Director
who previously had not been employed by the Company automatically receives an
option to purchase 3,000 shares of common stock per year ("Formula Awards"). No
Non-Employee Director who previously has been employed by the Company is
eligible to receive Formula Awards. Shares granted under the 1994 Plan have a
ten-year term and vest in the same manner as the 1992 Stock Plan, subject to
certain accelerated vesting upon the cessation of service. Non-Employee
Directors who have been previously employed by the Company are eligible to
receive discretionary awards of options to purchase shares of common stock.

Stock option activity for the three years ended December 31, 1998 is summarized
as follows:

<TABLE>
<CAPTION>
                                             Weighted
                                              Average
                                             Exercise
                                  Shares        Price
<S>                            <C>          <C>      
Balance, December 31, 1995     1,387,926    $   12.44
  Granted (weighted average
   fair value $10.15)            391,400    $   20.39
  Exercised                      (37,545)   $    8.84
  Terminated and canceled        (32,317)   $   20.21
-----------------------------------------------------
Balance, December 31, 1996     1,709,464    $   14.19
 Granted (weighted average
   fair value $9.97)             498,500    $   18.11
  Exercised                     (146,872)   $   12.07
  Terminated and cancelled       (92,389)   $   19.61
-----------------------------------------------------
Balance, December 31, 1997     1,968,703    $   15.08
  Granted (weighted average
   fair value $8.79)             558,600    $   15.55
  Exercised                      (56,094)   $    6.06
  Terminated and cancelled      (353,110)   $   18.02
-----------------------------------------------------
Balance, December 31, 1998     2,118,099    $   14.96
</TABLE>

The table below summarizes the status of outstanding options as of December 31,
1998.

<TABLE>
<CAPTION>
                                STOCK OPTIONS OUTSTANDING
                         ----------------------------------------
                                             WEIGHTED AVERAGE         STOCK OPTIONS EXERCISABLE
                                        -------------------------     -------------------------
Range of                                 Contractual     Exercise              Weighted Average
Exercise Prices             Shares              Life        Price       Shares   Exercise Price
<S>      <C>             <C>              <C>              <C>      <C>                  <C>
$ 4.18 - $10.77            459,301        2.03 years       $5.38       431,801           $ 5.28
$11.27 - $19.97          1,158,127        7.66 years       $15.94      423,787           $15.08
$20.00 - $28.00            500,671        7.15 years       $21.45      281,641           $21.45
-----------------------------------------------------------------------------------------------
$ 4.18 - $28.00          2,118,099        6.32 years       $14.96    1,137,229           $12.94
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for stock option grants: expected volatility of 51% and 47%,
risk free interest rates of 5.31% and 6.38%, and expected lives of 6.3 years and
6.2 years for 1998 and 1997, respectively. The calculations assume no future
dividend payments for grants in 1998, 1997 and 1996.

Restricted stock awards made to date under the 1992 Stock Plan were issued at no
cash cost to the recipients; however, such employees generally agreed to forego
salary increases and new stock option grants for a period of two years, other
than for exceptional promotions. The restricted shares generally vest in 25%
increments in the seventh, eight, ninth and tenth year from the year of award.
An accelerated vesting schedule may be triggered if certain performance targets
are achieved. Specifically, the vesting of 50% of such shares may be accelerated
(but not sooner than three years from the award year) based upon the average
sale price of the Company's stock price during a period of 91 consecutive
calendar days exceeding specified target levels. The remaining 50% of such
shares may be accelerated based on average earnings per common share over three
consecutive fiscal years exceeding specified target levels beginning with the
award year. Restricted shares are subject to forfeiture in certain circumstances
as defined in the 1992 Stock Plan.

Restricted stock activity for the three years ended December 31, 1998 is
summarized as follows:

<TABLE>
<CAPTION>
                                                         Shares
<S>                                                      <C>
Balance, December 31, 1995                               320,605
         Granted                                            --
         Vested                                          (28,347)
         Terminated and canceled                         (17,328)
----------------------------------------------------------------
Balance, December 31, 1996                               274,930
         Granted (weighted average fair value $18.94)     40,000
         Vested                                          (11,848)
         Terminated and cancelled                        (17,626)
----------------------------------------------------------------
Balance, December 31, 1997                               285,456
         Granted (weighted average fair value $16.50)     20,000
         Vested                                          (37,365)
         Terminated and cancelled                        (62,841)
----------------------------------------------------------------
Balance, December 31, 1998                               205,250
</TABLE>

Unearned compensation with respect to restricted shares, representing the fair
value of the restricted shares at date of award, is charged to income over the
shorter of a ten-year period or the period of actual vesting. Compensation
expense with respect to restricted shares, net of forfeitures, amounted to
$26,000 in 1998, $424,000 in 1997, and $382,000 in 1996.

At December 31, 1998 and 1997, 4,209,933 and 2,962,027 common shares,
respectively, were reserved for outstanding stock options and for future grants
of stock options and restricted shares under all Stock Plans. In addition,
500,000 shares of Series C Junior Participating Preferred Stock are authorized
for issuance under the Company's Stockholder Rights Plan.

If the Company had elected to recognize compensation cost for its stock based
compensation plans based on the fair value at the grant dates for awards under
those plans in accordance with SFAS 123, net income (loss) and earnings per
common share would have been reduced to the pro forma amounts below (amounts in
thousands, except per share data):

<TABLE>
<CAPTION>
                              1998     1997       1996
<S>                        <C>        <C>       <C>
Net income (loss):
     As reported           ($10,222)  $23,349   $13,066
     Pro forma             ($12,042)  $21,562   $11,794
Earnings (loss):
  per common share,
  Basic: As reported          ($.38)     $.87      $.50
           Pro forma          ($.44)     $.80      $.45
  Diluted: As reported        ($.38)     $.86      $.48
           Pro forma          ($.44)     $.80      $.44
</TABLE>

                                       19
<PAGE>   20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5:  COMMITMENTS AND CONTINGENCIES

The Company's leases consist primarily of facilities and equipment and expire
principally between 1999 and 2005. A number of leases require that the Company
pay certain executory costs (taxes, insurance and maintenance) and contain
renewal and purchase options. Annual rental expense for operating leases
included in results from continuing operations approximated $3,900,000 in 1998,
$4,600,000 in 1997, and $3,900,000 in 1996. Future minimum payments under
noncancelable leases as of December 31, 1998 were as follows (amounts in
thousands):

<TABLE>
<CAPTION>
                                            Operating               Capitalized
                                            Leases                     Lease
<S>                                        <C>                       <C>
1999                                       $ 4,019                   $ 2,450
2000                                         3,350                     2,450
2001                                         3,111                     2,450
2002                                         2,830                     2,450
2003                                         1,850                     2,450
Thereafter                                   1,960                     4,900
-------------------------------------------------------------------------------
  Total minimum
    lease payments                         $17,120                    17,150
-------------------------------------------------------------------------------
  Less: amount
    representing interest                                             (4,491)
-------------------------------------------------------------------------------
Present value of future minimum
  lease payments including current
  maturities of $1,392                                               $12,659
</TABLE>

The Company is self-insured for health care and workers compensation up to
predetermined amounts above which third party insurance applies. The Company is
fully insured through third party insurance for general liability and product
liability. The Company is contingently liable to insurance carriers under its
workers compensation and liability policies and has provided letters of credit
in favor of these carriers in the amount of $1,172,000.

In 1996, the Company entered into an agreement to make an equity investment in
NextWave Telecom Inc. ("NextWave"), and whereby NextWave agreed to purchase
$50,000,000 of equipment and services over a five-year period from the Company.
In connection with this agreement, subject to certain preconditions that have
not yet occurred, the Company agreed to provide secured product financing in
addition to its investment. In 1998, NextWave and certain of its subsidiaries
filed for relief under Chapter 11 of the United States bankruptcy code;
accordingly, the status of this commitment is, at this time, unlikely to be
filled.

Various legal actions are pending against or involve the Company and its
subsidiaries with respect to such matters as product liability, casualty claims
and employment practices. In the opinion of management, after review and
consultation with counsel, the aggregate liability, if any, that ultimately may
be incurred in excess of amounts already provided should not have a material
adverse effect on the consolidated financial position, results of operations or
cash flow of the Company.

The Company is subject to federal, state and local laws designed to protect the
environment and believes that, as a general matter, its policies, practices, and
procedures are properly designed to reasonably prevent risk of environmental
damage and financial liability to the Company. The Company has identified
potential environmental damage at two formerly occupied manufacturing
facilities. In this regard, the Company has engaged a contractor to evaluate one
of the sites and determine the cost, if any, to resolve environmental damage.
While the ultimate cost cannot yet be specifically determined, the Company
currently believes the costs of remediation at this site will not exceed
$100,000. Based upon environmental assessments of the second site, the Company
believes that the cost of any potential remediation, for which the Company may
ultimately be responsible, will not have a material adverse effect on the
consolidated financial position, results of operations or cash flow of the
Company.

