<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION


                              WASHINGTON, DC 20549


                                   FORM 10-Q/A
                                (AMENDMENT NO. 1)


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

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998


                                       OR


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

             FOR THE TRANSITION PERIOD FROM __________TO __________


                         COMMISSION FILE NUMBER 0-11402


                               TELXON CORPORATION
             (Exact name of registrant as specified in its charter)


           DELAWARE                                        74-1666060
(State or other jurisdiction of             (I.R.S. employer identification no.)
incorporation or organization)


3330 WEST MARKET STREET, AKRON, OHIO                         44333
(Address of principal executive offices)                  (Zip Code)


                                 (330) 664-1000
              (Registrant's telephone number, including area code)




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

* The registrant was unable timely to file a complete Form 10-Q for the 
  quarterly period ended December 31, 1998 for the reason described in the 
  opening paragraph of this Form 10-Q/A.

At December 31, 1998, there were 16,126,382 outstanding shares of the
Registrant's $.01 par value Common Stock.
<PAGE>   2

This Amendment No. 1 on Form 10-Q/A (this "Amendment") supersedes in its
entirety the Form 10-Q filed by Telxon Corporation ("Telxon" or the
"Registrant", and together with its subsidiaries, the "Company") on February 16,
1999 (the "Original Filing"), except that the exhibits filed with Original
Filing shall continue to be included as part of the Registrant's Form 10-Q
filing for the subject period as amended by this Amendment. This Amendment
includes the disclosures consisting of or based upon the Registrant's financial
statements for the subject period that are responsive to Item 1 of Part I and
the substantial majority of Item 2 of Part II of Form 10-Q, which disclosures
had been omitted from the Original Filing due to the unavailability of the
Registrant's financial statements for the subject period at the time for the
filing of the Original Filing. Additionally, the disclosures responsive to the
non-financial portions of Form 10-Q included in the Original Filing have been
updated from the Original Filing and are restated in full in this Amendment.

                               TELXON CORPORATION
        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


<TABLE>
<CAPTION>
                                                                                   Page No.
                                                                                   --------
<S>                                                                                <C>
PART I. FINANCIAL INFORMATION:

         Item 1:     Consolidated Financial Statements
                         Balance Sheet                                                 3
                         Statement of Operations                                       4
                         Statement of Cash Flows                                       5
                         Notes to Consolidated Financial Statements                  6-17

         Item 2:     Management's Discussion and Analysis of Financial
                         Condition and Results of Operations                         18-31

PART II. OTHER INFORMATION:

         Item 1:     Legal Proceedings                                                32
         Item 6: Exhibits and Reports on Form 8-K                                    32-39

All Items of Form 10-Q other than those listed above have been omitted as
inapplicable.
</TABLE>

                                       2

<PAGE>   3


PART I. FINANCIAL INFORMATION

ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS

                       TELXON CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                     (In thousands except per share amounts)
<TABLE>
<CAPTION>
                                                                                         DECEMBER 31,           MARCH 31,
                                                                                            1998                  1998
                                                                                            ----                  ----
                                                                                         (Unaudited)           (Unaudited
                                                                                                                 and As
                                                                                                                Restated)
<S>                                                                                      <C>                <C>
ASSETS
Current assets:
  Cash (including cash equivalents of $10,000 and $6,778)                                    $ 30,057           $ 27,500
  Accounts receivable, net of allowance for doubtful
    accounts of $9,581 and $4,749                                                             114,507            121,932
  Notes and other accounts receivable                                                          13,044             16,532
  Inventories                                                                                 125,450            109,935
  Prepaid expenses and other                                                                   13,344             16,084
                                                                                             --------           --------
         Total current assets                                                                 296,402            291,983
Property and equipment, net                                                                    67,911             53,969
Intangibles and other assets, net                                                              38,715             35,296
                                                                                             --------           --------
         Total                                                                               $403,028           $381,248
                                                                                             ========           ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable                                                                              $ 70,614           $  3,000
  Capital lease obligations due within one year                                                   710                968
  Accounts payable                                                                             59,993             58,634
  Income taxes payable                                                                          2,493              3,466
  Accrued liabilities                                                                          39,693             41,988
                                                                                             --------           --------
         Total current liabilities                                                            173,503            108,056
Capital lease obligations                                                                       1,822              1,876
Convertible subordinated notes and debentures                                                 106,913            107,224
Other long-term liabilities                                                                    11,011              6,867
                                                                                             --------           --------
         Total liabilities                                                                    293,249            224,023

Minority interest                                                                               3,076              2,791

Stockholders' equity:
  Preferred Stock, $1.00 par value per share; 500
    shares authorized, none issued                                                                 --                 --
  Common Stock, $.01 par value per share; 50,000
    shares authorized, 16,234 and 16,219 shares issued                                            162                162
  Additional paid-in capital                                                                   88,123             87,489
  Retained earnings                                                                            25,164             75,267
  Equity adjustment for foreign currency translation                                           (4,360)            (4,929)
  Unearned compensation relating to restricted
    stock awards                                                                                 (292)              (493)
  Treasury stock; 108 and 162 shares of common stock
    at cost                                                                                    (2,094)            (3,062)
                                                                                             --------           --------
         Total stockholders' equity                                                           106,703            154,434
                                                                                             --------           --------
Commitments and contingencies                                                                      --                 --
                                                                                             --------           --------
         Total                                                                               $403,028           $381,248
                                                                                             ========           ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3
<PAGE>   4


                       TELXON CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
                     (In thousands except per share amounts)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                       Three Months              Nine Months
                                                                           Ended                    Ended
                                                                       December 31,              December 31,
                                                                       ------------              ------------
                                                                    1998          1997         1998         1997
                                                                    ----          ----         ----         ----
                                                                            (As Restated)              (As Restated)
<S>                                                           <C>           <C>            <C>          <C>     
Revenues:
  Product, net                                                 $   76,393    $   97,581    $  255,975    $  274,528
  Customer service, net                                            20,016        19,835        62,222        57,239
                                                               ----------    ----------    ----------    ----------
         Total net revenues                                        96,409       117,416       318,197       331,767

Cost of revenues:
  Product                                                          57,446        57,066       169,388       163,684
  Customer service                                                 14,047        12,249        40,375        35,711
                                                               ----------    ----------    ----------    ----------
         Total cost of revenues                                    71,493        69,315       209,763       199,395
                                                               ----------    ----------    ----------    ----------

  Gross profit                                                     24,916        48,101       108,434       132,372

Operating expenses:
  Selling expenses                                                 22,828        20,791        67,699        59,727
  Product development and
    engineering expenses                                           10,670         9,876        29,107        28,527
  General and administrative expenses                              13,610         9,662        33,541        29,030
                                                               ----------    ----------    ----------    ----------
         Total operating expenses before
             other operating items                                 47,108        40,329       130,347       117,284

Other operating items:
  Unconsummated business combination
    costs                                                           4,491          --           8,070          --
  Asset impairment charge                                            --           1,434          --           1,434
                                                               ----------    ----------    ----------    ----------
         Total other operating items                                4,491         1,434         8,070         1,434
                                                               ----------    ----------    ----------    ----------

         (Loss) income from operations                            (26,683)        6,338       (29,983)       13,654

Interest income                                                       226           340           569         1,258
Interest expense                                                   (2,499)       (1,752)       (6,829)       (5,355)
Other non-operating (expense)
  income, net                                                        (238)         (160)        1,025          (324)
                                                               ----------    ----------    ----------    ----------

         (Loss) income before income
          taxes and cumulative effect
          of an accounting change                                 (29,194)        4,766       (35,218)        9,233

Provision for income taxes                                         16,659         2,280        14,784         4,484
                                                               ----------    ----------    ----------    ----------

         Net (loss) income before
          cumulative effect of
          accounting change                                       (45,853)        2,486       (50,002)        4,749

Cumulative effect of accounting change,
         net of taxes                                                --           1,240          --           1,240
                                                               ----------    ----------    ----------    ----------

         Net (loss) income                                     $  (45,853)   $    1,246    $  (50,002)   $    3,509
                                                               ==========    ==========    ==========    ==========

Net (loss) income per common share before
         accounting change:
                  Basic                                        $    (2.86)   $      .16    $    (3.11)   $      .30
                                                               ==========    ==========    ==========    ==========
                  Diluted                                      $    (2.86)   $      .15    $    (3.11)   $      .29
                                                               ==========    ==========    ==========    ==========

Cumulative effect of accounting change:
                  Basic                                        $     --      $      .08    $     --      $      .08
                                                               ==========    ==========    ==========    ==========
                  Diluted                                      $     --      $      .08    $     --      $      .08
                                                               ==========    ==========    ==========    ==========

Net (loss) income per common share:
                  Basic                                        $    (2.86)   $      .08    $    (3.11)   $      .22
                                                               ==========    ==========    ==========    ==========
                  Diluted                                      $    (2.86)   $      .08    $    (3.11)   $      .22
                                                               ==========    ==========    ==========    ==========

Average number of common shares outstanding:
                  Basic                                            16,048        15,685        16,101        15,742
                                                               ==========    ==========    ==========    ==========
                  Diluted                                          16,048        16,262        16,101        16,189
                                                               ==========    ==========    ==========    ==========
</TABLE>

See accompanying notes to consolidated financial statements 

                                       4
<PAGE>   5


                       TELXON CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                                     Nine Months
                                                                                                        Ended
                                                                                                    December 31,
                                                                                                    ------------
                                                                                              1998               1997
                                                                                              ----               ----
                                                                                                             (As Restated)
<S>                                                                                          <C>                 <C>    
Cash flows from operating activities:
  Net (loss) income                                                                          $(50,002)           $ 3,509
  Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:
    Cumulative effect of accounting change                                                         --              2,176
    Depreciation and amortization                                                              19,622             19,826
    Amortization of restricted stock awards, net                                                  201                148
    Provision for doubtful accounts                                                             5,249              2,639
    Provision for inventory obsolescence                                                        6,787              5,157
    Gain on sale of assets                                                                       (900)                --
    Loss on disposal of property and equipment                                                    255                825
    Asset impairment charges                                                                       --              1,434
    Minority interest                                                                             416                 --
    Changes in assets and liabilities:
         Accounts and notes receivable                                                         13,110            (10,364)
         Inventories                                                                          (22,045)           (22,399)
         Prepaid expenses and other                                                             3,372             (3,073)
         Intangibles and other assets                                                           2,806             (1,985)
         Accounts payable and accrued liabilities                                                (836)            (8,008)
         Other long-term liabilities                                                            4,012               (554)
                                                                                              -------            -------
           Total adjustments                                                                   32,049            (14,178)
                                                                                              -------            -------
  Net cash used in operating activities                                                       (17,953)           (10,669)

Cash flows from investing activities:
  Additions to property and equipment                                                         (26,538)           (19,157)
  Software and other investments                                                               (4,792)            (3,172)
  Proceeds from the sale of property and equipment                                                 --                866
  Proceeds from the sale of non-marketable investments                                             --              1,033
  Purchase of non-marketable investments                                                       (1,950)            (5,500)
  Payments from long-term notes receivable                                                        929                 --
  Additions to long-term notes receivable                                                        (795)              (140)
                                                                                              --------            ------
  Net cash used in investing activities                                                       (33,146)           (26,070)

Cash flows from financing activities:
  Borrowings on notes payable, net                                                             53,526              2,949
  Principal payments on capital leases                                                           (589)              (479)
  Purchase of treasury stock                                                                   (1,088)            (4,928)
  Debt issue costs paid                                                                          (302)               (25)
  Proceeds from exercise of stock options (includes tax
    benefit)                                                                                    1,793              6,958
                                                                                              -------            -------
  Net cash provided by financing activities                                                    53,340              4,475

  Effect of exchange rate changes on cash                                                         316               (339)
                                                                                              -------            -------

  Net increase (decrease) in cash and cash equivalents                                          2,557            (32,603)
  Cash and cash equivalents at beginning of period                                             27,500             45,386
                                                                                              -------            -------
  Cash and cash equivalents at end of period                                                  $30,057            $12,783
                                                                                              =======            =======
</TABLE>



See accompanying notes to consolidated financial statements.

                                       5
<PAGE>   6


                       TELXON CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                (In thousands except share and per share amounts)

1.       Management Representation

         The consolidated financial statements of Telxon Corporation ("Telxon")
         and its subsidiaries (collectively with Telxon, the "Company") have
         been prepared without audit and in accordance with the instructions to
         Form 10-Q. In the opinion of the Company, all adjustments, consisting
         of normal recurring adjustments necessary for a fair statement of
         results for the interim periods, have been made. The operating results
         for the nine months ended December 31, 1998, are not necessarily
         indicative of the results that may be achieved for the year ending
         March 31, 1999. The statements, including the unaudited March 31, 1998,
         balance sheet data, do not include all of the information and notes
         required by generally accepted accounting principles for complete
         financial statements and should be read in conjunction with the audited
         consolidated financial statements as contained in the Company's Annual
         Report on Form 10-K, as amended by Amendments No. 1 and No. 2 on Form
         10-K/A, for the fiscal year ended March 31, 1998, subject to a further
         amendment on Form 10-K/A to be filed to reflect the restatement matters
         discussed in Note 2 - Restatement below.

2.       Restatement

         On February 23, 1999, the Company announced that, having completed the
         review of certain judgmental accounting matters with the Company's
         outside auditors previously reported in the Company's January 27, 1999
         press release, it would be restating its audited financial statements
         for fiscal years 1996, 1997 and 1998 and its unaudited interim
         financial statements for the first and second quarters of fiscal 1999.
         The accompanying financial statements reflect the announced
         restatement, subject to the finalization of the financial statements 
         for the prior periods affected by the restatement. The more significant
         restatement adjustments affecting the periods covered by the 
         accompanying financial statements are described below.

         Product revenue of $14,100 and related cost of product revenue of
         $6,800 associated with a product financing arrangement recorded during
         the three months ended September 30, 1998, have been reversed as the
         criteria for revenue recognition had not fully been satisfied. Such
         product revenue and related cost of product revenue will be recognized
         upon sell-through to the end-user customer. As of December 31, 1998,
         approximately $8,100 of revenue remained deferred as the subject
         product had not been sold-through to end-user customers and was held in
         the distributor's inventory. Additionally, certain software license
         revenue of $2,000 recognized during the three months ended September
         30, 1998 has also been deferred as certain contingencies related to the
         customer's acceptance of such software had not been satisfied as of the
         date of these financial statements. During the three months ended June
         30, 1998 and the six months ended September 30, 1998, the Company has
         increased its product sales returns reserves by $3,964 and $4,725,
         respectively, to better reflect the levels of product returns in the
         Company's value-added distribution channel. The Company has also
         capitalized $1,950 previously expensed during the three months ended
         June 30, 1998, related to the repurchase of the common stock of its
         Metanetics Corporation subsidiary ("Metanetics") from a business
         partner, resulting in goodwill to be amortized over a useful life of
         three years. Adjustments have also been made to increase the Company's
         provision for the past due accounts receivable related to a certain
         foreign distributor as bad debt expense. Such adjustments totaled
         $2,200 and $1,000 for the three months ended June 30, 1998 and
         September 30, 1998, respectively. The Company has also made an
         adjustment to record, during the three months ended June 30, 1998, the
         $900 gain related to the sale of its Virtual Vision, Inc. subsidiary
         ("Virtual Vision"), which was previously recorded during the three
         months ended March 31, 1998, as certain conditions of the sale, though
         perfunctory, were not satisfied until after March 31, 1998.

         The statement of operations for the three and nine months ended
         December 31, 1997 has been restated to reflect additional provisions of
         $700 and $2,600, respectively, for the past due accounts receivable
         owed by the foreign distributor referenced above. Certain software
         license revenues and software royalties accrued related to a previously
         divested software operation of a net $300 and $500 for the three and
         nine months ended December 31, 1997, respectively, have been reversed
         to defer recognition of such items until those transactions are settled
         in cash. Additionally, severance amounts of $300 and $600 related to
         the Company's international operations for the three and nine months
         ended December 31, 1997, respectively, have been expensed that
         previously were improperly accrued as restructuring charges during the
         three months ended December 31, 1996. The settlement of certain
         contingencies related to the divestiture of the Company's Itronix 

                                       6
<PAGE>   7

         Corporation subsidiary ("Itronix") approximating $400 have been 
         expensed during the three months ended December 31, 1997.

         The results for the three months ended December 31, 1997 have also been
         adjusted to reflect a $1,400 asset impairment of the Company's equity
         investment in the referenced foreign distributor.

         A summary of the effects of the restatement on the Company's statements
         of operations for the three months ended June 30 and September 30, 1998
         and 1997 and the nine months ended December 31, 1997 follows. Also
         presented below is a summary of the effects of the restatement on the
         consolidated balance sheet as of March 31, 1998 (in thousands, except
         per share data):

                                       7
<PAGE>   8






<TABLE>
<CAPTION>
                                                 CONSOLIDATED STATEMENT OF OPERATIONS

                                           Three Months                            Three Months
                                       Ended June 30, 1998                     Ended June 30, 1997
                                                              (Unaudited)
                              ----------------------------------------------------------------------------
                                     As                                      As
                                 Previously               As             Previously              As
                                  Reported             Restated           Reported            Restated
<S>                           <C>                 <C>                 <C>                 <C>             
Revenues:
  Product, net                $         94,077    $         90,192    $         86,691    $         86,000
  Customer service, net                 20,970              20,970              18,222              18,222
                              ----------------    ----------------    ----------------    ----------------
Total net revenues                     115,047             111,162             104,913             104,222

Cost of revenues:
  Product                               57,310              54,473              52,561              52,097
  Customer service                      12,826              12,826              11,126              11,126
                              ----------------    ----------------    ----------------    ----------------
Total cost of revenues                  70,136              67,299              63,687              63,223
                              ----------------    ----------------    ----------------    ----------------

Gross profit                            44,911              43,863              41,226              40,999

Operating expenses:
  Selling expenses                      21,361              23,542              18,100              20,310
  Product development and
    engineering expenses                 8,930               9,014               9,126               9,126
  General & administrative
    expenses                             9,436               9,506               9,703               9,525
                              ----------------    ----------------    ----------------    ----------------
Total operating expenses
  before other operating
  items                               39,727              42,062              36,929              38,961

Other operating items:
  Unconsummated business
    combination costs                    1,749               1,749                --                  --
  Charge related to
    transactions with
    business partner                     1,950                --                  --                  --
                              ----------------    ----------------    ----------------    ----------------
Total other operating items              3,699               1,749                --                  --


Income from operations                   1,485                  52               4,297               2,038

Interest income                            179                 179                 498                 498
Interest expense                        (1,713)             (1,713)             (1,792)             (1,792)
Other non-operating income
  (expense)                                460               1,360                (157)               (157)
                              ----------------    ----------------    ----------------    ----------------

Income (loss) before income
  taxes                                    411                (122)              2,846                 587

Provision (benefit) for
  income taxes                             165                 (22)              1,252                 461
                              ----------------    ----------------    ----------------    ----------------

Net income (loss)             $            246    $           (100)   $          1,594    $            126
                              ================    ================    ================    ================

Net income (loss) per
  common share:
               Basic          $           0.02    $          (0.01)   $           0.10    $           0.01
                              ================    ================    ================    ================
               Diluted        $           0.01    $          (0.01)   $           0.10    $           0.01
                              ================    ================    ================    ================

Average number of common
  shares outstanding:
               Basic                    16,080              16,080              15,524              15,524
               Diluted                  16,938              16,080              15,792              15,792
</TABLE>

                                       8

<PAGE>   9



<TABLE>
<CAPTION>
                                                 CONSOLIDATED STATEMENT OF OPERATIONS

                                           Three Months                            Three Months
                                     Ended September 30, 1998                  Ended September 30, 1997
                                                              (Unaudited)
                              ----------------------------------------------------------------------------
                                     As                                      As
                                 Previously               As             Previously             As
                                  Reported             Restated            Reported           Restated
<S>                           <C>                 <C>                 <C>                 <C>             
Revenues:
  Product, net                $       103,133    $        89,390    $        91,138    $        90,947
  Customer service, net                21,236             21,236             19,182             19,182
                              ---------------    ---------------    ---------------    ---------------
Total net revenues                    124,369            110,626            110,320            110,129

