Financial Review




 1   Description of Business

12   Properties

12   Legal Proceedings

14   Commong Stock and Related Matters

14   Five Year Selected Financial Data

15   Management's Discussion and Analysis

19   Financial Statements




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                     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, 1999

                                       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                                   (IRS Employer
     of incorporation)                                       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, 1999, was  approximately  $16,090,000  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 10% 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,  1999,  the number of shares of the  Registrant's  common  stock
outstanding were 10,116,144.


                       DOCUMENTS INCORPORATED BY REFERENCE

The Proxy  Statement for the  Registrant's  Annual Meeting of Shareholders to be
held August 5, 1999.


<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,  expense reductions,  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

California Micro Devices Corporation ("California Micro Devices", "CAMD" or "the
Company") is the acknowledged  industry leading supplier of Thin Film Integrated
Passive Devices ("IPD's") and complimentary semiconductor solutions. The Company
serves  Original  Equipment  Manufacturers  ("OEM's"),   Contract  Manufacturers
("CM's") and End User electronic systems  manufacturers who need higher density,
higher performance, lower cost, unique functionality,  and faster time to market
for their passive and combined passive and semiconductor  solutions. 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 densest, highest performance electronic applications. In the last
two years the Company has focused its expertise on providing  high volume,  cost
effective  solutions  for computer  systems and  peripherals,  high  performance
networking, and the mobile communications markets.

The Company's  IPD's are  application  specific,  high volume standard and lower
volume custom  products.  They  represent  complete  solutions to the electronic
problems of termination,  filtering, electrostatic discharge ("ESD") protection,
and power switching that plague many system designers.  California Micro Devices
uses its semiconductor technologies to complement and enhance its IPD's and uses
its  extensive  thin  film  technology  to  enhance  the   capabilities  of  its
semiconductor  products.  Most of the systems in the  Company's  target  markets
include a core of highly integrated integrated circuits ("IC's"), accompanied by
discrete passive components,  semiconductors and low integration level IC's. The
Company's  goal is to service the need for the  integration  of these  companion
components. In recent years, these "un-integrated devices" have come to dominate
the size and  significantly  impact the cost of most systems,  providing a value
added opportunity for the Company.

Unlike  traditional  discrete passive  components that were developed during the
age of the  transistor,  IPD's are  targeted to  complement  many of todays 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  1999,  the  Company  introduced  additional  semiconductor
products  designed to provide ESD protection to today's  faster,  more sensitive
electronic  systems.  In addition,  the Company  developed  and  introduced  new
semiconductor   devices  in  the  areas  of  Power  Management  and  Operational
Amplifiers which target the same systems as the IPD's.

                                        1

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California  Micro  Devices  designs,   manufactures,  and  sells  certain  older
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)  products,  plus the revenue from
foundry services, now make up the majority of the Company's semiconductor sales.

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,  the overall demand for
these products has continued to grow,  even with the transition to higher levels
of semiconductor integration. For many years the number of passive components in
systems such as personal computers decreased,  offset in the market by increases
in the  numbers of  systems  sold.  However,  in recent  years  there has been a
reversal of this trend.  For  example,  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  and servers.  Similar  trends are  occurring in other areas such as
cellular phones,  where multiple bands, new functionality and higher frequencies
are being incorporated in state of the art systems,  dramatically increasing the
numbers of 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.  Pricing  pressures have been extremely severe
for  the  last  couple  of  years,  but  unit  consumption   continues  to  grow
significantly.  This is 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 the Company's
fiscal 1999, 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,  it is focused on some of
the largest and most rapidly  growing  segments.  The  Company's  prospects  are
dependent on its ability to penetrate  customers and applications in the face of
this intense competitive price pressure.

The target applications for the Company's IPD's are those  traditionally  served
by  multi-layered   ceramic   capacitors   ("MLCs")  and  thick-film   resistors
interconnected on PC boards. Passive components manufactured for placement on PC
boards,  which  comprise  most of the  worldwide  market for resistors and small
value capacitors, are traditionally discrete components,  able to perform only a
single  function per device.  The  direction  among the  manufacturers  of these
devices has been to make them smaller and cheaper.  However,  these  devices are
reaching  physical  size and cost  limits.  In the last  couple of years,  small
levels of integration,  normally 4 or 8 components per device, have been gaining
popularity in the discrete  passives  market.  This trend began initially in the
resistor market, but in the last year has become more common in some small value
capacitors.  This low but  increasing  level of  integration  has  significantly
increased the  competitiveness of the traditional  technologies  compared to the
Company's products,  but the total conversion costs of the competitor's  devices
(the  total  cost to use  them),  continues  to  exceed  the  total  cost of the
component by factors of 5X to 20X.  This  provides the opening for the Company's
higher levels of integration,  which is further  complemented by the combination
of passive and active  components.  This combination is beyond the capability of
the traditional passive components.