NOTE 6:  PENSION AND
EMPLOYEE BENEFIT PLANS

The Company has noncontributory pension plans covering the majority of its
full-time domestic employees. Plans covering salaried employees provide benefits
that are based on years of service and compensation during the ten-year period
prior to retirement, while the plan covering hourly employees typically provides
benefits based on specified amounts for each year of service. Domestic pension
costs are funded in compliance with the requirements of the Employee Retirement
Income Security Act of 1974, as amended, as employees become eligible to
participate, generally upon employment.

Net periodic pension cost of continuing operations for the Company's plans
included the following components (amounts in thousands):
<TABLE>
<CAPTION>
                                    1998      1997       1996
<S>                              <C>        <C>        <C>    
Service cost benefits
  earned during the year         $ 1,549    $ 1,204    $ 1,165
Interest cost on the projected
  benefit obligation               2,261      2,244      2,354
Actual income on plan assets      (1,779)    (5,602)    (3,474)
Net settlement gain                  (29)      --         --
Net amortization and deferral       (880)     3,576      1,509
--------------------------------------------------------------
Net periodic pension cost        $ 1,122    $ 1,422    $ 1,554
</TABLE>

Plan assets consist principally of equity securities (including 92,000 common
shares of the Company).

A reconciliation of the plans' projected benefit obligation, fair value of plan
assets, and funding status is as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                      1998        1997
<S>                                 <C>         <C>     
Projected benefit obligation:
  Balance, beginning of year        $ 31,341    $ 29,212
  Service cost                         1,549       1,204
  Interest cost                        2,261       2,244
  Benefits paid                       (2,076)     (1,781)
  Loss recognized                      2,856         462
  Settlements                           (583)       --
--------------------------------------------------------
                                    $ 35,348    $ 31,341
Fair value of plan assets:
  Balance, beginning of year        $ 28,086    $ 23,970
  Return on assets                     1,779    $  5,602
  Employer contributions                 216         206
  Benefits paid and plan expenses     (1,769)     (1,692)
--------------------------------------------------------
                                    $ 28,312    $ 28,086
Funding Status:
  Projected benefit obligation      $(35,348)   $(31,341)
  Fair value of plan assets           28,312      28,086
--------------------------------------------------------
  Unfunded obligation                 (7,036)     (3,255)
  Unrecognized:
    Net (gain)/loss                    2,190      (1,014)
    Prior service cost                 1,739       1,867
    Transition assets                   (135)       (189)
Additional minimum liability            (694)       (621)
--------------------------------------------------------
    Accrued liability               $ (3,936)   $ (3,212)
</TABLE>

                                       20
<PAGE>   21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

With respect to certain of the Company's pension plans, the accumulated pension
obligation exceeds the fair value of the plan assets, as follows (amounts in
thousands):
<TABLE>
<CAPTION>
                                   1998     1997
<S>                              <C>      <C>   
Accumulated benefit obligation   $7,502   $7,211
Fair value of plan assets         2,767    2,755
</TABLE>

The weighted average rates used in determining pension cost for the plans' are:

<TABLE>
<CAPTION>
                                   1998     1997
<S>                              <C>      <C>    
Discount rate                    6 3/4%   7 1/4%
Expected rate of increase
         in compensation              5%       5%
Expected long-term rate of
         return on plan assets   9 3/4%   9 3/4%
</TABLE>

The Company provides health care and life insurance benefits for certain retired
employees who reach retirement age while working for the Company. The components
of the expense for postretirement health care and life insurance benefits from
continuing operations are as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                     1998    1997     1996
<S>                                 <C>     <C>      <C>  
Service cost benefits attributed
         to service during period   $   4   $   6    $  15
Interest cost on accumulated
         post-retirement
         benefit obligation           105     110      110
Amortization of (gain) loss             2      (3)      (2)
----------------------------------------------------------
Net postretirement
         health care cost           $ 111   $ 113    $ 123
</TABLE>

The components of the accumulated postretirement benefit obligations (all of
which are unfunded) are as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                  1998     1997     1996
<S>                             <C>      <C>      <C>   
Retirees                        $1,403   $1,319   $1,103
Fully eligible active
         plan participants          69       96      102
Other active plan
         participants               72       87      141
Unrecognized net gain               60       74      263
--------------------------------------------------------
Accumulated postretirement
         benefit obligations    $1,604   $1,576   $1,609
</TABLE>

A reconciliation of the accumulated postretirement benefit cost is as follows 
(amounts in thousands):

<TABLE>
<CAPTION>
                                             1998       1997
<S>                                       <C>        <C>
Balance as of January 1,                  $ 1,576    $ 1,609
Net postretirement benefit cost:
         Service cost                           4          7
         Interest Cost                        105        110
         Amortization of gains/(losses)         2         (4)
Actual benefits paid                          (83)      (146)
------------------------------------------------------------
Balance as of December 31,                $ 1,604    $ 1,576
</TABLE>

The actuarial calculation assumed a health care cost trend rate of 9.2% for 1998
(9.6% in 1997 and 13.2% in 1996). In 1997, the assumed trend rate was reduced
based on the most current data. The assumed rate decreases approximately .4% per
year through the year 2010 to 5.0% and remains constant beyond that point.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change (plus or
minus) in the assumed health care cost trend rules would have the following
effects (amounts in thousands):

<TABLE>
<CAPTION>
                                            Plus      Minus
                                         1% Point   1% Point
<S>                                        <C>       <C>  
Effect on total of service
         and interest cost components      $  5      $ (4)
Effect of postretirement
         benefit obligation                $ 51      $(46)
</TABLE>

The weighted average discount rate used in determining the accumulated
postretirement benefit obligations was 6.75% in 1998, 7.25% in 1997 and 7.50% in
1996. The amount of unrecognized net gain related to the Company's
postretirement health benefits was $60,000 at December 31, 1998.

NOTE 7:  INCOME TAXES

Information with respect to income taxes in continuing operations is as follows
(amounts in thousands):

<TABLE>
<CAPTION>
                                    1998           1997           1996
<S>                             <C>            <C>            <C>     
Income (loss) before taxes
  and minority interests:
    Domestic                    $(22,892)      $  5,351       $  9,472
    Foreign                       14,338         41,362         37,054
----------------------------------------------------------------------
                                $ (8,554)      $ 46,713       $ 46,526
(Benefit) Provision
  for income taxes:
  Current:
    Federal                     $ (6,206)      $  2,247       $  2,764
    Foreign                       10,661         22,867         19,170
    State and local                  550            766            580
----------------------------------------------------------------------
                                   5,005         25,880         22,514
----------------------------------------------------------------------
  Deferred:
    Federal                       (5,472)        (5,275)        (2,054)
    Foreign                       (4,571)          (542)           108
    State and local                 (272)        (2,340)          (903)
                                 (10,315)        (8,157)        (2,849)
----------------------------------------------------------------------
                                $ (5,310)      $ 17,723       $ 19,665
----------------------------------------------------------------------
</TABLE>

A reconciliation of the (benefit) provision for income taxes at the U.S. Federal
statutory rate of 35% to the reported tax is as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                      1998           1997           1996
<S>                               <C>            <C>            <C>     
(Benefit) provision computed
   at the U.S. Federal
   statutory rate                 $ (2,994)      $ 16,350       $ 16,284
State and local income
   taxes, net of Federal
   income tax effect                   311         (1,023)          (210)
Net higher tax rates
   on foreign income                   406          7,016          6,082
Benefit of foreign sales
   corporation and other
   tax credits                      (1,513)        (2,115)        (2,055)
Impact of tax rate change
   on prior undistributed
   foreign earnings                 (3,670)          --             --
Tax effect of write-off of
   non-deductible acquired
   in-process research
   and development costs              --             --              932
Other, net                           2,150         (2,505)        (1,368)
------------------------------------------------------------------------
                                  $ (5,310)      $ 17,723       $ 19,665
</TABLE>

                                       21
<PAGE>   22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the Company's total provision (benefit) for
income taxes (amounts in thousands):

<TABLE>
<CAPTION>
                                      1998           1997           1996
<S>                               <C>            <C>            <C>     
Continuing operations             $ (5,310)      $ 17,723       $ 19,665
Discontinued operations             (2,640)          --           (3,780)
Extraordinary item                    --             (364)          --
Tax benefit of carryforward
  allocated to goodwill               --            6,085           --
Allocated to equity:
  Unrealized appreciation
    on investment securities          --            4,027           --
  Stock options                       (139)          (653)           (82)
  Pension gain (loss)                 (148)           149            112
------------------------------------------------------------------------
                                  $ (8,237)      $ 26,967       $ 15,915
</TABLE>

The components of deferred tax assets (liabilities) are comprised of the
following as of December 31, 1998 and 1997 (amounts in thousands):

<TABLE>
<CAPTION>
                                               1998           1997
<S>                                        <C>            <C>     
Gross deferred tax assets:
  Inventory                                $  5,718       $  4,854
  Bad debt reserves                           3,506          1,448
  Pensions and deferred
    compensation                              1,605          2,419
  Tax credit carryforwards                    2,546          1,575
  Plant consolidation reserve                 4,405          1,095
  Product warranty claims                       543          1,735
  Net operating loss carryforwards           11,512          3,116
  Unremitted foreign earnings                 4,747           --
  Other                                       1,181          1,332
------------------------------------------------------------------
                                             35,763         17,574
------------------------------------------------------------------

Gross deferred tax liabilities:
  Intangible assets                          (1,808)        (3,455)
  Depreciation                               (1,370)        (2,686)
  Unrealized appreciation on
    investment securities                      --           (4,027)
  Deferred start-up costs                    (1,850)        (2,309)
  Other                                      (8,595)        (5,920)
------------------------------------------------------------------
                                            (13,623)       (18,397)
------------------------------------------------------------------
Net deferred tax assets (liabilities)      $ 22,140       $   (823)
</TABLE>

During 1998, 1997, and 1996, general business tax credits of approximately
$600,000, $900,000 and $470,000, generated in the respective years were used to
reduce the provision for income taxes. At December 31, 1998, the Company has
available alternative minimum tax credits in the amount of $476,000 available to
reduce future Federal income tax liabilities.

