U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                    Form 10-K

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

                    For the fiscal year ended: March 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: 0-15449

                      CALIFORNIA MICRO DEVICES CORPORATION
                      ------------------------------------
             (Exact name of registrant as specified in its charter)

                California                                     94-2672609
                ----------                                     ----------
(State or other jurisdiction of incorporation)      (IRS Employer Identification
                                                                No.)


     215 Topaz Street, Milpitas, CA                             95035-5430
     ------------------------------                             ----------
(Address of principal executive offices)                        (Zip code)

       Registrant's telephone number, including area code: (408) 263-3214
                                                           --------------


        Securities registered pursuant to Section 12(b) of the Act: None

    Securities registered pursuant to Section 12(g) of the Act: Common Stock

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

Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K (Section  209.405 of this chapter) is not contained  herein,  and
will not be contained to the best of registrant's  knowledge,  in any definitive
proxy or information statement incorporated by reference in Part II of this Form
10-K or any amendment to this Form 10-K.
                                    Yes X No

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant as of March 31, 1998, was approximately $32,503,000.00 based upon the
last  sale  price of the  common  stock  reported  for such  date on the  NASDAQ
National Market System.  For purposes of this  disclosure,  common stock held by
persons who hold more than 5% of the outstanding  voting shares and common stock
held by executive officers and directors of the Registrant have been excluded in
that such persons may be deemed to be "affiliates" as that term is defined under
the rules and  regulations  promulgated  under the Securities Act of 1933.  This
determination of affiliate status is not necessarily a conclusive  determination
for other purposes.

As of March 31,  1998,  the number of shares of the  Registrant's  common  stock
outstanding were 9,978,351.


                       DOCUMENTS INCORPORATED BY REFERENCE

The Proxy  Statement for the  Registrant's  Annual Meeting of Shareholders to be
held August 7, 1998.


<PAGE>


                                     PART I

      This  report  contains  forward-looking  statements  within the meaning of
      Section 27A of the Securities Act of 1933, as amended,  and Section 21E of
      the  Securities  Act of  1934,  as  amended.  Except  for  the  historical
      information   contained  in  this  discussion  of  the  business  and  the
      discussion and analysis of financial  condition and results of operations,
      the  matters  discussed  herein  are  forward-looking   statements.   Such
      forward-looking statements are made pursuant to the safe harbor provisions
      of  the   Private   Securities   Litigation   Reform  Act  of  1995.   The
      forward-looking statements regarding revenues, orders, and sales involve a
      number of risks and  uncertainties,  including  but not limited to, demand
      for the  Company's  product,  pricing  pressures  which  could  affect the
      Company's  gross  margin  or the  ability  to  consummate  sales,  intense
      competition  within the  industry,  the  Company's  ability to attract and
      retain  high  quality  people,  the need for the Company to keep pace with
      technological  developments  and  respond  quickly to changes in  customer
      needs,  the Company's  dependence on third party  suppliers for components
      for its  products,  year 2000 issues,  and the Company's  dependence  upon
      intellectual property rights which, if not available to the Company, could
      have a material adverse effect on the Company. These same factors, as well
      as others, such as the continuing litigation involving the Company,  could
      also affect the  liquidity  needs of the  Company.  Actual  results  could
      differ materially from those projected in the  forward-looking  statements
      as a result of factors set forth below and elsewhere in this Form 10-K.

ITEM 1. BUSINESS.

General

The business strategy of California Micro Devices Corporation ("California Micro
Devices" or "the  Company") is to develop and  capitalize on the potential  high
growth market for Thin Film Passive Devices and related semiconductor solutions.
The  Company  serves  Original  Equipment   Manufacturers  (OEM)  and  End  User
electronic systems  manufacturers who need higher density,  higher  performance,
lower  cost,  unique  functionality,  and  faster  time to market.  The  Company
combines  multiple  Thin  Film  Passive  Electronic  Components  (resistors  and
capacitors) and/or semiconductor  devices into single chip solutions for many of
the  industry's  most  difficult  problems,  and allows its  customers  to build
systems which provide  superior value to their users.  California  Micro Devices
has  forged a  leadership  position  by  combining  proprietary  materials,  and
semiconductor  process  and design  technologies,  while  providing  specialized
applications support to its customers.

The Company's  Integrated  Passive Devices fall into two basic  categories.  The
Company's new P/Active(R)  Integrated Passive products incorporate the latest in
high  density,  high  frequency,  high  reliability  technology  in  Application
Specific  Passive  Networks for high volume  industry  standard  applications or
devices which complement industry leaders' semiconductor  solutions.  The second
category is the traditional  IPEC(TM) family, which consists primarily of custom
and general purpose devices for solving unique customer problems.

Unlike  traditional  discrete passive  components that were developed during the
age of the transistor,  these devices are targeted to complement many of today's
most  sophisticated  and  cost  effective   integrated  circuit  based  systems.
Applications   in  fields  such  as  high-speed   computers   and   peripherals,
telecommunications,  networking,  and medical  instrumentation  demonstrate  the
value that the Company can bring to almost any electronics application.

During fiscal year 1998, the Company also  introduced the first devices in a new
line of  semiconductor  products  designed  to provide  electrostatic  discharge
protection to today's  faster,  more  sensitive  electronic  systems.  These are
marketed as part of the Company's P/Active(R) family of products.

California  Micro  Devices  also  designs,   manufactures,   and  sells  certain
semiconductor  products  (primarily  analog and mixed  signal  products  for the
telecommunications  industry).  These sales continue to be a significant portion
of the Company's  business,  accounting for  approximately  35% of product sales
over the last three fiscal years. The sales of these older products,  which have
historically  constituted  the  bulk  of the  Company's  semiconductor  revenue,
continue to decline.  Sales of new  P/Active(R),  plus the onset of revenue from
foundry  services,  have begun to dominate  the  revenue  for the  semiconductor
operation's portion of the Company's business.

California  Micro  Devices  has a  relationship  with  Hitachi  Metals  Ltd.,  a
subsidiary  of  Hitachi  Ltd.,  that  involves  equity  participation,   product
development,   plus   manufacturing,   marketing  and  non-exclusive   worldwide
distribution  rights.  During fiscal 1998,  the Company  recognized  $569,000 in
technology  revenue from Hitachi and  $732,000 of product  revenue.  The Company
does not expect to have technology revenue from Hitachi in fiscal 1999.



<PAGE>


The Company was  incorporated in 1980, and has been a public company since 1986.
It utilizes 86,000 square feet of facilities in Milpitas,  California and Tempe,
Arizona.

Passive Components

Passive  components  -  principally  resistors  and  capacitors  - are  used  in
virtually all electronic products. They filter, condition,  shape, terminate and
improve the  characteristics  of the electrical  signals used and transmitted by
active  components  such as  microprocessors,  Application  Specific  Integrated
Circuits ("ASIC's") and dynamic random access memories ("DRAM's").  Although the
role of passive components has changed over the years, their usage has continued
to grow with the transition to higher levels of semiconductor  integration.  For
many  years  the  number of  passive  components  in  systems  such as  personal
computers was  decreasing,  being offset in the market by increasing  numbers of
systems. However, in the last few years there has been a reversal of this trend.
The number of passives in a PC reached a minimum with the 486  generation and is
now showing dramatic increases in the Pentium(R), Pentium Pro(R), Pentium II(R)1
and equivalent  workstation  generations.  Similar trends are occurring in other
areas where new functionality and higher  frequencies are being  incorporated in
state  of the art  systems,  dramatically  increasing  the  demands  on  passive
components.

According  to  industry  sources,  the  worldwide  market for  selected  passive
components  includes over $5.0 billion for resistors and resistor networks,  and
over  $9.0  billion  for  capacitors.   Unit   consumption   continues  to  grow
significantly,  driven by the increasing complexity of products such as personal
computers,   networking  equipment  and  telecommunications   devices,  and  the
increasing  volume  of  portable  products  such as  cellular  phones,  personal
communication  systems  ("PCS"),  pocket  pagers,  personal  digital  assistants
("PDA's") and notebook computers. In addition,  market growth has been augmented
by greater  electronic  content in products such as automobiles  and appliances.
During  calendar  year  1996,  over-capacity  in the  passives  industry  led to
significant price reductions that continued  unabated through 1997, so that even
in the face of increased  unit  demands,  total  industry  revenue has declined.
Although  California Micro Devices only addresses a small portion of the overall
market for passive  components,  these are some of the largest and most  rapidly
growing segments.

The target applications for the Company's Integrated Passive Devices (IPD's) are
those  traditionally  served by multi-layered  ceramic  capacitors  ("MLCs") and
thick-film  resistors   interconnected  on  PC  boards.  Passive  components  so
manufactured,  which  comprise  most of the  worldwide  market for resistors and
small value capacitors, are generally discrete components,  able to perform only
a  single   function  per  device.   Traditionally   the  direction   among  the
manufacturers  of these  devices has been to make them smaller and cheaper.  But
the size is now being limited by the ability to physically  handle them,  and we
estimate that the total  conversion  costs of the devices (the total cost to use
them), now exceeds the raw cost of the component by factors of 5X to 20X.

In the last few years there have been  efforts on the part of  discrete  passive
manufacturers  to achieve some of the benefits  that the Company  achieves  with
it's integrated  passives.  The nature and variety of materials involved in MLCs
and thick film resistors have limited the ability of thick film manufacturers to
achieve significant levels of integration to date. Four resistor packages, where
all of the resistors are the same, and 8 resistors packages, where all resistors
are the same and are in a  limited  interconnected  configuration,  have  become
reasonably  common.   Eight  capacitor   configurations   have  been  relatively
unsuccessful,  and  resistor  capacitor  combinations  are  even  more  limited.
However,  it is  clear  that  traditional  discrete  passive  manufacturers  are
embracing  the need for  integration,  and will  compete  to the limits of their
technology.

In contrast,  continuing  improvements  in silicon  fabrication  technology have
enabled  integrated  circuit  manufacturers to integrate  increasing  numbers of
active components,  principally  transistors,  onto single  semiconductor chips.
This  integration has increased the number of functions  performed by each chip,
improved  performance,  and  significantly  reduced the cost per  function.  The
failure of passive components to match the improvements in active components has
led to a relative  increase in the cost of using passive  components as compared
to the cost of the active  elements,  increased the proportion of space occupied
by passive  components on many printed  circuit  boards  ("PCB's"),  and in some
cases  limited  the  ability of system  designers  to take  advantage  of higher
performance  integrated  circuits.  This  is the  opportunity  California  Micro
Devices  looks  to  exploit.   Most  of  the  traditional   thick  film  passive
manufacturers  have  recognized the  advantages of thin film devices,  announced
their intentions to enter the market, and acknowledged the Company's  leadership
in  the  field.  Standards  organizations  such  as  the  Electronic  Industries
Associate  (EIA) are now  drafting  standards  for  Integrated  Passive  Devices
(IPD's),  a sign of the increasing role that these devices are beginning to play
in the industry.

-----------------
1 Pentium,  Pentium Pro, and Pentium II are registered trademarks of Intel Corp.

                                       2

<PAGE>


California Micro Devices' Goal/Strategies

The Company's goal, as the leader in Integrated Passive Devices,  is to create a
high growth company by converting significant portions of the thick film passive
market to its thin film,  Integrated Passive technology.  The Company's strategy
for achieving  this is to target  specific  market  segments  which place a high
value on the Company's  capabilities,  develop solutions to targeted high volume
applications  (standard or custom), and leverage its thin film and semiconductor
expertise  - which it  believes  is a unique  combination  in the  industry - to
provide  products with  significant  cost,  size,  performance  and  reliability
advantages  over  traditional  passive  components.  The Company also intends to
leverage  its  base  of  thin  film  technology  to  enhance  its  semiconductor
technology  and to provide  components,  which  complement  its  unique  passive
solutions to customer problems. Key elements of the Company's strategy include:

        Target High Volume  Solutions - The  Company  targets  manufacturers  of
products in growth markets such as personal computers,  cellular phones, pagers,
networking,   wireless   computer   networks  and  high   performance   graphics
workstations,  all of which  have an  increasing  need for  higher  performance,
higher density passive components.  The Company attempts to identify common high
volume applications or, when appropriate,  designs customized  solutions to meet
particular customer applications.

        Commit to  Technology  Leadership  - California  Micro  Devices uses its
extensive thin film processing and materials  expertise in combination  with its
semiconductor  capabilities  to develop and expand its product  technology.  For
example,  during  fiscal 1998,  the Company  announced the  introduction  of its
second  generation  P/Active(R)  RC  technology  that  effectively  doubled  the
capacitance   density,   which  could  be  achieved  without  sacrificing  other
characteristics  such as reliability  and frequency.  This new device  structure
allowed the Company to expand its product  capabilities,  integrate more devices
in a single  package,  and  serve a broader  segment  of the  passive  component
markets by lowering the cost of manufacturing.  This development strategy is the
equivalent of Moore's law for increasing density in the semiconductor  industry.
The Company is also using its expertise in integrating  different  components to
develop  combinations of passive  components and certain active components (such
as MOS  transistors  and Schottky  diodes with  passives),  into its P/Active(R)
solutions.   In  addition,   the  Company  has  been   developing  its  own  new
semiconductor products for the mobile telecommunications market and other custom
applications.

        Enhance  Position  as Low Cost  Solution  Provider  -  California  Micro
Devices  believes  that,  through  the use of its thin film  technology,  it can
provide  one of the  lowest  total cost  solutions  for its  customer's  passive
component needs. Having made significant  capital and technology  investments to
enhance  its  position  during  fiscal  year 1997,  the  Company  embarked on an
aggressive  pricing policy in fiscal year 1998 aimed at  penetrating  markets in
which cost savings are a dominant  driver.  While this has  short-term  negative
impacts,  the Company believes that this strategy is necessary in order to break
out of the more  traditional,  limited roles, to which Integrated  Passives have
historically been assigned.

        Leverage the Volume Capabilities of California Micro Devices' Technology
and  Facilities - the Company has  historically  had  underutilized  fabrication
facilities,  both in Semiconductors  and in Thin Film (both currently 25% to 30%
utilization).  The  Company  is  taking  advantage  of  this  capability  to  be
aggressive on volume  pricing.  It has also begun doing  foundry work  (contract
wafer manufacturing) for other semiconductor manufacturers to leverage the fixed
investment.  While  these  activities  provide a lower  average  margin than the
Company's traditional products, they provide an opportunity for additional fixed
cost absorption and higher incremental margin,  while the Company fine tunes its
manufacturing operations for even lower costs.