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

                                       2

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The low level of integration found in traditional passive components has several
limitations. To date, these products offer only resistors or capacitors, and not
combinations of the two. Also, these products are single valued arrays,  meaning
that all of the  resistors  or  capacitors  have the same  value.  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) in which, California Micro Devices plays a significant role, are
now  drafting  standards  for IPD's,  a sign of the  increasing  role that these
devices are beginning to play in the industry.  The first of these standards was
issued during the company's 1999 fiscal year.

California Micro Devices' Goal/Strategies

The Company's goal, as the leader in Integrated Passive Devices,  is to create a
high growth, high profitability  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 is also
using its base of thin film technology to enhance its  semiconductor  technology
and to provide  components  that  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  and  servers,  cellular
phones and their infrastructure,  pagers, networking, wireless computer networks
and high performance graphics workstations, all of which have an increasing need
for higher  performance  and higher  density  passive  components.  The  Company
attempts to identify  common,  high volume  applications  or, when  appropriate,
designs customized solutions to meet particular customer applications.

         Combine  Semiconductor  Functions  with its  Passives  and vice versa -
Whenever  it is  possible to combine  semiconductor  functions  with its passive
technologies, the Company is able to create unique value added for its customers
while at the same time generally improving its own margins.

         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 1999,  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 high  frequency  functionality.  This
improved  processing  technology  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  process  development  strategy  is the  equivalent  of Moore's  law in the
semiconductor industry, meaning the ability of the industry to double the number
of  transistors  on a chip  every 18  months.  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 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  years 1998 and 1999 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 to gain
market  acceptance  for its products  outside the  traditional  and more limited
applications

                                       3

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which integrated passive have fulfilled. The resulting increases in volume sales
are expected to more than offset the effects of this pricing strategy.

         Develop   Highly   Responsive   Product   Development   and  Production
Capabilities  - Passive  component  usage is not  typically  pre-planned  to the
extent that  semiconductor  requirements are  anticipated.  This is because most
passive  components  are standard,  off the shelf  components,  not solutions to
problems.  This creates a need for extremely fast new product  development to be
able to service  customer  requirements at the tail end of their design process.
California  Micro Devices  believes that solving this response problem is key to
reducing  the  customer's  risk  profile  in using  IPD's  and has  been  making
investments  in both  development  capability  and the  inventory  planning  and
production  capabilities  to service this need and create a unique  position for
the Company.

         Leverage  the  Volume   Capabilities   of  California   Micro  Devices'
Technology  and  Facilities  - The Company has  historically  had  underutilized
fabrication facilities, both in Tempe and in Milpitas (both currently 25% to 30%
utilization).  The  Company  is  taking  advantage  of  this  capability  to  be
aggressive  on volume  pricing.  It is also 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  currently
represent the most rapidly growing segment of the business.

Historically, integrated thin film passive components have been built on silicon
wafers, but 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 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.

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


                                       4

<PAGE>


For the last year,  the Company has focused much of its  development  efforts on
using the thin film passive  technology to provide  enhancement to semiconductor
devices. The Company believes that this allows for greater levels of integration
and  creates  unique  opportunities  for the  Company,  not  serviceable  by the
traditional  passives  suppliers  and by only a small  number  of  semiconductor
companies.

California Micro Devices Advantages

The Company  integrates  multiple passive  elements and small-scale  integration
semiconductors 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  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 have begun to introduce their own limited levels of integration as
well.

         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.  Marketing this
advantage  effectively to potential  customers remains one of the Company's most
significant challenges as the savings in manufacturing time and effort and space
must be demonstrated  to the customer  rather than simply  comparing the cost of
the components.

         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  operates  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.

        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

                                       5

<PAGE>


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").   The  Federal  Communications  Commission
("FCC") and the European  Community  strictly regulate these emissions.  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 delays in 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 10  times  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  computers  and
their peripherals,  portable  communications  devices and their  infrastructural
support,  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  individual  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  1999,  the  Company  further   strengthened   its   applications
engineering  effort 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 OEM's, 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 four regional  sales offices  throughout
the United States.  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,

                                       6

<PAGE>


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 1999 the  Company  also took  actions to
increase the amount of direct  presence it has in the field,  with the intention
of  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.