United States income taxes are not provided on undistributed earnings of the
Company's foreign subsidiaries because of the intent to reinvest these earnings.
The amount of undistributed earnings which are considered to be indefinitely
reinvested is approximately $42,000,000 at December 31, 1998. While the amount
of federal income taxes, if such earnings are distributed in the future, cannot
now be determined, such taxes may be reduced by tax credits and other
deductions.

The Company has a U.S. net operating loss carryforward in the amount of
approximately $33,000,000 (generated principally in 1998) available to reduce
future taxable income and may be carried forward for twenty years. The Company
has not provided any valuation allowance with respect thereto as it believes the
realization of this asset is "more likely than not."

NOTE 8:  INDUSTRY SEGMENT
AND GEOGRAPHIC DATA

In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This Statement redefines the way publicly held companies
report information about segments and is effective for the 1998 fiscal year.
Management has determined that the Company conducts its business through two
segments, based on products provided and services rendered: Telecommunications
Equipment Manufacturing and Wireless Engineering Services. Telecommunications
Equipment Manufacturing consists of three product lines: Systems Products, Site
Management and Other Non-Antenna Products, and Mobile and Base Station Antennas.

The following shows the operating results and asset positions for each of the
reportable segments for the years ended December 31, 1998, 1997, and 1996
(amounts in thousands).

<TABLE>
<CAPTION>
                                         1998            1997            1996
<S>                                 <C>             <C>             <C>      
Results of Operations:
  Segment results:
    Telecommunications
      equipment
      manufacturing                 $  12,256       $  60,812       $  53,382
    Wireless engineering
      services                         (7,867)         (2,573)          3,408
-----------------------------------------------------------------------------
                                        4,389          58,239          56,790
  Other income, net                     6,065           1,885             952
  Goodwill amortization                (6,295)         (3,404)         (2,432)
  General corporate
      expenses                         (5,908)         (6,956)         (5,999)
  Financing costs                      (6,805)         (3,051)         (2,785)
-----------------------------------------------------------------------------
Income (loss) before taxes
  and minority interests            $  (8,554)      $  46,713       $  46,526

Assets:
  Segment assets:
    Telecommunications
      equipment
      manufacturing                 $ 244,487       $ 271,046       $ 226,035
  Wireless engineering
      services                         16,527          20,918          23,915
-----------------------------------------------------------------------------
                                      261,014         291,964         249,950
  Goodwill                            131,939         126,923          75,502
  Assets of discontinued
    emissions testing
    business                           25,799          33,363          48,619
  Deferred income taxes                24,175           7,244             932
  Other general
    corporate assets                   22,658          54,939          35,509
-----------------------------------------------------------------------------
Total assets                        $ 465,585       $ 514,433       $ 410,512

Sales from external customers:
  Telecommunications
    equipment
    manufacturing                   $ 360,589       $ 396,828       $ 334,029
  Wireless engineering
    services                           27,415          35,680          35,469
-----------------------------------------------------------------------------
  Total sales                       $ 388,004       $ 432,508       $ 369,498
Depreciation and
  software amortization:
  Telecommunications
    equipment
    manufacturing                   $  13,990       $  12,072       $  10,888
  Wireless engineering
    services                        $   3,510       $   3,532       $   3,007
Fixed asset and
  capitalized software
  additions:
  Telecommunications
    equipment
    manufacturing                   $  18,361       $  24,220       $  17,547
  Wireless engineering
    services                        $   3,635       $   3,296       $   4,615
</TABLE>

                                       22

<PAGE>   23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The distribution of the Company's geographic sales and long-lived assets
(excluding deferred income taxes) is as follows (amounts in thousands):

<TABLE>
<S>                     <C>           <C>           <C>
Sales:                      1998          1997          1996
United States           $230,997      $272,346      $249,084
Italy                    113,401       117,607        92,284
Germany                   50,905        48,622        43,013
Other                     71,115        69,309        45,119
Intergeographic          (78,414)      (75,376)      (60,002)
------------------------------------------------------------
Total                   $388,004      $432,508      $369,498

Long-lived assets:          1998          1997          1996
United States           $220,505      $249,071      $193,626
Italy                     13,347        12,484        11,419
Germany                    7,487         7,014         4,708
Other                      5,097         3,828         1,580
------------------------------------------------------------
Total                   $246,436      $272,397      $211,333
</TABLE>


Sales by product line for the Telecommunications Equipment Manufacturing segment
are presented in the bar charts on page 27.

NOTE 9:  ACQUISITIONS AND DISPOSITIONS

In 1998, the Company acquired additional minority interests in several of its
subsidiaries. In June 1998, the Company acquired an additional 10% of Telia S.A.
("Telia") in France bringing its ownership interest to 72%. In July 1998, the
Company acquired the remaining 40% minority interest of Mikom Vertriebs und
Service G.m.b.H., in Austria. The remaining 60% interest is owned by the
Company's Mikom G.m.b.H. ("MIKOM") subsidiary in Germany. In October 1998, the
Company acquired an additional 12% interest in MIKOM, bringing its total
interest in MIKOM to 74%. In November 1998, the Company acquired the remaining
outstanding 35.7% minority interest in Tekmar Sistemi S.r.l. in Italy. All such
transactions were in cash and aggregated approximately $15,400,000.

In 1997, the Company acquired the remaining 20% minority interest in FOREM
S.r.l. ("FOREM"), and now owns 100% of FOREM. In a series of transactions to
acquire this 20% minority interest, the Company paid $31,297,000 in cash and
261,014 shares of the Company's common stock with an aggregate value of
approximately $6,000,000. The final purchase price was contingent upon the net
income of FOREM's 1997 fiscal year. At December 31, 1997, the Company had
recorded the estimated liability (included in accounts payable) for this final
cash payment in the amount of approximately $26,400,000, paid in 1998. In 1997,
the Company acquired 62% of the stock of Telia for a purchase price comprised of
approximately $3,000,000 in cash and shares of the Company's stock. This
transaction was recorded under the purchase method of accounting. The final
purchase price was contingent upon the net income of Telia's 1997 fiscal year.
At December 31, 1997, the Company had recorded the estimated liability (included
in accounts payable) for this final payment in the amount of approximately
$830,000. The remaining 28% ownership interest of Telia, which is held by senior
Telia management, is subject to put and call options, which provide for a
purchase price based upon future operating results.

In 1996, the Company acquired, in exchange for 83,964 shares of its common
stock, 100% of Signal Science, Incorporated ("SSI"). In addition, the selling
shareholders may receive further contingent cash consideration based on sales
over an eight-year period (none of which has been earned). The Company accounted
for the acquisition under the purchase method. In addition, the Company incurred
a one-time non-cash charge relating to the write-off of purchased in-process
research and development costs of $2,662,000. SSI's primary business is research
and development projects involving special purpose radio signal equipment for
telecommunications applications. In 1996, the Company also acquired a 64.3%
interest in Tekmar for cash and 9,783 shares of common stock. Further, in 1996,
the Company acquired the remaining 20% minority interest of its Grayson Wireless
subsidiary for cash.

Pro forma results of operations for the acquisitions in 1997 and 1996 have not
been presented because the impact is not significant to results of operations.

On March 1, 1999, the Company sold its MARTA Technologies, Inc. ("Marta")
subsidiary, which operated its discontinued centralized automotive emissions
testing programs, to a subsidiary of Environmental Systems Products, Inc.
Pursuant to the terms of the agreement, the Company received cash and notes in
exchange for the outstanding capital stock of Marta. Additional purchase price
consideration may be earned and is contingent on future events. The net book
value of the assets to be sold (including a capitalized lease obligation in the
amount of $12,659,000) amounts to approximately $9,000,000, before accrual for
any costs of disposal.

In December 1998, Marta and the State of Ohio entered into agreements to modify
the vehicle emissions testing program in Cincinnati and to settle pending
litigation between Marta and the State of Ohio. Pursuant to the settlement
agreement, Marta entered into a change order with the State for the conversion
of the current vehicle emissions testing process to a simpler lower speed test.
The cost of the change order will be funded by the State.

On February 16, 1999, Marta settled litigation with the State of Kentucky in
connection with the effective cancellation of a contract to operate the
centralized automotive testing program in Northern Kentucky.