Cost of revenues:
  Product                              62,411             57,469             54,276             54,521
  Customer service                     13,502             13,502             12,336             12,336
                              ---------------    ---------------    ---------------    ---------------
Total cost of revenues                 75,913             70,971             66,612             66,857
                              ---------------    ---------------    ---------------    ---------------

Gross profit                           48,456             39,655             43,708             43,272

Operating expenses:
  Selling expenses                     20,317             21,329             18,677             18,626
  Product development and
    engineering expenses                9,261              9,423              9,525              9,525
  General & administrative
    expenses                           10,425             10,425              9,843              9,843
                              ---------------    ---------------    ---------------    ---------------
Total operating expenses
  before other operating
  item                                 40,003             41,177             38,045             37,994

Other operating item:
  Unconsummated business
    combination costs                   1,830              1,830               --                 --
                              ---------------    ---------------    ---------------    ---------------
Total other operating item             1,830              1,830               --                 --

Income from operations                  6,623             (3,352)             5,663              5,278

Interest income                           164                164                420                420
Interest expense                       (2,617)            (2,617)            (1,811)            (1,811)
Other non-operating expense              --                  (97)                (7)                (7)
                              ---------------    ---------------    ---------------    ---------------

Income (loss) before income
  taxes                                 4,170             (5,902)             4,265              3,880

Provision (benefit) for
  income taxes                          1,672             (1,853)             1,877              1,742
                              ---------------    ---------------    ---------------    ---------------

Net income (loss)             $         2,498    $        (4,049)   $         2,388    $         2,138
                              ===============    ===============    ===============    ===============

Net income (loss) per
  common share:
               Basic          $          0.16    $         (0.25)   $          0.15    $          0.14
                              ===============    ===============    ===============    ===============
               Diluted        $          0.15    $         (0.25)   $          0.15    $          0.13
                              ===============    ===============    ===============    ===============

Average number of common
  shares outstanding:
               Basic                   16,075             16,075             15,772             15,772
               Diluted                 16,578             16,075             16,273             16,273
</TABLE>


                                       9

<PAGE>   10



<TABLE>
<CAPTION>
                                                     CONSOLIDATED STATEMENT OF OPERATIONS

                                               Three Months                           Nine Months
                                         Ended December 31, 1997                  Ended December 31, 1997
                                                                  (Unaudited)
                                  ----------------------------------------------------------------------------
                                         As                                      As
                                     Previously               As             Previously             As
                                      Reported             Restated            Reported           Restated
<S>                               <C>                 <C>                 <C>                 <C>             
Revenues:
  Product, net                    $        97,472    $        97,581    $       275,302    $       274,528
  Customer service, net                    19,835             19,835             57,239             57,239
                                  ---------------    ---------------    ---------------    ---------------
Total net revenues                        117,307            117,416            332,541            331,767

Cost of revenues:
  Product                                  56,482             57,066            163,319            163,684
  Customer service                         12,249             12,249             35,711             35,711
                                  ---------------    ---------------    ---------------    ---------------
Total cost of revenues                     68,731             69,315            199,030            199,395
                                  ---------------    ---------------    ---------------    ---------------

Gross profit                               48,576             48,101            133,511            132,372

Operating expenses:
  Selling expenses                         19,821             20,791             56,598             59,727
  Product development and
    engineering expenses                    9,876              9,876             28,526             28,527
  General & administrative
    expenses                                9,662              9,662             29,210             29,030
                                  ---------------    ---------------    ---------------    ---------------
Total operating expenses
  before other operating
  item                                     39,359             40,329            114,334            117,284

Other operating item:
  Asset impairment charge                    --                1,434               --                1,434
                                  ---------------    ---------------    ---------------    ---------------
Total other operating item                  --                1,434               --                1,434

Income from operations                      9,217              6,338             19,177             13,654

Interest income                               340                340              1,257              1,258
Interest expense                           (1,752)            (1,752)            (5,354)            (5,355)
Other non-operating
  expense                                    (160)              (160)              (325)              (324)
                                  ---------------    ---------------    ---------------    ---------------

Income before income taxes
  and cumulative effect of
  an accounting change                      7,645              4,766             14,755              9,233

Provision for income taxes                  3,288              2,280              6,416              4,484
                                  ---------------    ---------------    ---------------    ---------------

Income before cumulative
  effect of accounting
  change                                    4,357              2,486              8,339              4,749

Cumulative effect of
  accounting change, net of
  taxes                                     1,240              1,240              1,240              1,240
                                  ---------------    ---------------    ---------------    ---------------

Net income                        $         3,117    $         1,246    $         7,099    $         3,509
                                  ===============    ===============    ===============    ===============

Net income per common share
  before accounting change:
               Basic              $          0.28    $          0.16    $           .53    $          0.30
                                  ===============    ===============    ===============    ===============
               Diluted            $          0.27    $          0.15    $           .52    $          0.29
                                  ===============    ===============    ===============    ===============

Cumulative effect of
  accounting change:
               Basic              $          0.08    $          0.08    $           .08    $          0.08
                                  ===============    ===============    ===============    ===============
               Diluted            $          0.08    $          0.08    $           .08    $          0.08
                                  ===============    ===============    ===============    ===============

Net income per common share:
               Basic              $          0.20    $          0.08    $           .45    $          0.22
                                  ===============    ===============    ===============    ===============
               Diluted            $          0.19    $          0.08    $           .44    $          0.22
                                  ===============    ===============    ===============    ===============


Average number of common shares
  outstanding:
          Basic                            15,685             15,685             15,742             15,742
          Diluted                          16,262             16,262             16,189             16,189
</TABLE>

                                       10

<PAGE>   11



<TABLE>
<CAPTION>
                                                         CONSOLIDATED BALANCE SHEET

                                                                 Fiscal Year
                                                            Ended March 31, 1998
                                                                 (Unaudited)
                                                     -----------------------------------
                                                            As
                                                        Previously            As
                                                         Reported          Restated
<S>                                                  <C>                <C>            
ASSETS

Current assets:
  Cash                                               $        27,500    $        27,500
  Accounts receivable, net of allowance for
    doubtful accounts of $1,142 and $4,749                   125,739            121,932
  Notes and other accounts receivable                         22,949             16,532
  Inventories                                                108,178            109,935
  Prepaid expenses and other                                  11,307             16,084
                                                     ---------------    ---------------
    Total current assets                                     295,673            291,983
Property and equipment, net                                   52,108             53,969
Intangible and other assets, net                              42,758             35,296
                                                     ---------------    ---------------
    Total                                            $       390,539    $       381,248
                                                     ===============    ===============


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Notes payable                                      $         3,000    $         3,000
  Capital lease obligations due within one year                  968                968
  Accounts payable                                            58,634             58,634
  Income taxes payable                                         3,390              3,466
  Accrued liabilities                                         41,034             41,988
                                                     ---------------    ---------------
    Total current liabilities                                107,026            108,056
Capital lease obligations                                      1,876              1,876
Convertible subordinated debentures                          107,224            107,224
Other long-term liabilities                                    6,897              6,867
                                                     ---------------    ---------------
    Total liabilities                                        223,023            224,023

Minority interest                                              2,791              2,791

Stockholders' equity:
  Preferred Stock, $1.00 par value per share; 500
    shares authorized, none issued                              --                 --
  Common Stock. $.01 par value per share; 50,000
    shares authorized, 16,219 issued                             162                162
Additional paid-in capital                                    87,994             87,489
Retained earnings                                             85,053             75,267
Equity adjustment for foreign currency translation            (4,929)            (4,929)
Unearned compensation relating to restricted stock
  awards                                                        (493)              (493)
Treasury stock; 162 shares of common stock at cost            (3,062)            (3,062)
                                                     ---------------    ---------------
    Total stockholders' equity                               164,725            154,434
Commitments and contingencies                                   --                 --
                                                     ---------------    ---------------
    Total                                            $       390,539    $       381,248
                                                     ===============    ===============
</TABLE>

3.       Earnings Per Share

         Computations of basic and diluted earnings per share of common stock
         have been made in accordance with the Financial Accounting Standards
         Board's (FASB) Statement of Financial Accounting Standards No. 128,
         "Earnings Per Share". All securities having an anti-dilutive effect on
         earnings per share have been excluded from such computations. Common
         stock purchase rights outstanding under the Company's stockholder
         rights plan, which potentially have a dilutive effect, have been
         excluded from the weighted common shares computation as preconditions
         to the exercisability of such rights were not satisfied.

                  Reconciliation of Numerators and Denominators
                    Of the Basic and Diluted EPS Computations
                     (In thousands except per share amounts)

         In the following table, net income represents the numerator, and the
         shares represent the denominator, in the earnings per share
         calculation.

                                       11
<PAGE>   12
<TABLE>
<CAPTION>
                                        For the Three Months Ended      For the Three Months Ended
                                            December 31, 1998                December 31, 1997
                                            -----------------                -----------------
                                                         Per Share                         Per Share
                                    Income      Shares     Amount      Income     Shares    Amount
                                   ------       ------     ------      ------     ------    ------
                                             (Unaudited)                       (Unaudited)
<S>                                <C>           <C>      <C>         <C>          <C>      <C>     
Net (loss) income                  $(45,853)                          $  1,246
                                   ========                           ========

BASIC EPS
Income available to common
  stockholders                     $(45,853)     16,048   $  (2.86)   $  1,246     15,685   $    .08
                                   ========               ========    ========              ========

EFFECT OF DILUTIVE SECURITIES
Options                                            --                                 620
                                               --------                          --------

DILUTED EPS
Income available to stockholders
  of common shares and common
  stock equivalents                $(45,853)     16,048   $  (2.86)   $  1,246     16,305   $    .08
                                   ========    ========   ========    ========   ========   ========
</TABLE>
<TABLE>
<CAPTION>
                                        For The Nine Months Ended        For The Nine Months Ended
                                            December 31, 1998                December 31, 1997
                                            -----------------                -----------------
                                                         PER SHARE                         PER SHARE
                                    INCOME      SHARES     AMOUNT      INCOME     SHARES    AMOUNT
                                   ------       ------     ------      ------     ------    ------
                                             (UNAUDITED)                       (UNAUDITED)
<S>                                <C>           <C>      <C>         <C>          <C>      <C>     
Net (loss) income                  $(50,002)                          $  3,509
                                   ========                           ========

BASIC EPS
Income available to common
  stockholders                     $(50,002)     16,101   $  (3.11)   $  3,509     15,809   $    .22
                                   ========               ========    ========              ========

EFFECT OF DILUTIVE SECURITIES
Options                                            --                                 438
                                               --------                          --------

DILUTED EPS
Income available to stockholders
  of common shares and common
  stock equivalents                $(50,002)     16,101   $  (3.11)   $  3,509     16,247   $    .22
                                   ========    ========   ========    ========   ========   ========
</TABLE>

         Options to purchase 3,198,753 shares of common stock at a weighted
         average exercise price of $17.94 per share were outstanding at December
         31, 1998, but were not included in the computation of diluted earnings
         per share for the three and nine months ended December 31, 1998 because
         the options would have had an anti-dilutive effect on the net loss for
         the periods then ended.

         Options to purchase 312,550 shares of common stock at an exercise price
         of $25.31 per share were outstanding at December 31, 1997, but were not
         included in the computation of diluted earnings per share for the three
         months then ended because the options' exercise price was greater than
         the average market price for the common shares during the period.
         Additionally, options to purchase 775,051 shares of common stock at a
         weighted average exercise price of $23.82 per share were outstanding
         at December 31, 1997, but were not included in the computation of
         diluted earnings per share for the nine months then ended because the
         options' exercise price was greater than the average market price for
         the common shares during the period.

         The shares issuable upon conversion of Telxon's 5-3/4% Convertible
         Subordinated Notes and 7-1/2% Convertible Subordinated Debentures were
         omitted from the diluted earnings per share calculations because their
         inclusion at December 31, 1998 and 1997, would have had an
         anti-dilutive effect on earnings for the three and nine months then
         ended.

4.       Comprehensive Income

         Total comprehensive income consisted of the following:
<TABLE>
<CAPTION>
                                              Nine Months
                                                 Ended
                                              December 31,
                                              ------------
                                            1998         1997
                                            ----         ----
                                               (Unaudited)

<S>                                       <C>         <C>     
Net (loss) income                         $(50,002)   $  3,509
Other comprehensive income (expense):
Foreign Currency Translation Adjustment        569      (1,886)
                                          --------    --------
Total comprehensive (loss) income         $(49,433)   $  1,623
                                          ========    ========
</TABLE>

                                       12
<PAGE>   13
5.       Inventories

         Inventories consisted of the following:
<TABLE>
<CAPTION>
                                                                                          December 31,           March 31,
                                                                                             1998                 1998
                                                                                             ----                 ----
                                                                                          (Unaudited)         (Unaudited and
                                                                                                                As Restated)
<S>                                                                                          <C>                <C>     
         Purchased components                                                                $ 68,316           $ 49,514
         Work-in-process                                                                       25,659             37,375
         Finished goods                                                                        31,475             23,046
                                                                                             --------           --------
                                                                                             $125,450           $109,935
                                                                                             ========           ========
</TABLE>
6.       Accrued Liabilities

         Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
                                                                                          December 31,           March 31,
                                                                                             1998                 1998
                                                                                             ----                 ----
                                                                                          (Unaudited)         (Unaudited and
                                                                                                                As Restated)     
<S>                                                                                           <C>                <C>    
         Deferred customer service revenues                                                   $13,270            $13,448
         Accrued payroll and other employee compensation                                        7,751             12,353
         Other accrued liabilities                                                             18,672             16,187
                                                                                              -------            -------
                                                                                              $39,693            $41,988
                                                                                              =======            =======
</TABLE>

7.       Supplemental Cash Flow Information
<TABLE>
<CAPTION>
                                                                                                     Nine Months
                                                                                                        Ended
                                                                                                    December 31,
                                                                                                    ------------
                                                                                              1998               1997
                                                                                              ----               ----
                                                                                          (Unaudited)         (Unaudited and
                                                                                                                As Restated)
<S>                                                                                          <C>                 <C>   
         Cash paid during the period for:
         Interest                                                                            $8,946              $4,694
         Income taxes                                                                         5,506               5,502
</TABLE>

         The $5,049 decrease in current deferred tax assets and the $5,620
         decrease in non-current deferred tax assets during the nine months
         ended December 31, 1998, have been included in the cash flow impact of
         the changes in prepaid expenses and other long-term liabilities,
         respectively, in the accompanying consolidated statement of cash
         flows. The $1,934 increase in current deferred tax assets during the
         nine months ended December 31, 1997, has been included in the cash
         flow impact of the change in prepaid expenses in the accompanying
         consolidated statement of cash flows.

         Capital lease additions of $276 and $1,819 during the nine months ended
         December 31, 1998 and 1997, respectively, have been excluded from the
         accompanying consolidated statement of cash flows as non-cash
         transactions.

         The Company's re-issuance of treasury stock during the first nine
         months of fiscal 1999 and 1998 to satisfy purchases made by employees
         through the Company's 1995 Employee Stock Purchase Plan have been
         excluded from the accompanying consolidated statement of cash flows as
         non-cash transactions. See Note 11 - Other Debt and Equity Transactions
         for further details on the fiscal 1999 re-issuance.

8.       Litigation and Contingencies

         On September 21, 1993, a derivative Complaint was filed in the Court of
         Chancery of the State of Delaware, in and for Newcastle County, by an
         alleged stockholder of the Company derivatively on behalf of Telxon.
         The named defendants are the Company; Robert F. Meyerson, former
         Chairman of the Board, Chief Executive Officer and director; Dan R.
         Wipff, then President, Chief Operating Officer and Chief Financial
         Officer and director; Robert A. Goodman, Corporate Secretary and
         outside director; Norton W. Rose, outside director; and Dr. Raj Reddy,
         outside director. The Complaint alleges breach of fiduciary duty to the
         Company and waste of the Company's assets in connection with certain
         transactions entered into by Telxon and compensation amounts paid by
         the Company. The Complaint seeks an accounting, injunction, rescission,
         attorney's fees and costs. While the Company is nominally a defendant
         in this derivative action, no monetary relief is sought by the
         plaintiff from the Company. On November 12, 1993, Telxon and the
         individual director defendants filed a Motion to Dismiss. The plaintiff
         filed his brief in opposition to the Motion on May 2, 1994, and the
         defendants filed a final responsive brief. The Motion was argued before
         the Court on March 29, 1995, and on July 18, 1995, the Court issued its
         ruling. The Court dismissed all of the claims relating to the
         plaintiff's allegations of corporate waste; however, the claims
         relating to breach of fiduciary duty survived the Motion to Dismiss.

         On October 31, 1996, plaintiff's counsel filed a Motion to Intervene in
         the derivative action on behalf of a new plaintiff stockholder. As part
         of the Motion to 
                                       13
<PAGE>   14

         Intervene, the intervening plaintiff asked that the Court designate as
         operative for the action the intervening plaintiff's proposed
         Complaint, which alleges that a series of transactions in which the
         Company acquired technology from a corporation affiliated with Mr.
         Meyerson was wrongful in that Telxon already owned the technology by
         means of a pre-existing consulting agreement with another affiliate of
         Mr. Meyerson; the intervenor's complaint also names Raymond D. Meyo,
         President, Chief Executive Officer and director at the time of the
         first acquisition transaction, as a new defendant. The defendants
         opposed the Motion on grounds that the new claim alleged in the
         proposed Complaint and the addition of Mr. Meyo were time-barred by the
         statute of limitations and the intervening plaintiff did not satisfy
         the standards for intervention. After taking legal briefs, the Court
         ruled on June 13, 1997, to permit the intervention. On March 18, 1998,
         defendant Meyo filed a Motion for Judgement on the Pleadings (as to
         himself), in response to which Plaintiff filed its Answer and Brief in
         Opposition. The Motion was argued before the Court on November 4, 1998,
         and was granted from the bench, dismissing Meyo as a defendant in the
         case. The post-intervention claims are the subject of ongoing
         discovery, and no deadline for the completion of the discovery has yet
         been set by the Court.

         The defendants believe that the post-intervention claims lack merit,
         and they intend to continue vigorously defending this action. While the
         ultimate outcome of this action cannot presently be determined, the
         Company does not anticipate that this matter will have a material
         adverse effect on the Company's consolidated financial position,
         results of operations or cash flows and accordingly has not made
         provisions for any loss or related insurance recovery in its financial
         statements.

         On February 17, 1998, a complaint was filed against the Company in the
         District Court of Harris County, Texas, by Southwest Business
         Properties, the landlord of the Company's former Wynnwood Lane facility
         in Houston, Texas. The complaint alleges counts for breach of contract
         and temporary and permanent injunctive relief, all related to alleged
         environmental contamination at the Wynnwood property, and seeks
         specific performance, unspecified monetary damages for all injuries
         suffered by plaintiff, payment of pre-judgement interest, attorneys'
         fees and costs and other unspecified relief. In its Answer, Telxon
         denied plaintiff's allegations. No hearing has been had on, or is
         currently scheduled for, plaintiff's claim for temporary injunctive
         relief. The trial previously scheduled for March 8, 1999 has been reset
         to commence on a day during the Court's two week docket beginning
         October 25, 1999, with the specific trial date to be set by the Court
         at that time. If the Company were ultimately to become responsible for
         the alleged contamination, the associated loss could have a material
         adverse effect on results of operations for one or more quarters in
         which the associated charge(s) would be taken. Telxon believes that
         these claims lack merit, and it intends to vigorously defend this
         action.

         On May 8, 1998, two class action suits were filed in the Court of
         Chancery of the State of Delaware, in and for the County of New Castle,
         by certain alleged stockholders of Telxon on behalf of themselves and
         purported classes consisting of Telxon stockholders, other than
         defendants and their affiliates, relating to an alleged offer by Symbol
         Technologies, Inc. ("Symbol") to acquire the Company. The named
         defendants are Telxon and its Directors at the time, namely, Frank E.
         Brick, Robert A. Goodman, Dr. Raj Reddy, John H. Cribb, Richard J.
         Bogomolny, and Norton W. Rose.