In fiscal 1999,  the Company also added a dedicated  Strategic  Account Group to
service the top five account opportunities.

The Company sells through  distributors,  in the USA, 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  customer base, and the indications are that this trend will continue.
By the  end  of  fiscal  1998  and  continuing  into  fiscal  1999,  a  contract
manufacturer  had  become the  Company's  single  largest  direct  purchaser  of
product.  In  recognition  of this  trend,  the Company  established  a contract
manufacturing  account  program at the end of fiscal  1999 to be able to further
develop sales opportunities in this arena.

The Company's  foreign  product sales accounted for 39%, 33%, and 37% of product
sales for fiscal years ended March 31, 1999, 1998, and 1997,  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 1999, no one customer  accounted for over 10% of net product sales. 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.

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.

There has been a recent shift in customer  ordering  patterns that has lead to a
reduction in long term (i.e.,  3 to 6 month)  backlog,  and an increase in turns
orders.  Turns  orders are  customer  requests  for  products  that are made and
shipped within the same fiscal  quarter.  Recently,  the Company's  revenue from
turns orders has been more than 60% of the total quarter's revenue. Accompanying
this  shift has been a  substantial  overall  reduction  in  customer  requested
lead-time.  In light of the Company's  manufacturing  cycle time,  these factors
have required the Company to rely heavily on forecasts.

Products

Thin Film Products

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

                                       7

<PAGE>


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    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.

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 un-packaged 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 a product was 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 allow the Company
to invest in refining the manufacturing process of individual 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 could have a significant impact on both the space
savings and cost savings ability of integrated passives. In response to customer
demand,  in  February  1999 the Company  entered  into a  non-exclusive  license
agreement with Flip Chip  Technologies  that provides the Company with access to
their Ultra CSP(TM) technology for internal manufacturing.

Semiconductor Products

The Company's semiconductor  facilities are 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 years
1998 and  1999,  the  Company  has  begun  the  development  of a number  of new
integrated circuit families.  Two major new semiconductor  product families were
developed and introduced in fiscal 1999: the power management  solutions and the
Company's first operational  amplifiers.  The power management solutions address
the problems  caused by the use of different or changing power

                                       8

<PAGE>


supply voltages.  Operational amplifiers are devices with a large number of uses
in the measurement of electrical signals.

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  under-utilization  of its capacity
in Tempe, Arizona while it builds its own products and establishes relationships
with key partners.

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, process changes, 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, 1999, was approximately 25% in
Tempe and 30% in Milpitas.  Ramping up to 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.  This  certification is an  internationally  recognized
acknowledgment  that  the  Company  has  established  and  adheres  to  detailed
operational  controls.  To maintain ISO 9000 certification,  the Company must be
re-certified on a regular basis.

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 year 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 and 1999. Much of the Company's  equipment is still
very old, resulting in the risk of higher maintenance costs, more downtime,  and
in some cases 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,  packaging,  and testing of most of its  products.
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.  In recent  years,  capacity has been in ample supply in
most product types as a result of additional investments by vendors coupled with
a slowdown in the semiconductor industry growth rate.

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.  In addition,  the Company
maintains  significant  inventory  of  die  at its  foreign  subcontractors,  to
facilitate rapid response to customer  demands for prompt shipment.  The Company
monitors the financial  health of its  Southeast  Asian vendors in an attempt to
anticipate any financial problems there.

                                       9

<PAGE>


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 years 1997 and 1998,  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.  Use by  customers  has exceeded  expectations  and the
Company is investing  in updating and  expanding  its use of the  Internet.  The
Company's  website  can be  found at  WWW.CALMICRO.COM.  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.

For a description of the Company's position on the "Year 2000" please see Item 7
"Impact of the Year 2000" in "Management's  Discussion and Analysis of Financial
Conditions and Results of Operations."

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 are or
will be providing thin film products in addition to 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 information
the Company has, most of these  competitors  are trying to emulate the Company's
traditional  product line. Two competitors have been successful in imitating the
Company's  first  generation  P/Active(R)  products,  but still lag  behind  the
Company with respect to its more recent offerings.