In 1998, the Company recognized an additional loss for the discontinued
emissions testing business in the pretax amount of $7,350,000 or $4,710,000
after related income tax benefit of $2,640,000 ($.17 per basic and diluted
common share) relating principally to the diminution in the estimated value of
its Cincinnati, Ohio emissions testing program. The Company believes that the
aforementioned sale of Marta will not result in the need for an additional loss
provision.

                                       23
<PAGE>   24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summarized income statement information relating to the results of discontinued
operations of Marta for 1996 is as follows (amounts in thousands, except per
share data):

Sales                                               $ 14,914
Operating loss                                        (5,627)
Net loss                                              (3,766)
Loss per common share (basic and diluted)               (.14)

In 1997 and 1998, the residual operations of Marta were not material in relation
to the continuing operations of the Company. Results of operations for Marta are
net of allocated interest of $1,243,000 in 1996.

NOTE 10:  FAIR VALUES OF
FINANCIAL INSTRUMENTS

Financial Accounting Standards Board ("FASB") Statements No. 107, "Disclosure
about Fair Value of Financial Instruments," and No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments," are
part of a continuing process by the FASB to improve information regarding
financial instruments. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for such financial instruments
as defined by the Statements.

Cash and Short-Term Investments: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.

Long-Term Investments: It is not practicable to estimate the fair value of the
Company's 8% investment in the common stock of its former specialty rubber
products business or its other investments in telecommunications companies
because of the lack of quoted market prices and the inability to estimate fair
value without incurring excessive costs. However, management believes that the
carrying amounts recorded at December 31, 1998 reflects the corresponding fair
value. In 1997, one of the Company's investments in telecommunications companies
was carried at fair market value, based on its quoted stock price at December
31, 1997. This investment was sold in 1998.

Long-Term Debt: The fair values of the Company's long-term debt either
approximate fair value or are estimated using discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.

Off-balance-sheet instruments: The Company utilizes letters of credit to back
certain financing instruments and insurance policies. The letters of credit
reflect fair value as a condition of their underlying purpose and are subject to
fees competitively determined in the market place. The Company enters into
foreign currency contracts to offset the impact of currency rate changes related
to accounts receivable. The fair value of such contracts are based on quoted
market prices of comparable contracts. The carrying amounts and fair values of
the Company's financial instruments at December 31, 1998 and 1997 are as follows
(amounts in thousands):

<TABLE>
<CAPTION>
                                  Carrying       Fair
                                  Amount         Value

<S>                              <C>           <C>     
1998
Cash and cash equivalents        $ 19,900      $ 19,900
Non-current investments             5,195         5,195
Long-term debt                    141,633       145,175
Off balance sheet financial
  instruments:
    Letters of credit               1,220         1,220
    Foreign currency net
      sales contracts               5,523         5,519

1997
Cash and cash equivalents        $ 30,775      $ 30,775
Non-current investments            34,700        34,700
Long-term debt                    105,171       106,732
Off balance sheet financial
  instruments:
    Letters of credit               1,591         1,591
    Foreign currency net
      sales contracts               6,889         6,909
</TABLE>

NOTE 11:  SUPPLEMENTAL
CASH FLOW DISCLOSURE

There were no significant non-cash transactions in 1998.

During 1997, the following non-cash transactions were effected and are not
reflected in the Consolidated Statement of Cash Flows:

As described in Note 9, in 1997 the Company acquired 62% of Telia and the
remaining 20% minority interest in FOREM, in exchange for, in part, 289,389
shares of its common stock.

As described in Note 3, in 1997 the Company owned common stock and warrants in
RF Micro Devices, Inc. On December 31, 1997, the Company increased its
investment value to reflect its current trading value on that date of
$12,668,000, and recorded the related unrealized appreciation in the pretax
amount of $9,588,000 ($5,561,000 after related income tax effect) to
Stockholders' Equity as "Accumulated other comprehensive income (loss)."

As described in Note 9, in 1996 the Company acquired 100% of Signal Science,
Incorporated and 64.3% of Tekmar Sistemi S.r.l. in exchange for, in part, 93,747
shares of its common stock.

Information with respect to cash paid during the year for interest and taxes is
as follows:

<TABLE>
<CAPTION>
                                 1998             1997             1996
<S>                       <C>              <C>              <C>        
Interest paid             $ 8,020,000      $ 4,097,000      $ 4,907,000
Interest
  capitalized                 286,000          220,000             --
Income taxes
  paid, net                24,096,000       27,514,000        1,778,000
</TABLE>

                                       24
<PAGE>   25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12: UNAUDITED QUARTERLY FINANCIAL DATA

Quarterly financial data are summarized as follows (amounts in thousands, except
per share amounts):

<TABLE>
<CAPTION>
                                                      March 31        June 30        Sept. 30          Dec. 31
<S>                                                  <C>            <C>             <C>             <C>      
1998
Sales                                                $ 113,369      $  98,013       $  90,955       $  85,667
Gross profit                                            35,748         17,662          21,928          19,262
Income (loss) from continuing operations                 6,338        (11,134)          2,598          (3,314)
Loss from discontinued operations                         --             --            (4,710)           --
Net income (loss)                                        6,338        (11,134)         (2,112)         (3,314)
-------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share
  Basic and Diluted:
    Continuing operations                                  .23           (.41)            .10            (.12)
    Discontinued operations                               --             --              (.17)           --
    Net income                                             .23           (.41)           (.07)           (.12)
-------------------------------------------------------------------------------------------------------------

                                                                                                         1997
Sales                                                $ 102,503      $ 108,859       $ 111,389       $ 109,757
Gross profit                                            36,541         38,182          40,533          35,661
Income from continuing operations                        7,026          6,734           7,930           2,291
Extraordinary item - extinguishment of debt               --             --              --              (632)
Net income                                               7,026          6,734           7,930           1,659
-------------------------------------------------------------------------------------------------------------
Earnings per common share
  Basic and diluted:
    Continuing operations                                  .26            .25             .29             .08
    Extraordinary item - extinguishment of debt           --             --              --              (.02)
    Net income                                             .26            .25             .29             .06
-------------------------------------------------------------------------------------------------------------
</TABLE>

In the second quarter of 1998, the Company recorded a $15,800,000 before-tax
special charge to earnings, or $.38 per basic and diluted share after related
income taxes. Of this amount, $12,200,000 is recorded in cost of sales, and
$3,600,000 in selling, general and administrative expenses. In the fourth
quarter of 1998, the Company recorded a $3,600,000 before-tax special charge to
earnings, or $.09 per basic and diluted share after related income taxes; of
this amount, $300,000 is recorded in cost of sales, and $3,300,000 in selling,
general and administrative expenses. Such charges relate to inventory, other
asset write-off and employee terminations.

Income (loss) from continuing operations in the third quarter of 1998, includes
net gains in the amount of $7,797,000 from the sale of common stock investments
in telecommunications companies and the recognition of a loss reserve relating
to investments in certain other telecommunications ventures. The aggregate
impact of these was $.17 per basic and diluted share after related income taxes.

Net income for the three months ended September 30, 1998, includes a $3,700,000
deferred tax benefit, or $.13 per basic and diluted share, with respect to a
change in the applicable income tax rate on the undistributed earnings (prior to
1998) of a foreign subsidiary as a result of the Company's acquisition of an
additional interest in such subsidiary. The acquisition allows for earnings
(when distributed) to be taxed at a lower rate.

In the fourth quarter of 1997, the Company recorded a special pre-tax charge in
the amount of $9,650,000, or $.22 per basic and diluted common share after
related tax effects. This charge relates to the discontinuance of product
development and marketing efforts on two products, including the write-off of
related assets, and the cost of employee severance related to a reduction in its
Cleveland based workforce.


                                       25
<PAGE>   26

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Allen Telecom Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and of cash flows
present fairly, in all material respects, the financial position of Allen
Telecom Inc. and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PricewaterhouseCoopers LLP

CLEVELAND, OHIO

FEBRUARY 16, 1999, 
except as to paragraph five of Note 9, which is as of March 1, 1999

REPORT OF MANAGEMENT

To the Board of Directors and
Stockholders of Allen Telecom Inc.

The Company maintains accounting and related internal control systems which are
intended to provide reasonable assurance that assets are safeguarded from loss
or unauthorized use and to produce records necessary for the preparation of
financial information. There are limits inherent in all systems of internal
control, and the cost of the systems should not exceed the expected benefits.
Through the use of a program of internal audits and discussions with and
recommendations from its independent accountants, the Company periodically
reviews these systems and controls and compliance therewith.

The Audit Committee of the Board of Directors, comprised entirely of
non-employee directors, meets regularly with management, the internal auditors
and the independent accountants to review the results of their work and to
satisfy itself that their responsibilities are being properly discharged. The
internal auditors and independent accountants have full and free access to the
Audit Committee and may have discussions regarding appropriate matters, with and
without the presence of management.

The primary responsibility for the integrity of financial information rests with
management. Certain valuations contained herein result, of necessity, from
estimates and judgments of management. Actual results could differ from these
estimates. The accompanying consolidated financial statements, notes thereto and
other related information were prepared in conformity with generally accepted
accounting principles.