P/Active(R) Products

In the spring of 1996,  California Micro Devices introduced its new P/Active(R)1
family of integrated  passive  components.  These devices represent a major step
forward in the development of high performance,  lower cost passive  components.
In fiscal year 1998 these products  began to generate  revenue and now represent
the most rapidly growing segment of the business.

Historically, integrated thin film passive components have been built on silicon
wafers.  But for all intents and  purposes,  the silicon was  incidental  to the
devices themselves.  Silicon wafers are relatively cheap, readily available,  of
extremely high quality,  and are supported by many  generations of semiconductor
processing equipment.  They make an outstanding vehicle on which to deposit thin
films for creating higher performance  passive  components.  But the role of the
silicon was historically that of an inactive carrier.

In late  calendar 1990 and early 1991,  California  Micro Devices made the first
change in this role when it  introduced a family of multiple  resistor-capacitor
configurations  in a package.  As originally  conceived,  construction  of these
devices would have involved the deposition of multiple  layers of conducting and
insulating thin films on the top of the traditional "passive" silicon

-----------------
1  P/Active(R)  is a registered  trademark  and IPEC and PAC are  trademarks  of
California Micro Devices.

                                       3

<PAGE>


substrate,  using  metal films to  interconnect  them.  The Company  pioneered a
method of using very low  resistance  semiconductor  wafers for the substrate to
interconnect  the common ground node of all the capacitors  through the "silicon
interconnect"  provided by the wafer,  instead of using metals.  These  products
were a major success, providing new levels of performance and reliability.

California  Micro Devices new  P/Active(R)  family  recognizes the power of this
concept and extends it further. In the P/Active(R) family, the silicon substrate
fills a variety of roles. In some products,  it is used to provide this original
silicon interconnect  function although in additional  configurations.  In some,
the silicon is used to enhance and control the  electrical  characteristics.  In
others, ESD protection mechanisms for high performance capacitors are created in
the  substrate  and  integrated  with the  passives.  And in still  others,  the
integration of Schottky diodes both as simple  networks and in combination  with
other passive devices is provided.

In summary,  California  Micro Devices has changed the  traditional  role of the
silicon  wafer in thin film  passives  from  being a  non-contributing,  passive
carrier upon which thin films were  deposited,  to that of an active part of the
functioning device. In doing so, it extracts the full measure of capability from
the  silicon  substrate  to provide  customer  solutions  that have  performance
exceeding the limitations of traditional  devices.  The Company's  semiconductor
capabilities are central to this solution. The Company is not aware of any other
company that has achieved this level of capability to date.

California Micro Devices Advantages

The  Company  integrates  multiple  passive  elements  into a single  integrated
circuit.  The Company  believes  that its thin film  products have the following
desirable advantages over traditional thick film technology components:

        Smaller Size for  Miniaturization  and Portability - Customer demand for
smaller,  more portable products and more functionality within a given space has
created a need to reduce component size.  Discrete passive components  typically
require  significant  space on the PCB,  limiting  either the  ability to shrink
product  size  or to  incorporate  additional  features.  This  is  particularly
important in devices such as portable computers, cellular phones and pagers. The
integration of multiple passive devices on a single  integrated  circuit reduces
the size and weight of the passive components.  This has been the most important
factor in the Company's sales to date. For instance,  cellular phones  generally
require hundreds of discrete  semiconductors and passive  components,  which can
consume  as  much as 2/3 of the  PCB  space.  Even  one of the  Company's  older
IPEC(TM) products, which integrates 18 capacitors and 18 resistors,  reduces the
space  used on the PCB by up to 80%  compared  to the use of the same  number of
discrete elements.  Discrete components have been introduced in smaller sizes in
an attempt to provide space savings.  But such tiny devices  create  significant
assembly rework and reliability problems for manufacturers,  which significantly
increases  costs. It appears that discrete  passive  components are reaching the
limits of size reduction and there is increasing  interest in  integrating  more
components in a given package as the Company is doing. The traditional  passives
manufacturers seem to be acknowledging this by their attempts in the last couple
of years to introduce their own limited levels of integration.

        Lower Total Cost Solutions - Manufacturers  of electronic  products face
intense  price  competition,   especially  in  the  last  couple  of  years.  By
integrating multiple passive elements onto a single chip, the Company is able to
offer a lower total cost  solution  than that offered by most  discrete  passive
component manufacturers. The cost of purchasing and placing one of the Company's
thin film integrated  resistor/capacitor networks - which may combine as many as
76  components  in a single  surface  mount package - can be as much as 75% less
than the cost of purchasing  and  installing an equivalent  number of thick film
discrete  elements.  The Company's  Super PAC(TM) 1284 solution for the parallel
ports of PC's and Workstations  replaces 25 discrete  resistors,  17 capacitors,
and the  equivalent of 34 ESD  protection  diodes with one miniature IC package.
The  customer  also  realizes  further  cost savings by reducing the size of the
printed  circuit  board,  and by  eliminating  board  interconnection.  Not  all
potential customers  acknowledge the savings to be gained by integrating passive
components,  so  selling  this  advantage  remains  one  of the  Company's  most
significant challenges.

        Performance  at  Higher  Frequencies  - The  increasing  use  of  faster
microprocessors in computers,  and higher frequencies in communication products,
has created a significant  demand for improved  passive  component  performance.
Traditional  passive  components  do not perform well at many of today's  higher
frequencies due to a variety of problems including  variation of characteristics
with frequency,  signal matching delays, and  inconsistencies in characteristics
between devices and the PCB's on which they are used.  These problems often keep
higher frequency systems from operating to their full capability.  The Company's
thin film  technology  components  perform well at high  frequencies  due to the
inherently  smaller size of the component and the ability to achieve  consistent
placement of the components relative to each other. The Company's new PAC(TM) RC
family  of  filters  operate  properly  at up  to  10  times  the  frequency  of
traditional discrete components.  Other devices such as the PAC(TM) RG have been
characterized at frequencies up to 10 GHz (well beyond the functional  limits of
traditional  devices)  and are being  adopted by some  customers  to achieve the
operating frequency they need for the operation of next generation systems.

                                       4

<PAGE>


        Unique  Electrostatic  Discharge (ESD) Protection  Capabilities - All of
California  Micro Devices  P/Active(R)  family of products have been designed to
tolerate high levels of  electrostatic  discharge,  and these  capabilities  are
constantly  being  enhanced to keep pace with  increasingly  stringent  industry
requirements.  Recently the European  Community has introduced new electrostatic
discharge  requirements for systems aimed at improving system reliability in the
field.  The Company has taken a  leadership  position  in  providing  protection
devices,  which meet the most  stringent  levels of these new  standards,  while
simultaneously  increasing  the ESD  capabilities  of its  PAC(TM)  RC family of
products to not only  survive  the tests  themselves,  but also to help  protect
other devices to which they might be connected.

        EMI/RFI Filtering  Capabilities - Electronic systems designed to operate
at high frequencies can emit high levels of Electromagnetic  Interference/ Radio
Frequency Interference (EMI/RFI).  These emissions are strictly regulated by the
Federal  Communications  Commission ("FCC") and the European Community.  Because
systems  manufacturers  can only  test for the  existence  of  EMI/RFI  emission
problems late in the product design cycle,  non-compliance with FCC requirements
can result in costly delayed  product  introductions.  As products run at higher
frequencies  and become  smaller and more mobile,  the difficulty in suppressing
these  emissions  increases.  The Company's  filters are capable of  suppressing
EMI/RFI noise by as much as 10X more than  combinations of thick film components
at high  frequencies.  The Company  believes  that this  provides a  significant
advantage  for  state  of the art  digital  cellular  phones,  high  performance
microcomputers and workstations as well as portable  electronic  equipment.  The
Company's  new  P/Active(R)  filters are  effective to over 3 GHz, as much as 10
times the frequency at which traditional  capacitors stop acting like capacitors
and start behaving like  inductors  (stop  filtering).  This can result in fewer
problems in final FCC testing.

         Improved  Reliability  - the  Company's  thin film  technology  is more
reliable than  traditional  thick film  technology  due to greater  tolerance to
hostile  environmental  conditions  and the reduction in the number of component
interconnections.  Depending on the system,  over 40% of all system failures can
be attributed to poor interconnections.  Increased  integration,  along with the
Company's use of reliable processes common to the semiconductor industry, reduce
the  number of  connections  and  eliminate  many of the  problems  with  solder
migration,  cracking and peeling,  sensitivity to environmental conditions,  and
poor solder joints which often accompany the use of thick film technologies.

Sales and Marketing

The Company has focused its marketing efforts in the areas of personal computers
and  their  peripherals,   portable  communications  devices,  high  performance
workstations,  and networking systems. Additionally, the Company focuses its own
efforts on major world wide electronic  system  manufacturers who are considered
market  leaders  in these  segments,  and  where  the  Company  feels it has the
greatest  opportunities  and ability to influence  the  industry at large.  This
often involves a longer  design-in  cycle,  but has greater  long-term  business
potential.

The sales  process  requires that the Company  achieve  design wins in which its
products  are  specified  for  specific  projects.  The  Company's  products are
generally not specified without engineer to engineer contact,  as well as strong
interaction  with   procurement,   and  sometimes  other  functions  within  the
customer's organization.

The Company works with existing and potential new customers to identify  passive
and specialized  semiconductor  component needs which the Company's capabilities
address,  and seeks to have  customers  design the  Company's  products into the
customer's   electronic  systems.  The  Company  facilitates  these  efforts  by
providing   customized   solutions  as  necessary   to  meet   customer   design
requirements.  These customized  designs,  and the knowledge acquired during the
process,  can often be used to create standard  products,  which the Company can
then offer for similar application requirements in other areas.

During fiscal 1998, the Company further strengthened its marketing  applications
efforts  to  understand  in detail the  problems  facing the users in its chosen
segments.  The goal is to be able to specify and ultimately  design  Application
Specific  Passive  Networks,  which  satisfy  the needs of  multiple  customers.
Progress in this area is  particularly  evident in the improved  strength of the
Company's   applications   engineering   group  and  the  increased  numbers  of
application notes and seminars the group has completed. The Company has become a
value-added  partner with some of its customers,  as well as leading  vendors of
semiconductor  devices,  to provide the  knowledge  and the passive  networks to
complement the active devices in a system.

California Micro Devices sells its products to OEMs, distributors,  and contract
manufacturers.  The Company's  sales channels  consist  primarily of independent
regional sales representatives  supported by the Company's sales force, which is
located in Milpitas, California and in three regional sales offices. The Company
believes that independent sales  representatives  generally provide an effective
sales force at a lower cost than a dedicated  internal sales force.  Independent
sales  representatives  are  generally  able to leverage  their sales efforts by
offering  multiple,  although  normally not  competing,  products from different
vendors to their customers. This makes them ideal channels for opening the doors
at customer  sites.  Toward the end of fiscal  year 1998 the  Company  also took
actions to increase the amount of direct presence it has in the field,  with the
intention of

                                       5

<PAGE>


providing  a  greater  degree  of  the  Company  support  and  direction  to the
representatives. The Company's major accounts are also supported by headquarters
directed efforts of the sales, marketing and applications engineering staff.

The Company sells through  distributors,  both in the U.S.A. and in the Far East
and  Europe,  to  provide  sources of its  products  at  locations  close to the
customers.  As the Company's standard product line expands,  the Company expects
that more of its sales may be  through  national,  international,  and  regional
distributors.   Distributors  are  particularly  effective  in  serving  smaller
customers and those with particular service requirements. In the last year there
has also been a slight  shift  towards  the use of  distributors  to support the
short lead times required by many contract manufacturers.

There is a distinct shift towards the use of contract  manufacturing  within the
Company's customers base, and the indications are that this trend will continue.
By the end of fiscal  1998,  a contract  manufacturer  had become the  Company's
single largest direct purchaser of product.

The Company's  foreign  product sales accounted for 35%, 36%, and 31% of product
sales for fiscal years ended March 31, 1998, 1997, and 1996,  respectively.  The
Company uses  independent  foreign sales  representatives  and  distributors  to
provide  international  sales support.  The Company  expects that  international
sales will  continue  to  represent a  significant  portion of its sales for the
foreseeable  future.  The Company's sales are denominated in US dollars to avoid
currency risk.

In fiscal 1998, Bell Milgray Inc., a distributor, accounted for just over 10% of
net product  sales.  A significant  portion of the Company's  sales is made to a
relatively small number of customers including several distributors.  It remains
a  goal  of the  Company  to get  more  balanced  penetration  and  become  less
susceptible  to  swings  in any  specific  application  area or with  any  given
customer.  During  fiscal 1997,  Motorola  accounted  for 11% of the net product
sales.  During  fiscal  1996,  no  customer  accounted  for more than 10% of net
product sales.

Most of the systems into which the  Company's  products are designed  have short
life  cycles.  As a result,  the Company  requires a  significant  number of new
design wins on an ongoing basis to maintain and grow revenue.

Generally, the Company's sales are not subject to long-term contracts but rather
to  short-term  releases  of  customer's  purchase  orders,  most of  which  are
cancelable  on  relatively  short  notice.  The  timing  of these  releases  for
production as well as custom design work are in the control of the customer, not
the  Company.  Because of the short life  cycles  involved  with its  customers'
products,  the order  pattern  from  individual  customers  can be erratic  with
significant  accumulation and  de-accumulation of inventory during phases of the
life cycle.  For these  reasons,  the  Company's  backlog and bookings as of any
particular  date may not be  representative  of actual sales for any  succeeding
period.

In addition,  the Company  derives  technology  revenue and revenue from product
sales through  agreements with Hitachi Metals Ltd. The Company expects little or
no revenue from HML for joint research and development in the future.

Products

Thin Film Products

The Company's thin film product offerings fall into two categories:

o        The Company's new P/Active(R) family of components, which optimize high
         frequency performance,  density,  reliability,  and other capabilities.
         These devices are Application  Specific  Passive  Networks  targeted to
         solve industry standard applications or to complement the semiconductor
         offerings of the industry's leading chip suppliers.

o        IPECs(TM),  the Company's  traditional  custom  products which are cost
         effective for customers with unique high volume requirements or who can
         take  advantage  of  the  Company's   capabilities   to  provide  tight
         tolerances,  low  temperature  coefficients,   tight  matching  between
         components, or other special characteristics.