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;   Philips   Electronics,   N.V.;   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 with 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

                                       10

<PAGE>


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.  In fiscal  1999,  the Company  invested in numerous  application
specific devices and several new families of semiconductor  devices. 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.

For the fiscal years ended March 31, 1999,  1998,  and 1997,  the Company  spent
$3.7 million, $3.0 million, and $4.2 million,  respectively, on its research and
development  activities.  See  Item  7 for  discussion  of  fluctuations  in R&D
expenditures.

Employees/Personnel

As of March 31, 1999,  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,  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.

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 nine patents related to its thin film technologies.

The  Company  has  pending  seven  patent  applications   relating  to  specific
embodiments of its proprietary resistor,  capacitor,  diode, process and product
technologies, of which three were filed in fiscal 1999. 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  domestic and
international 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).

The Company has acquired a non-exclusive, non-assignable license with respect to
manufacturing Flip Chip, or "bumped" die from Flip Chip Technologies, an Arizona
corporation. Under the terms of this license, the Company can utilize certain of
Flip Chip's Ultra Chip Scale packaging technologies.

                                       11

<PAGE>


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.  In fiscal  1999 the  Company  entered  into a fully paid up license
under the Lemelson patents applicable to its product and manufacturing needs.

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 $32,640 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 $14,363 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.


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.

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 a three year period.  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. 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.

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.

                                       12

<PAGE>


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.

                                       13

<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 1999 and 1998 are as follows:


                                  Common Stock

  Fiscal 1999          Q1              Q2               Q3               Q4
  -----------          --              --               --               --
  High                 $6 3/8          $4 1/16          $3               $3 5/16
  Low                  $4 3/8          $1 7/8           $1 5/8           $2 1/4

  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


Certain debt covenants restrict the payment of dividends. No dividends were paid
in fiscal 1999,  1998, or 1997.  The Company  expects to continue that policy in
the foreseeable  future.  There were approximately  4,500 common shareholders of
record as of March 31, 1999.


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
                                                                  Ended                                    Ended
                                                                 March 31,                                March 31,
                                          1999             1998             1997            1996            1995
                                        --------         --------         --------        --------        --------
<S>                                     <C>              <C>              <C>             <C>             <C>
Total revenues                          $ 33,617         $ 33,043         $ 32,936        $ 39,882        $ 23,703

Income (loss) before income taxes*      $ (2,771)        $ (3,005)        $    704        $  5,119        $(22,617)

Net income (loss)                       $ (2,771)        $ (3,005)        $    704        $  5,119        $(23,502)

Net income (loss)  per common share     $  (0.28)        $  (0.30)        $   0.07        $   0.48        $  (2.75)

Total assets                            $ 33,644         $ 35,994         $ 38,270        $ 44,928        $ 40,688

Long-term obligations                   $  8,422         $  8,159         $  8,499        $  7,896        $  9,337


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

                                       14

<PAGE>


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

In the following  discussion,  fiscal 1999,  1998,  and 1997 refer to the twelve
months ended March 31, 1999, 1998, and 1997, respectively.

RESULTS OF OPERATIONS

Product sales for fiscal 1999 totaled $33.6 million compared to $32.5 million in
fiscal 1998 and $31.5  million in fiscal 1997.  The 3% increase in product sales
for both fiscal 1999 over fiscal 1998 and 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  demand  for some of the older  semiconductor
products.  The P/Active(R) family of products accounted for approximately 25% of
the Company's sales in fiscal 1999 compared to approximately  16% in fiscal 1998
and 3% in fiscal 1997. Thin film products (including  P/Active(R)) accounted for
approximately 69%, 66%, and 64% of the Company's sales in fiscal 1999, 1998, and
1997, 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 and  $1,430,000  in fiscal  1997.  There were no
cost-sharing  payments by HML in fiscal  1999.  The  Company  expects no further
revenue from HML for joint research and  development in the future.  The decline
in  fiscal  1998  and 1997 was due to  HML's  declining  participation  in joint
projects.

Cost of sales were 74%, 76%, and 67% of product sales for fiscal 1999, 1998, and
1997,  respectively.  The cost of sales percentage  decrease in 1999 compared to
1998 reflects primarily  manufacturing cost reduction and efficiencies partially
offset by unit price declines.  Average unit prices were 63 cents in fiscal 1999
compared to 72 cents in fiscal 1998 but average unit costs declined at a greater
rate, averaging 44 cents in fiscal 1999 compared to 54 cents in fiscal 1998. 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,  pricing  pressure  on  products  shipped  to Far East
personal computer OEM's, and write downs of inventory to net realizable value.