Allen Telecom

/s/ Robert G. Paul

ROBERT G. PAUL
PRESIDENT AND CHIEF
EXECUTIVE OFFICER

/s/ Robert A. Youdelman

ROBERT A. YOUDELMAN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER

/s/ James L. Leporte, III

JAMES L. LEPORTE, III
VICE PRESIDENT
AND CONTROLLER, CHIEF
ACCOUNTING OFFICER

                                       26

<PAGE>   27

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS
OVERVIEW

<TABLE>
<CAPTION>
($ millions)                                 1998          1997         1996
<S>                                     <C>           <C>          <C>      
Sales                                   $   388.0     $   432.5    $   369.5
Operating income
(before special charges and
         credits, discussed below)      $    11.6     $    57.1    $    49.4
Income (loss) before taxes
         and minority interests         $    (8.5)    $    46.7    $    46.5
</TABLE>

In 1998, sales declined by $44.5 million, or 10%, driven by the unsettled
climate for the global wireless telecommunications market. During 1998, economic
dislocations in Asia became more widespread and were followed by economic
disruption in South America, notably Brazil. In addition, European original
equipment manufacturers ("OEM's") had excess inventory at a time when worldwide
demand was decreasing. The development of wireless networks in the U.S. has not
increased as anticipated, affecting domestic sales. The Company currently sees
no significant change in its market in the near term, but hopes to see gradual
improvement as the uncertainties in Asia and South America are resolved.

The increase in sales in 1997 to $432.5 million, or 17% over 1996, was due
primarily to growth of international sales, which increased approximately $51
million. The Site Management and Other Non-antenna and Systems product lines
were the beneficiaries of this growth.

In 1998, international sales constituted approximately 58% of total sales,
compared with 60% in 1997, and 56% in 1996. Export sales from the U.S. are
primarily to major wireless telephony companies, and are typically payable in
U.S. dollars. European sales are primarily to major OEMs and wireless operators
in European currencies.

Operating income, representing income before financing costs and special charges
and credits (as discussed below), decreased from $57.1 million in 1997, or 13%
of sales to $11.6 million in 1998, or 3% of sales. Results were impacted by
lower gross profit margins and the impact of fixed costs on lower sales. In
addition, cost reductions in selling, general and administrative expenses did
not significantly impact the Company's results until the fourth quarter of 1998.
Operating income for 1997 increased $7.4 million or 14% over 1996. This is
attributable principally to the growth of the Site Management and Base Station
Antenna businesses, improved product margins and the spreading of fixed costs on
higher sales.

In 1998, the Company initiated a number of cost reduction efforts to improve and
adjust operations to existing market conditions. These actions include, among
others, the discontinuance of product development and marketing efforts on
certain products, the formation of a worldwide Systems business, the
consolidation of two manufacturing operations of the Systems product line, and
the reorganization of the Company's North American-based sales force and
Wireless Engineering Services business. As a result of asset write-offs,
severance and other costs associated with such actions, the Company incurred
before-tax charges for the year of $19.4 million, or $.47 per basic and diluted
share after related taxes. Such cost reduction efforts were offset, in part, by
net gains from the sale of telecommunications investments as well as the
recognition of loss reserves on other investments in the amount of $6.0 million,
or $.14 per basic and diluted share after related income taxes.

In the fourth quarter of 1997, the Company recorded special charges of $9.6
million ($6.0 million after related income taxes or $.22 per basic and diluted
share) relating to the discontinuance of product development and marketing
efforts on two products, including the write-off of assets and the cost of
employee severance. These charges were offset, in part, by a $2.2 million gain
from telecommunications investments. Operating income in 1996 excludes the
one-time non-cash charge for acquired in-process research and development
incurred in connection with an acquisition in the amount of $2.7 million, or
$.10 per basic and diluted share.

RESULTS OF OPERATIONS BY SEGMENT

TELECOMMUNICATIONS
EQUIPMENT MANUFACTURING:

<TABLE>
<CAPTION>
($ millions)                               1998          1997          1996
<S>                                   <C>           <C>           <C>      
Sales                                 $   360.6     $   396.8     $   334.0
Gross profit, % of sales                   25.0%         36.4%         36.0%
Operating expenses,
         % of sales                        13.3%         13.5%         13.8%
Research and development
         and new product
         engineering, % of sales            8.3%          7.6%          6.3%
Operating income                      $    12.3     $    60.8     $    53.4
</TABLE>

The decrease in sales in 1998 to $360.6 million, or 9% below 1997, was due
essentially to weakness in international sales which decreased approximately $32
million, or 13%. Sales of foreign operations were negatively impacted by the
strong U.S. dollar relative to certain European currencies in fiscal 1997. As a
result of exchange differences, reported sales in the year ended December 31,
1998 were $6.7 million lower as compared with the corresponding prior year
period, assuming the exchange rates stayed the same. The Site Management and
Systems product lines were primarily affected by this decrease. The 19% increase
in sales in 1997 to $396.8 million was due to the growth in international sales
increasing $49.6 million, or 25% compared to 1996.

Sales of Systems products, which generally are comprised of booster and repeater
products for cellular and PCS systems, test and measurement products, as well as
indoor coverage products, decreased 17% in 1998 to $92.6 million, as compared
with $111.0 million in 1997.

[BAR GRAPH]
<TABLE>
<CAPTION>
SALES OF SYSTEMS PRODUCTS
(MILLIONS OF DOLLARS)
<S>      <C>
94       $76.1
95       $95.1
96       $94.1
97       $111.0
98       $92.6
</TABLE>

[BAR GRAPH]
<TABLE>
<CAPTION>
SALES OF SITE MANAGEMENT AND OTHER NON-ANTENNA PRODUCTS
(MILLIONS OF DOLLARS)
<S>      <C>
94       $53.0
95       $112.9
96       $159.3
97       $197.3
98       $184.5
</TABLE>

[BAR GRAPH]
<TABLE>
<CAPTION>
SALES OF MOBILE AND BASE STATION ANTENNAS
(MILLIONS OF DOLLARS)
<S>      <C>
94       $68.7
95       $73.8
96       $80.6
97       $88.5
98       $83.5
</TABLE>

[BAR GRAPH]
<TABLE>
<CAPTION>
SALES OF WIRELESS ENGINEERING SERVICES
(MILLIONS OF DOLLARS)

<S>       <C>  
94        $15.7
95        $24.8
96        $35.5
97        $35.7
98       $27.4
</TABLE>

                                       27
<PAGE>   28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Much of this decrease was due to lower sales of the Extend-A-Cell(R) frequency
translating repeater and microcell products. The 18% increase in 1997 to $111.0
million, as compared with $94.1 million in 1996, was primarily due to higher
shipments of test and measurement products to domestic PCS and international
markets.

Sales of Site Management and Other Non-antenna products, which includes tower
mounted amplifiers, filters, combiners and duplexers, decreased to $184.6
million or 6% below 1997 sales of $197.3 million. Sales were adversely affected
by slowdown in OEM production levels due to the Asian crisis and the high levels
of inventory mentioned previously. The 24% increase in 1997 to $197.3 million,
compared with $159.3 million in 1996, was due to the Company's strong market
presence in Europe and the worldwide acceptance of GSM technology.

The sales of Mobile and Base Station Antennas remained strong, though down
slightly, at $83.5 million. This $5.0 million decrease, or 6% under the 1997
levels of $88.5 million, occurred mainly in the domestic market as sales of base
station and land mobile antennas slowed significantly in the fourth quarter of
1998. The 10% increase in sales in 1997 to $88.5 million was due to an increase
in sales of base station antennas. However, this increase was partially offset
by a decline in mobile antenna sales.

At December 31, 1998, the Company had an order backlog for this segment of
approximately $51.9 million, down from approximately $112.5 million at December
31, 1997 and $109.0 million at December 31, 1996.

Gross profit margins declined in 1998 as compared with 1997. Excluding the
aforementioned special charges for severance and the write-off of certain assets
relating to the discontinuation of certain product development efforts of $12.5
million in 1998 and $2.0 million in 1997, the gross profit margins would have
been 28.5% in 1998 compared to 36.9% in 1997. This 8.4 percentage point decline
in profit margins is due primarily to the spreading of fixed costs over lower
sales, pricing pressure caused by excess capacity throughout the industry,
product mix and higher obsolescence and warranty provisions. In 1999, the
Company anticipates continued pricing pressure to be partially offset by savings
from restructuring efforts and lower in-country production costs in China,
Mexico and Brazil. In 1997, excluding restructuring, the small increase in
margins, 36.9% compared with 36.0% in 1996, was due to slightly improved margins
in the Base Station Antenna and Systems product lines, partially offset by
pricing pressures in the Site Management product line.