All  these  devices  provide  the  benefits  of  combining  multiple  thin  film
resistors, capacitors, diodes, etc. into single high-density packages. Resistors
impede the flow of electrical  current and dissipate  electrical energy as heat.
They  are used to  divide,  pull-up/pull-down  voltage,  terminate  and  control
current  and filter out noise.  Capacitors  store  electrical  charges  and pass
alternating    current    while    blocking    direct    current.     Integrated
resistors-capacitors  are used for a variety  of  purposes  including  filtering
electromagnetic  radio frequency  interference,  creating  high-pass or low-pass
filters, and terminating transmission lines.

                                       6

<PAGE>


The Company offers a variety of precision and non-precision  thin film resistors
and  capacitors  as well as  combinations  of those  elements  with and  without
semiconductor  devices.  The  Company  has  particular  strength  in the area of
resistor-capacitor  filters,  one of the  most  rapidly  growing  and  difficult
segments of the integrated  passive  component  business.  The Company's current
product  line  addresses a  substantial  portion of the  resistor  and  resistor
network market, and a small percentage of the total capacitor market.

The  Company  sells  these  products  both in  standard  semiconductor  industry
packages,  primarily  Surface Mount  Technology  (SMT),  and as unpackaged  die.
Packaged devices  represent the dominant portion of the Company's  business.  As
the pressure for higher  performance  and density  continues to mount on systems
manufacturers,  there is growing interest in the Company's capability to provide
"bumped" die for flip chip assembly.

Historically, most of the Company's thin film business was custom in nature, and
typically its products were only sold to one customer. In late fiscal year 1997,
the Company began the effort to define  standard  products  which would not only
provide a greater  degree of stability to the overall  revenue  base,  but could
also be used as technology drivers for improving the cost and  manufacturability
of its products.

During  fiscal year 1998,  the Company  announced a  partnership  with Flip Chip
Technologies  and Avex  Corporation  targeted at providing Flip Chip  Integrated
Passives for use in standard electronic systems. The success of this program and
its acceptance by the industry  would have an enormous  impact on both the space
savings and cost savings ability of integrated passives.

Semiconductor Products

The Company's  semiconductor  facilities are nominally limited to the production
of CMOS or BiCMOS  circuits using greater than 1.5 micron minimum  feature size.
This  requires  the  Company  to  focus on  specialized  circuits,  rather  than
competing at the leading edge of the semiconductor technology.

The Company's semiconductor business includes analog and mixed signal integrated
circuits  that combine  digital and analog  functions on a single chip.  Product
groups include data communications and interface families, and telecommunication
dual tone  multi-frequency  receiver  and  transceiver  (DTMF)  products.  These
products are used in customer applications such as personal computers, answering
machines, portable telephones and switching systems.

With the significant  strengthening  of its design  resources during fiscal year
1998,  the  Company  has begun  the  development  of a number of new  integrated
circuit families. The first of these, the new ElectroStatic Discharge protection
circuits,  have  recently  been  introduced  to the market  and  received a very
positive  response.  Other devices in this family and other  categories  will be
announced in fiscal year 1999 as a result of the Company's new developments.

The Company participates in the foundry business, in which wafers are fabricated
to customer  specifications,  using  customer  designed  tooling.  Most of these
products are built using  unique  processes  which are not directly  competitive
with the mainstream  foundries in Southeast  Asia and  elsewhere.  The Company's
intent is to do foundry work to leverage the underutilization of its capacity in
Tempe,  Arizona while it builds its own products and  establishes  relationships
with key  partners.  The Company sees the foundry  business as being a long-term
component of its revenue.

Manufacturing

The Company's  manufacturing  processes are complex, and require production in a
highly  controlled,  clean  environment  suitable  for fine  tolerances.  Normal
manufacturing  risks include  errors in  fabrication  processes,  defects in raw
materials,  as well as  other  factors  that  can  affect  yields.  The  Company
currently  operates  wafer  fabrication  facilities in Milpitas,  California and
Tempe,  Arizona.  The Milpitas facility includes a 10,000 square foot clean room
and  primarily  uses  4 and  5  inch  round  and 4 1/2  inch  square  wafers  to
manufacture thin film passive  components.  The Tempe facility includes a 16,000
square foot clean room and is equipped for five-inch  wafer  fabrication of both
thin film and  semiconductor  products.  The  Company  estimates  that its wafer
capacity utilization for the year ended March 31, 1998, was approximately 25% in
Tempe and 30% in Milpitas.  Obtaining full wafer fabrication  capacity from both
of these locations would require moderate additional capital expenditures.

During fiscal 1997, both the Milpitas  facility and the Tempe facility  received
ISO 9000  certification,  and the  second  phase of this work was  completed  in
fiscal 1998. This certification is an internationally  recognized acknowledgment
that the Company has established and adheres to detailed operational controls.

                                       7

<PAGE>


The Company  manufactures  its products  using industry  standard  semiconductor
wafer  fabrication  equipment that the Company  modifies as necessary to produce
thin film  products.  The Company has  historically  purchased  used  processing
equipment at significantly lower cost than new equipment, but has also purchased
new  equipment  for some  operations  where  it  could be shown to be more  cost
effective.

During fiscal 1996, and continuing in fiscal 1997, the Company made  substantial
investments  in  capital  equipment  to both  upgrade  its  capabilities  and to
increase  capacity in areas such as test and finish of thin film products.  This
investment  level declined  substantially  in fiscal 1998. Much of the Company's
equipment  is still  very old,  resulting  in  higher  maintenance  costs,  more
downtime, and in some cases the risk of the unavailability of spare parts or the
expertise to maintain the equipment.  Selective investments in capital equipment
enhance  productivity,   improve  costs,  and  increase  the  Company's  revenue
potential.

The Company uses  subcontractors in Asia,  primarily in Thailand and secondarily
in  Malaysia,  for  assembly and  packaging  most of its  product.  Although the
Company has not typically  experienced any significant  disruption of deliveries
due to the use of foreign  subcontractors,  this  common  industry  practice  is
subject to  political,  economic  and other  risks.  Also,  due to its volume of
product,  it is impractical for the Company to spread its use of  subcontractors
over more than a few suppliers without significant increase in its costs. Should
the operations of its subcontractors be disrupted in both Thailand and Malaysia,
the Company would have to reevaluate  its sources of supply for these  services.
The  volatility  of the  semiconductor  industry  has  occasionally  resulted in
shortages  of  subcontractor  capacity  and other  disruptions  of supply.  This
capacity  was in short supply  during much of fiscal  1996,  but is presently in
ample supply as a result of  additional  investments  by vendors  coupled with a
slowdown in the semiconductor industry growth rate.

Additionally,  during  fiscal 1997,  the Company  began  testing and finishing a
large portion of its product at its foreign  subcontractors,  and the proportion
of the Company's  product  tested there has  continued to increase.  The Company
also "drop-ships" product from these foreign vendors to customers.  This has the
effect of both saving  freight  charges and reducing  the  delivery  cycle time.
However,  it increases the Company's  exposure to  disruptions in operations not
under its direct control and has required the Company to enhance its MIS systems
to coordinate this remote activity. The Company monitors the financial health of
its Southeast  Asian vendors in an attempt to anticipate any financial  problems
there.

Management Information Systems

In  the  last  half  of  fiscal  1996,  the  Company  installed  new  management
information  systems  for  work  in  process  tracking,  order  processing,  and
financial management. During fiscal year 1997, these systems were solidified and
new  capabilities  installed.  The  Company  is now able to  analyze  costs  and
variances  at the detailed  operational  level and is using these tools for cost
analysis and reduction.  Also, the new systems provide greatly  improved insight
into customer order patterns and requirements.

During fiscal 1998, the Company  established a web site on the Internet and this
has  become  an  extremely  effective  method of  communicating  with all of the
Company's   constituents.   Both   Internet  and  the  internal   networks  have
significantly  improved the Company's  operations.  In fiscal 1998, the Internet
was  combined  with the  Company's  MIS  systems to provide  efficient  low cost
methods of implementing production control techniques around the world.

Many  computer  systems  employ a  two-digit  date  field and  could  experience
problems  beyond  the year  1999.  The  Company  has  evaluated  its  management
information  systems (MIS) and has a plan to convert all its MIS applications to
year 2000 compliant  versions by the end of calendar 1998. The Company is in the
process of  evaluating  computers  and  software  utilized in its  manufacturing
operations. Nothing has come to the attention of the Company that would indicate
a material  impact of year 2000 issues on the Company's  results of operation or
financial condition.

The Company is also  evaluating  the possible  impact of year 2000 issues on its
key suppliers  and  subcontractors.  Noncompliance  with year 2000 issues on the
part of key  suppliers  and  subcontractors  could result in  disruption  of the
Company's  operations.  However,  the potential impact and related costs are not
known at this time.

Competition

Competition in the passives industry is based on a number of factors,  including
price, product performance,  established customer  relationships,  manufacturing
capabilities,  product development and customer support. The primary competition
for the  Company has come from  established  competitors  and from  pre-existing
technologies. Many of the Company's competitors have announced that they will be
providing  thin film products as well as their  traditional  thick film devices.
The Company has seen only  sporadic  thin film  competition,  but  continues  to
believe that this competition  will become more prominent.  From

                                       8

<PAGE>


information  the  Company  has,  these  competitors  are trying to  emulate  the
Company's  traditional  product  line,  but no one has yet  been  successful  in
imitating the  Company's new  P/Active(R)  products  because of the  significant
component of semiconductor technology involved.

The Company's  primary  competitors  for its  resistors,  resistor  networks and
capacitors are  substantially  larger  foreign and domestic  companies as listed
below. Although most of them employ older technology  manufacturing methods such
as  thick  film,  multi-layer  ceramic  and wire  wound  technology,  they  have
substantially  greater  resources  than the Company and their  technologies  are
usually  the  accepted  standard  for  existing  applications.  They  also  have
significantly greater sales and distribution  capabilities and typically operate
at  lower  gross  margins  than  the  Company  targets.   Competitors   include:
AVX/Kyocera;  IRC; Beckman Industrial Corp.; KOA Electronics,  Inc.;  Matsushita
Electronics  Components Co., Ltd.; Murata-Erie of North America, Inc.; ROHM Co.,
Ltd.; TDK Corp. of America; and Vishay Intertechnology, Inc.

The Company  believes  its  competitive  strengths  include  unique high density
capabilities, product performance characteristics, its understanding of customer
product requirements, high quality, high technology processing and manufacturing
facilities,   cost  efficient  operations,  dual  manufacturing  locations,  and
experienced management and technical staff.

The Company  believes  its  competitive  weaknesses  include its  relative  size
compared to its  competitors,  its limited  sales,  marketing  and  distribution
capabilities, a less mature manufacturing infrastructure, and less presence with
major   corporations   around  the  world.   All  of  these  factors  result  in
inefficiencies  in  the  day-to-day   operations  of  the  Company  as  well  as
limitations  on the speed at which the Company can  penetrate  new customers and
markets.

Research and Development

The Company's  research and  development  (R&D)  programs  consist  primarily of
developing  new  products,  processes  and  materials in response to  identified
market needs.  Additionally,  the Company redesigns products to reduce costs and
expand the capabilities and performance of its existing products.  During fiscal
1997, the Company focused most of its efforts on introducing the new P/Active(R)
family of products and in developing  next generation  base  technologies.  This
resulted  in a  new  family  of  devices  with  substantially  higher  frequency
performance. In fiscal year 1998, the level of investment in process development
declined  significantly  while the direct  investment in new products  increased
significantly.  While  there will  continue  to be  additional  base  technology
developments  and refinements,  particularly in the areas of enhanced  capacitor
technologies and improved ESD diode  technologies,  the  concentration of effort
going forward will be on new products.

In mid fiscal 1998, the Company was able to hire additional  mid-level engineers
it needed to expand its staff.  Although there continues to be significant  risk
that the  Company  may not be able to  recruit  the top  engineering  talent  it
requires in the time frame needed, the fiscal 1998 additions represented a major
improvement in the Company's development capability.

For the fiscal years ended March 31, 1998,  1997,  and 1996,  the Company  spent
$3.0 million, $4.2 million, and $3.4 million,  respectively, on its research and
development  activities.  See Item 7 for  discussion  of  fluctuations  in R & D
expenditures.

The Company has a Joint  Development  Agreement  (JDA) with Hitachi  Metals Ltd.
(HML). Under the terms of the agreement, HML has contributed a percentage of the
actual  expenditures  for mutually  agreed upon joint product  development.  The
Company includes HML's contribution toward product development in the Statements
of Operations line labeled "Technology related revenues". HML's participation in
and contribution  towards joint development  programs has been declining and the
Company  does not expect  their  contribution  to continue  into fiscal 1999 and
beyond.

Employees/Personnel

As of March 31, 1998,  the Company had 256 full-time  and  part-time  employees,
including  employees  in sales and  marketing,  engineering,  and  research  and
development  activities,  manufacturing,  finance, and administration.  Of these
employees,  150 were  headquartered  in Milpitas,  California  and 106 in Tempe,
Arizona.  The Company's  success is highly  dependent on its ability to hire and
retain high quality  people.  Although the Company has been able to recruit many
talented  senior  managers in the last couple of years,  its future  progress is
tightly linked to the ability to maintain and extend this base of talent.  There
can be no  assurance  that the required  people will be  available  when needed,
particularly   in  the   difficult   recruiting   environment   which  has  been
characteristic of semiconductor and related industries in recent years.

                                       9

<PAGE>


Patents and Licenses

The Company's  policy is to apply for patent  protection  for its novel products
and  manufacturing  processes  where  such  protection  is  warranted.   Process
technologies  are more often  designated as trade secrets.  With respect to mask
works, the Company's policy is to selectively seek copyright protection.

The  Company's  ability  to  compete  may be  affected  by how it  protects  its
intellectual  property.  The Company  believes  that it is  important  to obtain
patent  protection  for its  patentable  inventions,  and to  protect  its trade
secrets.  The Company's trade secrets are protected by having its employees sign
confidentiality  and non-disclosure  agreements as part of its personnel policy.
It is not the Company's  intention to rely solely on protection of  intellectual
property rights to deter competition.  However, when and where appropriate,  the
Company has taken aggressive action to protect its intellectual property rights.
Although the Company continues to implement  protective  measures and intends to
defend its intellectual  property  rights,  there can be no assurance that these
measures will be successful.