Research and  development  expenses were $3.7 million in fiscal 1999 compared to
$3.0  million  and $4.2  million  in  fiscal  1998 and 1997,  respectively.  The
increase in fiscal 1999 compared to fiscal 1998 reflected a higher number of new
products being developed and introduced. 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.

Selling, marketing, and administrative expenses in fiscal 1999 were $7.3 million
compared  to  $7.9   million  and  $7.4   million  for  fiscal  1998  and  1997,
respectively.  Fiscal 1999 expenses were lower than fiscal 1998 primarily due to
a legal  settlement  with an insurance  carrier.  The  settlement,  net of legal
expenses incurred, reduced legal expenses by approximately $575,000. Fiscal 1998
expenses, as compared to fiscal 1997, reflect increased headcount,  advertising,
and  other  costs  in   marketing   and  sales   partially   offset  by  reduced
administrative expenses.

Interest expense was $892,000, $941,000, and $739,000, in fiscal 1999, 1998, and
1997, respectively.  The increase in interest expense in fiscal 1998 compared to
fiscal 1997 primarily reflects higher interest on capital equipment leases.

Interest and other  income was  $219,000 in fiscal 1999  compared to $511,000 in
fiscal  1998 and $1.4  million in fiscal  1997.  The  decrease in fiscal 1999 as
compared  to  fiscal  1998 and in fiscal  1998 as  compared  to  fiscal  1997 is
primarily due to the comparatively lower level of cash and investments period to
period.

As a result of the above factors,  the Company had a net loss of $2.8 million in
fiscal  1999 as  compared  to a net loss of $3.0  million in fiscal 1998 and net
income of $0.7 million in fiscal 1997.

                                       15

<PAGE>


The Company's  effective tax rate was 0% in fiscal 1999, 1998 and 1997. At March
31,  1999,  the  Company  had  Federal  and  State  tax  loss  carryforwards  of
approximately $29.0 million and $7.0 million, respectively. See Note 13 of Notes
to Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Unrestricted cash, cash equivalents, and short-term securities were $4.9 million
at March 31,  1999  compared  to $5.6  million  at March 31,  1998.  Receivables
decreased  to $4.5  million at March 31, 1999  compared to $5.1 million at March
31, 1998.  This decrease  occurred  partly  because  fourth  quarter fiscal 1998
product  sales were $0.2  million  higher than the fiscal  1999 fourth  quarter,
partially  because a greater  proportion of sales shipped in the last two months
of fiscal 1998 as compared to fiscal  1999,  and partly due to the  reduction of
receivables  over 90 days past due as of March 31, 1999 as compared to March 31,
1998.  Inventories  were $8.4  million  at March 31,  1999 as  compared  to $8.1
million at March 31, 1998 due to an increased  finished  goods offset by reduced
raw materials and  work-in-process.  The increase in finished  goods was in part
due to new products and in part due to customers  rescheduling  into fiscal 2000
certain orders  originally  built in anticipation of shipment in the fiscal 1999
fourth  quarter.  Property,  plant and  equipment  decreased to $11.5 million at
March 31, 1999 compared to $12.9 million at March 31, 1998. Capital expenditures
were $1.5  million in fiscal 1999 but  depreciation  and  amortization  was $2.9
million. The Company made significant expenditures in fiscal 1997 to upgrade its
manufacturing  operations and management  information  systems as well as to buy
out previously leased  equipment,  resulting in higher  depreciation  expense in
subsequent  years.  Current  liabilities were $6.1 and $6.2 million at March 31,
1999 and 1998,  respectively.  Long-term debt was $7.5 million at March 31, 1999
compared to $7.2 million at March 31, 1998. The net increase was due to $650,000
in new financing in fiscal 1999  collateralized by certain equipment,  partially
offset by reductions of other  long-term  debt.  Common stock  increased by $0.3
million in fiscal 1999 primarily due to the operation of the Company's  employee
stock  purchase  program and the  issuance of stock in exchange  for a licensing
agreement.

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,  and the payment of previously  accrued legal
fees totaling $1.4 million.

The Company made capital lease payments of $0.4 million,  $0.6 million, and $0.9
million in fiscal 1999,  1998, and 1997,  respectively,  and debt  repayments of
$0.2 million,  $0.2 million,  and $0.4 million in fiscal 1999,  1998,  and 1997,
respectively.