Operating expenses, which consist of selling, general and administrative
expenses, but exclude amortization of goodwill, decreased in 1998, due primarily
to the aforementioned restructuring efforts at the end of 1997 and during 1998
which reduced expenses. The special charges associated with these restructuring
efforts were $4.3 million in 1998 and $5.0 million in 1997. Excluding these
special charges the operating expenses would have been 12% of sales in both 1998
and 1997. With the savings from restructuring efforts, operating expenses are
anticipated to be lower in 1999. The decline in percentage in 1997 from 1996
represents the spreading of fixed costs on higher sales.

In the past few years, the Company has significantly increased its research and
development and new product engineering costs in order to keep pace with the
technological advances in the industry. The Company anticipates that this trend
will continue as PCS and cellular systems are implemented and expanded and the
Company strives to develop ancillary products, including emergency 911
geolocation systems and software products, for the wireless telephony industry.

<TABLE>
<CAPTION>
WIRELESS ENGINEERING SERVICES:
($ millions)                   1998        1997       1996
<S>                          <C>         <C>         <C>  
Sales                        $ 27.4      $ 35.7      $35.5
Gross profit,
         % of sales            16.6%       17.6%      30.3%
Operating expenses,
         % of sales            42.3%       24.6%      20.7%
Operating income (loss)      ($ 7.9)     ($ 2.6)     $ 3.4
</TABLE>

Wireless Engineering Services provides engineering and consulting services to
major wireless operators. In 1998, sales for the segment decreased from $35.7
million in 1997 to $27.4 million in 1998, or 23%. This decline was due to a
general slowdown in the pace of development of wireless networks from prior
years.

Gross profit decreased from 17.6% in 1997 to 16.6% in 1998 due to fixed
engineering costs on lower sales and pricing pressures. Gross profit declined
12.7 percentage points from 1996 to 1997 primarily due to the discontinuance of
a software product line and a corresponding cost of sales charge of $2.0 million
for the write-off of certain software development costs.

Operating expenses, as a percentage of sales, was 42.3% in 1998, 24.6% in 1997,
and 20.7% in 1996. In 1998, the Company incurred a one-time charge of $2.6
million due to realigning the Wireless Engineering Services business.
Additionally, the Company incurred costs of $.7 million in 1997 related to the
discontinuance of a software product line. Excluding these one-time charges,
operating costs as a percentage of sales were 32.7% in 1998, 22.6% in 1997, and
20.7% in 1996. The increase in 1998 over 1997 was due to fixed costs on
substantially lower sales.

Backlog for the Wireless Engineering Services segment was $.9 million at
December 31, 1998, $2.5 million at December 31, 1997, and $.2 million at
December 31, 1996.

The Wireless Engineering Services Segment was realigned in the fourth quarter of
1998 to reduce engineering and general and administrative costs. In addition,
product offerings have been reorganized to focus on this segment's core business
of engineering and microwave coordination services. The full impact of such
changes will not benefit segment operating results until early 1999.

<TABLE>
<CAPTION>
FINANCING COSTS
($ millions)                1998          1997          1996
<S>                      <C>           <C>           <C>       
Financing expenses:
Interest expense         $    (8.3)    $    (4.5)    $    (3.8)
Interest income          $     1.5     $     1.5     $     1.0
</TABLE>

The increase in interest expense in 1998 over 1997 is due to higher outstanding
borrowings incurred in connection with the acquisitions of minority interests in
subsidiaries and to support lower cash flow from operations. (See Liquidity and
Capital Resources.) The increase in interest expense in 1997 over 1996 was
primarily related to increased credit line borrowings as a result of the
significant amount of investments ($44.4 million) made in telecommunications
companies.

                                       28
<PAGE>   29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
INCOME TAXES
($ millions)                      1998          1997           1996
<S>                          <C>           <C>            <C>       
Benefit (provision) for
         income taxes        $     5.3     $   (17.7)     $   (19.7)
Effective tax rate                62.1%         37.9%          42.3%
</TABLE>

The significantly higher effective tax rate benefit in 1998, as compared with
1997, is due, in large part, to the impact of a $3.7 million deferred tax
benefit ($.13 per basic and diluted share) with respect to the change in the
applicable income tax rate on the undistributed earnings (prior to 1998) of a
foreign subsidiary as a result of the Company's acquisition of an additional
interest in such subsidiary. The acquisition allows for the Company's pro rata
share of earnings (when distributed) to be taxed at a lower rate.

Through December 31, 1998, the Company has recorded a net U.S. deferred tax
asset pertaining to the recognition of net operating loss carryforwards, related
temporary differences and tax credits in the amount of approximately $20.0
million and has not provided any valuation allowance with respect thereto. The
Company believes the realization of this asset is "more likely than not." This
determination is based upon, in part, that the significant U.S. pretax loss
incurred in 1998, which accounted for the majority of the recognized tax
benefit, included substantial one time net special charges which are not
expected to be recurring, anticipated future U.S. taxable income as well as
available tax planning strategies, should they be necessary, to utilize such
losses in the future. The taxable losses may be carried forward for a period of
twenty years.

The lower effective tax rate in 1997, as compared with 1996, is due to a higher
proportion of tax benefits attributable to the Company's foreign sales
corporation, which has reduced U.S. income taxes payable through favorable tax
treatment accorded certain export sales, and business tax and other credits
available to reduce U.S. income taxes payable. These benefits were offset, in
part, by higher tax rates on European sourced income.

DISCONTINUED OPERATIONS:

As described in Note 9 of the Notes to Consolidated Financial Statements, the
Company has sold its Marta Technologies Inc. ("Marta") subsidiary which operated
its discontinued centralized automotive emissions testing programs. Pursuant to
the agreement, the Company received cash and notes in exchange for the
outstanding capital stock of Marta.

In the third quarter of 1998, the Company recognized an additional loss for the
disposal of the Marta business in the pretax amount of $7.3 million ($4.7
million after related income tax benefit of $2.6 million), or $.17 per basic and
diluted common share. (This is the primary reason for the reduction in "Assets
of discontinued emissions testing business" on the Consolidated Balance Sheet.)
This loss provision was principally related to the estimated diminution in value
of the Cincinnati, Ohio program. Based on the aforementioned sale, the Company
believes that there will be no need for any additional loss provision.

ENVIRONMENTAL

The Company is subject to federal, state and local laws designed to protect the
environment and believes that, as a general matter, its policies, practices and
procedures are properly designed to prevent unreasonable risk of environmental
damage and financial liability. (See also Note 5 of Notes to Consolidated
Financial Statements.)

<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES
<S>                            <C>           <C>          <C>      
($ millions)                        1998          1997         1996
Cash flow from operations      $    (2.3)    $    18.0    $    53.6
Total debt                     $   140.2     $   104.0    $    56.0
Stockholders' equity           $   250.1     $   260.8    $   226.0
Debt to equity ratio                .6:1          .4:1         .2:1
</TABLE>

The decline in cash flow from operations from 1997 to 1998 was due primarily to
a decline of approximately $28.9 million in income from continuing operations.
The decline in income was offset, in part, by a lower level of investment in
working capital of $9.9 million, in particular, receivables and inventories. The
significant decrease in cash flow from operations in 1997, as compared with
1996, is due primarily to an increased investment in working capital of
approximately $16.1 million and $24.0 million in tax payments made principally
by the Company's European subsidiaries.

The Company continued to make significant investments in the wireless
telecommunications industry both in capital improvements ($22.0, $27.6 and $22.2
million in 1998, 1997 and 1996, respectively) and investments in
telecommunication companies ($42.1, $44.4 and $16.9 million in 1998, 1997 and
1996, respectively). The 1998 amount includes $26.4 million for the acquisition
of the remaining outstanding minority interest of FOREM. Such amount was
included in Accounts Payable in the Consolidated Balance Sheet in 1997, and such
payment is a principal reason for the decline in that caption from 1997 to 1998.

As more fully described in Note 2 to the Consolidated Financial Statements, the
Company entered into a new $100.0 million domestic revolving credit agreement in
1998, expiring on December 31, 2001. This facility replaced the Company's
existing domestic revolving credit agreement. Borrowings under this new
obligation are collateralized by substantially all domestic assets of the
Company as well as a pledge of 65% of the stock of applicable domestic and
foreign subsidiaries. At December 31, 1998, $49.3 million is available for
borrowing under this agreement and $37.6 million is available under existing
foreign lines of credit.

In 1997, the Company borrowed $65.0 million in a private placement transaction.
These notes bear interest at a weighted average interest rate of approximately
6.65% and have an average outstanding life of 7.5 years. The Company believes
this longer term financing strategy is consistent with its investing activities
and also affords it an opportunity to take advantage of lower interest rates. In
this regard, the Company prepaid certain borrowings with a portion of the
proceeds, in the amount of $15.0 million, which bore interest at the rate of
8.13%. This resulted in a prepayment premium of $1.0 million, or $.02 per basic
and diluted common share after related income tax effects, and has been reported
as an "Extraordinary item" in the Consolidated Statement of Operations.

                                       29
<PAGE>   30

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In 1996, the Company entered into an agreement to make an equity investment in
NextWave Telecom Inc. ("NextWave"), and NextWave agreed to purchase $50.0
million of equipment and services over a five-year period from the Company. In
connection with this agreement, subject to certain preconditions that have not
yet occurred, the Company has agreed to provide secured product financing in
addition to its investment. In 1998, NextWave and certain of its subsidiaries
filed for relief under Chapter 11 of the U.S. bankruptcy code; accordingly, this
commitment is, at this time, unlikely to be filled.