         The plaintiffs allege that on April 21, 1998, Symbol made an offer to
         purchase Telxon for $38.00 per share in cash and that on May 8, 1998,
         Telxon rejected Symbol's proposal. Plaintiffs further allege that
         Telxon has certain anti-takeover devices in place purportedly designed
         to thwart hostile bids for the Company. Plaintiffs charge the Director
         defendants with breach of fiduciary duty and claim that they are
         entrenching themselves in office. The plaintiffs seek certification of
         the purported class, unspecified compensatory damages, equitable and/or
         injunctive relief requiring the defendants to act in specified manners
         consistent with the defendant Directors' fiduciary duties, and payment
         of attorney's fees and costs. The parties have stipulated that the
         plaintiffs will file an Amended Complaint and that the defendants will
         answer only the Amended Complaint.

         On June 2, 1998, the Court ordered consolidation of the above-captioned
         cases. This action is in its early stages, with no scheduling order
         having been issued by the Court; discovery has not yet commenced. The
         defendants believe that these claims lack merit and intend to
         vigorously defend the consolidated action.

         In December 1998 and January and February 1999, a total of 26 class
         actions were filed in the United States District Court, Northern
         District of Ohio, by certain alleged stockholders of the Company on
         behalf of themselves and purported classes consisting of Telxon
         stockholders, other than the defendants and their affiliates, 


                                       14
<PAGE>   15

         who purchased stock during the period May 8, 1998 and January 27, 1999
         or various portions thereof. The named defendants are the Company,
         President and Chief Executive Officer Frank E. Brick, and Senior Vice
         President and Chief Financial Officer Kenneth W. Haver. On February 9,
         1999, the plaintiffs filed a Motion to Consolidate all of the actions.
         The complaints allege claims for "fraud on the market" arising from
         alleged misrepresentations and omissions with respect to the Company's
         financial performance and prospects and an alleged violation of
         generally accepted accounting principles by improperly recognizing
         revenues. Each complaint seeks certification of its purported class,
         unspecified compensatory damages, interest, attorneys' fees and costs.
         The defendants believe that these claims lack merit and they intend to
         vigorously defend these actions. Defendants anticipate filing a Motion
         to Dismiss.

         By letter dated December 18, 1998, the Staff of the Division of
         Enforcement of the Securities and Exchange Commission advised the
         Company that it was conducting a preliminary, informal inquiry into
         trading of the securities of the Company at or about the time of the
         Company's December 11, 1998 press release announcing that the Company
         would be restating the revenues for its second fiscal quarter ended
         September 30, 1998. In cooperation with the informal inquiry, the
         Company has voluntarily provided certain responsive information to the
         Staff. On January 20, 1999, the Commission issued a formal Order
         Directing Private Investigation And Designating Officers To Take
         Testimony with respect to the referenced trading and specified
         accounting matters, pursuant to which a subpoena duces tecum was served
         on the Company on February 11, 1999 requiring the production of
         specified documents. The Company has delivered documents to, and
         intends to continue cooperating fully with, the Staff.

         On February 1, 1999, Telxon filed a Complaint in the United States
         District Court, Northern District of Ohio, against Symbol alleging
         claims for (i) violation of the Lanham Act, (ii) violation of Ohio's
         Unfair Business Practices Statute, (iii) product disparagement, and
         (iv) tortious interference with business relationships and contracts.
         Each of the Company's claims are based upon false and misleading
         statements allegedly made in the marketplace by Symbol, the Company's
         primary competitor, which are damaging to Telxon. The Company is
         seeking preliminary and permanent injunctive relief and compensatory
         damages, punitive damages, and attorneys' fees in amounts to be
         determined at trial.

         On February 24, 1999, Symbol filed an Answer and Counterclaim to
         Telxon's February 1, 1999 Complaint. Symbol's Answer denies the
         allegations in Telxon's Complaint, and Symbol's Counterclaim alleges a
         single count for fraud in the inducement, related to Symbol's alleged
         exploration of a business combination with the Company. Symbol seeks
         compensatory damages of not less than $3,000, punitive damages, and
         reasonable attorneys' fees in amounts to be determined at trial. The
         Company's Response to Symbol's Counterclaim is due on March 17, 1999.
         Telxon believes that Symbol's claim lacks merit, and it intends to
         vigorously defend the counterclaim.

         Also on February 24, 1999, Symbol filed (i) a Motion to Strike from the
         February 1, 1999 Complaint the allegations related to a previous
         lawsuit by Telxon against Symbol based on unfair business practices by
         Symbol, in which judgment for injunctive relief in favor of Telxon was
         entered against Symbol, and (ii) a Motion to Dismiss from the Complaint
         the claims against Symbol for product disparagement and for tortious
         interference with business relationships and contracts, based on
         allegations that Telxon fails to state a cause of action as to those
         matters. Telxon believes that these motions lack merit, and it intends
         to vigorously oppose these motions. Telxon's response to these motions
         is due on March 11, 1999.

         In the event that any of the foregoing litigation ultimately results
         in a money judgment against the Company or is otherwise determined
         adversely to the Company by a court of competent jurisdiction, such
         determination could, depending on the particular circumstances,
         adversely affect the Company's conduct of its business and the results
         and condition thereof. In the normal course of its operations, the
         Company is subject to performance under contracts and assertions that
         technologies it utilizes may infringe third party intellectual         
         properties, and is also subject to various pending legal actions and
         contingencies, which may include matters involving suppliers,  
         customers, lessors of Company products to customers and lessors of
         equipment to the Company.

9.       Income Taxes

         The Company's consolidated provision for income taxes for the three and
         nine months ended December 31, 1998 reflects the valuation allowance
         established for the 


                                       15
<PAGE>   16

         Company's inability to utilize domestic net operating loss benefits.
         The consolidated provision for income taxes was also increased by
         non-deductible goodwill amortization and foreign tax rate
         differentials. As of December 31, 1998, the Company had fully reserved
         for its $16,966 domestic net deferred tax assets based on its current
         assessment regarding the utilization of such assets. 

10.      Subsidiary Stock Transactions

         During the three months ended June 30, 1998, the Company entered into a
         series of transactions with a business partner relating to Metanetics,
         a development stage subsidiary that develops image processing
         technology. The Company repurchased 400,000 voting common shares of
         Metanetics for $1,950 or $4.875 per share. Simultaneously, the business
         partner agreed to pay amounts due of $1,850 for previously purchased
         manufacturing rights and software licenses. Additionally, the companies
         mutually agreed to terminate such agreements and released each other
         from any future liability related to the original agreements. The
         Company had recorded the additional $1,950 investment in Metanetics as
         an operating expense as of June 30, 1998, because of the historical
         financial losses of the subsidiary and future funding requirements for
         its operations. However, after further assessment as part of the
         restatement discussed in Note 2 - Restatement above and based, in part,
         on an independent valuation of Metanetics, the Company has capitalized
         this additional investment as goodwill for the nine months ended
         December 31, 1998, to be amortized over a useful life of three years.
         Giving effect to the share repurchase, the Company's interest in the
         voting common stock of Metanetics was 60% at December 31, 1998.

         During the three months ended June 30, 1998, the Company's Aironet
         Wireless Communications, Inc. ("Aironet") subsidiary, a developer,
         manufacturer, and marketer of wireless LAN systems, sold 222,222 shares
         of its voting common stock to various third-party investors at a price
         of $3.50 per share. Proceeds from this sale of stock were $778. The
         resulting pre-tax net gain of $340 was recorded as non-operating income
         in the accompanying consolidated statement of operations. In addition
         to the sale of the shares of stock, 66,667 warrants at $3.50 per share
         for the purchase of Aironet voting common stock were issued. A gain of
         $47 relating to these warrants has been deferred until the warrants are
         exercised or lapse. The Company's remaining interest in the issued
         voting common stock of Aironet at December 31, 1998, was 76%.

         During the three months ended June 30, 1998, the Company sold the stock
         of its Virtual Vision subsidiary to a third party in exchange for $500
         in cash and $4,500 in Series F Preferred Shares of FED Corporation at a
         value of $6.00 per share or 750,000 shares. The Company recorded a
         pre-tax gain of $900 as non-operating income in the accompanying
         consolidated statement of operations.

11.      Other Debt and Equity Transactions

         In September 1998, the Company entered into a product financing
         arrangement with a commercial finance institution under which
         $14,100 was advanced to one of the Company's value-added distributors.
         The financing agreement called for the payment of various
         administrative and advance fees by the Company as well as interest
         payable at the financial institution's prime lending rate minus .15%.
         As of December 31, 1998, the entire advanced amount remained
         outstanding and was recorded as a note payable in the accompanying
         consolidated balance sheet. The interest rate on this financing
         agreement was the financial institution's prime lending rate plus 2.5%
         as of December 31, 1998. Repayment of the advance by the Company is due
         March 26, 1999.

         During the three months ended June 30, 1998, $311 in aggregate
         principal amount of the Company's 7-1/2% Convertible Subordinated
         Debentures were surrendered for conversion into 11,621 shares of the
         Company's Common Stock, $.01 par value per share. The surrendered
         Convertible Subordinated Debentures have been canceled effective as of
         their conversion into common stock.

         During the first nine months of fiscal 1999, the Company repurchased
         63,300 shares of its common stock, at a weighted average price of
         $17.19 per share, pursuant to its open market repurchase program.

         During the first nine months of fiscal 1999, the Company re-issued
         94,234 shares of treasury stock, at a weighted average cost of $21.82
         per share, to satisfy options exercised under the Company's stock
         option plans. Additionally, the Company re-issued 23,775 shares of
         treasury stock, at a weighted average cost of $14.88, during the first
         nine months of fiscal 1999 to satisfy purchases made by employees
         through the Company's 1995 Employee Stock Purchase Plan.



                                       16
<PAGE>   17

12.      Bank Waivers

         The Company has obtained waivers with respect to its revolving credit
         facility from the group of eight lending banks for certain covenant
         violations arising from the restatement described in Note 2 -
         Restatement above or the Company's financial results for the quarter
         ended December 31, 1998. Effective through March 26, 1999, the waiver
         included the covenants requiring the Company to maintain specified
         leverage, current asset, net worth and fixed charge coverage ratios.
         Additionally, pursuant to the credit facility agreement, the Company
         elected in December 1998 to reduce the available maximum credit
         facility from $100,000 to $75,000 in order to reduce financing costs.
         Then, in February 1999, as part of the most recent of the waivers noted
         above, the bank group further reduced the permitted borrowing amount to
         the lesser of $55,000 (the amount then, and which continues to be,
         outstanding under the facility) or the sum of eligible accounts
         receivable and inventory as included in the Company's borrowing base.

         Contemporaneously with the above waivers, the Company also obtained
         waivers under its separate $20,000 business purpose revolving
         promissory note with one of the banks in the above bank group. This
         note incorporates the same covenants as apply under the revolving
         credit facility, which the bank also waived with respect to the
         business purpose revolving promissory note through March 26, 1999.
         Approximately $4,000 was at December 31, 1998, and continues to
         be, outstanding under the note, and the Company is not able to make any
         further borrowings thereunder.

         In connection with the above waivers, the lenders under both the
         revolving credit facility and the business purpose revolving promissory
         note exercised their rights under the terms of their respective loans
         to file UCC financing statements to perfect the security interests
         previously conditionally granted in their favor by the Company in its
         accounts receivable, inventory and equipment and the proceeds thereof.

13.      Subsequent Events

         Subsequent to December 31, 1998, the Company re-issued 29,224 shares
         of treasury stock, at a weighted average cost of $22.98 per share,
         to satisfy purchases made by employees through its 1995 Employee
         Stock Purchase Plan.



                                       17
<PAGE>   18


                       TELXON CORPORATION AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
        RESULTS OF OPERATIONS

IN ADDITION TO DISCUSSING AND ANALYZING THE COMPANY'S RECENT HISTORICAL
FINANCIAL RESULTS AND CONDITION, THE FOLLOWING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDES STATEMENTS
REGARDING CERTAIN TRENDS OR OF OTHER FORWARD-LOOKING INFORMATION CONCERNING THE
COMPANY'S ANTICIPATED REVENUES, COSTS, FINANCIAL RESOURCES OR OTHERWISE
AFFECTING OR RELATING TO THE COMPANY WHICH ARE INTENDED TO QUALIFY FOR THE
PROTECTIONS AFFORDED "FORWARD-LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, PUBLIC LAW 104-67. THE FORWARD-LOOKING STATEMENTS
MADE HEREIN AND ELSEWHERE IN THIS FORM 10-Q/A ARE INHERENTLY SUBJECT TO RISKS
AND UNCERTAINTIES, WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. THE SUMMARY OF CERTAIN OF THE
RISKS AND OTHER IMPORTANT FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS,
OPERATING RESULTS AND FINANCIAL AND OTHER CONDITION UNDER "FACTORS THAT MAY
AFFECT FUTURE RESULTS" BELOW SHOULD BE READ IN CONJUNCTION WITH THE MORE
COMPLETE DISCUSSION OF THOSE AND OTHER RISKS AND IMPORTANT FACTORS AFFECTING THE
BUSINESS, OPERATING RESULTS AND CONDITION OF THE COMPANY UNDER "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION - FACTORS THAT MAY AFFECT FUTURE RESULTS", AND OTHER CAUTIONARY
STATEMENTS APPEARING UNDER "ITEM 1. BUSINESS" AND ELSEWHERE, IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K, AS AMENDED BY AMENDMENTS NO. 1 AND NO. 2 ON FORM
10-K/A, FOR THE FISCAL YEAR ENDED MARCH 31, 1998.

On February 23, 1999, the Company announced that it would restate its previously
issued financial statements for the fiscal years 1996, 1997 and 1998, and its
unaudited interim financial statements for the first and second quarters of
fiscal 1999. This restatement was based upon the completion of a review of
certain judgmental accounting matters by the Audit Committee of the Board of
Directors, the Company's management and the Company's outside auditors,
PricewaterhouseCoopers LLP. See Note 2 - Restatement to the accompanying
consolidated financial statements for further detail concerning the restatement
adjustments made. The financial information for all periods included in the
following discussion gives effect to the restatement and should be read in
conjunction with the restated information presented in Note 2 - Restatement to
the accompanying consolidated financial statements. The Company plans to file
appropriate amended Forms 10-K and 10-Q reflecting the restatement for fiscal
years 1996, 1997 and 1998, the first, second and third quarters of each of
fiscal years 1997 and 1998 and the first and second quarters of fiscal 1999 as
expeditiously as practicable over the coming weeks, and the financial 
information presented in this Form 10-Q/A remains subject to the finalization 
of the restated financial statements for those prior periods.

OVERVIEW

The Company recorded net losses of $45.9 million or $2.86 per common share
(diluted) and $50.0 million or $3.11 per common share (diluted) for the third
quarter and first nine months of fiscal 1999, respectively. In comparison, the
Company recorded net income of $1.2 million or $.08 per common share (diluted)
and $3.5 million or $.22 per common share (diluted) for the third quarter and
first nine months of fiscal 1998, respectively. The results of the third quarter
and first nine months of fiscal 1999 include charges of $4.5 million and $8.1
million, respectively, for costs incurred in response to takeover and proxy
contest proposals and terminated discussions of proposed business combination 
transactions. Third quarter and first nine months of fiscal 1998 results include
an asset impairment charge of $1.4 million related to the reduction of the
carrying value of the Company's equity investment in a foreign distributor. As
stated when the Company announced the restatement, the Company anticipates that
it will incur a loss for the fourth quarter of fiscal 1999 and that it will post
a net loss for fiscal 1999. The Company continues to review all aspects of its
operations to improve profitability, which could result in one-time charges in
the fourth quarter of fiscal 1999.

The Company operates in a rapidly changing and dynamic market, and the Company's
strategies and plans are designed to adapt to changing market conditions where
and when possible. However, there can be no assurance that the Company's
management will identify the risks (especially those newly emerging from time to
time) affecting, and their impact on, the Company and its business, that the
Company's strategies and plans will take into account all market conditions and
changes thereto or that such strategies and plans will be successfully
implemented. Accordingly, neither the historical results presented in the
Company's consolidated financial statements and discussed herein, nor any
forward-looking statements in this Form 10-Q/A, are necessarily indicative of
the Company's future results. See "Factors That May Affect Future Results" for a
discussion of risk factors which may affect the Company's future results of
operations.

FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company's business, operating results and financial and other condition may
be affected by a number of risks and other important factors, including, without
limitation, the following, some of which are inherently difficult to identify
and predict and/or are beyond 



                                       18
<PAGE>   19
 the Company's control: general and industry-specific economic conditions; the
identification and implementation of appropriate cost reduction, efficiency and
other operating improvement strategies; the continued adequacy of the Company's
internal and external sources of working capital; sales and manufacturing cycles
from quarter to quarter and within each quarter; serving markets characterized
by increasingly rapid technological change and associated changes in market
demand and product obsolescence and by price erosion; intense competition; the
Company's ability to gain and maintain market acceptance of its products; the
levels of customer demand for the Company's products and of customers'
commitments of resources to information technology investments; concentration of
revenues in the retail industry, and possible decreases in their purchases from
the Company in response to any downturn in general economic prospects or
conditions to the extent reduced levels of new store openings are not offset by
their investment in the Company's systems to improve the efficiency of existing
stores; ability to penetrate and expand revenues in new and existing markets;
risks associated with foreign sales and operations, including the possible
affects of the adoption of the "euro"; timely and efficient enhancement of
appropriate product offerings through internal development and acquisition of or
investment in new businesses and technologies; dependence on, and freedom from
infringement of, technologies and other proprietary rights of or by third
parties; government regulation of radio and other products and product health
and safety concerns; dependence on sole source, or a limited number of,
suppliers; and attracting and retaining qualified employees. In addition to
being subject to the foregoing factors and other cautionary statements elsewhere
in this Form 10-Q/A, the Company's conduct of its business and the results and
condition thereof are also subject to the possible adverse effects of certain
pending litigation and other contingencies discussed in Note 8 Litigation and
Contingencies to the accompanying consolidated financial statements included in
Item 1 above.

READINESS FOR THE YEAR 2000

THE INFORMATION SET FORTH UNDER THIS CAPTION IS HEREBY DESIGNATED TO BE A "YEAR
2000 READINESS DISCLOSURE" UNDER THE YEAR 2000 INFORMATION READINESS DISCLOSURE
ACT (THE "YEAR 2000 ACT"), PUBLIC LAW 105-271, AND THE STATEMENTS BELOW AND THE
REGISTRANT, AS THE MAKER THEREOF, SHALL BE ENTITLED TO THE PROTECTIONS PROVIDED
BY THE YEAR 2000 ACT.

As the end of the twentieth century nears, there is worldwide concern regarding
the use by many existing computer programs of only the last two digits rather
than four to identify the year in a date field. If not corrected, many computer
applications may fail to treat year dates intended to represent years in the
twenty-first century as such but instead treat them as still in the twentieth
century, potentially resulting in system failure or miscalculations disruptive
of business operations, including, among other things, an inability to initiate,
receive, process, invoice or otherwise complete normal business activities.
These Year 2000 issues affect virtually all companies and organizations.

Year 2000 issues affect both the Company's offerings of computer products and
related services to its customers as well as its own operations. The Year 2000
readiness of the Company's operations in turn involves not only its corporate
information systems but also computer-based systems used directly in the conduct
of its business ("Process Management Systems"), such as hardware and software
engineering design tools, manufacturing equipment and customer service and
maintenance tracking systems. In addition, the Company could also be affected by
the Year 2000 readiness of its customers and of its suppliers of raw materials,
components, peripherals, finished products and software and its providers of
facilities, equipment and services. The costs of the Company's Year 2000
readiness efforts are being funded from the Company's consolidated operating 
cash flows and borrowings.