As of April 1999,  the  Company has a $3.0  million  revolving  secured  line of
credit  agreement that expires on July 31, 2000.  Under the terms of the line of
credit,  the  Company  can  borrow up to $3.0  million  at prime  plus  one-half
percent,  collateralized by eligible receivables.  See Footnote 9. There were no
bank  borrowings at March 31, 1999,  1998, and 1997 and there were no borrowings
during  fiscal  1999,  1998,  and 1997.  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.

                                       16

<PAGE>


IMPACT OF YEAR 2000

Many  computer  systems  employ a  two-digit  date  field and  could  experience
problems  beyond the year 1999.  Also,  some systems assign  special  meaning to
certain  dates,  such as 9/9/99,  and the year 2000 is a leap  year,  which some
systems may not recognize.  The Company has evaluated its management information
systems (MIS) and has developed a plan, as described  herein,  to convert all of
its MIS  applications  to year 2000 compliant  versions by March 31, 1999.  This
plan is  intended to  encompass  all major  categories  of systems in use by the
Company, including manufacturing, sales, finance and human resources.

California Micro Devices utilizes  software packages supplied by outside vendors
for all of its  mission  critical  applications.  These  software  vendors  have
supplied the Company with versions of their software that they have certified to
be year  2000  compliant.  However,  the  Company  recognizes  that  relying  on
certification  statements alone could  potentially  place its systems at risk if
some level of  integration  and system level testing is not also  performed.  To
ensure  that these  applications  work in CAMD's  environment,  the  Company has
completed a consolidated,  system level test plan that incorporated testing each
of the key  applications.  The positive  results of these tests have allowed the
Company to proceed with its migration  plan to year 2000  compliant  systems and
the Company was fully  converted  as of March 1, 1999.  As a result of the above
progress,  the Company has not formulated  formal  contingency  plans  regarding
conversion  to year 2000  compliant  critical  systems.  Should  any  unforeseen
difficulties arise in the implementation of these software packages, the Company
would convert to alternate software packages.

The Company has completed its  evaluation of 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 has substantially completed its evaluation of the possible impact of
year  2000  issues  on its  key  suppliers  and  subcontractors.  Part  of  this
evaluation  was  performed  based upon  representations  received from those 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. Nothing has come to the attention of the Company that would indicate
a  material  impact on the  Company  as a result of year 2000  issues at its key
suppliers and  subcontractors.  However,  the potential impact and related costs
are not known at this time.

The Company's products are not date sensitive.

The  out-of-pocket  expenditures  incurred to date related to these programs are
less than $300,000.  The Company  currently  expects that the total  incremental
expenditures  of  these  programs  will  not  exceed  $500,000.  Most  of  these
expenditures  involve new capital  equipment that will be amortized over a three
to five year period.

The costs of the  project  and the date on which the  Company  believes  it will
complete the year 2000  modifications  are based on management's best estimates,
which were derived utilizing  numerous  assumptions of future events,  including
the continued availability of certain resources,  third-party modification plans
and other  factors.  There can be no  assurance  that  these  estimates  will be
achieved and actual results could differ materially from those anticipated.

The  Company  believes  that its most  reasonably  likely  worst-case  year 2000
scenarios would relate to problems with the systems of third parties rather than
with the Company's  internal  systems or its  products.  Because the Company has
less control over  assessing  and  remediating  the year 2000  problems of third
parties,  the Company  believes  the risks are  greatest in the areas of utility
services,   telecommunications,   transportation   supply  chains  and  critical
suppliers  of  materials.  Due to the large number of  variables  involved,  the
Company cannot provide an estimate of the damage it might suffer if any of these
scenarios were to occur.

Based on currently available  information,  management does not believe that the
year 2000 matters  discussed above related to internal  systems or products sold
to customers  will have a material  adverse  impact on the  Company's  financial
condition or overall trends in results of operations.  However,  it is uncertain
to what extent the Company may be affected by such matters.  In addition,  there
can be no  assurance  that the  failure  to  ensure  year 2000  capability  by a
supplier or another third party would not have a material  adverse effect on the
Company.

                                       17

<PAGE>


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company owns  financial  instruments  that are  sensitive to market risks as
part of its investment  portfolio.  The investment portfolio is used to preserve
the  Company's  cash  until  it is  required  to  fund  operations  and  capital
investments.  None of  these  market-risk  sensitive  instruments  are  held for
trading purposes.  The Company does not own derivative financial  instruments in
its investment portfolio. The investment portfolio contains instruments that are
subject to fluctuation in interest rates.