The Company has been granted six patents related to its thin film  technologies.
Two patents relate to the Company's  proprietary  resistor,  capacitor and diode
technology; two patents related to the Company's P/Active(R) production; and two
patents relate to proprietary  inductor process  technology.  These patents have
been  designated  for filing in Japan and Europe  pursuant to the  International
Patent  Cooperation  Treaty.  The Company has also been awarded a United  States
patent for a BiCMOS Track and Hold Amplifier.

The Company has filed patent  applications  relating to specific  embodiments of
its proprietary  resistor,  capacitor,  diode, process and product technologies.
During fiscal 1998, the Company also filed three  important new  applications on
its P/Active(R)  technology.  The Company has obtained  approval from the United
States  Copyright  Office to register  certain of its mask works for its passive
component products. It has also established trademarks for its P/Active(R)family
of devices.

The Company has granted a non-exclusive,  non-assignable license with respect to
certain of its thin film passive  component  (including mixed active and passive
components, such as resistors, capacitors,  transistors, diodes, and networks of
the same) process and product technology to Hitachi Metals (HML).

As is the case with many companies in the electronics industry, the Company has,
from time to time,  been  notified of claims that it may be  infringing  certain
patent rights of others.  Where appropriate,  these claims have been referred to
counsel,  and they are in various stages of evaluation.  If it appears necessary
or  desirable,  the Company may seek  licenses for these  intellectual  property
rights. The Company can give no assurances that licenses will be available, that
the terms will be  acceptable,  or that the disputes can be  reconciled  without
litigation.

Environmental Issues

The Company is subject to a variety of federal,  state and local  regulations in
connection  with the  discharge  and  storage  of certain  chemicals  during its
manufacturing  processes. The Company believes that it is in compliance with all
such  environmental  regulations.  Industrial  waste  generated at the Company's
facilities  is either  processed  prior to  discharge  or stored in barrels with
double  containment  methods until  removed by an  independent  contractor.  The
Company has obtained all necessary permits for such discharges and storage.

The Company  believes that it is in  compliance  with  applicable  environmental
health and safety regulations.


ITEM 2. PROPERTIES.

The  Company  currently  leases  approximately  40,000  square  feet of  office,
development and manufacturing space including a 10,000 square foot clean room in
Milpitas,  California,  pursuant to an agreement  that expires on June 30, 2002,
that  provides for a current  monthly rent of $31,689 plus  operating  expenses.
This rent amount will be increased 3% annually. The Company also owns 5 acres of
land and a 46,000 square foot  building in Tempe,  Arizona which houses a 16,000
square foot clean room, wafer fabrication, manufacturing, and engineering design
center.

The Company  also  leases  approximately  24,000  square feet of space in Tempe,
Arizona, which formerly housed test facilities and warehouse space. Monthly rent
on the leased Tempe facilities is $13,988 plus operating  expenses,  pursuant to
an agreement that expires in March 2001.  These  facilities are currently  being
subleased  through the term of the lease.  The  sublease  revenue is expected to
cover the costs of the lease. See Note 12 of Notes to Financial Statements.

                                       10

<PAGE>


ITEM 3. LEGAL PROCEEDINGS.

From August 5, 1994 through  February 16, 1995,  eleven  purported  class action
complaints  were filed against the Company in the United States  District  Court
for the Northern  District of California.  Other  defendants  named in the class
actions include certain of the Company's current and former officers and Coopers
& Lybrand L.L.P.,  the Company's former independent  auditor.  The class actions
purport to be brought on behalf of  classes  of  shareholders  of the  Company's
common  stock over varying  periods of time  ranging  from  September 7, 1993 to
January 9, 1995.  The  gravamen  of the  allegations  against the Company in the
class actions is that it violated Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 by disseminating false and misleading  financial statements
and  reports  for the fiscal  year ended June 30,  1993 and June 30,  1994.  The
complaints seek unspecified compensatory damages and attorneys' fees, as well as
other relief.

By court  order  dated  May 20,  1997,  these  actions  have been  settled.  The
Company's  contribution  towards  the  settlement  consisted  of the  payment of
$6,000,000  in cash and the  issuance  of 608,696  new  shares of the  Company's
common stock to the class.  Each new share was accompanied by a Contingent Value
Right (CVR),  personal to the  shareholder,  that  entitles the  shareholder  to
receive the  difference  between  $11.50 and the highest 20 day average  trading
price of the  Company's  common stock  (assuming  the average price is less than
$11.50) over the three years  following  the  Effective  Date of the  Settlement
Agreement.  The CVR  expires  at the end of that  three-year  period or when the
$11.50  price  is  met,  whichever  occurs  first.  The  total  amount  of  this
settlement,  $13,000,000,  was expensed in the fiscal year ended March 31, 1995.
In  addition,  the Company has put  $2,000,000  into a  restricted  account as a
guarantee for  performance  under the CVR. The cash will cease to be restricted,
without interest, if and when the CVR is extinguished.  Since the Effective Date
of the Settlement  Agreement,  the highest  20-day average  trading price of the
Company's  common  stock has been  $8.18.  Should  any  payment  to the class be
required  under the terms of the CVR,  it will be charged  to equity,  since the
full  amount of $11.50  per share was  included  in the  $13,000,000  previously
expensed.

A putative  shareholders  derivative action was filed against certain former and
present  officers and  directors of the Company on May 25, 1995,  in Santa Clara
County Superior  Court.  This action has been dismissed with prejudice as to all
defendants.

The Company continues to cooperate with the pending investigations of certain of
its  former  officers  by the  Justice  Department  and  the  SEC.  The  Justice
Department  has advised the Company that it is not currently a target or subject
of the  investigation.  The SEC has taken the position that it is premature,  at
this stage in its investigation,  to discuss the resolution of the investigation
of the Company.

The Company is a party to or target of  lawsuits,  claims,  investigations,  and
proceedings,  including  commercial  and  employment  matters,  which  are being
handled  and  defended in the  ordinary  course of  business.  In the opinion of
management,  the ultimate  disposition of these matters will not have a material
adverse  effect on the financial  condition or overall  trends in the results of
operations of the Company.

The Company  believes  that,  with regard to these matters and those  previously
reported,  it has to the best of its  knowledge,  made such  adjustments  to its
financial statements by means of reserves and expensing the costs thereof,  that
these  matters  will not have any  additional  adverse  impact on the  Company's
financial condition.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not Applicable.

                                       11

<PAGE>


                                     PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
        SHAREHOLDER MATTERS.

The  Company's  common  stock trades on the Nasdaq  National  Market tier of The
Nasdaq Stock Market under the symbol "CAMD".

Closing prices by quarter for fiscal 1998 and 1997 are as follows:

                                  Common Stock
                                  ------------

     Fiscal 1998               Q1           Q2           Q3         Q4
     -----------               --           --           --         --
     High                      $ 8 7/8      $ 8 11/16    $ 7 3/4    $ 6 3/4
     Low                       $ 7          $ 6 13/16    $ 5 1/4    $ 4 3/4

     Fiscal 1997               Q1           Q2           Q3         Q4
     -----------               --           --           --         --
     High                      $12 1/ 2     $ 9          $ 7 5/8    $ 9
     Low                       $ 7 3/8      $ 4 7/8      $ 5 1/2    $ 5 1/16


Certain debt covenants restrict the payment of dividends. No dividends were paid
in fiscal 1998,  1997, or 1996.  The Company  expects to continue that policy in
the foreseeable  future.  There were approximately  4,400 common shareholders of
record as of March 31, 1998.


ITEM 6.   SELECTED FINANCIAL DATA.

<TABLE>
The selected  financial data (in thousands except per common share  information)
set forth below with  respect to  operating  and balance  sheet data are derived
from the financial statements of the Company.

<CAPTION>
                                                                        Twelve Months                Nine Months   Twelve Months
                                                                            Ended                        Ended     Ended June 30,
                                                                           March 31,                   March 31,    (unaudited)
                                                              1998           1997          1996          1995           1994
                                                            --------       --------      --------      --------       --------
<S>                                                         <C>            <C>           <C>           <C>            <C>     
     Total revenues                                         $ 33,043       $ 32,936      $ 39,882      $ 23,703       $ 30,073

     Income (loss) before income taxes*                     $ (3,005)      $    704      $  5,119      $(22,617)      $(16,634)

     Net income (loss)                                      $ (3,005)      $    704      $  5,119      $(23,502)      $(15,227)

     Net income (loss)  per common share                    $  (0.30)      $   0.07      $   0.48      $  (2.75)      $  (1.88)

     Total assets                                           $ 35,994       $ 38,270      $ 44,928      $ 40,688       $ 52,097

     Long-term obligations                                  $  8,159       $  8,499      $  7,896      $  9,337       $ 11,762

<FN>
*And  cumulative  effect of change in  accounting in fiscal year 1995 totaling a
loss of $835,000.
</FN>
</TABLE>

The 1994  financial  statements  were  restated in February  1995 as a result of
certain irregularities uncovered in investigations by current management and the
SEC.  The  impact of the  restatement  was to change  net  income  for 1994 from
$5,059,000  or $0.62 per share to a net loss of  ($15,227,000)  or  ($1.88)  per
share.  The  restatement  resulted  in a decrease  of  $20,286,000  in  retained
earnings  at June  30,  1994,  from  $9,581,000  to an  accumulated  deficit  of
($10,705,000).

The Company's former independent auditors, Coopers & Lybrand L.L.P., resigned as
the Company's  auditors in January 1995, and were replaced by Ernst & Young LLP.
Coopers & Lybrand  L.L.P.  reports were  withdrawn;  as a result,  the Company's
statements  of  operations,  shareholders'  equity,  and cash flows for the year
ended June 30, 1994 are unaudited.  These  statements  include all  adjustments,
which the Company believes necessary for a fair presentation.

                                       12

<PAGE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS.

In the following  discussion,  fiscal 1998,  1997,  and 1996 refer to the twelve
months ended March 31, 1998, 1997, and 1996, respectively.

RESULTS OF OPERATIONS

Product sales for fiscal 1998 totaled $32.5 million compared to $31.5 million in
fiscal 1997 and $38.6 million in fiscal 1996. The 3% increase in sales in fiscal
1998 over  fiscal  1997  reflects  primarily  the  increase in unit sales of the
Company's new P/Active(R) family of products, offset by a decline in some of the
older products.  The P/Active(R)  family of products accounted for approximately
16% of the Company's sales in fiscal 1998 compared to approximately 3% in fiscal
1997 and none in fiscal 1996.  The 18% decrease in sales in fiscal 1997 compared
to fiscal 1996  relates  primarily  to reduced  demand from  customers  as their
inventories  were being  reduced  and also due to lower  shipments  of thin film
products  into   customers'   new  products.   Thin  film  products   (including
P/Active(R))  accounted  for  approximately  66%,  64%, and 65% of the Company's
sales in fiscal 1998, 1997, and 1996, respectively.

Technology  related  revenues,  consisting of  cost-sharing  payments by Hitachi
Metals Ltd.  (HML)  related to joint process and product  development  projects,
were  $569,000 in fiscal 1998,  $1,430,000  in fiscal 1997,  and  $1,240,000  in
fiscal 1996. The decline in fiscal 1998 is due to HML's declining  participation
in joint  projects.  The Company expects little or no revenue from HML for joint
research and development in the future.

Cost of sales were 76%, 67%, and 58% of product sales for fiscal 1998, 1997, and
1996,  respectively.  The cost of  sales  percentage  increase  in  fiscal  1998
compared to fiscal 1997 reflects a higher mix of lower margin standard products,
a lower mix of high margin  custom  products,  and pricing  pressure on products
shipped to Far East  personal  computer  OEMs.  In addition,  in fiscal 1997 the
Company's  inventories  increased by $1,903,000,  which provided  higher factory
utilization,  whereas in fiscal 1998 inventories were reduced by $751,000.  Also
engineering charges from manufacturing to research and development  decreased by
$1,200,000,  as the  nature of R&D  programs  shifted  from  material  intensive
process development projects to product development projects involving a greater
proportion  of R&D personnel  costs.  The cost of sales  percentage  increase in
fiscal  1997  compared  to fiscal 1996  reflects  an  increased  mix of packaged
products,  which included  significant outside contractor costs, and reduced mix
of sales of product in die form (which  generally carry a higher margin),  lower
factory utilization due to lower customer demand, and unusual levels of scrap.


Research and  development  expenses were $3.0 million in fiscal 1998 compared to
$4.2  million  and $3.4  million  in  fiscal  1997 and 1996,  respectively.  The
decrease  in fiscal 1998  compared  to fiscal  1997 is due to reduced  materials
costs, as the Company's  research and development  emphasis shifted from process
development  efforts to product  development.  Thus,  in fiscal  1998 there were
fewer process  development  projects involving  significant  material costs, and
more new product  development  efforts,  which involve more personnel  costs. In
fiscal 1998 personnel related costs increased to 60% of research and development
expenditures  as compared to 42% in fiscal 1997,  while material costs decreased
to 40% as compared to 58% in fiscal 1997.  The increase in fiscal 1997  compared
to fiscal 1996  primarily  reflects  the increase in  development  costs for the
P/Active(R)  products  in  addition  to  increased  joint  process  and  product
development projects in conjunction with HML.

Selling, marketing, and administrative expenses in fiscal 1998 were $7.9 million
compared  to  $7.4  million  and  $10.6   million  for  fiscal  1997  and  1996,
respectively. Fiscal 1998 expenses reflect increased headcount, advertising, and
other costs in marketing and sales  partially  offset by reduced  administrative
expenses.  Fiscal 1997 expenses,  as compared to fiscal 1996, reflect reductions
in legal expenses in part due to insurance  reimbursements  and fee  reductions,
reduced  consulting fees,  reduced sales commission,  and reduced bonus expense.
Fiscal 1996 expenses  included  $1.1 million of unusual  legal costs  associated
primarily  with  shareholder  litigation.  See  Note 16 of  Notes  to  Financial
Statements.

Interest expense was $941,000,  $739,000, and $1,100,000,  in fiscal 1998, 1997,
and 1996, respectively. The increase in interest expense in fiscal 1998 compared
to fiscal 1997 primarily  reflects higher interest on capital  equipment leases.
The  decline in  interest  expense in fiscal  1997 as  compared  to fiscal  1996
relates primarily to the expiration of certain equipment leases.