With respect to its products, the Company has identified those that are or will
be made Year 2000 ready. Those already- or to-be-made-Year 2000 ready products
represent the existing products which management believes will continue to be a
significant part of the Company's ongoing product line. Customers may continue
to order the Company's other existing products, but with no assurance from the
Company as to their Year 2000 readiness or the feasibility or availability of an
upgrade path to readiness.
All new products are being designed to be Year 2000 ready.

The Company has completed the software/firmware upgrades for its products which
were identified to be made Year 2000 ready, subject to the completion of
debugging activities. Subject to negotiated contractual commitments, the Company
will make the upgrades available free of charge for products purchased after
December 31, 1997 which were ordered with the latest software version as of the
order date; an upgrade fee will be charged customers who requested an older
software version when they ordered the equipment. Customers will be responsible
for installing the upgrades, or they may retain the Company to do so for a fee.
The costs to date of upgrading the Company's products to Year 2000 readiness
have not been, and the Company does not expect that the remaining cost of doing
so will be, material to the Company's financial position or results of
operations.

The Company has purchased and is working with outside contractors to develop and
install new corporate-wide information systems. Though the new systems were
identified as a strategic business initiative independent of Year 2000
considerations, they are also being 



                                       19
<PAGE>   20

designed to make the Company's Information Systems Year 2000 ready. To date, the
Company has installed the following phases of the new systems installation: key
financial reporting; accounting; and services help desk and contract billing.
While the new information systems will be dynamic ones permitting ongoing
improvements as business needs are identified, the basic operational systems
remaining to be installed are the order entry, manufacturing, product repair and
service management, engineering documents management, and accounts receivable
systems. The installation of these complex systems, comprising a substantial
portion of the overall new systems installation, are expected to be
substantially completed during the first quarter of fiscal 2000, though one to
four additional months of work may be required in order to achieve full user
acceptance.

The total capital expenditures for the new systems installation, including the
addition of interfaces for "bolt-on" enhancements, is presently estimated to be
approximately $28.0 million. In addition, the company will also accelerate the
replacement of approximately $2.4 million of computer hardware in connection
with the new systems installation. As of December 31, 1998, the Company had
spent approximately $22.6 million in capital expenditures, purchased $.5 million
of replacement computer hardware and leased an additional $1.0 million of
replacement computer hardware. The company anticipates that it will lease all of
its remaining replacement hardware requirements. The forgoing time and cost
targets are management's current best estimates based on presently available
information and numerous assumptions. Given the uncertainties and complexities
inherent in any new system installation, there can be no assurance that the
project will be completed within the expected time and cost parameters. For
example, to the extent that any additional work is required after the targeted
installation date in order to achieve full user acceptance of the new systems,
the Company's monthly systems development expenditures have ranged from
approximately $1.25 million to approximately $1.75 million.

In addition to these capitalized expenditures, the Company had incurred
approximately $2.9 million of non-capitalizable expenses as of December 31, 1998
related to the new systems installation. These non-capitalizable expenses
exclude the one-time, after-tax charge of $1.2 million recorded during fiscal
1998 as a change in accounting principle in accordance with the Financial
Accounting Standards Board's Emerging Issues Task Force consensus ruling
"Accounting for Costs Incurred in Connection with a Consulting Contract of an
Internal Project That Combines Business Process Reengineering and Information
Technology Transformation". The Company estimates that it may incur an
additional $1.4 million in non-capitalizable expenses in connection with the
completion of the initial installation of the new systems.

The Company has engaged an outside consultant to evaluate the Year 2000
readiness of its engineering, manufacturing and customer maintenance and service
Process Management Systems. The consultant's findings and recommendations were
received by the Company on February 8, 1999 and are being reviewed and will be
acted upon by the Company team overseeing the study, which includes senior
management from each of the affected functional areas. To the extent any Year
2000 issues are identified, remediation options will include re-writing the
affected software or replacing the affected hardware or software with hardware
or software that is Year 2000 ready. The Company believes that, in general,
replacement, Year 2000 ready hardware and software for its Process Management
Systems are readily available, making that the most likely means of addressing
any remediation needs identified by the consultant. The estimated cost of the
study is immaterial, but until the results of the consultant's study and any
follow-on analyses the company may undertake at the consultant's recommendation
are evaluated by the Company, the timetable and cost for any remediation that
may ultimately be required with respect to the Company's Process Management
Systems cannot be estimated.

To the extent that the re-writing of affected software is selected as the means
for remediating any Year 2000 issues, whether in preparing upgrades to Company
products, making Process Management Systems Year 2000 ready or otherwise, given
the technical nature of the task of isolating and correcting non-compliant
programming and the limited internal resources available, and the increasing
demand for available external resources, to perform the work, there can be no
assurances as to if, when and at what cost any such software work can be
completed.

The Company's own Year 2000 readiness is also affected by the Year 2000
readiness of its customers as well as of its suppliers of raw materials,
components, peripherals, finished products and software and its providers of
facilities, equipment and services and any failure on their part to achieve
readiness in their own operations or with respect to the items they supply or
otherwise provide to the Company. Insofar as no single customer has accounted
for more than ten percent of the Company's revenues in recent fiscal years, the
Company does not anticipate that its operating results will be materially
adversely affected by the failure of any particular customer to itself be Year
2000 ready. The volume of Year 2000 inquiries which the Company has received
from its customers regarding the Year 2000 readiness of the Company products
they use further suggests that the 



                                       20
<PAGE>   21

Company's customers are addressing their Year 2000 issues. The Company has made
Year 2000 readiness inquiries of the current suppliers to its engineering,
manufacturing and service functions and is assessing the responses, which to
date have been received from approximately three-quarters of those suppliers.
The responses received from the suppliers have not identified any material Year
2000 issues but generally indicate only that the respective suppliers are in the
midst of their own Year 2000 readiness efforts. The Company has also made
readiness inquires of its providers of facilities and related equipment and
services (elevators, HVAC, utilities, etc.). As the result of a limited number
of potential Year 2000 issues which those inquiries have identified to date, the
Company has replaced or is in the process of updating the affected items at a
nominal cost. The company is still in the process of receiving, assessing and
following up on the providers' responses, most of which have indicated only that
the respective providers are in the midst of their own Year 2000 readiness
efforts.

There are several possible scenarios which, alone or in aggregate effect, could,
depending on the particular circumstances, materially adversely affect Company's
business and/or its financial results or conditions. These scenarios could
affect the Year 2000 readiness of the Company's own product or service
offerings, disrupt its business operations or negatively impact its operating
results. The Company could be adversely affected by the failure of one or more
of its suppliers of raw materials, components, peripherals, finished products or
software or its providers of facilities, equipment and services to achieve Year
2000 readiness in their own operations or with respect to the items they supply
or otherwise provide to the Company. If such an event were to, or circumstances
indicate that one is likely to, occur, the Company would seek alternative
sources of supply (the Company periodically reviews its sourcing options as part
of its general operating procedures independent of Year 2000 concerns) or seek
to develop or obtain a software upgrade to make the affected item Year 2000
ready. As with all businesses such as the Company engaged in some facet of the
computer industry, there is a risk that the Company's customers may, in advance
of or after the change in the millennium, experience Year 2000 failures or other
difficulties in their use of computer systems comprised of or incorporating
products or services furnished by the Company and may commence legal action or 
seek other compensation for their resulting losses; such legal actions, even if 
not ultimately determined adversely to the Company, would likely involve 
significant defense costs to the Company, particularly where the combination of
products and/or services of several different vendors in addition to the Company
in the subject customer system presents complex issues for isolating the cause
of the Year 2000 problem and determining the vendor responsible for that
problem. Disruptions in the economy generally, domestically and/or in foreign
countries, resulting from Year 2000 issues could also materially affect the
Company. At this time, the Company does not believe that the likelihood of any
of the above scenarios occurring can be reliably predicted, or that the nature
or extent of their possible adverse effects on the Company, can be reasonably
estimated. Though the Company currently does not have formal contingency plans
in place to address any particular possible Year 2000 scenario, the Company
intends to develop appropriate contingency plans if and when any significant
risks relating to its Year 2000 readiness can be more definitely identified.

RESULTS OF OPERATIONS

REVENUES
<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                              ------------------
                                                                 DECEMBER 31,                      INCREASE/(DECREASE)
                                                                 ------------                      -------------------
                                                            1998               1997            DOLLAR           PERCENTAGE
                                                            ----               ----            ------           ----------
                                                                       (IN  THOUSANDS)

<S>                                                        <C>               <C>               <C>                  <C>    
Net Revenues:
   Product, net                                            $76,393           $ 97,581          $(21,188)            (21.7)%
   Customer service, net                                    20,016             19,835               181               0.9%
                                                           -------           --------          --------
   Total net revenues                                      $96,409           $117,416          $(21,007)            (17.9)%
                                                           =======           ========          ========
</TABLE>
<TABLE>
<CAPTION>
                                                               NINE MONTHS ENDED
                                                               -----------------
                                                                  DECEMBER 31,                     INCREASE/(DECREASE)
                                                                  ------------                     -------------------
                                                            1998               1997            DOLLAR           PERCENTAGE
                                                            ----               ----            ------           ----------
                                                                       (IN  THOUSANDS)

<S>                                                       <C>                <C>               <C>                   <C>   
Net Revenues:
   Product, net                                           $255,975           $274,528          $(18,553)             (6.8)%
   Customer service, net                                    62,222             57,239             4,983               8.7%
                                                          --------           --------           -------
   Total net revenues                                     $318,197           $331,767          $(13,570)             (4.1)%
                                                          ========           ========          ========
</TABLE>

Net product revenues include the sale of portable tele-transaction computers
("PTCs"), including rugged, wireless mobile computers and pen-based and
touch-screen workslates; hardware accessories; wireless data communication
products; custom application software, network management software and software
licenses; and a variety of professional services, including system integration
and project management.

                                       21
<PAGE>   22

The decrease in consolidated product revenues during the third quarter of fiscal
1999 from fiscal 1998 levels primarily reflects the absence in the current
quarter of a sale of approximately $30.0 million to a major domestic retail
customer recorded in the third quarter of fiscal 1998. Additionally, third
quarter fiscal 1999 consolidated product revenues were lower than expected due
to the unanticipated cancellation of a $13.0 million order to a large domestic
logistics company in early December 1998 and by the unexpected delay in the
roll-out of two large retail projects totaling $18.0 million. Consolidated
product revenues for the third quarter of fiscal 1999 were also negatively
impacted by a $5.4 million increase in the amounts provided for domestic product
sales returns, necessitated by an increase in the Company's historical product
return experience and specific product return issues, particularly with the
Company's value-added distributors. However, an increase in domestic unit
volumes, adjusted for the $30.0 million prior year transaction, and a $3.2
million increase in International product revenues, driven primarily by higher
Canadian subsidiary and foreign distributor sales, served to partially offset
the overall reduction in consolidated product revenues between the two periods.

Similarly, consolidated product revenues for the first nine months of fiscal
1999 were negatively impacted by the absence of the $30.0 million prior year
sale to a major domestic retail customer, a $11.7 million increase in domestic
product returns and a $11.5 million increase in the amounts provided for
domestic product sales returns. The increase in the domestic product sales
return reserves was necessitated by an increase in the Company's historical
product return experience and specific product return issues, particularly in
the Company's value-added distribution channel. Consolidated product revenues
for the first nine months of fiscal 1999 were also lower due to the
unanticipated cancellation of a $13.0 million order to a large domestic
logistics company in early December 1998 and by the unexpected delay in the
roll-out of two large retail projects totaling $18.0 million. An increase in
domestic unit volumes, adjusted for the $30.0 million prior year transaction,
and a $5.8 million increase in International product revenues, due primarily to
higher Canadian and European subsidiaries and foreign distributor sales, served
to partially offset the overall reduction in consolidated product revenues
between the two periods.

The Company expects consolidated product revenue for the fourth quarter of
fiscal 1999 to be higher than the levels experienced during the third quarter of
fiscal 1999. However, it is anticipated that consolidated product revenues for 
the fourth quarter of fiscal 1999 will be less than those in the fourth quarter
of fiscal 1998.

The increase in consolidated customer service revenues during the first nine
months of fiscal 1999 from fiscal 1998 levels was primarily the result of the
continued growth of the installed base of the Company's products.

The Company anticipates that fourth quarter fiscal 1999 customer services
revenues will be slightly greater than those recorded during the third quarter
of fiscal 1999.

Revenues from the Company's international operations (including Canada)
increased $3.7 million or 12.1% and $7.5 million or 8.2% in the third quarter
and first nine months of fiscal 1999, respectively, from fiscal 1998 levels.
This increase was attributable primarily to the increased revenues recorded by
the Company's European and Canadian subsidiaries as well as increased sales to
foreign distributors. The European Economic and Monetary Union and a new
currency, the "euro," began in Europe on January 1, 1999. As the Company
operates in certain of these countries, the adoption of the euro may have an
impact on its financial results. While the Company's initial assessment is that
the adoption of the euro will not have a material adverse affect on the Company,
the Company will continue to monitor trends, issues and events related to the
adoption of the euro and their potential impact on the Company and its financial
results and operations.


                                       22
<PAGE>   23


COST OF REVENUES
<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                               ------------------ 
                                                                   DECEMBER 31,                         INCREASE
                                                                   ------------                         --------
                                                            1998                1997            DOLLAR           PERCENTAGE
                                                            ----                ----            ------           ----------
                                                                       (IN  THOUSANDS)

<S>                                                        <C>                <C>                <C>                  <C> 
Cost of Revenues:
   Product                                                 $57,446            $57,066            $  380               0.7%
   Customer service                                         14,047             12,249             1,798              14.7%
                                                            ------            -------            ------
   Total cost of revenues                                  $71,493            $69,315            $2,178               3.1%
                                                           =======            =======            ======

Cost of product revenues as a
   percentage of product revenues,
   net                                                       75.2%              58.5%

Cost of customer service revenues
   as a percentage of customer
   service revenues, net                                     70.2%              61.8%
</TABLE>
<TABLE>
<CAPTION>
                                                              NINE MONTHS ENDED
                                                              -----------------
                                                                 DECEMBER 31,                           INCREASE
                                                                 ------------                           --------
                                                            1998                1997            DOLLAR           PERCENTAGE
                                                            ----                ----            ------           ----------
                                                                       (IN  THOUSANDS)

<S>                                                        <C>                <C>                <C>                  <C> 

Cost of Revenues:
   Product                                                $169,388           $163,684           $ 5,704               3.5%
   Customer service                                         40,375             35,711             4,664              13.1%
                                                          --------           --------           -------
   Total cost of revenues                                 $209,763           $199,395           $10,368               5.2%
                                                          ========           ========           =======

Cost of product revenues as a
   percentage of product revenues,
   net                                                       66.2%              59.6%

Cost of customer service revenues
   as a percentage of customer
   service revenues, net                                     64.9%              62.4%
</TABLE>

Consolidated product gross margin decreased to 24.8% in the third quarter of
fiscal 1999 from 41.5% in the third quarter of fiscal 1998. The decrease in
consolidated product gross margin between the two periods was due, in part, to
the absence in the current quarter of the approximately $30.0 million sale to a
major domestic retail customer recorded in the third quarter of fiscal 1998,
which increased that period's consolidated product gross margin by approximately
5.2%. Consolidated product gross margin was also negatively impacted by
increased costs in the Company's value-added distribution channel, a $1.8
million increase in domestic inventory provisions and a $1.4 million increase in
manufacturing expenses due to lower than expected volumes.

Additionally, consolidated product gross margin for the first nine months of
fiscal 1999 decreased to 33.8% from 40.4% for the first nine months of fiscal
1998. The decrease in consolidated product gross margin between the two periods
was due, in part, to a general increase in domestic manufacturing expenses
during fiscal 1999 that was not offset by an increase in average selling price.
Year-to-date fiscal 1999 consolidated product gross margin was also lower than
comparable fiscal 1998 levels because of the absence in the current fiscal year
of the approximately $30.0 million sale to a major domestic retail customer
recorded during the first nine months of fiscal 1998, which increased that
period's consolidated product gross margin by approximately 1.6%. Consolidated
product gross margin for the first nine months of fiscal 1999 was also
negatively impacted by increased costs in the Company's value-added distribution
channel, a $1.6 million increase in inventory provisions and a $1.6 million
increase in product warranty reserves over fiscal 1998 levels.

The Company expects continued consolidated product gross margin pressures for
the fourth quarter of fiscal 1999. While the Company does anticipate
improvements in the consolidated product gross margin from third quarter fiscal
1999 levels primarily reflecting anticipated increased sales volumes, the fourth
quarter fiscal 1999 consolidated product gross margin is expected to be below
fourth quarter fiscal 1998 levels.

Consolidated customer service gross margin decreased to 29.8% in the third
quarter of fiscal 1999 from 38.2% in the third quarter of fiscal 1998.
Additionally, consolidated customer service margin for the first nine months of
fiscal 1999 decreased to 35.1% from 37.6% during the same period in fiscal 1998.
The decrease in consolidated customer service 



                                       23
<PAGE>   24

gross margin in both the third quarter and first nine months of fiscal 1999
from comparable fiscal 1998 levels was primarily the result of the higher costs
associated with servicing the Company's increasingly complex units that were not
entirely offset by increases in maintenance and repair revenues.

The Company expects fourth quarter fiscal 1999 consolidated customer service
gross margin to remain consistent with third quarter fiscal 1999 gross margin
levels.

At December 31, 1998, consolidated inventory allowance accounts increased to
$15.6 million from $11.7 million at March 31, 1998. As a percentage of
consolidated gross inventories, the Company's consolidated inventory allowances
increased to 11.0% at December 31, 1998, from 9.6% at March 31, 1998. The
increase in consolidated inventory allowance accounts during the first nine
months of fiscal 1999 represents the Company's provision for obsolescence as
well as provisions related to the Company's remanufacturing operations and test
equipment held by customers. The Company anticipates continuing to provide for
inventory obsolescence resulting from technological change.

OPERATING EXPENSES
<TABLE>
<CAPTION>
                                                                    THREE MONTHS ENDED
                                                                    ------------------
                                                                       DECEMBER 31,                 INCREASE/(DECREASE)
                                                                       ------------                 -------------------
                                                                  1998            1997            DOLLAR       PERCENTAGE
                                                                  ----            ----            ------       ----------
                                                                             (IN THOUSANDS)

<S>                                                             <C>              <C>             <C>                  <C> 
Operating Expenses:
   Selling expenses                                             $22,828          $20,791         $ 2,037              9.8%
   Product development and
      engineering expenses                                       10,670            9,876             794              8.0%
General and administrative
   expenses                                                      13,610            9,662           3,948             40.9%
                                                                -------           ------         -------
Total operating expenses before
   other operating items                                        $47,108          $40,329         $ 6,779             16.8%
                                                                =======          =======         =======

Other operating items:
   Unconsummated business combination
     costs                                                       $4,491           $   --          $4,491               N.M.
   Asset impairment charge                                           --            1,434          (1,434)          (100.0)%
                                                                 ------          -------         --------
Total other operating items                                      $4,491          $ 1,434          $3,057            213.2%
                                                                 ======          =======          ======
</TABLE>
<TABLE>
<CAPTION>
                                                                    NINE MONTHS ENDED
                                                                    -----------------
                                                                       DECEMBER 31,                   INCREASE/DECREASE
                                                                       ------------                   -----------------
                                                                  1998            1997            DOLLAR       PERCENTAGE
                                                                  ----            ----            ------       ----------
                                                                             (IN THOUSANDS)

<S>                                                            <C>              <C>              <C>                 <C>  
Operating Expenses:
   Selling expenses                                            $ 67,699         $ 59,727         $ 7,972             13.3%
   Product development and
      engineering expenses                                       29,107           28,527             580              2.0%
General and administrative
   expenses                                                      33,541           29,030           4,511             15.5%
                                                               --------         --------         -------
Total operating expenses before
   other operating items                                       $130,347         $117,284         $13,063             11.1%
                                                               ========         ========         =======

Other operating items:
   Unconsummated business combination
      costs                                                      $8,070           $   --         $ 8,070               N.M.
   Asset impairment charge                                           --            1,434          (1,434)          (100.0)%
                                                                 ------           ------         -------
Total other operating items                                      $8,070           $1,434         $ 6,636            462.8%
                                                                 ======           ======         =======
</TABLE>

Consolidated selling expenses as a percentage of consolidated total revenues
increased to 23.7% in the third quarter of fiscal 1999 from 17.7% in the third
quarter of fiscal 1998. Additionally, selling expenses as a percentage of
consolidated total revenues increased to 21.3% in the first nine months of
fiscal 1999 from 18.0% in the first nine months of fiscal 1998. The increase in
consolidated selling expenses for the third quarter and first nine months of
fiscal 1999 from comparable fiscal 1998 levels was due primarily to the
Company's increased investment in personnel and resources as well as increased
expenditures relating to its value-added distribution channel. Consolidated
selling expenses for the third quarter and first nine months of fiscal 1999 were
also negatively impacted by $.8 million and $2.4 million increases,
respectively, in provisions for doubtful customer accounts over comparable
fiscal 1998 levels. The total provision for doubtful accounts for the third
quarter and first nine months of fiscal 1999 include $.4 million and $3.6
million, respectively, related to the past due accounts receivable of a foreign
distributor. The Company recorded provisions of $.7 million and $2.6 million,
respectively, during the third 




                                       24
<PAGE>   25

quarter and first nine months of fiscal 1998 for the past due accounts
receivable of the referenced foreign distributor.