The Company's  investment portfolio includes debt instruments that are primarily
United Stated  government  bonds,  high-grade  corporate  bonds and money market
funds of less  than one year in  duration.  These  investments  are  subject  to
interest rate risk, and could decline in value if interest rates  increase.  The
Company's investment portfolio also consists of certain commercial paper that is
also subject to interest rate risk. Due to the short  duration and  conservative
nature of these instruments, the Company does not believe that it has a material
exposure to interest rate risk.

The interest rates on the Company's long-term debt and capital lease obligations
are fixed and therefore not subject to interest rate  fluctuations.  See Note 11
of Notes to Financial Statements.

                                       18

<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                          20

Balance Sheets                                                             21
        March 31, 1999 and March 31, 1998

Statements of Operations                                                   22
        Years ended March 31, 1999, March 31, 1998, and March 31, 1997

Statements of Shareholders' Equity                                         23
        Years ended March 31, 1999, March 31, 1998, and March 31, 1997

Statements of Cash Flows                                                   24
        Years ended March 31, 1999, March 31, 1998, and March 31, 1997

Notes to Financial Statements                                              25


Financial Statement Schedule:

Schedule 2        Valuation and Qualifying Accounts                        41

                                       19

<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, 1999 and 1998, and the related statements of
operations,  shareholders' equity, and cash flows for each of the three years in
the  period  ended  March 31,  1999.  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.  These 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,  1999 and  1998,  and the  results  of its
operations  and its cash flows for each of the three  years in the period  ended
March 31, 1999 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 28, 1999

                                       20

<PAGE>


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

<CAPTION>
                                                                                 March 31,          March 31,
                                                                                   1999               1998
                                                                                 --------           --------
<S>                                                                              <C>                <C>
ASSETS:
Current assets:
  Cash and cash equivalents                                                      $    762           $    480
  Short-term investments                                                            4,171              5,110
  Accounts receivable, less allowance for doubtful
    accounts of $224 in 1999 and $380 in 1998                                       4,471              5,086
  Inventories                                                                       8,438              8,092
  Other assets                                                                        592                987
                                                                                 --------           --------
      Total current assets                                                         18,434             19,755

  Property and equipment, net                                                      11,540             12,925
  Restricted cash                                                                   2,900              2,909
  Other long-term assets                                                              770                405
                                                                                 --------           --------

      Total assets                                                               $ 33,644           $ 35,994
                                                                                 ========           ========

LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
  Accounts payable                                                               $  3,239           $  3,328
  Accrued salaries and benefits                                                       998              1,008
  Other accrued liabilities                                                           554                802
  Deferred margin on shipments to distributors                                        576                581
  Current maturities of long-term debt and capital lease obligations                  685                489
                                                                                 --------           --------
      Total current liabilities                                                     6,052              6,208

  Long-term debt, less current maturities                                           7,503              7,185
  Other long-term liabilities                                                         919                974
                                                                                 --------           --------
      Total liabilities                                                            14,474             14,367

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 10,116,144 as of March 31, 1999
  and 9,978,351 as of March 31, 1998                                               53,328             53,011

Accumulated deficit                                                               (34,160)           (31,389)
Accumulated other comprehensive income                                                  2                  5
                                                                                 --------           --------
Total shareholders' equity                                                         19,170             21,627
                                                                                 --------           --------

Total liabilities and shareholders' equity                                       $ 33,644           $ 35,994
                                                                                 ========           ========

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

                                                                 21

<PAGE>


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

<CAPTION>
                                                            Years Ended March 31,
                                                   1999                 1998                 1997
                                                 --------             --------             --------
<S>                                              <C>                  <C>                  <C>
Revenues:
  Net product sales                              $ 33,617             $ 32,474             $ 31,506
  Technology related revenues                        --                    569                1,430
                                                 --------             --------             --------
    Total revenues                                 33,617               33,043               32,936

Cost and expenses:
  Cost of sales                                    24,730               24,701               21,255
  Research and development                          3,685                3,017                4,180
  Selling, marketing and administrative             7,300                7,900                7,412
                                                 --------             --------             --------
    Total costs and expenses                       35,715               35,618               32,847
                                                 --------             --------             --------

Operating (loss) income                            (2,098)              (2,575)                  89

Interest expense                                      892                  941                  739
Interest income and other, net                       (219)                (511)              (1,354)
                                                 --------             --------             --------