The decrease in Other assets in the Consolidated Balance Sheet is due primarily
to the sale of the common stock investment in RF Micro Devices, Inc. in 1998,
which generated approximately $14.4 million in cash.

In 1998, the Company used cash of approximately $2.1 million in the operation of
its discontinued Marta business. In 1997, the Company generated cash from Marta
in the amount of $7.8 million as compared with a cash usage of $6.1 million in
1996. The cash generation in 1997 was due to the settlement of claims with the
State of Texas and subsequent sale and disposal of the related assets, which
generated $12.4 million in cash. The Company does not expect that the sale of
Marta (as discussed above) will have a significant impact on future cash flow.

Capital expenditures in 1999 are estimated at $18.0 million, of which $1.5
million was committed at December 31, 1998.

The Company's working capital position remains strong at 2.9:1.0, as compared
with 1.9:1.0 at the end of each of the last two years. The Company believes it
has adequate cash liquidity resources (through available borrowing capacity both
domestically and in Europe) in the near term to fund operations and capital
expenditures. Borrowings under available domestic and European credit lines are
expected to be the primary source of liquidity throughout 1999.

YEAR 2000 STATUS REVIEW

Many computer systems and other equipment with software, embedded chips or
processors use only two digits to represent the year, and may be unable to
accurately process certain data before, during or after the year 2000. If not
corrected, these systems could cause date-related transaction failures. This is
commonly known as the Year 2000 ("Y2K") issue. This Y2K issue can arise at any
point in the Company's supply, manufacturing, distribution and financial chains.

The Company and each of its operating businesses are in the process of
implementing a Y2K readiness program with the objective of having all of its
business systems, including those that effect the Company's facilities and
manufacturing operations, functioning properly with respect to Y2K issues before
June 30, 1999.

Each operating business is at a different state in terms of Y2K readiness.
Generally, the Company's larger businesses are closer to Y2K readiness than its
smaller businesses and outlying sales offices. The Company's Y2K readiness
program has been divided into several broad areas, as follows:

1.  Computer Hardware / Netware

2.  Computer Software / Systems

3.  Test Equipment

4.  Other Factory Equipment

5.  Miscellaneous Office / Building Systems

6.  Vendor Compliance

7.  Product Compliance

8.  Customer Compliance and Interface issues

The first component of the Company's Y2K readiness program is to identify the
internal business systems of the Company that are susceptible to system failures
of processing errors as a result of this Y2K issue. The Company has
substantially completed its identification of computer hardware and netware
systems, computer software and related systems and test equipment that may be
susceptible to Y2K failures. The Company's principal operating businesses have
substantially completed their identification of other factory equipment, and
miscellaneous office/building equipment and systems that may be susceptible to
Y2K problems. Some of the Company's smaller offices, notably its international
sales offices, have not yet completed their assessments of miscellaneous
office/building equipment and systems. However, such assessments will be
completed early in the second quarter of 1999 and the potential risk at these
facilities is not estimated to be significant.

The second part of the Company's Y2K readiness program involves the actual
remediation and replacement of internal business systems and embedded chips by
June 30, 1999. The Company has substantially completed the actual remediation
and replacement of its computer hardware and netware that had potential Y2K
issues. The Company is in the process of remediating and/or replacing its
computer software and related systems that have potential Y2K issues. Such
remediation is on schedule to be completed by June 30, 1999. However, the
Company has developed contingency plans with respect to one such software system
that is not yet Y2K compliant. Testing with respect to most internal business
systems has been performed. Remediation and/or replacement efforts are ongoing
with respect to test equipment and other factory equipment that is likely to be
susceptible to Y2K failures. Such remediation and/or replacement of equipment
and embedded chips is on schedule to be completed by June 30, 1999. Remediation
efforts with respect to miscellaneous office/building systems have been slower
to develop as the identification of potential issues has been difficult in some
international locations. The Company plans to complete final testing by
September 30, 1999.

Independent verification of Y2K compliance of these internal software systems is
expected to be completed by September 30, 1999. The Company will develop other
contingency plans, as necessary, with respect to non-information technology
equipment and systems as the Company's readiness program develops further.

As part of the Company's Y2K readiness program, significant service providers,
vendors, suppliers and customers that the Company believes are critical to
business operations after January 1, 2000, are substantially identified and
steps are being taken to reasonably determine their stages of Y2K readiness.

Because of the significant number of business systems used by the Company and
the extent of the Company's foreign operations (including some third parties
that are not actively promoting Y2K issues), it is reasonably possible that the
Company may experience some disruption in its businesses due to the Y2K issue.
The Company currently believes that the greatest risk of disruption in its
businesses exists in certain international markets. Notwithstanding all of the
Company's efforts, there are still many uncertainties regarding the Y2K issue.
For example, if the Company is 

                                       30
<PAGE>   31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

unsuccessful in identifying or finding all Y2K problems in its critical
operations or if critical customers or suppliers are unsuccessful in resolving
Y2K issues, the Company's results of operations or financial condition could be
materially impacted.

The Company has developed a Y2K readiness disclosure statement and related
disclaimer for use by its divisions to help them comply with the Year 2000
Information and Readiness Disclosure Act. This Federal law precludes the use of
any statement made by a company regarding that company's Year 2000 readiness
against that company in any future litigation involving Y2K matters. The
Company's Y2K readiness disclosure statement is posted prominently on the Allen
Telecom website. In addition, The Company has developed a vendor survey with the
assistance of counsel and has carefully reviewed with counsel all of its
divisions' responses to our customers which cannot be answered simply by use of
the standard Y2K readiness disclosure statement. As a result of these actions,
the Company believes it has mitigated its exposure to Y2K related litigation.

The total costs that the Company expects to incur in connection with Y2K issues
is dependent on the Company's ability to identify Y2K problems, the nature of
remediation efforts involved and the ability of third parties (including the
Company's suppliers, vendors and customers) to successfully address their own
Y2K issues. The total cost associated with required Y2K remediation efforts is
approximately $2.0 million, of which approximately $1.0 million was spent
through December 31, 1998.

Euro
Effective January 1, 1999, member states of the European Economic and Monetary
Union adopted a common currency known as the Euro. Modifications to certain of
the Company's information systems software were required in connection with this
conversion. The Company's computer software for one of its European businesses
was not Euro compliant at year-end 1998, but is expected to be Euro compliant by
March 31, 1999. There is no material adverse effect to this European business
because its software is not Euro compliant, and alternate systems to accommodate
Euro conversions are currently being utilized. Expenses relating to
modifications to the Company's software that have been and will be made are
nominal. The Company believes that conversion to the Euro has not and will not
have any significant operational impact. In addition, the Company does not
believe the conversion to the Euro will have a material impact on the results of
operations, financial position or cash flow of its European businesses.

QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk exposure relating to derivatives results from
the use of foreign currency forward contracts to offset the impact of currency
rates against certain accounts receivable. The contracts entered into at
year-end all expire within one year. This procedure of entering into currency
rate contracts will diminish significantly in 1999 and thereafter due to the
establishment of the European Monetary Union ("EMU") and its introduction of the
Euro currency in 1999. A significant portion of the foreign currency contracts
involve currencies which are now under the EMU and additional foreign currency
forward contracts will not be required as rates on these currencies will not
fluctuate or these transactions will be in the Euro currency. The Company does
not enter into derivative instrument transactions for trading or speculative
purposes.

The Company's on-balance sheet instruments which would be subject to interest
rate fluctuation are various components of its long-term debt. The Company
believes this fluctuation risk is minimal. Approximately 63% of the Company's
long-term debt is fixed rate debt and not subject to interest rate fluctuation.
The variable rate debt is primarily made up of the Company's domestic revolving
credit facility and industrial revenue bonds. The revolving credit debt interest
is determined on a LIBOR or prime rate basis, at the Company's option. The
industrial development bonds carry interest rates which are established based on
the low yield, tax free bond market.

The table below provides information about the Company's derivative financial
instruments and other financial instruments that are sensitive to changes in
exchange and interest rates. For derivative instruments, the table presents
contract amounts and related weighted average contractual exchange rates by
expected maturity date. For debt obligations, the table presents principal cash
flows and related weighted average interest rates by expected maturity dates.