The Company expects fourth quarter fiscal 1999 consolidated selling expenses
(excluding the impact of bad debt write-offs or recoveries related to the
referenced foreign distributor) to be comparable to third quarter fiscal 1999
levels.

Consolidated product development and engineering expenses for the third quarter
and first nine months of fiscal 1999 reflect an increase in domestic product
development and engineering expenses from comparable fiscal 1998 levels,
partially offset by the absence of the engineering costs of the Company's former
Virtual Vision, Inc. subsidiary ("Virtual Vision") sold in the first quarter of
fiscal 1999. Included in the Company's consolidated third quarter and first nine
months of fiscal 1998 results were $.7 million and $1.9 million, respectively,
of product development and engineering expenses incurred by Virtual Vision. The
increase in domestic product development and engineering expenses was due
primarily to the Company's increased utilization of external professional
services in its development of new products as well as higher material costs.
These increases were partially offset by a decrease in internal personnel
expenses. Third quarter and first nine months of fiscal 1999 consolidated
product development and engineering expenses also reflect an increase in the
engineering costs incurred by the Company's Aironet Wireless Communications,
Inc. subsidiary ("Aironet"), a developer, manufacturer and marketer of wireless
LAN systems.

The Company expects fourth quarter fiscal 1999 consolidated product development
and engineering expenses to be comparable to third quarter fiscal 1999 levels.

During the first nine months of fiscal 1999, the Company capitalized internal
software development costs in accordance with the requirements of Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed" aggregating $4.4 million.
The capitalization of these costs were offset by amortization of $5.6 million on
previously unamortized software.

The Company anticipates the dollar amount of internal software development costs
capitalized during the remainder of fiscal 1999 to be lower than the comparable
fiscal 1998 levels.

The increase in consolidated general and administrative expenses during the
third quarter and first nine months of fiscal 1999 from comparable fiscal 1998
levels was due primarily to increased external professional services costs as
well as higher costs associated with the Company's installation of its new
corporate-wide information systems. During the third quarter and first nine
months of fiscal 1999, the Company expensed $1.2 million and $2.4 million,
respectively, of costs associated with the installation of these new systems. In
comparison, the Company expensed costs of $.2 million and $.4 million,
respectively, during the third quarter and first nine months of fiscal 1998 for
the installation of these new systems. Also included in the consolidated general
and administrative expenses for the third quarter of fiscal 1999 is an
approximately $1.3 million charge related to the purchase of an interest in a
joint venture in the People's Republic of China licensing technology from the
Company's Metanetics Corporation subsidiary ("Metanetics"). As the entity
purchased was a development stage enterprise with no operations, the amount of
the purchase has been expensed as start-up costs in the current period.

The Company anticipates that general and administrative expenses (excluding any
one-time charges) for the fourth quarter of fiscal 1999 will be comparable or
slightly lower than third quarter of fiscal 1999 levels.

During the first nine months of fiscal 1999 the Company incurred costs in
response to an unsolicited takeover proposal in the first quarter and to
a proxy contest initiated by a stockholder of the Company late in the first
quarter which was settled during the second quarter. During the third quarter
of fiscal 1999, the Company also incurred costs relating to discussions of
proposed business combination transactions which have been terminated. For
these items, the Company recorded $4.5 million and $8.1 million for the third
quarter and the nine months, respectively, under the caption of "Unconsummated
Business Combination Costs" on the accompanying statement of operations. The
terms of the proxy contest settlement included an agreement by the Company
that, from September 1, 1998, to May 31, 1999, it will take all actions
necessary to declare its shareholder rights plan inapplicable to any fully
financed, all-cash tender offer that, among other things, ensures holders of
the Company's common stock a price per share that is in excess of the greater
of $40 or 140% of the average closing price per share of the Company's common
stock during a specified period ending before the announcement of the tender
offer.

During the first quarter of fiscal 1999, the Company entered into a series of
transactions with a business partner relating to Metanetics, a development stage
subsidiary that develops image processing technology. The Company repurchased
400,000 voting common shares 




                                       25
<PAGE>   26

of Metanetics for approximately $2.0 million or $4.875 per share.
Simultaneously, the business partner agreed to pay amounts due of approximately
$1.9 million for previously purchased manufacturing rights and software
licenses. Additionally, the companies mutually agreed to terminate such
agreements and released each other from any future liability related to the
original agreements. The Company had recorded the additional $2.0 million
investment in Metanetics as an operating expense as of June 30, 1998, because of
the historical financial losses and future funding requirements for its
operations. However, after further assessment as part of the restatement
discussed in Note 2 - Restatement and based, in part, on an independent
valuation of Metanetics, the Company has capitalized this additional investment
as goodwill for the nine months ended December 31, 1998, to be amortized over a
useful life of three years. Giving effect to the share repurchase, the Company's
interest in the voting common stock of Metanetics was 60% at December 31, 1998.

During the third quarter of fiscal 1998, the Company recorded a $1.4 million
asset impairment charge to reduce the carrying value of its equity investment in
the referenced foreign distributor.

The Company continues to assess its long-lived assets for appropriate valuation
as required by SFAS No. 121. The Company may take discrete impairment charges in
the future to adjust the carrying value of these long-lived assets to their
estimated net realizable value if events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.

OTHER NON-OPERATING INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                               ------------------
                                                                  DECEMBER 31,                     INCREASE/(DECREASE)
                                                                  ------------                     -------------------
                                                            1998               1997            DOLLAR             PERCENTAGE
                                                            ----               ----            ------             ----------
                                                                       (IN  THOUSANDS)

<S>                                                        <C>               <C>               <C>                  <C>    
Non-Operating Income (Expense):
  Interest income                                          $   226           $   340           $(114)               (33.5)%
  Interest expense                                          (2,499)           (1,752)            747                 42.6%
  Other non-operating expense, net                            (238)             (160)             78                 48.8%
                                                           -------           -------           -----
Total non-operating expense, net                           $(2,511)          $(1,572)          $ 939                 59.7%
                                                           =======           =======           =====
</TABLE>
<TABLE>
<CAPTION>
                                                               NINE MONTHS ENDED
                                                               -----------------
                                                                  DECEMBER 31,                     INCREASE/(DECREASE)
                                                                  ------------                     -------------------
                                                            1998               1997           DOLLAR              PERCENTAGE
                                                            ----               ----           ------              ----------
                                                                       (IN  THOUSANDS)

<S>                                                        <C>               <C>              <C>                   <C>    
Non-Operating Income (Expense):
  Interest income                                          $   569           $ 1,258          $ (689)               (54.8)%
  Interest expense                                          (6,829)           (5,355)          1,474                 27.5%
  Other non-operating income
    (expense), net                                           1,025              (324)          1,349                416.4%
                                                           -------           -------          ------
Total non-operating expense, net                           $(5,235)          $(4,421)         $  814                 18.4%
                                                           =======           =======          ======
</TABLE>

The increase in consolidated interest expense during the third quarter and first
nine months of fiscal 1999 from comparable fiscal 1998 levels reflects the
Company's increased borrowings against its revolving credit facilities to meet
operating cash flow requirements. The Company expects consolidated interest
expense for the remainder of fiscal 1999 to increase from comparable fiscal 1998
levels.

During the first quarter of fiscal 1999, the transaction to sell the stock of
Virtual Vision to a third party was consummated, resulting in a $.9 million
non-operating gain.

During the first quarter of fiscal 1999, Aironet sold 222,222 shares of its
voting common stock to various third-party investors at a price of $3.50 per
share. The resulting pre-tax net gain of approximately $.3 million was recorded
as other non-operating income in the accompanying consolidated statement of
operations. In addition to the sale of the shares of stock, 66,667 warrants at
$3.50 per share for the purchase of Aironet voting common stock were issued. A
gain of approximately $.05 million relating to these warrants has been deferred
until the warrants are exercised or lapse. The Company's remaining interest in
the voting common stock of Aironet at December 31, 1998, was 76%.



                                       26
<PAGE>   27


INCOME TAXES
<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                               ------------------
                                                                  DECEMBER 31,                          INCREASE
                                                                  ------------                          --------
                                                           1998               1997              DOLLAR           PERCENTAGE
                                                           ----               ----              ------           ----------
                                                                       (IN  THOUSANDS)

<S>                                                        <C>                <C>               <C>               <C>   
Income Taxes:
   Provision for income taxes                              $16,659            $2,280            $14,379           630.7%
</TABLE>
<TABLE>
<CAPTION>
                                                             NINE MONTHS ENDED
                                                             -----------------
                                                                DECEMBER 31,                             INCREASE
                                                                ------------                             --------
                                                           1998               1997              DOLLAR           PERCENTAGE
                                                           ----               ----              ------           ----------
                                                                       (IN  THOUSANDS)

<S>                                                        <C>                <C>               <C>               <C>   
Income Taxes:
   Provision for income taxes                              $14,784            $4,484            $10,300           229.7%
</TABLE>

The increase in the Company's consolidated provision for income taxes in the
third quarter and first nine months of fiscal 1999 from comparable fiscal 1998
levels was due primarily to the valuation allowance established for the
Company's inability to utilize domestic net operating loss benefits. The
consolidated provision for income taxes was also increased by non-deductible
goodwill amortization and foreign tax rate differentials. As of December 31,
1998, the Company had fully reserved for its approximately $17.0 million
domestic net deferred tax assets based on its current assessment regarding the
utilization of such assets.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE
<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                                                            ------------------
                                                               DECEMBER 31,                          (DECREASE)
                                                               ------------                          ----------
                                                         1998               1997              DOLLAR           PERCENTAGE
                                                         ----               ----              ------           ----------
                                                                       (IN  THOUSANDS)

<S>                                                      <C>                <C>               <C>               <C>     
   Cumulative effect of accounting
      change, net of taxes                               $--                $1,240            $(1,240)          (100.0)%
</TABLE>
<TABLE>
<CAPTION>
                                                             NINE MONTHS ENDED
                                                             -----------------
                                                               DECEMBER 31,                          (DECREASE)
                                                               ------------                          ----------
                                                         1998               1997              DOLLAR           PERCENTAGE
                                                         ----               ----              ------           ----------
                                                                       (IN  THOUSANDS)

<S>                                                      <C>                <C>               <C>               <C>     
   Cumulative effect of accounting
      change, net of taxes                               $--                $1,240            $(1,240)          (100.0)%
</TABLE>

During the third quarter of fiscal 1998, the Company recorded a one-time,
after-tax, non-cash charge of $1.2 million to expense previously capitalized
costs associated with the Company's corporate-wide information systems
implementation project. These previously capitalized costs were expensed in
accordance with the FASB's Emerging Issues Task Force consensus ruling,
"Accounting for Costs Incurred in Connection with a Consulting Contract of an
Internal Project That Combines Business Process Reengineering and Information
Technology Transformation".


                                       27
<PAGE>   28

FINANCIAL CONDITION

LIQUIDITY
<TABLE>
<CAPTION>
                                                                                                              DOLLAR
                                                               DECEMBER 31,               MARCH 31,          INCREASE
                                                                   1998                     1998            (DECREASE)
                                                                   ----                     ----            ----------
                                                                                (IN THOUSANDS EXCEPT RATIOS)

<S>                                                              <C>                      <C>                 <C>    
Cash and cash equivalents                                        $ 30,057                 $ 27,500            $ 2,557
Accounts receivable                                               114,507                  121,932             (7,425)
Notes and other receivables                                        13,044                   16,532             (3,488)
Inventories                                                       125,450                  109,935             15,515
Other                                                              13,344                   16,084             (2,740)
                                                                 --------                 --------            -------
Total current assets                                             $296,402                 $291,983            $ 4,419
                                                                 ========                 ========            =======

Notes payable                                                    $ 70,614                 $  3,000            $67,614
Capital lease obligations                                             710                      968               (258)
Accounts payable                                                   59,993                   58,634              1,359
Income taxes payable                                                2,493                    3,466               (973)
Accrued liabilities                                                39,693                   41,988             (2,295)
                                                                 --------                 --------            -------
Total current liabilities                                        $173,503                 $108,056            $65,447
                                                                 ========                 ========            =======

Working capital (current assets
   less current liabilities)                                     $122,899                 $183,927           $(61,028)
                                                                 ========                 ========           =========

Current ratio (current assets divided
   by current liabilities)                                       1.7 to 1                 2.7 to 1
</TABLE>

The decrease in the Company's consolidated working capital at December 31, 1998,
from March 31, 1998, was due primarily to the increase in notes and accounts
payable and decreases in accounts and notes receivable and other current assets.
These reductions in working capital were partially offset by increases in
inventories and cash and a decrease in accrued liabilities. The increase in
notes payable between the two periods reflects the Company's increased reliance
on its revolving credit facilities to meet operating cash flow requirements. The
decrease in accounts receivable between the two periods was due primarily to the
reduction in consolidated total revenues, partially offset by the increase in
consolidated days sales outstanding ("DSO"). Consolidated DSO increased to
approximately 110 days at December 31, 1998, from approximately 84 days at March
31, 1998. The increase in DSO reflects the Company's granting of extended terms
and the increase in the amount of accounts receivable due from distributors who
are granted longer standard payments terms. The increase in consolidated
inventories between the two periods was due primarily to the Company's purchase
of material in anticipation of previously forecasted production levels.
Consolidated inventory turns decreased to 2.0 at December 31, 1998, from 2.3 at
March 31, 1998.

During the second quarter of fiscal 1999, the Company extended to August 3,
1999, the $20.0 million in bank credit which it maintains under its business
purpose revolving promissory note in addition to its larger revolving credit
agreement.

The Company has obtained waivers with respect to its revolving credit facility
from the group of eight lending banks for certain covenant violations arising
from the restatement described in note 2 above or the Company's financial
results for the quarter ended December 31, 1998. Effective through March 26,
1999, the waiver included the covenants requiring the Company to maintain
specified leverage, current asset, net worth and fixed charge coverage ratios.
Additionally, pursuant to the credit facility agreement, the Company elected in
December 1998 to reduce the available maximum credit facility from $100.0
million to $75.0 million in order to reduce financing costs. Then, in February
1999, as part of the most recent of the waivers noted above, the bank group
further reduced the permitted borrowing amount to the lesser of $55.0 million
(the amount then, and which continues to be, outstanding under the facility) or
the sum of eligible accounts receivable and inventory as included in the
Company's borrowing base.

Contemporaneously with the above waivers, the Company also obtained waivers
under its separate $20.0 million business purpose revolving promissory note, the
lender under which is also one of the banks in the above bank group. This note
incorporates the same covenants as apply under the revolving credit facility,
which the bank also waived with respect to the business purpose revolving
promissory note through March 26, 1999. Approximately $4.0 million was at
December 31, 1998, and continues to be, outstanding under the note, and the
Company is not able to make any further borrowings thereunder.

In connection with the above waivers, the lenders under both the revolving
credit facility and the business purpose revolving promissory note exercised
their rights under the terms of their respective loans to file UCC financing
statements to perfect the security



                                       28
<PAGE>   29

interests previously conditionally granted in their favor by the Company in its
accounts receivable, inventory and equipment and the proceeds thereof.

The Company is currently negotiating with its existing lenders in order to
extend the waivers, which will allow the Company to continue its discussions
with several prospective asset-based lenders for a replacement facility. The
Company expects to be able to obtain satisfactory replacement credit
arrangements on a timely basis, but there is no assurance whether or when the
Company will be able to obtain an adequate replacement facility on acceptable
terms. In the event that the current waivers are not extended beyond March 26,
1999, or until a replacement facility is obtained, the Company will be in       
default of, and subject to the lenders' rights of acceleration under, its
existing credit agreements and the lenders' rights and remedies as secured
parties.

Pending an agreement by the lenders to permit additional borrowings under the
Company's existing credit facilities or the establishment of a replacement
credit facility, the Company has been relying, and will continue to rely, upon
internally generated cash flows. The Company presently projects that its
collections of accounts receivable will be in amounts and at times that are
believed to be sufficient, together with its cash on hand, to support the
Company's efforts to manage the payment of the amounts presently owing to or
subsequently incurred with its suppliers in a manner which does not disrupt the
flow of necessary materials, components or services to the Company. 

The Company is currently considering a variety of measures to increase its cash
flows from operating, financing and investing activities. Operating cash flows
may be enhanced primarily by increased collection of accounts receivable,
reductions in inventories and controls on operating expenses. However, there is
no assurance that (i) the Company will actually generate cash from its internal
sources in the amounts and at the times presently projected by the Company,
(ii) that the cash generated from such sources will be sufficient to support
the Company's efforts to manage the payment of the amounts presently owing to
or subsequently incurred with its suppliers in a manner which does not disrupt
the flow of necessary materials, components or services to the Company or to    
meet the Company's other cash requirements, or (iii) any other internal sources
of cash flows can be accessed on a timely basis in meaningful amounts and on
acceptable terms. In addition, in the event that any payments may ultimately be
required in the near term in respect of the litigation, commitments and
contingencies referenced in note 8 to the accompanying consolidated financial
statements, such payments could have a material adverse effect on the Company's
cash flows and, in turn, on the Company's results of operations and financial
condition. 

CASH FLOWS FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>                                                                                                         DOLLAR
                                                                                  NINE MONTHS                    INCREASE 
                                                                                  -----------                   (DECREASE)   
                                                                              ENDED DECEMBER 31,                    IN 
                                                                              ------------------                CASH FLOW  
                                                                           1998                1997               IMPACT
                                                                           ----                ----               ------
                                                                                          (IN THOUSANDS)

<S>                                                                       <C>                  <C>              <C>      
Net (loss) income                                                         $(50,002)            $  3,509         $(53,511)
Cumulative effect of accounting change                                          --                2,176           (2,176)
Depreciation and amortization                                               19,622               19,826             (204)
Asset impairment charge                                                         --                1,434           (1,434)
Provision for inventory obsolescence                                         6,787                5,157            1,630
Provision for doubtful accounts                                              5,249                2,639            2,610
Accounts and notes receivable                                               13,110              (10,364)          23,474
Inventories                                                                (22,045)             (22,399)             354
Prepaid expenses and other                                                   3,372               (3,073)           6,445
Intangibles and other assets                                                 2,806               (1,985)           4,791
Accounts payable and accrued liabilities                                      (836)              (8,008)           7,172
Other long-term liabilities                                                  4,012                 (554)           4,566
Other                                                                          (28)                 973           (1,001)
                                                                          --------             --------         --------
Net cash used in operating activities                                     $(17,953)            $(10,669)        $ (7,284)
                                                                          ========             ========         ========
</TABLE>

The increase in the net cash used in the Company's consolidated operating
activities during the first nine months of fiscal 1999 from comparable fiscal
1998 levels was due primarily to the decrease in the Company's consolidated net
earnings and the absence of the positive cash flow impact of the cumulative
effect of an accounting change and asset impairment charge recorded during the
first nine months of fiscal 1998. These negative cash flow items were partially
offset by the positive cash flow impact of the increase in inventory
obsolescence and doubtful accounts provisions and the overall reduction in
working capital at December 31, 1998, from December 31, 1997 levels.