Interest and other  income was $511,000 in fiscal 1998  compared to $1.4 million
in fiscal 1997 and $2.8 million in fiscal  1996.  The decrease in fiscal 1998 as
compared  to  fiscal  1997 is  primarily  due to the  lower  level  of cash  and
investments in fiscal

                                       13

<PAGE>


1998  compared to fiscal 1997.  The higher level of interest and other income in
fiscal  1996 was  primarily  due to the sale of the  Company's  interest in Cell
Access for a gain of $1.6 million.

As a result of the above factors,  the Company had a net loss of $3.0 million in
fiscal  1998 as compared  to a net income of $0.7  million  and $5.1  million in
fiscal 1997 and 1996, respectively.

The Company's  effective tax rate was 0% in fiscal 1998, 1997 and 1996. At March
31,  1998,  the  Company  had  Federal  and  State  tax  loss  carryforwards  of
approximately  $25.5  million and $19.5  million,  respectively.  See Note 13 of
Notes to Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Unrestricted cash, cash equivalents, and short-term securities were $5.6 million
at March 31,  1998  compared  to $6.8  million  at March 31,  1997.  Receivables
increased  to $5.1  million at March 31, 1998  compared to $3.9 million at March
31, 1997. This increase occurred  primarily because fourth quarter product sales
were $1.5  million  higher in fiscal 1998 than in fiscal 1997,  and  secondarily
because a greater  proportion  of sales shipped in the last month of fiscal 1998
as compared to fiscal 1997.  Inventories  were $8.1 million at March 31, 1998 as
compared to $8.8 million at March 31, 1997 reflecting  reduced raw materials and
finished goods, partially offset by increased  work-in-process.  Property, plant
and  equipment  decreased to $12.9  million at March 31, 1998  compared to $14.5
million at March 31, 1997. The Company made  significant  expenditures in fiscal
1997 and 1996 to upgrade its manufacturing operations and management information
systems  as  well as to buy out  previously  leased  equipment.  This  level  of
expenditure  was not  necessary in fiscal 1998.  Current  liabilities  were $6.2
million  at both  March 31,  1998 and 1997.  Long  term debt and  capital  lease
obligations  totaled $8.2 million at March 31, 1998  compared to $8.5 million at
March 31, 1997 as the Company's  long term  financing  activities  were minimal.
Common  stock  increased  by $1.1  million in fiscal 1998  primarily  due to the
operation of the Company's employee stock purchase program.

Significant cash outflows in fiscal 1997 included capital equipment additions of
$6.0 million  (including  capital lease buy-outs of $2.1 million),  $5.0 million
paid  as  part  of  the  settlement  of  shareholder  litigation,  $2.0  million
transferred  to  restricted  cash  in  connection  with  the  settlement  of the
shareholder  class action  lawsuits  (see Item 3), and the payment of previously
accrued legal fees totaling $1.4 million.

The Company made capital lease payments of $0.6 million,  $0.9 million, and $2.1
million in fiscal 1998,  1997, and 1996,  respectively,  and debt  repayments of
$0.2 million,  $0.4 million,  and $0.5 million in fiscal 1998,  1997,  and 1996,
respectively.

The Company has a $3.0 million line of credit agreement that expires on July 31,
1998.  Under the terms of the line of credit,  the Company can borrow up to $3.0
million at prime,  collateralized by short-term investments managed by the bank.
There were no bank  borrowings at March 31, 1998,  1997, and 1996 and there were
no borrowings  during fiscal 1998,  1997, and 1996. The Company is in compliance
with its financial covenants.

The Company expects to fund its future liquidity needs through its existing cash
balances, cash flows from operations,  bank borrowings,  and equipment lease and
loan financing  arrangements.  Depending on market conditions and the results of
operations, the Company may pursue other sources of liquidity.

The Company  believes  that it has  sufficient  financial  resources to fund its
operations for at least the next twelve months.

IMPACT OF YEAR 2000

Many  computer  systems  employ a  two-digit  date  field and  could  experience
problems  beyond  the year  1999.  The  Company  has  evaluated  its  management
information  systems (MIS) and has a plan to convert all its MIS applications to
year 2000 compliant  versions by the end of calendar 1998. The Company is in the
process of  evaluating  computers  and  software  utilized in its  manufacturing
operations. Nothing has come to the attention of the Company that would indicate
a material  impact of year 2000 issues on the Company's  results of operation or
financial condition.

The Company is also  evaluating  the possible  impact of year 2000 issues on its
key suppliers  and  subcontractors.  Noncompliance  with year 2000 issues on the
part of key  suppliers  and  subcontractors  could result in  disruption  of the
Company's  operations.  However,  the potential impact and related costs are not
known at this time.

                                       14

<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                   Index to Financial Statements and Schedules


                                                                     Page Number
                                                                     -----------
Financial Statements:

Report of Ernst & Young LLP, Independent Auditors                        16

Balance Sheets                                                           17
  March 31, 1998 and March 31, 1997

Statements of Operations                                                 18
  Years ended March 31, 1998, March 31, 1997, and March 31, 1996

Statements of Shareholders' Equity                                       19
  Years ended March 31, 1998, March 31, 1997, and March 31, 1996

Statements of Cash Flows                                                 20
  Years ended March 31, 1998, March 31, 1997, and March 31, 1996

Notes to Financial Statements                                            21


Financial Statement Schedule: 


Schedule 2     Valuation and Qualifying Accounts                         37

                                       15

<PAGE>


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


The Board of Directors and Shareholders
California Micro Devices Corporation


         We have audited the  accompanying  balance  sheets of California  Micro
Devices Corporation as of March 31, 1998 and 1997, and the related statements of
operations,  shareholders' equity, and cash flows for each of the three years in
the  period  ended  March 31,  1998.  Our audits  also  included  the  financial
statement  schedule  listed  in the  index  at Item  14(a)(2).  These  financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion,  the  financial  statements  referred to above  present
fairly,  in all material  respects,  the financial  position of California Micro
Devices  Corporation  as of March 31,  1998 and  1997,  and the  results  of its
operations  and its cash flows for each of the three  years in the period  ended
March 31, 1998 in conformity  with  generally  accepted  accounting  principles.
Also, in our opinion, the related financial statement schedule,  when considered
in relation to the basic financial statements taken as a whole,  presents fairly
in all material respects the information set forth therein.


                                                            /s/ERNST & YOUNG LLP

San Jose, California
April 29, 1998

                                       16

<PAGE>


<TABLE>
                                                CALIFORNIA MICRO DEVICES CORPORATION
                                                           BALANCE SHEETS
                                           (Amounts in Thousands, Except Per Share Data)

<CAPTION>
                                                                                                  March 31,               March 31,
                                                                                                    1998                    1997
                                                                                                   --------                --------
<S>                                                                                                <C>                     <C>     
ASSETS:
Current assets:
  Cash and cash equivalents                                                                        $    480                $    343
  Short-term investments                                                                              5,110                   6,467
  Accounts receivable, less allowance for doubtful
    accounts of $380 in 1998 and $437 in 1997                                                         5,086                   3,938
  Inventories                                                                                         8,092                   8,843
  Other assets                                                                                          987                     874
                                                                                                   --------                --------
      Total current assets                                                                           19,755                  20,465

  Property and equipment, net                                                                        12,925                  14,481
  Restricted cash                                                                                     2,909                   2,903
  Other long-term assets                                                                                405                     421
                                                                                                   --------                --------

      Total assets                                                                                 $ 35,994                $ 38,270
                                                                                                   ========                ========

LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
  Accounts payable                                                                                 $  3,328                $  2,618
  Accrued salaries and benefits                                                                       1,008                     795
  Other accrued liabilities                                                                             802                   1,457
  Deferred margin on shipments to distributors                                                          581                     576
  Current maturities of long-term debt and capital
     lease obligations                                                                                  489                     745
                                                                                                   --------                --------
      Total current liabilities                                                                       6,208                   6,191

  Long-term debt, less current maturities                                                             7,185                   7,315
  Capital lease obligations less current maturities                                                     974                   1,184
                                                                                                   --------                --------
      Total liabilities                                                                              14,367                  14,690

Shareholders' equity:
  Preferred stock - no par value; shares authorized
    10,000,000;  none issued and outstanding                                                           --                      --
  Common stock - no par value;  shares  authorized
    25,000,000;  shares issued and outstanding 9,978,351
    in 1998 and 9,741,124 in 1997                                                                    53,011                  51,939

Accumulated deficit                                                                                 (31,384)                (28,359)
                                                                                                   --------                --------
Total shareholders' equity                                                                           21,627                  23,580
                                                                                                   --------                --------

Total liabilities and shareholders' equity                                                         $ 35,994                $ 38,270
                                                                                                   ========                ========

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                 17

<PAGE>


<TABLE>
                                                CALIFORNIA MICRO DEVICES CORPORATION
                                                      STATEMENTS OF OPERATIONS
                                            (Amounts in Thousands, Except Per Share Data)

<CAPTION>
                                                                                            Years ended March 31,
                                                                                 --------------------------------------------------
                                                                                   1998                 1997                 1996
                                                                                 --------             --------             --------
<S>                                                                              <C>                  <C>                  <C>     
Revenues:
  Net product sales                                                              $ 32,474             $ 31,506             $ 38,642
  Technology related revenues                                                         569                1,430                1,240
                                                                                 --------             --------             --------
    Total revenues                                                                 33,043               32,936               39,882

Cost and expenses:
  Cost of sales                                                                    24,701               21,255               22,430
  Research and development                                                          3,017                4,180                3,417
  Selling, marketing and administrative                                             7,900                7,412               10,573
                                                                                 --------             --------             --------
    Total costs and expenses                                                       35,618               32,847               36,420
                                                                                 --------             --------             --------

Operating (loss) income                                                            (2,575)                  89                3,462

Interest expense                                                                      941                  739                1,100
Interest income and other, net                                                       (511)              (1,354)              (2,757)
                                                                                 --------             --------             --------

Net (loss) income                                                                $ (3,005)            $    704             $  5,119
                                                                                 ========             ========             ========

Basic (loss) earnings  per share                                                 $  (0.30)            $   0.07             $   0.51
                                                                                 ========             ========             ========

Diluted (loss) earnings per share                                                $  (0.30)            $   0.07             $   0.48
                                                                                 ========             ========             ========

Weighted average common shares outstanding                                          9,971               10,234               10,035
Dilutive effect of employee stock options                                            --                    315                  610
Weighted average common shares outstanding,
  assuming dilution                                                                 9,971               10,549               10,645

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                 18

<PAGE>


<TABLE>
                                                CALIFORNIA MICRO DEVICES CORPORATION
                                                 STATEMENTS OF SHAREHOLDERS' EQUITY
                                            (Amounts in Thousands, Except Per Share Data)

<CAPTION>
                                                                       Common Stock
                                                                       ------------
                                                                Number of                           Accumulated
                                                                 Shares             Amount            Deficit             Total
                                                               -----------        -----------        -----------        -----------
<S>                                                             <C>               <C>                <C>                <C>        
Balance at March 31, 1995                                       10,181,404        $    54,947        $   (34,302)       $    20,645

  Exercise of stock options                                        124,684                495               --                  495
  Unrealized gain on
    available-for-sale investments, net                               --                 --                   91                 91
  Net income                                                          --                 --                5,119              5,119
                                                               -----------        -----------        -----------        -----------
Balance at March 31, 1996                                       10,306,088             55,442            (29,092)            26,350

  Exercise of stock options                                        214,389                885               --                  885
  Revision of settlement with shareholders                        (891,304)            (5,000)              --               (5,000)
  Employee Stock Purchase Plan                                     108,951                592               --                  592
  Stock award                                                        3,000                 20               --                   20
  Unrealized gain on
    available-for-sale investments, net                               --                 --                   29                 29
  Net income                                                          --                 --                  704                704
                                                               -----------        -----------        -----------        -----------
Balance at March 31, 1997                                        9,741,124             51,939            (28,359)            23,580

  Exercise of stock options                                         51,742                214               --                  214
  Employee Stock Purchase Plan                                     185,485                858               --                  858
  Unrealized loss on
    available-for-sale investments, net                               --                 --                  (20)               (20)
  Net loss                                                            --                 --               (3,005)            (3,005)
                                                               ===========        ===========        ===========        ===========
Balance at March 31, 1998                                        9,978,351        $    53,011        $   (31,384)       $    21,627
                                                               ===========        ===========        ===========        ===========
</TABLE>

                                                                 19

<PAGE>


<TABLE>
                                                CALIFORNIA MICRO DEVICES CORPORATION
                                                      STATEMENTS OF CASH FLOWS
                                                       (Amounts in Thousands)

<CAPTION>
                                                                                           March 31,       March 31,      March 31,
                                                                                             1998            1997            1996
                                                                                           --------        --------        --------
<S>                                                                                        <C>             <C>             <C>     
Cash flows from operating activities:
  Net (loss) income                                                                        $ (3,005)       $    704        $  5,119
  Adjustments  to reconcile  net (loss) income to net cash
 (used in) provided by operating activities:
    Depreciation and amortization                                                             2,852           2,191           1,763
    Issuance of cash - settlement                                                              --            (5,000)           --
Change in operating assets and liabilities:
  Inventories                                                                                   751          (1,903)         (2,193)
  Accounts receivable                                                                        (1,148)            562          (1,297)
  Other assets                                                                                 (113)           (289)          4,860
  Trade accounts payable and other current liabilities                                          268          (3,491)          1,299
  Other long-term assets                                                                         16             113             145
  Deferred margin on distributor sales                                                            5            (463)           (118)
                                                                                           --------        --------        --------
Net cash (used in)provided by operating activities                                             (374)         (7,576)          9,578
                                                                                           --------        --------        --------

Investing activities:
  Securities purchases                                                                       (6,144)         (3,940)        (25,833)
  Securities sales                                                                            7,481          18,140          13,690
  Capital expenditures                                                                       (1,132)         (6,011)         (4,412)
  Net change in restricted cash                                                                  (6)         (1,998)             84
                                                                                           --------        --------        --------
Net cash provided by (used in) investing activities                                             199           6,191         (16,471)
                                                                                           --------        --------        --------

Financing activities:
  Net repayments of capital lease obligations                                                  (585)           (910)         (2,107)
  Repayments of debt                                                                           (175)           (372)           (539)
  Proceeds from issuance of common stock                                                      1,072           1,498             495
                                                                                           --------        --------        --------
Net cash provided by (used in) financing activities                                             312             216          (2,151)
                                                                                           --------        --------        --------

Net increase (decrease) in cash and cash equivalents                                            137          (1,169)         (9,044)
Cash and cash equivalents at beginning of period                                                343           1,512          10,556
                                                                                           --------        --------        --------
Cash and cash equivalents at end of period                                                 $    480        $    343        $  1,512
                                                                                           ========        ========        ========

Supplemental disclosures of cash flow information:
  Interest paid                                                                            $    941        $    896        $  1,068
  Income taxes refunded                                                                    $   --          $    (60)       $ (3,757)
Supplemental disclosures of non-cash investing and financing activities:
  Capital expenditures financed through capital lease obligations                          $    163        $  1,455        $   --
  Unrealized (loss) gain on securities                                                     $    (20)       $     29        $     91

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                 20

<PAGE>


                      CALIFORNIA MICRO DEVICES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


1.      THE COMPANY

The  Company  designs,  develops,  manufactures  and  markets a line of  passive
electronic components for Original Equipment  Manufacturers and distributors who
need higher density,  higher performance,  lower cost and unique  functionality.
The Company uses its silicon-based thin film materials and process technology to
integrate multiple passive elements onto a single integrated circuit.