ANTICIPATED TRANSACTIONS AND RELATED DERIVATIVES
December 31, 1998
<TABLE>
<CAPTION>
                            Expected Maturity Date     
                            ----------------------     Fair
                               1999        Total       Value
-------------------------------------------------------------
<S>                         <C>        <C>        <C>       
Lira Functional Currency:      (US $ Equivalent in Thousands)
  Foreign Exchange
   Agreements
   (Receive Lira/Pay DM)
     Contract Amount        $    291.4 $    291.4 $    291.1
     Avg. Contractual
       Exchange rate             990.0      990.0      989.3
   (Receive Lira/Pay ECU)
     Contract Amount        $  3,667.2 $  3,667.2 $  3,664.9
     Avg. Contractual
       Exchange rate           1,947.0    1,947.0    1,945.8
   (Receive Lira/Pay FF)
     Contract Amount        $  1,564.5 $  1,564.5 $  1,562.9
     Avg. Contractual
       Exchange rate             295.3      295.3      295.0
</TABLE>

LIABILITIES
December 31, 1998
<TABLE>
<CAPTION>
                                                        Expected Maturity Date
                         ---------------------------------------------------------------------------------------    Fair  
                             1999       2000         2001         2002         2003     Thereafter     Total        Value
-----------------------------------------------------------------------------------------------------------------------------
                                                         (US $ Equivalent  in Thousands) 
<S>                      <C>         <C>         <C>          <C>          <C>          <C>          <C>          <C>        
Long Term Debt
  Fixed Rate (US)        $  1,397.0  $  1,525.0  $   4,665.0  $  12,651.0  $  12,817.0  $  43,307.0  $  76,362.0  $  81,203.0
    Avg. interest rate          8.8%        8.8%         7.4%         7.0%         7.0%         6.8%         7.0%         7.0%
  Fixed Rate (Lira)           708.0       745.0        425.0        411.0        404.0        905.0      3,598.0      3,598.0
    Avg. interest rate          6.2%        6.3%         5.9%         5.6%         5.5%         8.2%         6.5%         6.5%
  Fixed Rate (DM)             542.0       530.0        476.0        146.0         67.0       --          1,761.0      1,761.0
    Avg. interest rate          4.4%        4.5%         4.4%         4.1%         3.5%      --              4.4%         4.4%
  Fixed Rate (FF)             108.0       108.0        108.0         71.0       --           --            395.0        395.0
    Avg. interest rate          8.5%        8.5%         8.5%         8.5%      --           --              8.5%         8.5%
  Variable Rate (US)         --          --         33,500.0       --           --         15,500.0     49,000.0     49,000.0
    Avg. interest rate       --          --              7.8%      --           --              3.6%         6.4%         6.4%
  Variable Rate (Lira)        315.0       316.0       --           --           --           --            631.0        631.0
    Avg. interest rate          4.7%        4.7%      --           --           --           --              4.7%         4.7%
</TABLE>

                                       31

<PAGE>   32


Five Year Summary of Operations 
                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>


     Five years ended December 31, 1998                            1998           1997            1996        1995          1994
<S>                                                               <C>           <C>          <C>           <C>           <C>
OPERATING RESULTS
Sales                                                             $ 388,004     $ 432,508    $ 369,498     $ 306,556     $ 213,517
Cost of sales                                                      (293,404)     (281,591)    (238,401)     (189,103)     (127,160)
Selling, general and administrative expenses                        (71,672)      (72,671)     (59,053)      (49,464)      (43,943)
Research & development and product engineering                      (30,742)      (30,367)     (21,023)      (17,006)       (8,865)
Write-off of in-process research and development costs                   --            --       (2,662)           --            --
Other income (loss), net                                              6,065         1,885          952         1,556          (309)
Net interest and financing expense                                   (6,805)       (3,051)      (2,785)       (2,098)       (1,785)
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and minority interests                    (8,554)       46,713       46,526        50,441        31,455
Benefit (provision) for income taxes                                  5,310       (17,723)     (19,665)      (20,138)      (11,191)
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest                               (3,244)       28,990       26,861        30,303        20,264
Minority interests                                                   (2,268)       (5,009)      (6,305)       (3,027)         (523)
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from Continuing Operations                             (5,512)       23,981       20,556        27,276        19,741
Discontinued operations:
         Loss from discontinued operations                               --            --       (3,766)        5,363         9,453
         Loss for disposal of emissions testing business             (4,710)           --       (3,724)           --            --
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item                             (10,222)       23,981       13,066        32,639        29,194
Extraordinary item - extinguishment of debt                              --          (632)          --            --            --
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                 ($ 10,222)    $  23,349    $  13,066     $  32,639     $  29,194
==================================================================================================================================
Earnings (Loss) Per Common Share:
Basic: Income (loss)                                                  ($.21)         $.89         $.78         $1.05          $.77
        Discontinued operations:
                 Loss from discontinued operations                       --            --         (.14)          .20           .37
                 Loss for disposal of emissions testing business       (.17)           --         (.14)           --            --
        Extraordinary item - extinguishment of debt                      --          (.02)          --            --            --
-----------------------------------------------------------------------------------------------------------------------------------
        Net income (loss)                                             ($.38)         $.87         $.50         $1.25         $1.14
==================================================================================================================================
Diluted: Income (loss) from continuing operations                     ($.21)         $.88         $.76         $1.02          $.76
         Discontinued operations:
                  Loss from discontinued operations                      --            --         (.14)          .20           .36
                  Loss for disposal of emissions testing business      (.17)           --         (.14)           --            --
         Extraordinary item - extinguishment of debt                     --          (.02)          --            --            --
-----------------------------------------------------------------------------------------------------------------------------------
         Net income (loss)                                            ($.38)         $.86         $.48         $1.22         $1.12
==================================================================================================================================
FINANCIAL CONDITION
Total assets                                                      $ 465,585     $ 514,433    $ 410,512     $ 363,565     $ 357,716
Working capital                                                     133,465       111,015       94,378        93,371       107,940
Current ratio                                                          2.92          1.85         1.90          2.11          2.54
Total debt                                                          140,223       104,034       55,955        55,799        45,064
Stockholders' equity                                                250,081       260,822      225,951       210,377       224,181
Debt to equity ratio                                                    .56           .40          .25           .27           .20
Book value per common share                                            9.10          9.55         8.44          7.92          8.59
Shares outstanding at year end                                       27,473        27,298       26,763        26,570        26,107
Return on stockholders' equity                                         (4.0%)         9.4%         6.0%         14.7%         14.1%
Capital expenditures                                                 18,094        22,247       20,992        24,498        14,833
Depreciation                                                         15,615        12,808       12,231         8,896         7,477
Number of employees                                                   3,000         3,300        2,900         2,800         2,700
</TABLE>


                                       32

<PAGE>   33



Shareholder Information

EXCHANGE LISTINGS
Common Stock
(Ticker Symbol - ALN)
New York Stock Exchange
Pacific Exchange

TRANSFER AGENT AND REGISTRAR
Harris Trust Company of New York
600 Superior Avenue East, Suite 600
Cleveland, OH 44114-2650
(800) 942-5909

AUDITORS
PricewaterhouseCoopers LLP
Cleveland, Ohio

FORM 10-K OR ADDITIONAL
INFORMATION ABOUT THE COMPANY
Stockholders and others interested in obtaining additional information about the
Company may do so by writing or calling Allen Telecom Inc., 25101 Chagrin Blvd.,
Beachwood, Ohio, 44122-5687, (216) 765-5855. The Form 10-K Annual Report,
including financial statements and schedules, will be furnished without charge.
Information concerning the Company can also be found on the Internet at
http://www.allentele.com.

AFFIRMATIVE ACTION POLICY
It is the policy of Allen Telecom Inc. that all employees will be judged on the
basis of qualifications and ability, without regard to age, sex, race, creed,
color or national origin, in all personnel actions. No employee or applicant for
employment will receive discriminatory treatment because of physical or mental
handicap in regard to any position for which the employee or applicant for
employment is qualified.

STOCKHOLDERS
As of March 3, 1999, Allen Telecom Inc. had 27,504,546 outstanding shares of
Common Stock owned by 1,745 holders of record.

ANNUAL STOCKHOLDERS' MEETING
The Annual Meeting of Stockholders will be held at the Cleveland Marriott at Key
Center, 127 Public Square, Cleveland, Ohio on Friday, April 30, 1999 at 9:30
a.m.

<TABLE>
<CAPTION>
DIVIDENDS DECLARED ON COMMON STOCK
(dollars per share)        1998     1997    1996     1995     1994
<S>                        <C>      <C>     <C>      <C>      <C> 
1st Quarter                   -        -       -     $.05     $.04
2nd Quarter                   -        -       -     $.05     $.04
3rd Quarter                   -        -       -     $.05     $.04
4th Quarter                   -        -       -        -     $.04
</TABLE>



<TABLE>
<CAPTION>
Stock price (dollars per share)

<S>      <C>               <C>
94       $13.50             $25.63
95       $21.25             $39.38
96       $14.00             $28.75
97       $16.00             $30.00
98       $4.69              $21.13
</TABLE>



<TABLE>
<CAPTION>
MARKET PRICE RANGE OF COMMON STOCK

(dollars per share)      1998              1997                1996
                    High     Low       High     Low        High     Low
<S>               <C>      <C>        <C>       <C>       <C>      <C>
1st Quarter       21 1/8   15 1/2     26 3/8    16        23 1/4   16 7/8
2nd Quarter       17 7/16   9 9/16    24 1/8    16 1/2    28 3/4   18 7/8
3rd Quarter       11 5/8    6 3/16    29 1/8    18 3/4    22 1/2   14
4th Quarter        8 3/8    4 11/16   30         16       23 3/4   14 3/4
</TABLE>


                                       33