                                       29
<PAGE>   30


CASH FLOWS FROM INVESTING ACTIVITIES
<TABLE>
<CAPTION>                                                                                                         DOLLAR
                                                                                  NINE MONTHS                    INCREASE
                                                                                  -----------                   (DECREASE)
                                                                              ENDED DECEMBER 31,                    IN
                                                                              ------------------                 CASH FLOW
                                                                           1998                1997               IMPACT
                                                                           ----                ----               ------
                                                                                          (IN THOUSANDS)

<S>                                                                       <C>                  <C>               <C>     
   Additions to property and equipment                                    $(26,538)            $(19,157)         $(7,381)
   Software and other investments                                           (4,792)              (3,172)          (1,620)
   Purchase of non-marketable investments                                   (1,950)              (5,500)           3,550
   Proceeds from the sale of non-marketable
     investments                                                                --                1,033           (1,033)
   Proceeds from the sale of property and
     equipment                                                                  --                  866             (866)
   Other                                                                       134                 (140)             274
                                                                          --------             --------          -------
Net cash used in investing activities                                     $(33,146)            $(26,070)         $(7,076)
                                                                          ========             ========          =======
</TABLE>

The increase in the net cash used in the Company's consolidated investing
activities during the first nine months of fiscal 1999 from comparable fiscal
1998 levels was due primarily to increased investments in the Company's new
corporate-wide information systems and software for sale or lease to customers
in products or as application software, as well as the absence of proceeds from
the sale of non-marketable investments and property and equipment recorded
during the first nine months of fiscal 1998. These increased uses of cash were
partially offset by the reduction in the purchase of non-marketable investments
in emerging technology companies between the two periods. During the first nine
months of fiscal 1999, the Company recorded a $8.2 million increase in the
capitalization of expenditures relating to the installation of new
corporate-wide information systems from amounts capitalized during the first
nine months of fiscal 1998. As of December 31, 1998, the Company has capitalized
$22.6 million of the total estimated capital expenditures of approximately $28.0
million for the new systems. The Company anticipates additional capitalization
of costs associated with the new corporate-wide information systems during the
remainder of fiscal 1999 and into fiscal 2000 as discussed above under
"Readiness for the Year 2000".

CASH FLOWS FROM FINANCING ACTIVITIES
<TABLE>
<CAPTION>                                                                                                       DOLLAR
                                                                                  NINE MONTHS                  INCREASE
                                                                                  ------------                (DECREASE) 
                                                                               ENDED DECEMBER 31,                 IN 
                                                                               ------------------              CASH FLOW    
                                                                           1998                1997              IMPACT
                                                                           ----                ----              ------
                                                                                          (IN THOUSANDS)

<S>                                                                        <C>                   <C>             <C>    
   Notes payable, net                                                      $53,526               $2,949          $50,577
   Purchase of treasury stock                                               (1,088)              (4,928)           3,840
   Proceeds from exercise of stock options                                   1,793                6,958           (5,165)
   Other                                                                      (891)                (504)            (387)
                                                                           -------               ------          -------
Net cash provided by financing activities                                  $53,340               $4,475          $48,865
                                                                           =======               ======          =======
</TABLE>

The increase in the net cash provided by the Company's consolidated financing
activities for the first nine months of fiscal 1999 from fiscal 1998 levels was
due primarily to the increase in the Company's borrowings against its revolving
credit facilities to meet operating cash flow requirements and the reduction in
the amount of Company common stock repurchased under its open market repurchase
program. These increases were partially offset by the decrease in the proceeds
from the exercise of stock options, reflecting the decrease in the market price
of the Company's common stock.

In September 1998, the Company entered into a product financing arrangement
with a commercial finance institution under which $14.1 million was advanced
with respect to one of the Company's value-added distributors. The financing
agreement called for the payment of various administrative and advance fees by
the Company as well as interest payable at the financial institution's prime
lending rate minus .15%. As of December 31, 1998, the entire advanced amount
remained outstanding and was recorded as a note payable in the accompanying
consolidated balance sheet. The interest rate on this financing agreement was
the financial institution's prime lending rate plus 2.5% as of December 31,
1998. The Company's repayment of the unpaid balance of the advance is due
March 26, 1999.



                                       30
<PAGE>   31


OTHER TRANSACTIONS

During the first nine months of fiscal 1999, $.3 million in aggregate principal
amount of the Company's 7-1/2% Convertible Subordinated Debentures were
surrendered for conversion into 11,621 shares of the Company's common stock. The
surrendered Convertible Subordinated Debentures have been canceled effective as
of their conversion into common stock.

During the first nine months of fiscal 1999, the Company repurchased 63,300
shares of its common stock, at a weighted average price of $17.19 per share,
pursuant to its open market repurchase program.

During the first nine months of fiscal 1999, the Company re-issued 94,234 shares
of treasury stock, at a weighted average cost of $21.82 per share, to satisfy
stock options exercised under the Company's stock option plans. Additionally,
the Company re-issued 23,775 shares of treasury stock, at a weighted average
cost of $14.88, during the first nine months of fiscal 1999 to satisfy purchases
made by employees through the Company's 1995 Employee Stock Purchase Plan.

SUBSEQUENT EVENTS

Subsequent to December 31, 1998, the Company re-issued 29,224 shares of treasury
stock, at a weighted average cost of $22.98 per share, to satisfy purchases made
by employees through its 1995 Employee Stock Purchase Plan.


                                       31
<PAGE>   32



PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

See Note 8 to the consolidated financial statements included in Part I of this
Quarterly Report on Form 10-Q/A for a discussion of the material pending legal
proceedings to which the Company is a party, which footnote discussion is
incorporated in this Part II by this reference.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)         Exhibits required by Item 601 of Regulation S-K:

                     3.1       Restated Certificate of Incorporation of
                               Registrant, incorporated herein by reference to
                               Exhibit No. 2(b) to Registrant's Registration
                               Statement on Form 8-A with respect to its Common
                               Stock filed pursuant to Section 12(g) of the
                               Securities Exchange Act, as amended by Amendment
                               No. 1 thereto filed under cover of a Form 8 and
                               Amendment No. 2 thereto filed on Form 8-A/A.

                     3.2       Amended and Restated By-Laws of Registrant, as
                               amended, incorporated herein by reference to
                               Exhibit No. 2(b) to Registrant's Registration
                               Statement on Form 8-A with respect to its Common
                               Stock filed pursuant to Section 12(g) of the
                               Securities Exchange Act, as amended by Amendment
                               No. 1 thereto filed under cover of a Form 8 and
                               Amendment No. 2 thereto filed on Form 8-A/A.

                     4.1       Portions of the Restated Certificate of
                               Incorporation of Registrant pertaining to the
                               rights of holders of Registrant's Common Stock,
                               par value $.01 per share, incorporated herein by
                               reference to Exhibit No. 2(b) to Registrant's
                               Registration Statement on Form 8-A with respect
                               to its Common Stock filed pursuant to Section
                               12(g) of the Securities Exchange Act, as amended
                               by Amendment No. 1 thereto filed under cover of a
                               Form 8 and Amendment No. 2 thereto filed on Form
                               8-A/A.

                     4.2       Text of form of Certificate for Registrant's
                               Common Stock, par value $.01 per share, and
                               description of graphic and image material
                               appearing thereon, incorporated herein by
                               reference to Exhibit 4.2 to Registrant's Form
                               10-Q for the quarter ended June 30, 1995.

                     4.3       Rights Agreement between Registrant and KeyBank
                               National Association, as Rights Agent, dated as
                               of August 25, 1987, as amended and restated as of
                               July 31, 1996, incorporated herein by reference
                               to Exhibit 4 to Registrant's Form 8-K dated
                               August 5, 1996.

                               4.3.1    Form of Rights Certificate (included as
                                        Exhibit A to the Rights Agreement
                                        included as Exhibit 4.3 above). Until
                                        the Distribution Date (as defined in the
                                        Rights Agreement), the Rights Agreement
                                        provides that the common stock purchase
                                        rights created thereunder are evidenced
                                        by the certificates for Registrant's
                                        Common Stock (the text of which and
                                        description thereof is included as
                                        Exhibit 4.2 above, which stock
                                        certificates are deemed also to be
                                        certificates for such common stock
                                        purchase rights) and not by separate
                                        Rights Certificates; as soon as
                                        practicable after the Distribution Date,
                                        Rights Certificates will be mailed to
                                        each holder of Registrant's Common Stock
                                        as of the close of business on the
                                        Distribution Date.

                               4.3.2    Letter agreement among Registrant,
                                        KeyBank National Association and Harris
                                        Trust and Savings Bank, dated June 11,
                                        1997, with respect to the appointment of
                                        Harris Trust and Savings Bank as
                                        successor Rights Agent under the Rights
                                        Agreement included as Exhibit 4.3 above,
                                        incorporated herein by reference to
                                        Exhibit 4.3.2 to Registrant's Form 10-K
                                        for the year ended March 31, 1997.

                     4.4       Indenture by and between Registrant and
                               AmeriTrust Company National Association, as
                               Trustee, dated as of June 1, 1987, regarding
                               Registrant's 7-1/2% Convertible Subordinated
                               Debentures Due 2012, incorporated herein by
                               reference to Exhibit 4.2 to Registrant's


                                       32
<PAGE>   33

                               Registration Statement on Form S-3, Registration
                               No. 33-14348, filed May 18, 1987.

                               4.4.1       Form of Registrant's 7-1/2%
                                           Convertible Subordinated Debentures
                                           Due 2012 (set forth in the Indenture
                                           included as Exhibit 4.4 above).

                     4.5       Indenture by and between Registrant and Bank One
                               Trust Company, N.A., as Trustee, dated as of
                               December 1, 1995, regarding Registrant's 5-3/4%
                               Convertible Subordinated Notes due 2003,
                               incorporated herein by reference to Exhibit 4.1
                               to Registrant's Registration Statement on Form
                               S-3, Registration No. 333-1189, filed February
                               23, 1996.

                               4.5.1       Form of Registrant's 5-3/4%
                                           Convertible Subordinated Notes due
                                           2003 issued under the Indenture
                                           included as Exhibit 4.5 above,
                                           incorporated herein by reference to
                                           Exhibit 4.2 to Registrant's
                                           Registration Statement on Form S-3,
                                           Registration No. 333-1189, filed
                                           February 23, 1996.

                               4.5.2       Registration Rights Agreement by and
                                           among Registrant and Hambrecht &
                                           Quist LLC and Prudential Securities
                                           Incorporated, as the Initial
                                           Purchasers of Registrant's 5-3/4%
                                           Convertible Subordinated Notes due
                                           2003, with respect to the
                                           registration of said Notes under
                                           applicable securities laws,
                                           incorporated herein by reference to
                                           Exhibit 4.3 to Registrant's
                                           Registration Statement on Form S-3,
                                           Registration No. 333-1189, filed
                                           February 23, 1996.

                     10.1      Compensation and Benefits Plans of  Registrant.

                               10.1.1      Amended and Restated Retirement and
                                           Uniform Matching Profit-Sharing Plan
                                           of Registrant, effective July 1,
                                           1993, incorporated herein by
                                           reference to Exhibit 10.1.1 to
                                           Registrant's Form 10-K for the year
                                           ended March 31, 1994.

                                           10.1.1.a        Amendment, dated
                                                           January 1, 1994, to
                                                           the Plan included as
                                                           Exhibit 10.1.1 above,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.1.1.a to
                                                           Registrant's Form
                                                           10-K for the year
                                                           ended March 31, 1994.

                                           10.1.1.b        Amendment, dated
                                                           April 1, 1994, to the
                                                           Plan included as
                                                           Exhibit 10.1.1 above,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.1.1.b to
                                                           Registrant's Form
                                                           10-K for the year
                                                           ended March 31, 1994.

                                           10.1.1.c        Amendment, dated
                                                           January 1, 1994, to
                                                           the Plan included as
                                                           Exhibit 10.1.1 above,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.1.1.c to
                                                           Registrant's Form
                                                           10-Q for the quarter
                                                           ended December 31,
                                                           1994.

                               10.1.2      1990 Stock Option Plan for employees
                                           of Registrant, as amended,
                                           incorporated herein by reference to
                                           Exhibit 10.1.2 to Registrant's Form
                                           10-Q for the quarter ended September
                                           30, 1997.

                               10.1.3      1990 Stock Option Plan for
                                           Non-Employee Directors of Registrant,
                                           as amended, incorporated herein by
                                           reference to Exhibit 10.1.3 to
                                           Registrant's Form 10-Q for the
                                           quarter ended September 30, 1998.

                               10.1.4      Non-Qualified Stock Option Agreement
                                           between Registrant and Raj Reddy,
                                           dated as of October 17, 1988,
                                           incorporated herein by reference to
                                           Exhibit 10.1.6 to Registrant's Form
                                           10-K for the year ended March 31,
                                           1994.

                                           10.1.4.a        Description of
                                                           amendments extending
                                                           the term of the
                                                           Agreement included as
                                                           Exhibit 10.1.4 above,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 


                                       33
<PAGE>   34

                                                           10.1.4.a to
                                                           Registrant's Form
                                                           10-Q for the quarter
                                                           ended September 30,
                                                           1998.

                               10.1.5      1992 Restricted Stock Plan of 
                                           Registrant, as amended, filed 
                                           herewith.

                               10.1.6      1995 Employee Stock Purchase Plan of
                                           Registrant, as amended, incorporated
                                           herein by reference to Exhibit 10.1.7
                                           to Registrant's Form 10-Q for the
                                           quarter ended September 30, 1995.

                               10.1.7      1996 Stock Option Plan for employees,
                                           directors and advisors of Aironet
                                           Wireless Communications, Inc., a
                                           subsidiary of Registrant,
                                           incorporated herein by reference to
                                           Exhibit 10.1.7 to Registrant's Form
                                           10-K for the year ended March 31,
                                           1997.

                                           10.1.7.a        Amended and Restated
                                                           1996 Stock Option
                                                           Plan for employees,
                                                           directors and
                                                           advisors of Aironet
                                                           Wireless
                                                           Communications, Inc.,
                                                           a subsidiary of
                                                           Registrant,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.1.7.a to
                                                           Registrant's Form
                                                           10-K for the year
                                                           ended March 31, 1998.

                               10.1.8      Non-Competition Agreement by and
                                           between Registrant and Robert F.
                                           Meyerson, effective February 27,
                                           1997, incorporated herein by
                                           reference to Exhibit 10.1.8 to
                                           Registrant's Form 10-K for the year
                                           ended March 31, 1997.

                               10.1.9      Employment Agreement between
                                           Registrant and Frank E. Brick,
                                           incorporated herein by reference to
                                           Exhibit 10.1.9 to Registrant's Form
                                           10-K for the year ended March 31,
                                           1998.

                                           10.1.9.a        1997 Section 162(m)
                                                           Performance-Based
                                                           Compensation Plan of
                                                           Registrant with
                                                           respect to its
                                                           President and Chief
                                                           Executive Officer
                                                           adopted by the
                                                           Performance-Based
                                                           Compensation
                                                           Committee of
                                                           Registrant's Board of
                                                           Directors and
                                                           approved by
                                                           Registrant's
                                                           Stockholders at the
                                                           Annual Meeting
                                                           thereof, held
                                                           September 10, 1997,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.1.9.a to
                                                           Registrant's Form
                                                           10-K for the year
                                                           ended March 31, 1998.

                               10.1.10     Amended and Restated Employment
                                           Agreement between Registrant and
                                           James G. Cleveland, effective as of
                                           April 1, 1997, incorporated herein by
                                           reference to Exhibit 10.1.10 to
                                           Registrant's Form 10-K for the year
                                           ended March 31, 1998.

                               10.1.11     Amended and Restated Employment
                                           Agreement between Registrant and
                                           Kenneth W. Haver, effective as of
                                           April 1, 1997, incorporated herein by
                                           reference to Exhibit 10.1.11 to
                                           Registrant's Form 10-K for the year
                                           ended March 31, 1998.

                               10.1.12     Amended and Restated Employment
                                           Agreement between Registrant and
                                           David W. Porter, effective as of
                                           April 1, 1997, incorporated herein by
                                           reference to Exhibit 10.1.13 to
                                           Registrant's Form 10-K for the year
                                           ended March 31, 1998.

                               10.1.13     Amended and Restated Employment
                                           Agreement between Registrant and
                                           Danny R. Wipff, effective as of April
                                           1, 1997, incorporated herein by
                                           reference to Exhibit 10.1.14 to
                                           Registrant's Form 10-K for the year
                                           ended March 31, 1998.

                               10.1.14     Description of Key Employee Retention
                                           Program, incorporated herein by
                                           reference to Exhibit 10.1.15 to
                                           Registrant's Form 10-K for the year
                                           ended March 31, 1998.

                                           10.1.14.a       Form of letter
                                                           agreement made with
                                                           key employees
                                                           selected under the
                                                           retention program
                                                           described in Exhibit
                                                           10.1.15 above,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.1.15.a to
                                                           Registrant's Form
                                                           10-K for the year
                                                           ended March 31, 1998.


                                       34
<PAGE>   35

                               10.1.15     Letter agreement of Registrant with
                                           Robert A. Goodman, dated as of
                                           December 29, 1997 and executed and
                                           delivered January 20, 1998, for
                                           continued consulting services
                                           following certain changes in his law
                                           practice, incorporated herein by
                                           reference to Exhibit 10.1.17 to
                                           Registrant's Form 10-K for the year
                                           ended March 31, 1998.

                     10.2      Material Leases of Registrant.

                               10.2.1      Lease between Registrant and 3330 W.
                                           Market Properties, dated as of
                                           December 30, 1986, for premises at
                                           3330 West Market Street, Akron, Ohio,
                                           incorporated herein by reference to
                                           Exhibit 10.2.1 to Registrant's Form
                                           10-K for the year ended March 31,
                                           1994.

                               10.2.2      Lease Agreement between The Woodlands
                                           Commercial Properties Company, L.P.
                                           and Registrant, made and entered into
                                           as of January 16, 1998, including
                                           Rider No. 1 thereto, for premises at
                                           8302 New Trails Drive, The Woodlands,
                                           Texas, incorporated herein by
                                           reference to Exhibit 10.2.2 to
                                           Registrant's Form 10-K for the year
                                           ended March 31, 1998.

                               10.2.3      Standard Office Lease (Modified Net
                                           Lease) between Registrant and John D.
                                           Dellagnese III, dated as of July 19,
                                           1995, for premises at 3875 Embassy
                                           Parkway, Bath, Ohio, including an
                                           Addendum thereto, incorporated herein
                                           by reference to Exhibit 10.2.4 to
                                           Registrant's Form 10-K for the year
                                           ended March 31, 1996.

                                           10.2.3.a        Second Addendum,
                                                           dated as of October
                                                           5, 1995, to the Lease
                                                           included as Exhibit
                                                           10.2.3 above,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.2.4.a to
                                                           Registrant's Form
                                                           10-K for the year
                                                           ended March 31, 1996.

                                           10.2.3.b        Third Addendum, dated
                                                           as of March 1, 1996,
                                                           to the Lease included
                                                           as Exhibit 10.2.3
                                                           above, incorporated
                                                           herein by reference
                                                           to Exhibit 10.2.4.b
                                                           to Registrant's Form
                                                           10-K for the year
                                                           ended March 31, 1996.

                                           10.2.3.c        Fourth Addendum,
                                                           dated as of April 16,
                                                           1996, to the Lease
                                                           included as Exhibit
                                                           10.2.3 above,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.2.2.c to
                                                           Registrant's Form
                                                           10-Q for the quarter
                                                           ended June 30, 1997.