The Company also designs, manufactures and sells certain semiconductor products,
primarily analog and mixed signal products for the telecommunications  industry.
These sales are a significant portion of the Company's business.

The Company's  products are marketed  primarily to customers in the computer and
computer  peripherals,   wireless   communications,   networking,   and  medical
industries.


2.      SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

In the accompanying  financial statements,  fiscal 1998, 1997, and 1996 refer to
twelve months ended March 31, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments with a maturity date of
three  months  or less at the  date of  purchase  to be cash  equivalents.  Cash
equivalents  generally  consist of corporate bonds,  commercial paper, and money
market funds.

Short-term Investments

The  Company  invests its excess cash in high  quality  instruments.  All of the
Company's marketable  investments are classified as  available-for-sale  and the
Company  views its  available-for-sale  portfolio  as  available  for use in its
current operations.  Accordingly,  the Company has classified all investments as
short-term,  even though the stated  maturity  date may be one year or more past
the current balance sheet date.

Available-for-sale  securities are stated at fair market value,  with unrealized
gains and losses,  net of tax, reported as a component of shareholder's  equity.
The cost of securities  sold is based upon the specific  identification  method.
Realized  gains  and  losses  and  declines  in value  judged  to be other  than
temporary are included in interest income and other (net).

Inventories

Inventories are stated at the lower of cost or market.  Cost is determined using
the first-in, first-out (FIFO) basis.

Property and Equipment

Property and equipment are stated at cost.  Depreciation  and  amortization  are
computed using the straight-line method over the shorter of the estimated useful
lives of the assets,  or the  remaining  lease term.  Estimated  useful lives of
assets are as follows:

                            Building                                    40 years
                            Machinery and equipment                    3-7 years
                            Leasehold improvements                       4 years
                            Furniture and fixtures                       7 years

                                       21

<PAGE>


Revenue Recognition

Revenue from product sales to end user  customers is recognized  upon  shipment.
Revenue  under  license and  technology  agreements  is recognized as technology
related sales upon completion of the appropriate terms of the agreement. Revenue
under product  development  and engineering  design  agreements is recognized as
technology related sales using the percentage-of-completion method.

The Company recognizes revenue on shipments to distributors upon the final sales
by the distributor to OEMs or other end users.  Distributor agreements allow the
distributors   certain   rights  of  return  and  price   protection  on  unsold
merchandise.  As a result,  the Company  believes that  deferral of  distributor
sales  and  related  gross  margins  until  the  merchandise  is  resold  by the
distributors   results  in  a  more  meaningful   measurement  of  revenue  from
distributors.

Common Stock

On December 16, 1996, the Company reduced the previously issued 1,500,000 shares
of  common  stock  being  held in  trust,  in  connection  with the  anticipated
settlements of shareholder class action, to 608,696 shares. The 1,500,000 shares
have been  included in shares  outstanding  and in the  computation  of weighted
average  common and common share  equivalents  outstanding  beginning with their
issuance in May 1995 until  December  16,  1996.  The  608,696  shares have been
included in shares outstanding and in the computation of weighted-average shares
and share equivalents  outstanding since December 17, 1996. See Note 16 to Notes
to Financial Statements.

Net Income (Loss) Per Share

In February 1997, the Financial  Accounting Standards Board issued Statement No.
128,  Earnings per Share.  Under the new  requirements  for calculating  primary
earnings  per share,  the  dilutive  effect of stock  options is  excluded.  The
Company has changed its method of  computing  earnings per share for fiscal 1998
and has restated fiscal 1997 and fiscal 1996 to conform to the pronouncement.

Basic earnings per common share are computed  using the weighted  average number
of common  shares  outstanding  during the period.  Diluted  earnings per common
share  incorporate the incremental  shares issuable upon the assumed exercise of
stock options and other dilutive securities.

Employee Stock Plans

The Company  accounts for its stock option plans and its employee stock purchase
plan in accordance  with the  provisions of the  Accounting  Principles  Board's
Opinion No. 25 (APB 25),  "Accounting  for Stock Issued to  Employees." In 1995,
the Financial  Accounting  Standards  Board  released the Statement of Financial
Accounting   Standard   No.  123  (SFAS  123),   "Accounting   for  Stock  Based
Compensation."  SFAS 123 provides an  alternative to APB 25 and is effective for
fiscal years  beginning  after December 15, 1995. As allowed under SFAS 123, the
Company continues to account for its employee stock plans in accordance with the
provision of APB 25 and has adopted the  disclosure  provisions of SFAS 123. See
Note 15 of Notes to Financial Statements.

Adoption of FAS 130 and FAS 131

In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"reporting   Comprehensive   Income"   ("FAS  130"),   and  Statement  No.  131,
"Disclosures  about  Segments of an Enterprise  and Related  Information"  ("FAS
131"). The Company is required to adopt these Statements in fiscal 1998. FAS 130
establishes new standards for reporting and displaying  comprehensive income and
its components.  FAS 131 requires  disclosure of certain  information  regarding
operating segments,  products and services,  geographic areas of operation,  and
major customers.

Use of Estimates

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

                                       22

<PAGE>


Reclassifications

Certain amounts  presented in prior years have been reclassified to conform with
current year presentation.


3.      HITACHI METALS, LTD.

The Company has a Joint Development  Agreement with Hitachi Metals Ltd. (HML), a
significant  shareholder.  Under the terms of the agreement,  HML  contributes a
percentage  of the actual  expenditures  for mutually  agreed upon joint product
development.  The Company includes HML's contribution toward product development
in the Statements of Operations line labeled "Technology related revenues".  The
Company expects little or no revenue from HML for joint research and development
in the future.

Sales to Hitachi Metals, Ltd., and its subsidiary,  Hitachi Kinzoku Shoji, Ltd.,
were $0.7 million,  $2.1 million and $1.2 million in fiscal 1998, 1997 and 1996.
Trade accounts  receivable from all HML entities at March 31, 1998 and 1997 were
$154,000 and $117,000, respectively.

                                       23

<PAGE>


4.      CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

<TABLE>
The following is a summary of cash, cash  equivalents and marketable  securities
at March 31, 1998 and March 31, 1997, respectively (amounts in thousands):

<CAPTION>
                                                                                                           March 31,       March 31,
                                                                                                             1998            1997
                                                                                                           -------          -------
<S>                                                                                                        <C>              <C>    
Cash equivalents
  Money market funds                                                                                       $ 1,960          $ 1,370
  Commercial paper                                                                                             520              973
Less:
  Amount classified as restricted cash in connection with class action settlement*                          (2,000)          (2,000)
                                                                                                           -------          -------
Total cash equivalents                                                                                     $   480          $   343
                                                                                                           =======          =======
Short-term investments:
  U. S. Treasuries & U.S. Government agencies                                                              $ 3,198          $ 5,523
  Corporate bonds                                                                                            1,912
                                                                                                                                944
                                                                                                           -------          -------
Total short-term investments                                                                               $ 5,110          $ 6,467
                                                                                                           =======          =======

<FN>
*See Note 16 of Notes to Financial Statements.
</FN>
</TABLE>


<TABLE>
The  following is a summary of  available-for-sale  securities at March 31, 1998
and March 31, 1997, respectively (amounts in thousands):

<CAPTION>
                                                                                          Gross             Gross          Estimated
                                                                                        Unrealized        Unrealized          Fair
                                                                          Cost            Gains             Losses           Value
                                                                         ------           ------           --------          ------
<S>                                                                      <C>              <C>              <C>               <C>   
March 31, 1998:
  Commercial paper                                                       $  520           $ --             $   --            $  520
  U.S. Treasuries & U.S. government agencies                              3,200             --                   (2)          3,198
  Corporate bonds                                                         1,905                7               --             1,912
                                                                         ------           ------           --------          ------
    Total                                                                $5,625           $    7           $     (2)         $5,630
                                                                         ======           ======           ========          ======

March 31, 1997:
  Commercial paper                                                       $  973           $ --             $   --            $  973
  U.S. Treasuries & U.S. government agencies                              5,503               20               --             5,523
  Corporate bonds                                                           940                4               --               944
                                                                         ------           ------           --------          ------
    Total                                                                $7,416           $   24           $   --            $7,440
                                                                         ======           ======           ========          ======
</TABLE>


Of the 1998  securities  listed  above,  $2.6  million  of debt  securities  (at
estimated  fair market  value)  mature  within one year and $3.0 million  mature
between one and two years.  Realized gains and losses on the sales of securities
are reported as other income and were not significant  for all years  presented.
See Note 5 of Notes to Financial Statements.


5.      CONCENTRATIONS OF CREDIT RISK

The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of temporary cash investments and trade receivables.

The Company places its temporary cash investments and short-term securities with
substantial  financial  service  institutions.  See Note 4 of Notes to Financial
Statements.

A significant  portion of the Company's sales are to customers whose  activities
are related to  computer  and  computer  peripherals,  wireless  communications,
networking, medical, and consumer electronics industries, including some who are
located in foreign  countries.  The Company  generally  extends  credit to these
customers  and,  therefore,   collection  of  receivables  is  affected  by  the
aforementioned  industries  and economic  influences  of  customers'  geographic
locations.  However,  the Company  monitors  extensions  of credit and  requires
collateral, such as letters of credit, whenever deemed necessary.

                                       24

<PAGE>


6.      CONCENTRATION OF OTHER RISKS

Markets

The Company  markets  its  products  into  high-technology  industries,  such as
personal computers,  telecommunications,  and networking, that are characterized
by rapid technological change, intense competitive pressure, and volatile demand
patterns.  Most of the systems  into which the  Company's  products are designed
have short life cycles. As a result,  the Company requires a significant  number
of new design wins on an ongoing basis to maintain and grow revenue.

Customers

Generally, the Company's sales are not subject to long-term contracts but rather
to  short-term  releases  of  customers'  purchase  orders,  most of  which  are
cancelable  on  relatively  short  notice.  The  timing  of these  releases  for
production as well as custom design work are in the control of the customer, not
the  Company.  Because of the short life  cycles  involved  with its  customers'
products,  the order  pattern  from  individual  customers  can be erratic  with
significant  accumulation and  de-accumulation of inventory during phases of the
life cycle.  For these  reasons,  the  Company's  backlog and bookings as of any
particular  date may not be  representative  of actual sales for any  succeeding
period.

Inventories

The Company records inventory  reserves on a part-by-part basis to appropriately
consider  excess  inventory  levels and obsolete  inventory based on backlog and
demand,  and to consider  reductions in sales price.  The Company makes specific
provisions for the risk of inventory  obsolescence  based on backlog and demand.
However,  due to the  volatility  of  demand,  and  the  fact  that  many of the
Company's products are specific to individual  customers,  backlog is subject to
revisions and cancellations and anticipated demand is constantly changing, which
may require additions to the reserves in the future.

Manufacturing

Manufacturing  risks include  errors in  fabrication  processes,  defects in and
supply of raw materials,  as well as other factors,  which can affect yields and
costs.   The  Company  intends  to  eventually   convert  from  five-inch  wafer
manufacturing processes to six-inch.  Currently,  five-inch wafers are no longer
considered  to be  economically  viable for most  applications.  While the wafer
manufacturers presently have excess capacity and there is available supply, when
the supply  becomes  tight,  vendors may direct  their  capacity to larger wafer
sizes.  Additionally,  there  is a risk  of  disruptions  to  the  manufacturing
processes as upgrading of facilities and equipment are attempted.

Subcontractors

The Company uses  subcontractors in Asia,  primarily  Thailand and the Malaysia,
for assembly,  packaging,  and test of most of its product. This common industry
practice is subject to political and economic risks and industry  volatility has
occasionally   resulted  in  shortages  of  subcontractor   capacity  and  other
disruptions to supply.


7.      INVENTORIES

Inventories consist of the following (amounts in thousands):

                                                 March 31,      March 31,
                                                   1998           1997
                                                  ------         ------
         Raw materials                            $  775         $1,316
         Work-in-process                           5,480          3,821
         Finished goods                            1,837          3,706
                                                  ------         ------
                                                  $8,092         $8,843
                                                  ======         ======

In the fourth  quarter of fiscal  1998,  the  Company  made  adjustments  to its
inventory  valuations to reflect the increased risk of  obsolescence  due to the
Company's  increasing emphasis on higher volume standard products as compared to
low  volume  custom  products  and to reflect  increasing  pricing  pressure  in
Southeast  Asia.  The  effect  of  these  valuation  adjustments  was to  reduce
inventories by approximately $900,000.

                                       25

<PAGE>


8.      PROPERTY AND EQUIPMENT

Property and equipment consist of the following (amounts in thousands):

                                                         March 31,   March 31,
                                                           1998        1997
                                                          -------     -------
         Land                                             $   137     $   137
         Buildings                                          3,030       3,030
         Machinery, equipment and tooling                  21,282      20,017
         Leasehold improvements                               708         685
         Furniture and fixtures                               367         360
                                                          -------     -------
                                                           25,524      24,229
         Less accumulated depreciation and amortization    12,599       9,748
                                                          -------     -------
                                                          $12,925     $14,481
                                                          =======     =======


9.      SHORT-TERM BORROWINGS

The Company has a bank line of credit,  which  expires July 31, 1998.  Under the
terms of the line of credit,  the  Company can borrow up to  $3,000,000,  at the
bank's prime rate. The line is collateralized by short-term  investments managed
by the bank. There were no bank borrowings during fiscal 1998, 1997 and 1996.