                                           10.2.3.d        Fifth Addendum, dated
                                                           as of June 24, 1997,
                                                           to the Lease included
                                                           as Exhibit 10.2.3
                                                           above, incorporated
                                                           herein by reference
                                                           to Exhibit 10.2.2.d
                                                           to Registrant's Form
                                                           10-Q for the quarter
                                                           ended June 30, 1997.

                                           10.2.3.e        Sixth Addendum, dated
                                                           as of March, 1998, to
                                                           the Lease included as
                                                           Exhibit 10.2.3 above,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.2.3.e to
                                                           Registrant's Form
                                                           10-Q for the quarter
                                                           ended September 30,
                                                           1998.

                                           10.2.3.f        Seventh Addendum,
                                                           dated as of July 20,
                                                           1998, to the Lease
                                                           included as Exhibit
                                                           10.2.3 above,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.2.3.f to
                                                           Registrant's Form
                                                           10-Q for the quarter
                                                           ended September 30,
                                                           1998.

                                           10.2.3.g        Eighth Addendum,
                                                           dated as of September
                                                           8, 1998, to the Lease
                                                           included as Exhibit
                                                           10.2.3 above,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.2.3.g to
                                                           Registrant's Form
                                                           10-Q for the quarter
                                                           ended September 30,
                                                           1998.

                                       35
<PAGE>   36

                               10.2.4      Lease Contract between Desarrollos \
                                           Inmobiliarios Paso del Norte, S.A. de
                                           C.V. and Productos y Servicios de
                                           Telxon, S.A. de C.V., a subsidiary of
                                           Registrant, for premises in Ciudad
                                           Juarez, Chihuahua, Mexico, made and
                                           entered into as of April 10, 1997,
                                           incorporated herein by reference to
                                           Exhibit 10.2.4 to Registrant's Form
                                           10-K for the year ended March 31,
                                           1998.

                     10.3      Credit Agreements of Registrant.

                               10.3.1      Credit Agreement by and among
                                           Registrant, the lenders party thereto
                                           from time to time and The Bank of New
                                           York, as letter of credit issuer,
                                           swing line lender and agent for the
                                           lenders, dated as of March 8, 1996,
                                           incorporated herein by reference to
                                           Exhibit 10.3.2 to Registrant's Form
                                           10-K for the year ended March 31,
                                           1996.

                                           10.3.1.a        Amendment No. 1,
                                                           dated as of August 6,
                                                           1996, to the
                                                           Agreement included as
                                                           Exhibit 10.3.1 above,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.3.2.a to
                                                           Registrant's Form 8-K
                                                           dated August 16,
                                                           1996.

                                           10.3.1.b        Security Agreement,
                                                           dated as of August 6,
                                                           1996, by and among
                                                           Registrant and The
                                                           Bank of New York, as
                                                           Agent, incorporated
                                                           herein by reference
                                                           to Exhibit 10.3.2.b
                                                           to Registrant's Form
                                                           8-K dated August 16,
                                                           1996.

                                           10.3.1.c        Amendment No. 2,
                                                           dated as of December
                                                           16, 1996, to the
                                                           Agreement included as
                                                           Exhibit 10.3.1 above,
                                                           incorporated herein
                                                           by reference to
                                                           Exhibit 10.3.2.c to
                                                           Registrant's Form 8-K
                                                           dated December 16,
                                                           1996.

                                           10.3.1.d        Amendment No. 3,
                                                           dated as of December
                                                           12, 1997, to the
                                                           Agreement included as
                                                           Exhibit 10.3.1 above,
                                                           included herein by
                                                           reference to Exhibit
                                                           10.3.1.d to
                                                           Registrant's Form
                                                           10-K for the year
                                                           ended March 31, 1998.

                                           10.3.1.e        Waiver and Agreement,
                                                           dated as of December
                                                           29, 1998, with
                                                           respect to the
                                                           Agreement included as
                                                           Exhibit 10.3.1 above,
                                                           filed with the
                                                           Original Filing.

                                           10.3.1.f        Waiver Extension and
                                                           Agreement, dated as
                                                           of February 12, 1999,
                                                           with respect to the
                                                           Agreement included as
                                                           Exhibit 10.3.1 above,
                                                           filed with the
                                                           Original Filing.

                               10.3.2      Business Purpose Revolving Promissory
                                           Note (Swing Line) made by Registrant
                                           in favor of Bank One, Akron, N.A.,
                                           dated August 6, 1996, incorporated
                                           herein by reference to Exhibit 10.3.8
                                           to Registrant's Form 8-K dated August
                                           16, 1996.

                                           10.3.2.a        Bank One Security
                                                           Agreement, dated as
                                                           of August 6, 1996, by
                                                           and among Registrant
                                                           and Bank One, Akron
                                                           N.A., incorporated
                                                           herein by reference
                                                           to Exhibit 10.3.8.a
                                                           to Registrant's Form
                                                           8-K dated August 16,
                                                           1996.

                               10.3.3      Business Purpose Revolving Promissory
                                           Note (Swing Line) made by Registrant
                                           in favor of Bank One, NA (fka Bank
                                           One, Akron, N.A.), dated August 5,
                                           1997 (extending the credit facility
                                           evidenced by the Note included as
                                           Exhibit 10.3.2 above), incorporated
                                           herein by reference to Exhibit 10.3.8
                                           to Registrant's Form 10-Q for the
                                           quarter ended June 30, 1997.

                               10.3.4      Business Purpose Revolving Promissory
                                           Note (Swing Line) made by Registrant
                                           in favor of Bank One, NA (fka Bank
                                           One, Akron, N.A.), dated August 4,
                                           1998 (extending the credit facility
                                           evidenced by the Note included as
                                           Exhibit 10.3.3 above), 

                                       36
<PAGE>   37

                                           incorporated herein by reference to 
                                           Exhibit 10.3.4 to Registrant's Form 
                                           10-Q for the quarter ended June 30, 
                                           1998.

                                           10.3.4.a        Consent, dated as of
                                                           December 29, 1998,
                                                           with respect to the
                                                           Note included as
                                                           Exhibit 10.3.4 above,
                                                           filed with the
                                                           Original Filing.

                                           10.3.4.b        Further Consent,
                                                           dated as of February
                                                           12, 1999, with
                                                           respect to the Note
                                                           included as Exhibit
                                                           10.3.4 above, filed
                                                           with the Original
                                                           Filing.

                     10.4      Amended and Restated Agreement between Registrant
                               and Symbol Technologies, Inc., dated as of
                               September 30, 1992, incorporated herein by
                               reference to Exhibit 10.4 to Registrant's Form
                               10-K for the year ended March 31, 1998.

                     10.5      License, Rights, and Supply Agreement between
                               Aironet Wireless Communications, Inc., a
                               subsidiary of Registrant, and Registrant, dated
                               as of March 31, 1998, incorporated herein by
                               reference to Exhibit 10.5 to Registrant's Form
                               10-K for the year ended March 31, 1998.

                     10.6      Agreement of Purchase and Sale of Assets by and
                               among Vision Newco, Inc., a subsidiary of
                               Registrant, Virtual Vision, Inc., as debtor and
                               debtor in possession, and the Official Unsecured
                               Creditors' Committee, on behalf of the bankruptcy
                               estate of Virtual Vision, dated as of July 13,
                               1995, incorporated herein by reference to Exhibit
                               10.8 to Registrant's Form 10-Q for the quarter
                               ended June 30, 1995.

                     10.7      Stock Purchase Agreement by and among Registrant
                               and FED Corporation, dated as of March 31, 1998,
                               with respect to FED Corporation's purchase of all
                               of the stock of Virtual Vision, Inc. (fka Vision
                               Newco, Inc.), incorporated herein by reference to
                               Exhibit 10.7 to Registrant's Form 10-K for the
                               year ended March 31, 1998.

                               10.7.1      Escrow Agreement by and among FED
                                           Corporation, Registrant and First
                                           Union National Bank, with respect to
                                           the transactions under the Stock
                                           Purchase Agreement included as
                                           Exhibit 10.7 above, incorporated
                                           herein by reference to Exhibit 10.7.1
                                           to Registrant's Form 10-K for the
                                           year ended March 31, 1998.

                     10.8      Subscription Agreement by and among New Meta
                               Licensing Corporation, a subsidiary of
                               Registrant, and certain officers of Registrant as
                               Purchasers, dated as of September 19, 1995,
                               incorporated herein by reference to Exhibit 10.8
                               to Registrant's Form 10-Q for the quarter ended
                               September 30, 1995.

                     10.9      Amended and Restated Shareholder Agreement by and
                               among Metanetics Corporation fka New Meta
                               Licensing Corporation, and its Shareholders,
                               including the officers of Registrant party to the
                               Agreement included as Exhibit 10.8 above, dated
                               as of March 28, 1996, incorporated herein by
                               reference to Exhibit 10.9.3 to Registrant's Form
                               10-K for the year ended March 31, 1996.

                     10.10     First Amendment, dated as of March 30, 1996, to
                               the Agreement included as Exhibit 10.9 above,
                               incorporated herein by reference to Exhibit
                               10.9.4 to Registrant's Form 10-K for the year
                               ended March 31, 1996.

                     10.11     Stock Purchase Agreement by and among Meta
                               Holding Corporation, a subsidiary of Registrant,
                               and certain officers of Registrant as Purchasers,
                               dated as of March 30, 1996, incorporated herein
                               by reference to Exhibit 10.8 to Registrant's Form
                               10-K for the year ended March 31, 1997.

                     10.12     Stock Purchase Agreement by and between
                               Metanetics Corporation, a subsidiary of
                               Registrant fka New Meta Licensing Corporation,
                               and Accipiter II, Inc., dated as of September 30,
                               1996, incorporated herein by reference to Exhibit
                               10.8 to Registrant's Form 10-Q for the quarter
                               ended September 30, 1996.

                     10.13     Stock Purchase Agreement by and between
                               Registrant and Telantis Capital, Inc., dated as
                               of March 31, 1997, incorporated herein by


                                       37
<PAGE>   38

                               reference to Exhibit 10.10 to Registrant's Form
                               10-K for the year ended March 31, 1997.

                     10.14     Subscription Agreement by and among Aironet
                               Wireless Communications, Inc., a subsidiary of
                               Registrant, and the investors who executed the
                               same, dated as of March 31, 1998, incorporated
                               herein by reference to Exhibit 10.14 to
                               Registrant's Form 10-K for the year ended March
                               31, 1998.

                               10.14.1     Form of Warrant issued pursuant to
                                           the Subscription Agreement included
                                           as Exhibit 10.14 above, incorporated
                                           herein by reference to Exhibit
                                           10.14.1 to Registrant's Form 10-K for
                                           the year ended March 31, 1998.

                               10.14.2     Stockholders Agreement by and among
                                           Aironet Wireless Communications, Inc.
                                           and its Stockholders party thereto,
                                           including Registrant and the
                                           investors party to the Subscription
                                           Agreement included as Exhibit 10.14
                                           above, entered into as of March 31,
                                           1998 in connection with the
                                           transactions under the Subscription
                                           Agreement, incorporated herein by
                                           reference to Exhibit 10.14.2 to
                                           Registrant's Form 10-K for the year
                                           ended March 31, 1998.

                               10.14.3     Registration Rights Agreement by and
                                           among Aironet Wireless
                                           Communications, Inc. and certain of
                                           its security holders, including
                                           Registrant and the investors party to
                                           the Subscription Agreement included
                                           as Exhibit 10.14 above, entered into
                                           as of March 31, 1998 in connection
                                           with the transactions under the
                                           Subscription Agreement, incorporated
                                           herein by reference to Exhibit
                                           10.14.3 to Registrant's Form 10-K for
                                           the year ended March 31, 1998.

                     10.15     DFS Vendor Agreement between Registrant and
                               Deutsche Financial Services Corporation, dated as
                               of September 30, 1998, filed with the Original
                               Filing.

         27. Financial Data Schedule as of December 31, 1998, filed herewith.

         (b)         Reports on Form 8-K

          During the second quarter of fiscal 1999 to which this Form 10-Q
relates, the Registrant filed the following Current Reports on Form 8-K: (i)
Current Report dated October 20, 1998, attaching the Registrant's press release
of that date, which announced the Registrant's financial results for the second
quarter of fiscal 1999, and the six month period, ended September 30, 1998 (the
press release, as incorporated in the Form 8-K, includes consolidated balance
sheets for the Registrant for September 30, 1998 (unaudited), and March 31,
1998, and condensed consolidated statements of operations for the quarterly and
six- month periods (unaudited) ended September 30, 1998 and 1997); and (ii)
Current Report dated December 11, 1998, attaching the Registrant's press release
of that date (the "December Release"), which announced that the Registrant would
restate the previously released financial results for its second quarter, ended
September 30, 1998, of its 1999 fiscal year to reflect a change in the timing of
recognizing revenues financed under a new floor-plan arrangement to a segment of
its value-added distributor channel and that its revenues and earnings for
fiscal 1999 are anticipated to be negatively affected as a result of unexpected
delays in the general availability of certain models of its pen-based product
line and lower than expected demand from U.S. customers.

          Subsequent to the end of the third quarter of fiscal 1999, the Company
filed the following Current Reports on Form 8-K: (1) Current Report dated
January 27, 1999, attaching the Registrant's press release of that date (the
"January Release"), which announced that its financial results for the third
quarter, ended December 31, 1998, of its 1999 fiscal year, and the restated
results for the fiscal year 1999 second quarter, ended September 30, 1998, the
need for which restatement was announced in the December Release, had been
rescheduled to mid-February pending the completion of a review of certain
judgmental accounting matters with its outside auditors and also updated certain
of the information contained in the December Release concerning the Company's
expectations for the fiscal 1999 third and fourth quarters and the full year,
stating that revenues were expected to be under $100 million with less than
targeted gross margins in the third quarter and below prior year levels for the
full year, and that a loss was expected for the fourth quarter and the full
year; (2) Current Report dated February 23, 1999, attaching the Registrant's
press release of that date (the "February Release"), which announced the
Registrant's 


                                       38
<PAGE>   39

financial results for the third quarter of fiscal 1999, and the nine month
period, ended December 31, 1998, and that, having completed the review of
certain judgmental accounting matters with the Registrant's outside auditors
previously reported in the January Release, the Registrant will be restating its
audited financial statements for fiscal years 1996, 1997 and 1998 and its
unaudited interim financial statements for the first and second quarters of
fiscal 1999 (the press release, as incorporated in the Form 8-K, includes
comparative unaudited consolidated statements of operations for the Registrant
for its fiscal years ended March 31, 1996, 1997 and 1998 and first and second
quarters ended June 10 and September 30, 1998 [including, as to the September 30
quarter, the effects of the restatement item announced in the December Release]
as previously reported and as restated, as well as consolidated statements of
operations for the quarterly and nine-month periods ended December 31, 1998 and
1997 which give effect to those restatements); and (3) Current Report dated
March 1, 1999, attaching the Registrant's press release of that date, which
announced the Registrant's consolidated balance sheet for the third quarter of
fiscal 1999 ended December 31, 1998, which was not available at the time of the
February Release due to the complexity of deriving it from the restated
consolidated statements of operations included as attachments to the February
Release (the press release, as incorporated in the Form 8-K, includes an
unaudited consolidated balance sheet for the Registrant comparing its financial
position at December 31, 1998 and, as restated to give effect to the restated
consolidated statements of operations attached to the February Release, at the
end of the Registrant's prior fiscal year on March 31, 1998).


                                       39
<PAGE>   40

                               TELXON CORPORATION

                                    SIGNATURE

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: March 10, 1999

                                              TELXON CORPORATION
                                              (Registrant)

                                              /s/ Frank E. Brick
                                              Frank E. Brick, President
                                              and Chief Executive Officer



                                       40
<PAGE>   41



                               TELXON CORPORATION

                                      -----


                                    EXHIBITS

                                       TO

                                   FORM 10-Q/A

                     FOR THE QUARTER ENDED DECEMBER 31, 1998


<PAGE>   42



                                INDEX TO EXHIBITS

WHERE
FILED
-----

*         3.1       Restated Certificate of Incorporation of Registrant,
                    incorporated herein by reference to Exhibit No. 2(b) to
                    Registrant's Registration Statement on Form 8-A with respect
                    to its Common Stock filed pursuant to Section 12(g) of the
                    Securities Exchange Act, as amended by Amendment No. 1
                    thereto filed under cover of a Form 8 and Amendment No. 2
                    thereto filed on Form 8-A/A.

*         3.2       Amended and Restated By-Laws of Registrant, as amended,
                    incorporated herein by reference to Exhibit No. 2(b) to
                    Registrant's Registration Statement on Form 8-A with respect
                    to its Common Stock filed pursuant to Section 12(g) of the
                    Securities Exchange Act, as amended by Amendment No. 1
                    thereto filed under cover of a Form 8 and Amendment No. 2
                    thereto filed on Form 8-A/A.

*         4.1       Portions of the Restated Certificate of Incorporation of
                    Registrant pertaining to the rights of holders of
                    Registrant's Common Stock, par value $.01 per share,
                    incorporated herein by reference to Exhibit No. 2(b) to
                    Registrant's Registration Statement on Form 8-A with respect
                    to its Common Stock filed pursuant to Section 12(g) of the
                    Securities Exchange Act, as amended by Amendment No. 1
                    thereto filed under cover of a Form 8 and Amendment No. 2
                    thereto filed on Form 8-A/A.

*         4.2       Text of form of Certificate for Registrant's Common Stock,
                    par value $.01 per share, and description of graphic and
                    image material appearing thereon, incorporated herein by
                    reference to Exhibit 4.2 to Registrant's Form 10-Q for the
                    quarter ended June 30, 1995.

*         4.3       Rights Agreement between Registrant and KeyBank National
                    Association, as Rights Agent, dated as of August 25, 1987,
                    as amended and restated as of July 31, 1996, incorporated
                    herein by reference to Exhibit 4 to Registrant's Form 8-K
                    dated August 5, 1996.

*                   4.3.1     Form of Rights Certificate (included as Exhibit A
                              to the Rights Agreement included as Exhibit 4.3
                              above). Until the Distribution Date (as defined in
                              the Rights Agreement), the Rights Agreement
                              provides that the common stock purchase rights
                              created thereunder are evidenced by the
                              certificates for Registrant's Common Stock (the
                              text of which and description thereof is included
                              as Exhibit 4.2 above, which stock certificates are
                              deemed also to be certificates for such common
                              stock purchase rights) and not by separate Rights
                              Certificates; as soon as practicable after the
                              Distribution Date, Rights Certificates will be
                              mailed to each holder of Registrant's Common Stock
                              as of the close of business on the Distribution
                              Date.


<PAGE>   43



*                   4.3.2     Letter agreement among Registrant, KeyBank
                              National Association and Harris Trust and Savings
                              Bank, dated June 11, 1997, with respect to the
                              appointment of Harris Trust and Savings Bank as
                              successor Rights Agent under the Rights Agreement
                              included as Exhibit 4.3 above, incorporated herein
                              by reference to Exhibit 4.3.2 to Registrant's Form
                              10-K for the year ended March 31, 1997.

*         4.4       Indenture by and between Registrant and AmeriTrust Company
                    National Association, as Trustee, dated as of June 1, 1987,
                    regarding Registrant's 7-1/2% Convertible Subordinated
                    Debentures Due 2012, incorporated herein by reference to
                    Exhibit 4.2 to Registrant's Registration Statement on Form
                    S-3, Registration No. 33-14348, filed May 18, 1987.

*                   4.4.1     Form of Registrant's 7-1/2% Convertible
                              Subordinated Debentures Due 2012 (set forth in the
                              Indenture included as Exhibit 4.4 above).

*         4.5       Indenture by and between Registrant and Bank One Trust
                    Company, N.A., as Trustee, dated as of December 1, 1995,
                    regarding Registrant's 5-3/4% Convertible Subordinated Notes
                    due 2003, incorporated herein by reference to Exhibit 4.1 to
                    Registrant's Registration Statement on Form S-3,
                    Registration No. 333-1189, filed February 23, 1996.

*                   4.5.1     Form of Registrant's 5-3/4% Convertible
                              Subordinated Notes due 2003 issued under the
                              Indenture included as Exhibit 4.5 above,
                              incorporated herein by reference to Exhibit 4.2 to
                              Registrant's Registration Statement on Form S-3,
                              Registration No. 333-1189, filed February 23,
                              1996.

*                   4.5.2     Registration Rights Agreement by and among
                              Registrant and Hambrecht & Quist LLC and
                              Prudential Securities Incorporated, as the Initial
                              Purchasers of Registrant's 5-3/4% Convertible
                              Subordinated Notes due 2003, with respect to the
                              registration of said Notes under applicable
                              securities laws, incorporated herein by reference
                              to Exhibit 4.3 to Registrant's Registration
                              Statement on Form S-3, Registration No. 333-1189,
                              filed February 23, 1996.

          10.1      Compensation and Benefits Plans of Registrant.

*                   10.1.1    Amended and Restated Retirement and Uniform
                              Matching Profit-Sharing Plan of Registrant,
                              effective July 1, 1993, incorporated herein by
                              reference to Exhibit 10.1.1 to Registrant's Form
                              10-K for the year ended March 31, 1994.

*                             10.1.1.a  Amendment, dated January 1, 1994, to the
                                        Plan included as Exhibit 10.1.1 above,
                                        incorporated herein by reference to
                                        Exhibit 10.1.1.a to Registrant's Form
                                        10-K for the year ended March 31, 1994.

*                             10.1.1.b  Amendment, dated April 1, 1994, to the
                                        Plan included as Exhibit 10.1.1 above,
                                        incorporated herein by reference to


<PAGE>   44

                                        Exhibit 10.1.1.b to Registrant's Form
                                        10-K for the year ended March 31, 1994.

*                             10.1.1.c  Amendment, dated January 1, 1994, to the
                                        Plan included as Exhibit 10.1.1 above,
                                        incorporated herein by reference to
                                        Exhibit 10.1.1.c to Registrant's Form
                                        10-Q for the quarter ended December 31,
                                        1994.

*                   10.1.2    1990 Stock Option Plan for employees of
                              Registrant, as amended, incorporated herein by
                              reference to Exhibit 10.1.2 to Registrant's Form
                              10-Q for the quarter ended September 30, 1997.

*                   10.1.3    1990 Stock Option Plan for Non-Employee Directors
                              of Registrant, as amended, incorporated herein by
                              reference to Exhibit 10.1.3 to Registrant's Form
                              10-Q for the quarter ended September 30, 1998.

*                   10.1.4    Non-Qualified Stock Option Agreement between
                              Registrant and Raj Reddy, dated as of October 17,
                              1988, incorporated herein by reference to Exhibit
                              10.1.6 to Registrant's Form 10-K for the year
                              ended March 31, 1994.

*                             10.1.4.a  Description of amendments extending the
                                        term of the Agreement included as
                                        Exhibit 10.1.4 above, incorporated
                                        herein by reference to Exhibit 10.1.4.a
                                        to Registrant's Form 10-Q for the
                                        quarter ended September 30, 1998.

*                   10.1.5    1992 Restricted Stock Plan of Registrant, as
                              amended, filed with the Original Filing.

*                   10.1.6    1995 Employee Stock Purchase Plan of Registrant,
                              as amended, incorporated herein by reference to
                              Exhibit 10.1.7 to Registrant's Form 10-Q for the
                              quarter ended September 30, 1995.

*                   10.1.7    1996 Stock Option Plan for employees, directors
                              and advisors of Aironet Wireless Communications,
                              Inc., a subsidiary of Registrant, incorporated
                              herein by reference to Exhibit 10.1.7 to
                              Registrant's Form 10-K for the year ended March
                              31, 1997.

*                             10.1.7.a  Amended and Restated 1996 Stock Option
                                        Plan for employees, directors and
                                        advisors of Aironet Wireless
                                        Communications, Inc., a subsidiary of
                                        Registrant, incorporated herein by
                                        reference to Exhibit 10.1.7.a to
                                        Registrant's Form 10-K for the year
                                        ended March 31, 1998.

*                   10.1.8    Non-Competition Agreement by and between
                              Registrant and Robert F. Meyerson, effective
                              February 27, 1997, incorporated herein by
                              reference to Exhibit 10.1.8 to Registrant's Form
                              10-K for the year ended March 31, 1997.

*                   10.1.9    Employment Agreement between Registrant and Frank
                              E. Brick, incorporated herein by reference to
                              Exhibit 


<PAGE>   45

                              10.1.9 to Registrant's Form 10-K for the year
                              ended March 31, 1998.

*                             10.1.9.a  1997 Section 162(m) Performance-Based
                                        Compensation Plan of Registrant with
                                        respect to its President and Chief
                                        Executive Officer adopted by the
                                        Performance-Based Compensation Committee
                                        of Registrant's Board of Directors and
                                        approved by Registrant's Stockholders at
                                        the Annual Meeting thereof, held
                                        September 10, 1997, incorporated herein
                                        by reference to Exhibit 10.1.9.a to
                                        Registrant's Form 10-K for the year
                                        ended March 31, 1998.

*                   10.1.10   Amended and Restated Employment Agreement between
                              Registrant and James G. Cleveland, effective as of
                              April 1, 1997, incorporated herein by reference to
                              Exhibit 10.1.10 to Registrant's Form 10-K for the
                              year ended March 31, 1998.

*                   10.1.11   Amended and Restated Employment Agreement between
                              Registrant and Kenneth W. Haver, effective as of
                              April 1, 1997, incorporated herein by reference to
                              Exhibit 10.1.11 to Registrant's Form 10-K for the
                              year ended March 31, 1998.

*                   10.1.12   Amended and Restated Employment Agreement between
                              Registrant and David W. Porter, effective as of
                              April 1, 1997, incorporated herein by reference to
                              Exhibit 10.1.13 to Registrant's Form 10-K for the
                              year ended March 31, 1998.

*                   10.1.13   Amended and Restated Employment Agreement between
                              Registrant and Danny R. Wipff, effective as of
                              April 1, 1997, incorporated herein by reference to
                              Exhibit 10.1.14 to Registrant's Form 10-K for the
                              year ended March 31, 1998.

*                   10.1.14   Description of Key Employee Retention Program,
                              incorporated herein by reference to Exhibit
                              10.1.15 to Registrant's Form 10-K for the year
                              ended March 31, 1998.

*                             10.1.14.a Form of letter agreement made with key
                                        employees selected under the retention
                                        program described in Exhibit 10.1.15
                                        above, incorporated herein by reference
                                        to Exhibit 10.1.15.a to Registrant's
                                        Form 10-K for the year ended March 31,
                                        1998.

*                   10.1.15   Letter agreement of Registrant with Robert A.
                              Goodman, dated as of December 29, 1997 and
                              executed and delivered January 20, 1998, for
                              continued consulting services following certain
                              changes in his law practice, incorporated herein
                              by reference to Exhibit 10.1.17 to Registrant's
                              Form 10-K for the year ended March 31, 1998.

          10.2      Material Leases of Registrant.
<PAGE>   46

*                   10.2.1    Lease between Registrant and 3330 W. Market
                              Properties, dated as of December 30, 1986, for
                              premises at 3330 West Market Street, Akron, Ohio,
                              incorporated herein by reference to Exhibit 10.2.1
                              to Registrant's Form 10-K for the year ended March
                              31, 1994.

*                   10.2.2    Lease Agreement between The Woodlands Commercial
                              Properties Company, L.P. and Registrant, made and
                              entered into as of January 16, 1998, including
                              Rider No. 1 thereto, for premises at 8302 New
                              Trails Drive, The Woodlands, Texas, incorporated
                              herein by reference to Exhibit 10.2.2 to
                              Registrant's Form 10-K for the year ended March
                              31, 1998.

*                   10.2.3    Standard Office Lease (Modified Net Lease) between
                              Registrant and John D. Dellagnese III, dated as of
                              July 19, 1995, for premises at 3875 Embassy
                              Parkway, Bath, Ohio, including an Addendum
                              thereto, incorporated herein by reference to
                              Exhibit 10.2.4 to Registrant's Form 10-K for the
                              year ended March 31, 1996.

*                             10.2.3.a  Second Addendum, dated as of October 5,
                                        1995, to the Lease included as Exhibit
                                        10.2.3 above, incorporated herein by
                                        reference to Exhibit 10.2.4.a to
                                        Registrant's Form 10-K for the year
                                        ended March 31, 1996.

*                             10.2.3.b  Third Addendum, dated as of March 1,
                                        1996, to the Lease included as Exhibit
                                        10.2.3 above, incorporated herein by
                                        reference to Exhibit 10.2.4.b to
                                        Registrant's Form 10-K for the year
                                        ended March 31, 1996.

*                             10.2.3.c  Fourth Addendum, dated as of April 16,
                                        1996, to the Lease included as Exhibit
                                        10.2.3 above, incorporated herein by
                                        reference to Exhibit 10.2.2.c to
                                        Registrant's Form 10-Q for the quarter
                                        ended June 30, 1997.

*                             10.2.3.d  Fifth Addendum, dated as of June 24,
                                        1997, to the Lease included as Exhibit
                                        10.2.2 above, incorporated herein by
                                        reference to Exhibit 10.2.2.d to
                                        Registrant's Form 10-Q for the quarter
                                        ended June 30, 1997.

*                             10.2.3.e  Sixth Addendum, dated as of March, 1998,
                                        to the Lease included as Exhibit 10.2.3
                                        above, incorporated herein by reference
                                        to Exhibit 10.2.3.e to Registrant's Form
                                        10-Q for the quarter ended September 30,
                                        1998.

*                             10.2.3.f  Seventh Addendum, dated as of July 20,
                                        1998, to the Lease included as Exhibit
                                        10.2.3 above, incorporated herein by
                                        reference to Exhibit 10.2.3.f to
                                        Registrant's Form 10-Q for the quarter
                                        ended September 30, 1998.

*                             10.2.3.g  Eighth Addendum, dated as of September
                                        8, 1998, to the Lease included as
                                        Exhibit 


<PAGE>   47

                                        10.2.3 above, incorporated herein by
                                        reference to Exhibit 10.2.3.g to
                                        Registrant's Form 10-Q for the quarter
                                        ended September 30, 1998.

*                   10.2.4    Lease Contract between Desarrollos \ Inmobiliarios
                              Paso del Norte, S.A. de C.V. and Productos y
                              Servicios de Telxon, S.A. de C.V., a subsidiary of
                              Registrant, for premises in Ciudad Juarez,
                              Chihuahua, Mexico, made and entered into as of
                              April 10, 1997, incorporated herein by reference
                              to Exhibit 10.2.4 to Registrant's Form 10-K for
                              the year ended March 31, 1998.

          10.3      Credit Agreements of Registrant.

*                   10.3.1    Credit Agreement by and among Registrant, the
                              lenders party thereto from time to time and The
                              Bank of New York, as letter of credit issuer,
                              swing line lender and agent for the lenders, dated
                              as of March 8, 1996, incorporated herein by
                              reference to Exhibit 10.3.2 to Registrant's Form
                              10-K for the year ended March 31, 1996.

*                             10.3.1.a  Amendment No. 1, dated as of August 6,
                                        1996, to the Agreement included as
                                        Exhibit 10.3.1 above, incorporated
                                        herein by reference to Exhibit 10.3.2.a
                                        to Registrant's Form 8-K dated August
                                        16, 1996.

*                             10.3.1.b  Security Agreement, dated as of August
                                        6, 1996, by and among Registrant and The
                                        Bank of New York, as Agent, incorporated
                                        herein by reference to Exhibit 10.3.2.b
                                        to Registrant's Form 8-K dated August
                                        16, 1996.

*                             10.3.1.c  Amendment No. 2, dated as of December
                                        16, 1996, to the Agreement included as
                                        Exhibit 10.3.1 above, incorporated
                                        herein by reference to Exhibit 10.3.2.c
                                        to Registrant's Form 8-K dated December
                                        16, 1996.

*                             10.3.1.d  Amendment No. 3, dated as of December
                                        12, 1997, to the Agreement included as
                                        Exhibit 10.3.1 above, incorporated
                                        herein by reference to Exhibit 10.3.1.d
                                        to Registrant's Form 10-K for the year
                                        ended March 31, 1998.

*                             10.3.1.e  Waiver and Agreement, dated as of
                                        December 29, 1998, with respect to the
                                        Agreement included as Exhibit 10.3.1
                                        above, filed with the Original Filing.

*                             10.3.1.f  Waiver Extension and Agreement, dated as
                                        of February 12, 1999, with respect to
                                        the Agreement included as Exhibit 10.3.1
                                        above, filed with the Original Filing.
<PAGE>   48

*                   10.3.2    Business Purpose Revolving Promissory Note (Swing
                              Line) made by Registrant in favor of Bank One,
                              Akron, N.A., dated August 6, 1996, incorporated
                              herein by reference to Exhibit 10.3.8 to
                              Registrant's Form 8-K dated August 16, 1996.

*                             10.3.2.a  Bank One Security Agreement, dated as of
                                        August 6, 1996, by and among Registrant
                                        and Bank One, Akron N.A., incorporated
                                        herein by reference to Exhibit 10.3.8.a
                                        to Registrant's Form 8-K dated August
                                        16, 1996.

*                   10.3.3    Business Purpose Revolving Promissory Note (Swing
                              Line) made by Registrant in favor of Bank One, NA
                              (fka Bank One, Akron, N.A.), dated August 5, 1997
                              (extending the credit facility evidenced by the
                              Note included as Exhibit 10.3.2 above),
                              incorporated herein by reference to Exhibit 10.3.8
                              to Registrant's Form 10-Q for the quarter ended
                              June 30, 1997.

*                   10.3.4    Business Purpose Revolving Promissory Note (Swing
                              Line) made by Registrant in favor of Bank One, NA
                              (fka Bank One, Akron, N.A.), dated August 5, 1997
                              (extending the credit facility evidenced by the
                              Note included as Exhibit 10.3.3 above),
                              incorporated herein by reference to Exhibit 10.3.4
                              to Registrant's Form 10-Q for the quarter ended
                              June 30, 1998.

*                             10.3.4.a  Consent, dated as of December 29, 1998,
                                        with respect to the Note included as
                                        Exhibit 10.3.4 above, filed with the
                                        Original Filing.

*                             10.3.4.b  Further Consent, dated as of February
                                        12, 1999, with respect to the Note
                                        included as Exhibit 10.3.4 above, filed
                                        with the Original Filing.

*         10.4      Amended and Restated Agreement between Registrant and Symbol
                    Technologies, Inc., dated as of September 30, 1992,
                    incorporated herein by reference to Exhibit 10.4 to
                    Registrant's Form 10-K for the year ended March 31, 1998.

*         10.5      License, Rights, and Supply Agreement between Aironet
                    Wireless Communications, Inc., a subsidiary of Registrant,
                    and Registrant, dated as of March 31, 1998, incorporated
                    herein by reference to Exhibit 10.5 to Registrant's Form
                    10-K for the year ended March 31, 1998.

*         10.6      Agreement of Purchase and Sale of Assets by and among Vision
                    Newco, Inc., a subsidiary of Registrant, Virtual Vision,
                    Inc., as debtor and debtor in possession, and the Official
                    Unsecured Creditors' Committee, on behalf of the bankruptcy
                    estate of Virtual Vision, dated as of July 13, 1995,
                    incorporated herein by reference to Exhibit 10.8 to
                    Registrant's Form 10-Q for the quarter ended June 30, 1995.

*         10.7      Stock Purchase Agreement by and among Registrant and FED
                    Corporation, dated as of March 31, 1998, with respect to FED
                    Corporation's purchase of all of the stock of Virtual
                    Vision, Inc. (fka Vision Newco, Inc.), incorporated herein
                    by reference 


<PAGE>   49

                    to Exhibit 10.7 to Registrant's Form 10-K for the year ended
                    March 31, 1998.

*                   10.7.1    Escrow Agreement by and among FED Corporation,
                              Registrant and First Union National Bank, with
                              respect to the transactions under the Stock
                              Purchase Agreement included as Exhibit 10.7 above,
                              incorporated herein by reference to Exhibit 10.7.1
                              to Registrant's Form 10-K for the year ended March
                              31, 1998.

*         10.8      Subscription Agreement by and among New Meta Licensing
                    Corporation, a subsidiary of Registrant, and certain
                    officers of Registrant as Purchasers, dated as of September
                    19, 1995, incorporated herein by reference to Exhibit 10.8
                    to Registrant's Form 10-Q for the quarter ended September
                    30, 1995.

*         10.9      Amended and Restated Shareholder Agreement by and among
                    Metanetics Corporation fka New Meta Licensing Corporation,
                    and its Shareholders, including the officers of Registrant
                    party to the Agreement included as Exhibit 10.8 above, dated
                    as of March 28, 1996, incorporated herein by reference to
                    Exhibit 10.9.3 to Registrant's Form 10-K for the year ended
                    March 31, 1996.

*         10.10     First Amendment, dated as of March 30, 1996, to the
                    Agreement included as Exhibit 10.9 above, incorporated
                    herein by reference to Exhibit 10.9.4 to Registrant's Form
                    10-K for the year ended March 31, 1996.

*         10.11     Stock Purchase Agreement by and among Meta Holding
                    Corporation, a subsidiary of Registrant, and certain
                    officers of Registrant as Purchasers, dated as of March 30,
                    1996, incorporated herein by reference to Exhibit 10.8 to
                    Registrant's Form 10-K for the year ended March 31, 1997.

*         10.12     Stock Purchase Agreement by and between Metanetics
                    Corporation, a subsidiary of Registrant fka New Meta
                    Licensing Corporation, and Accipiter II, Inc., dated as of
                    September 30, 1996, incorporated herein by reference to
                    Exhibit 10.8 to Registrant's Form 10-Q for the quarter ended
                    September 30, 1996.

*         10.13     Stock Purchase Agreement by and between Registrant and
                    Telantis Capital, Inc., dated as of March 31, 1997,
                    incorporated herein by reference to Exhibit 10.10 to
                    Registrant's Form 10-K for the year ended March 31, 1997.

*         10.14     Subscription Agreement by and among Aironet Wireless
                    Communications, Inc., a subsidiary of Registrant, and the
                    investors who executed the same, dated as of March 31, 1998,
                    incorporated herein by reference to Exhibit 10.14 to
                    Registrant's Form 10-K for the year ended March 31, 1998.

*                   10.14.1   Form of Warrant issued pursuant to the
                              Subscription Agreement included as Exhibit 10.14
                              above, incorporated herein by reference to Exhibit
                              10.14.1 to Registrant's Form 10-K for the year
                              ended March 31, 1998.

*                   10.14.2   Stockholders Agreement by and among Aironet
                              Wireless Communications, Inc. and its Stockholders
                              party thereto, including Registrant and the
                              investors party to the Subscription Agreement
                              included as Exhibit 10.14 above, entered into as
                              of March 31, 1998 in connection with the
                              transactions under the Subscription Agreement,

<PAGE>   50

                    incorporated herein by reference to Exhibit 10.14.2 to
                    Registrant's Form 10-K for the year ended March 31, 1998.

*                   10.14.3   Registration Rights Agreement by and among Aironet
                              Wireless Communications, Inc. and certain of its
                              security holders, including Registrant and the
                              investors party to the Subscription Agreement
                              included as Exhibit 10.14 above, entered into as
                              of March 31, 1998 in connection with the
                              transactions under the Subscription Agreement,
                              incorporated herein by reference to Exhibit
                              10.14.3 to Registrant's Form 10-K for the year
                              ended March 31, 1998.

*         10.15     DFS Vendor Agreement between Registrant and Deutsche
                    Financial Services Corporation, dated as of September 30,
                    1998, filed with the Original Filing.

**        27.       Financial Data Schedule as of December 31, 1998, filed
                    herewith.


--------------------------
*        Previously filed

**       Filed herewith