10.     FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has evaluated the estimated fair value of financial instruments. The
amounts reported as cash and cash equivalents,  accounts receivable,  short-term
borrowings,  accounts payable and accrued expenses approximate fair value due to
their  short-term  maturities.  The fair values of  short-term  investments  are
estimated  based on quoted market prices.  The fair value for long-term debt was
estimated using discounted cash flow analysis based on estimated  interest rates
for similar types of borrowing arrangements.

The carrying  amounts and estimated fair values of the Company's  long-term debt
are as follows (amounts in thousands):

                                                   Carrying             Fair
                                                    Amount             Value
                                                    ------             ------
        Long-term debt (excluding capital leases)   $7,315             $8,403

                                       26

<PAGE>


11.     LONG-TERM DEBT

Long-term debt consists of the following (amounts in thousands):

                                                          March 31,    March 31,
                                                             1998        1997
                                                            ------       ------
Industrial revenue bonds at 10.5%, due through
   March 1, 2018                                             7,315       $7,430
Industrial revenue bonds at 12%, due through
   March 1, 1998                                              --             60
                                                            ------       ------
                                                             7,315        7,490
Less current maturities                                        130          175
                                                            ------       ------
                                                            $7,185       $7,315
                                                            ======       ======


Industrial  revenue bonds are collateralized by a lien on all land and buildings
of the  Company in Tempe,  Arizona,  and  certain  equipment  acquired  with the
proceeds of the bonds and require  certain  minimum annual sinking fund payments
ranging from $130,000 in fiscal 1999 to $780,000 in fiscal 2018. The Company may
prepay  the  10.5%  Industrial  Revenue  Bond  by  redeeming  all or part of the
outstanding  principal  amounts  on or  after  March  1,  1998,  with  penalties
declining from 2% on March 1, 1998, to zero at March 1, 2000. At March 31, 1998,
cash of $909,000 was held in sinking fund trust accounts of which $800,000 is to
be used for  principal  and  interest  payments  in the event of  default by the
Company,  and the  balance to be used for  semi-annual  interest  and  principal
payments.

The  Industrial   Revenue  Bonds  and  certain  lease  agreements   require  the
maintenance of various financial  covenants  including certain minimum levels of
net  worth,  current  ratio,  quick  ratio,  ratio  of debt to net  worth,  debt
coverage,  and debt to working capital ratio.  The Company is in compliance with
these covenants at March 31, 1998. As a result of these covenants, the Company's
ability to pay dividends is restricted.

Future maturities of long-term debt at March 31, 1998 are as follows (amounts in
thousands):

                          1999                  $  130
                          2000                     140
                          2001                     155
                          2002                     170
                          2003                     185
                          2004 and thereafter    6,535
                                                ------
                                                $7,315
                                                ======


12.     LEASE COMMITMENTS

Operating Leases

The Company leases  certain  manufacturing  facilities  under  operating  leases
expiring  in 2001 and 2002.  During  1997,  the  Company  had  sublet the leased
facility in Arizona for the remaining  period of the lease.  The rents  received
should equal the amounts owed by the Company during the remaining  lease period.
Future gross minimum lease payments,  under non-cancelable operating leases, for
the years ended March 31 are as follows (amounts in thousands):

                          1999                  $  515
                          2000                     524
                          2001                     541
                          2002                     413
                          2003                      69
                                                ------
                                                 2,062
                           Sublease receipts      (517)
                                                ------
                                               $ 1,545
                                               =======


Rent  expense net of sublease  income was  $417,000,  $524,000  and  $478,000 in
fiscal 1998, 1997, and 1996, respectively.

                                       27

<PAGE>


Capital Leases

Obligations   under   capital   leases  are  at  interest   rates  ranging  from
approximately  7%  to  10%,   depending   primarily  upon  the  purchase  option
arrangements  at the end of the lease term, and are due in monthly  installments
through April 2002. Future minimum lease payments,  under capital leases for the
years ended March 31, are as follows (amounts in thousands):

         1999                                          $  473
         2000                                             455
         2001                                             455
         2002                                             181
                                                       ------
         Total minimum lease payments                   1,564
           Less amount representing interest              231
                                                       ------
         Present value of net minimum lease payments    1,333
           Less current portion                           359
                                                       ------
                                                       $  974
                                                       ======


Machinery  and  equipment  under  capital  leases  are as  follows  (amounts  in
thousands):

                                                     March 31,    March 31,
                                                       1998         1997
                                                      ------        ------
         Cost                                         $1,619        $3,902
           Less accumulated amortization                 145           973
                                                      ------        ------
                                                      $1,474        $2,929
                                                      ======        ======


13.     INCOME TAXES

Due to current year losses and the availability of tax loss carryforwards, there
was no provision  for income taxes for the periods  ended March 31, 1998,  1997,
and 1996.

A reconciliation  of the Company's  effective tax rate to the federal  statutory
rate is as follows:

                                                 March 31,  March 31,  March 31,
                                                   1998       1997        1996
                                                 ---------  ---------  ---------
Federal statutory tax rate                         (34)%        34%         34%
Losses with no current benefit                      34         --          --
Utilization of loss carryforward                   --          (34)        (34)
                                                 ---------  ---------  ---------
Effective income tax rate                            0%          0%          0%
                                                 =========  =========  =========


At March 31,  1998,  the  Company  had  federal  and state  net  operating  loss
carryforwards  of  approximately  $25,500,000 and $19,500,000  respectively.  In
addition,  the  Company  had  federal and  California  credit  carryforwards  of
approximately  $300,000  and $50,000,  respectively.  These  carryforwards  will
expire at various dates beginning in 2008 through 2013, except for certain state
net operating losses of approximately $6,900,000, which expire from 1999 through
2003.

                                       28

<PAGE>


Deferred  income taxes reflect the tax effects of net operating  loss and credit
carryforwards and temporary  differences  between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes.  Significant  components of the Company's  deferred tax assets and
liabilities are as follows (amounts in thousands):


                                                          March 31,   March 31,
                                                           1998          1997
                                                         --------      --------
Deferred tax assets:
  Net operating loss carryforwards                       $ 10,000      $  4,895
  Tax credit carryforwards                                    350           560
  Inventory reserves                                        3,500         2,506
  Other non-deductible accruals and reserves                  750         1,763
Total deferred tax assets                                  14,600         9,724
  Less valuation allowance                                (14,100)       (9,054)
                                                         --------      --------
Net deferred tax asset                                        500           670
                                                         --------      --------

Deferred tax liabilities:
  Tax over book depreciation                                  500           670
                                                         --------      --------
Total net deferred tax asset                             $   --        $   --
                                                         ========      ========


The valuation  allowance increased by $5,046,000 during the year ended March 31,
1998.  Approximately $467,000 of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions  which, when recognized,  will be
directly allocated to common stock.


14.     INTEREST INCOME AND OTHER, NET

Interest income and other, net, consists of (amounts in thousands):

                                         March 31,      March 31,      March 31,
                                           1998           1997           1996
                                          ------         ------         ------
Interest income                           $  403         $1,024         $1,194
Other income                                 108            330          1,563
                                          ------         ------         ------
                                          $  511         $1,354         $2,757
                                          ======         ======         ======


Interest  income  reflects the amounts  earned from  investments  in  short-term
securities.  Other income for fiscal 1997 includes $184,000 from the sale of the
final portion of the Company's interest in Cell Access.  Other income for fiscal
1996 reflects the $1.6 million realized from the sale of the Company's  interest
in Cell Access.

                                       29

<PAGE>


15.     EMPLOYEE BENEFIT PLANS

401(K) Savings Plan

The Company  maintains a 401(K) Savings Plan covering  substantially  all of its
employees.  Under the plan, eligible employees may contribute up to 15% of their
base  compensation to the plan with the Company matching at a rate of 50% of the
participants'  contributions  up to a maximum of 3% of their base  compensation.
Participants'  contributions  are  fully  vested  at all  times.  The  Company's
contributions vest incrementally over a two-year period.  Prior to January 1995,
the  Company's  contributions  were  made by  issuance  of  common  stock of the
Company;  after January 1, 1995,  contributions  have been made in cash.  During
fiscal 1998,  1997,  and 1996,  the Company  expensed  $210,000,  $136,000,  and
$163,000, respectively, relating to its contributions under the plan.

Nonqualified Deferred Compensation Plan

In April 1997, the Company implemented a nonqualified deferred compensation plan
for the benefit of eligible  employees.  This plan is designed to permit certain
discretionary  employer  contributions in excess of the tax limits applicable to
the  401(k)  plan and to permit  employee  deferrals  in excess of  certain  tax
limits.  During fiscal 1998, the Company  expensed  $21,000 for this plan and in
fiscal 1997 there was no expense relating to its contributions under the plan.

Stock Option Plans

The 1995  Employee  Stock Option Plan,  Amended as of July 26, 1996 and July 18,
1997, (the "1995 Plan") is administered by a stock option  committee  consisting
of not less than two directors who,  during the one year period prior to service
as  administrator  of the plan,  shall not have been  granted or awarded  equity
securities  except as permitted  under Rule 16b-3 under the Securities  Exchange
Act of 1934. The 1995 Plan provides for options for the purchase of shares to be
granted  to  employees  and  certain  consultants  to  the  Company.   The  1995
Non-Employee  Directors  Plan Amended as of July 26, 1996 and July 18, 1997 (the
"Directors  Plan") is  administered  by not less than three members of the Board
and the amount of shares granted to the directors  shall be a fixed amount on an
annual basis, as approved by the shareholders.

Under the Company's  1995 Plan,  for fiscal  year-ended  March 31, 1998 and 1997
1,850,614  and  2,165,163  shares of common  stock are  reserved  for  issuance,
respectively.  The 1995 Plan  provides for issuance of options to employees  and
consultants  at prices not less than 85% of fair market value for shares  issued
under a non-qualified stock option agreement.  Options may also be issued to key
employees for not less than 100% of fair market value for shares issued under an
incentive stock option agreement.

Under the Directors Plan, for fiscal  year-ended March 31, 1998 and 1997 166,875
and 214,875 shares of common stock are reserved for issuance,  respectively. The
1995  Directors  Plan provides for a fixed  issuance  amount to the directors at
prices not less than 100% of the fair  market  value of the common  stock at the
time of the grant.

In addition  to the two 1995  plans,  the Company has a plan that was adopted in
1981 (The  Employee  Incentive  Stock  Option  Plan),  and another plan that was
adopted in 1987 (The 1987  Stock  Option  Plan)  both of which are still  active
although no new options are being issued under these plans. These plans provided
for  the  issuance  of  1,500,000   and   2,500,000   shares  of  common  stock,
respectively. Under these plans, the Company has granted incentive stock options
and non-qualified options to designated employees, officers, and directors.

Generally,  options  under the plans  become  exercisable  and vest over varying
periods ranging up to four years as specified by the Board of Directors.  Option
terms do not exceed  ten years  from the date of the grant and all plans  except
the 1981 Employee Incentive Stock Option Plan (the "1981 Plan") expire within 20
years of date of adoption.  The 1981 Plan may be  terminated  at any time by the
Board of Directors.  No option may be granted during any period of suspension or
after termination of any plan. Unexercised options expire upon, or within, three
months  of  termination  of   employment,   depending  upon  the   circumstances
surrounding  termination.  On January 22, 1998, the Board of Directors  ratified
the decision of the Compensation Committee to reprice all current employee stock
options  (except for those granted to Jeffrey C. Kalb) with an exercise price in
excess of $6.00.  The  repricing  was to be the  higher of $6.00 or the  closing
market price of the  Company's  stock on the  effective  date of the  repricing,
February 13, 1998.  The closing price on February 13 was $5.3125;  therefore the
applicable options were repriced at $6.00. Pursuant to the terms of the repriced
options,  the  repriced  options may not be  exercised in whole or in part until
February  13,  1999,  that is, one year after the  effective  date.  The Board's
action was in response to a decline in the market price of the  Company's  stock
during the preceding months which had effectively eliminated

                                       30

<PAGE>


the incentive  value of options with  significantly  higher exercise  prices.  A
total of 692,150  options were repriced.  The repricing did not apply to options
held by directors or other non-employee option holders.

<TABLE>
The following is a summary of stock option activity and related information:

<CAPTION>
                                        1998                           1997                            1996
                              ---------------------------     ----------------------------    ---------------------------
                                         Weighted-Average                 Weighted-Average               Weighted-Average
                                             Exercise                        Exercise                        Exercise
                               Options        Price           Options          Price          Options         Price
                              ---------      -------          ---------       -------         ---------      ---------
<S>                           <C>            <C>              <C>             <C>             <C>            <C>      
Options:
  Outstanding at
    beginning of year         2,032,446      $6.1255          1,841,864       $5.7560         1,603,195      $  5.2831
  Granted                     1,178,297      $6.1174            515,517       $6.7402           759,700      $  8.2655
  Exercised                     (51,742)     $4.1914           (214,389)      $4.1285          (124,684)     $  3.9663
  Canceled                     (843,670)     $8.1121           (110,546)      $6.4146          (396,347)     $ 10.4849
                              ---------      -------          ---------       -------         ---------      ---------
  Outstanding at
    end of year               2,315,331      $5.4395          2,032,446       $6.1255         1,841,864      $  5.7560
                              =========      =======          =========       =======         =========      =========
Available for grant*:
  Beginning                     137,454                          68,198                               0
  Ending                        182,016                         137,454                          68,198

<FN>
---------------------------
*  Available for grant under plans which are currently active.
</FN>
</TABLE>


<TABLE>
The following table summarizes  information  about options  outstanding at March
31, 1998:

<CAPTION>
                                                Options Outstanding                         Options Exercisable
                                  -------------------------------------------------     ------------------------------
                                                Weighted-Average
                                                    Remaining      Weighted-Average                   Weighted-Average
                                     Number        Contractual        Exercise            Number           Exercise
    Range of Exercise Prices      Outstanding      Life (Years)        Price            Exercisable         Price
    ------------------------      -----------      ------------        -----            -----------         -----
<S>                                  <C>               <C>            <C>                  <C>             <C>    
      $ 3.6250 - $ 3.6250            11,666            1.09           $3.6250              11,666          $3.6250
      $ 3.9300 - $ 3.9300           680,666            6.74           $3.9300             502,567          $3.9300
      $ 4.1250 - $ 5.8750           599,743            7.78           $5.3131             220,579          $5.3114
      $ 6.0000 - $ 6.0000           748,000            8.12           $6.0000              16,150          $6.0000
      $ 7.0000 - $12.7500           275,778            8.17           $7.9933             110,756          $8.5474
                                  ---------            ----           -------             -------          -------
                                  2,315,331            7.60           $5.4395             861,718          $4.9117
                                  =========            ====           =======             =======          =======
</TABLE>


Employee Stock Purchase Plan

The 1995 Employee Stock Purchase Plan (the "Purchase Plan") is available for all
full-time  employees  possessing less than 5% of the Company's common stock on a
fully  diluted  basis.  The  Purchase  Plan  provides  for the issuance of up to
300,000  shares at 85% of the fair market  value of the common  stock at certain
defined  points in the plan  offering  periods.  Purchase of the shares is to be
through  employees'  payroll  deductions  and may not exceed 15% of their  total
compensation.  The Purchase  Plan  terminates on February 9, 2005, or earlier at
the discretion of the Company's Board of Directors.  As of fiscal year-end March
31,  1998 and  1997,  5,564 and  141,049  shares  were  reserved  for  issuance,
respectively.

The following is a summary of stock purchased under the plan:

                                                  1998        1997        1996
                                                  ----        ----        ----
Aggregate purchase price                        $858,000    $592,000        --
Shares purchased                                 185,485     108,951        --
Employee participants as of March 31                 151         150       139

                                       31

<PAGE>


Stock-Based Compensation

As permitted  under Statement of Financial  Accounting  Standards No. 123 ("SFAS
123"),"Accounting  for  Stock-Based  Compensation,"  the  Company has elected to
follow Accounting  Principles Board Opinion No. 25, "Accounting for Stock Issued
to  Employees"  ("APB  25"),  and related  Interpretations,  in  accounting  for
stock-based awards to employees.  Under APB 25, the Company generally recognized
no compensation expense with respect to such employee grants.

Pro forma  information  regarding  net income  (loss) and net income  (loss) per
share is required by SFAS 123 for grants after April 1, 1995,  as if the Company
had accounted for its  stock-based  compensation  under the fair value method of
SFAS 123. The fair value of the Company's stock-based grants was estimated using
a Black-Scholes  option-pricing  model. The Black-Scholes option valuation model
was developed for use in estimating  the fair value of traded  options that have
specific  vesting  schedules and are  ordinarily not  transferable.  Because the
Black-Scholes  model  requires  the  input  of  highly  subjective  assumptions,
including the expected stock price  volatility  which can materially  affect the
fair  value  estimate,  in  management's  opinion,  the  existing  models do not
necessarily provide a reliable single measure of the fair value of its grants.

<TABLE>
The fair value of the Company's  stock-based  grants was  estimated  assuming no
expected dividends and the following weighted-average assumptions:

<CAPTION>
                                                                 Options                                 Purchase Plan
                                                   ----------------------------------           ---------------------------------
                                                   1998            1997          1996           1998           1997          1996
                                                   ----            ----          ----           ----           ----          ----
<S>                                                <C>            <C>            <C>            <C>            <C>            <C>   
Expected Life Years                                 3.02           3.17           3.15            .34             .5             .5
Volatility                                         61.39%         64.68%         65.45%         64.10%         64.43%         64.14%
Risk-Free Interest Rate                             5.77%          6.20%          5.61%          5.43%          5.25%          5.19%
</TABLE>


<TABLE>
For pro forma  purposes,  the estimated fair value of the Company's  stock-based
grants is amortized over the options'  vesting period for stock options  granted
under the 1995 Plan and the  Director  Plan and the  purchase  period  for stock
purchases  under the Purchase  Plan.  No purchases  were made under the Purchase
Plan prior to fiscal year 1997.  The  Company's  pro forma  information  follows
(amounts in thousands except per share amounts):

<CAPTION>
                                                                                    1998             1997               1996
                                                                                 ---------         ---------         ----------
<S>                                                                              <C>               <C>               <C>       
Net income (loss) - pro forma                                                    $  (5,073)        $  (1,148)        $    4,346
Diluted net income (loss) per share - pro forma                                  $   (0.51)        $   (0.11)        $     0.41
</TABLE>


Because SFAS 123 is applicable only to options  granted  subsequent to March 31,
1995, its pro forma effect will not be fully reflected until  approximately  the
year 2000. The  weighted-average  fair value of stock options  granted in fiscal
1998 and 1997 were $2.30 and $3.24 per share, respectively. The weighted-average
fair value of stock  purchase  rights  granted in fiscal 1998 and 1997 was $1.88
and $2.35 per share, respectively.

                                       32

<PAGE>


16.     LITIGATION

From August 5, 1994 through  February 16, 1995,  eleven  purported  class action
complaints  were filed against the Company in the United States  District  Court
for the Northern  District of California.  Other  defendants  named in the class
actions include certain of the Company's current and former officers and Coopers
& Lybrand L.L.P.,  the Company's former independent  auditor.  The class actions
purport to be brought on behalf of  classes  of  shareholders  of the  Company's
common  stock over varying  periods of time  ranging  from  September 7, 1993 to
January 9, 1995.  The  gravamen  of the  allegations  against the Company in the
class actions is that it violated Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 by disseminating false and misleading  financial statements
and  reports  for the fiscal  year ended June 30,  1993 and June 30,  1994.  The
complaints seek unspecified compensatory damages and attorneys' fees, as well as
other relief.

By court  order  dated  May 20,  1997,  these  actions  have been  settled.  The
Company's  contribution  towards  the  settlement  consisted  of the  payment of
$6,000,000  in cash and the  issuance  of 608,696  new  shares of the  Company's
common stock to the class.  Each new share was accompanied by a Contingent Value
Right (CVR),  personal to the  shareholder,  that  entitles the  shareholder  to
receive the  difference  between  $11.50 and the highest 20 day average  trading
price of the  Company's  common stock  (assuming  the average price is less than
$11.50) over the three years  following  the  Effective  Date of the  Settlement
Agreement.  The CVR  expires  at the end of that  three-year  period or when the
$11.50  price  is  met,  whichever  occurs  first.  The  total  amount  of  this
settlement,  $13,000,000,  was expensed in the fiscal year ended March 31, 1995.
In  addition,  the Company has put  $2,000,000  into a  restricted  account as a
guarantee for  performance  under the CVR. The cash will cease to be restricted,
without interest, if and when the CVR is extinguished.  Since the Effective Date
of the Settlement  Agreement,  the highest  20-day average  trading price of the
Company's  common  stock has been  $8.18.  Should  any  payment  to the class be
required  under the terms of the CVR,  it will be charged  to equity,  since the
full  amount of $11.50  per share was  included  in the  $13,000,000  previously
expensed.

A putative  shareholders  derivative action was filed against certain former and
present  officers and  directors of the Company on May 25, 1995,  in Santa Clara
County Superior  Court.  This action has been dismissed with prejudice as to all
defendants.

The Company continues to cooperate with the pending investigations of certain of
its  former  officers  by the  Justice  Department  and  the  SEC.  The  Justice
Department  has advised the Company that it is not currently a target or subject
of the  investigation.  The SEC has taken the position that it is premature,  at
this stage in its investigation,  to discuss the resolution of the investigation
of the Company.

The Company is a party to or target of  lawsuits,  claims,  investigations,  and
proceedings,  including  commercial  and  employment  matters,  which  are being
handled  and  defended in the  ordinary  course of  business.  In the opinion of
management,  the ultimate  disposition of these matters will not have a material
adverse  effect on the financial  condition or overall  trends in the results of
operations of the Company.

The Company  believes  that,  with regard to these matters and those  previously
reported,  it has to the best of its  knowledge,  made such  adjustments  to its
financial statements by means of reserves and expensing the costs thereof,  that
these  matters  will not have any  additional  adverse  impact on the  Company's
financial condition.

                                       33

<PAGE>


17.     SEGMENT INFORMATION

The Company maintains thin film and semiconductor  product line information only
through the gross margin  calculation.  Manufacturing  facilities are shared and
the sales and marketing force serves all customers and the company may sell both
thin film and semiconductor product lines to the same customer.  Therefore,  the
Company does not record equipment, receivables, liabilities or operating expense
by product lines.  As a result the company does not report  earnings and balance
sheet data for each product line.

The Company's principal  operations are conducted in the United States.  Foreign
sales, primarily in Europe, Canada and Asia, aggregated  approximately 35%, 36%,
and 31% of product sales for fiscal 1998, 1997, and 1996, respectively.  Foreign
currency transaction gains and losses are not significant.

In fiscal 1998, Bell Milgray Inc., a distributor, accounted for just over 10% of
net product  sales.  During fiscal 1997,  Motorola  accounted for 11% of the net
product  sales.  During fiscal 1996, no customer  accounted for more than 10% of
net product sales.

A  significant  portion of the  Company's  sales is made to a  relatively  small
number of customers  including  several  distributors.  It remains a goal of the
Company to get more balanced  penetration and become less  susceptible to swings
in any specific application area or with any given customer.


ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

There were no  disagreements  with the  independent  auditors in the three years
ended March 31, 1998, March 31, 1997, and March 31, 1996.

                                       34

<PAGE>


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The  information  required by this Item is set forth in the 1998 Proxy Statement
under the captions  "Directors  and Executive  Officers of the  Registrant"  and
"Executive Compensation" and is incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION.

The  information  required by this Item is set forth in the 1998 Proxy Statement
under  the  caption  "Executive  Compensation"  and is  incorporated  herein  by
reference.


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

Information  related to  security  ownership  of certain  beneficial  owners and
security  ownership of management is set forth in the 1998 Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and Management" and
is incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

No reportable relationships and transactions.

                                       35

<PAGE>


                                     PART IV


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

The following documents are filed as a part of this Report:

(a)     1. See Item 8 for a list of financial statements filed herein.

        2. See Item 8 for a list of financial  statement  schedules  filed.  All
other  schedules  have  been  omitted  because  they are not  applicable  or the
required information is shown in the Financial Statements or the notes thereto.

        3. Exhibit Index:

<TABLE>
         The  exhibits  listed  below  are filed  herewith  or  incorporated  by
reference as indicated. pursuant to Regulation S-K. The exhibit number refers to
number  indicated  pursuant  to  the  Instructions  to  The  Exhibit  Table  for
Regulation S-K.

<CAPTION>
 Exhibit
  Number       Description                       Document if Incorporated by Reference
  ------       -----------                       -------------------------------------
<S>            <C>                               <C>                           
    3(i)       Articles of Incorporation, as     Exhibit  3(i) to the  Company's  Annual
               amended                           Report on Form 10K  (File No.  0-15549)
                                                 for the  fiscal  year  ended  March 31,
                                                 1995, ("1995 Form 10-K").

    3(ii)      By-Laws, as amended.              Exhibit 3(ii) to the  Company's  Annual
                                                 Report on Form 10K  (File No.  0-15549)
                                                 for the  fiscal  year  ended  March 31,
                                                 1995, ("1995 Form 10-K").

   10.11       Commitment letter from Wells      Exhibit 10.11 to the  Company's  Annual
               Fargo Bank.                       Report on Form 10K  (File No.  0-15549)
                                                 for the  fiscal  year  ended  March 31,
                                                 1995, ("1995 Form 10-K").

   10.12*      Waiver and Second Amendment to
               Credit Agreement

   18          Letter re: change in accounting   Exhibit  18  to  the  Company's  Annual
               principals.                       Report on Form 10K  (File No.  0-15549)
                                                 for the  fiscal  year  ended  March 31,
                                                 1995, ("1995 Form 10-K").

   23.1        Consent  of  Ernst & Young LLP,
               Independent Auditors

   27*         Financial Data Schedule
</TABLE>


(b)     1.        Reports on Form 8-K:

         None.

*Exhibit on EDGAR filing only.


                           DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's  Proxy Statement in connection with its 1998 Annual
Meeting of  Shareholders  (which will be filed with the  Securities and Exchange
Commission  within 120 days of the end of the fiscal year ended March 31,  1998)
are incorporated by reference into Part III.

                                           36

<PAGE>


<TABLE>
                                                             SCHEDULE 2

                                                CALIFORNIA MICRO DEVICES CORPORATION
                                                  VALUATION AND QUALIFYING ACCOUNTS


                                    Year Ended March 31, 1998, March 31, 1997, and March 31, 1996
                                                       (Amounts in Thousands)

<CAPTION>
                                                                               Additions
                                                                Balance at     Charged to      Charged to                 Balance at
                                                                 Beginning      Cost and         Other     Deductions       End of
                                                                  of Year        Expense        Accounts       (1)           Year
                                                                 ---------      --------       ----------  ----------       ------
<S>                                                                 <C>           <C>              <C>         <C>            <C>  
Year ended March 31, 1998
  Allowance for doubtful accounts
    (deducted from accounts receivable)                             $ 437         $  --            $--         $  57          $ 380
                                                                    =====         =======          ===         =====          =====


Year ended March 31, 1997
  Allowance for doubtful accounts
    (deducted from accounts receivable)                             $ 900         $   (15)         $--         $ 448          $ 437
                                                                    =====         =======          ===         =====          =====


Year ended March 31, 1996
  Allowance for doubtful accounts
    (deducted from accounts receivable)                             $ 832         $  (345)         $--         $(413)         $ 900
                                                                    =====         =======          ===         =====          =====

<FN>
(1) Represents write-offs net of recovery of receivables.
</FN>
</TABLE>

                                                                 37

<PAGE>


                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the  undersigned,  thereunto  duly  authorized on the 15th day of June
1998.

CALIFORNIA MICRO DEVICES CORPORATION
           (Registrant)


By:  /s/ Jeffrey C. Kalb
     -------------------------
     JEFFREY C. KALB
     President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities indicated on the 15th day of June 1998.

By:

        /s/ Jeffrey C. Kalb             President and Chief Executive Officer
        --------------------------      and Director (Principal Executive
        JEFFREY C. KALB                 Officer)

        /s/ John E. Trewin              Vice President and Chief Financial
        --------------------------      Officer (Principal Financial and 
        JOHN E. TREWIN                  Accounting Officer)

        /s/ Wade Meyercord              Chairman of the Board
        --------------------------
        WADE MEYERCORD

        /s/ Angel G. Jordan             Director
        --------------------------
        ANGEL G. JORDAN

        /s/ Stuart Schube               Director
        --------------------------
        STUART SCHUBE

        /s/ John Sprague                Director
        --------------------------
        JOHN SPRAGUE

        /s/ Donald Waite                Director
        --------------------------
        DONALD WAITE

                                       38