Net (loss) income                                $ (2,771)            $ (3,005)            $    704
                                                 ========             ========             ========

Basic (loss) earnings  per share                 $  (0.28)            $  (0.30)            $   0.07
                                                 ========             ========             ========

Diluted (loss) earnings per share                $  (0.28)            $  (0.30)            $   0.07
                                                 ========             ========             ========

Weighted average common shares outstanding         10,017                9,971               10,234
Dilutive effect of employee stock options            --                   --                    315
Weighted average common shares outstanding,
  assuming dilution                                10,017                9,971               10,549

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

                                                                 22

<PAGE>


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

<CAPTION>
                                                      Common Stock                             Accumulated
                                                ---------------------------                       Other
                                                 Number Of                      Accumulated   Comprehensive
                                                  Shares          Amount          Deficit      Income/(Loss)       Total
                                                -----------     -----------     -----------     -----------     -----------
<S>                                              <C>            <C>             <C>             <C>             <C>
Balance at March 31, 1996                        10,306,088     $    55,442     $   (29,088)    $        (4)    $    26,350

Components of comprehensive income/(loss):
  Net income                                           --              --               704            --               704
  Change in unrealized gain/(loss) on
    available for sale investments                     --              --              --                29              29
                                                                                                                -----------
    Total comprehensive income                                                                                          733

  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
                                                -----------     -----------     -----------     -----------     -----------
Balance at March 31, 1997                         9,741,124          51,939         (28,384)             25          23,580

Components of comprehensive income/(loss):
  Net income                                           --              --            (3,005)           --            (3,005)
  Change in unrealized gain/(loss) on
    available for sale investments                     --              --              --               (20)            (20)
                                                                                                                -----------
    Total comprehensive income                                                                                       (3,025)

  Exercise of stock options                          51,742             214            --                               214
  Employee Stock Purchase Plan                      185,485             858            --                               858
                                                -----------     -----------     -----------     -----------     -----------
Balance at March 31, 1998                         9,978,351          53,011         (31,389)              5          21,627

Components of comprehensive income/(loss):
  Net income                                           --              --            (2,771)           --            (2,771)
  Change in unrealized gain/(loss) on
    available for sale investments                     --              --              --                (3)             (3)
                                                                                                                -----------
    Total comprehensive income                                                                                       (2,774)

  Exercise of stock options                           6,600              26                                              26
  Employee Stock Purchase Plan                      100,993             211                                             211
  Stock award                                           200               1                                               1
  Licensing agreement                                30,000              79                                              79
                                                -----------     -----------     -----------     -----------     -----------
Balance at March 31, 1999                        10,116,144     $    53,328     $   (34,160)    $         2     $    19,170
                                                 ==========     ===========     ===========     ===========     ===========

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

                                                                 23

<PAGE>


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

<CAPTION>
                                                                                        Years Ended March 31,
                                                                                  1999            1998             1997
                                                                                --------        --------        --------
<S>                                                                             <C>             <C>             <C>
Cash flows from operating activities:
  Net income (loss)                                                             $ (2,771)       $ (3,005)       $    704
  Adjustments to reconcile  net income  (loss) to net cash (used in)
    provided by operating activities:
      Depreciation and amortization                                                2,945           2,852           2,191
      Issuance of cash for class action settlement                                  --              --            (5,000)
      Issuance of common stock in exchange for licensing agreement                    79            --              --
Change in operating assets and liabilities:
  Inventories                                                                       (346)            751          (1,903)
  Accounts receivable                                                                616          (1,148)            562
  Other assets                                                                       394            (113)           (289)
  Trade accounts payable and other current liabilities                              (347)            268          (3,491)
  Other long-term assets                                                            (381)             16             113
  Net increase in other long-term liabilities                                        323            --              --
  Deferred margin on distributor sales                                                (5)              5            (463)
                                                                                --------        --------        --------
Net cash provided by (used in) operating activities                                  507            (374)         (7,576)
                                                                                --------        --------        --------

Investing activities:
  Securities purchases                                                            (4,824)         (6,144)         (3,940)
  Securities sales                                                                 5,760           7,481          18,140
  Capital expenditures                                                            (1,544)         (1,132)         (6,011)
  Net change in restricted cash                                                        9              (6)         (1,998)
                                                                                --------        --------        --------
Net cash (used in) provided by investing activities                                 (599)            199           6,191
                                                                                --------        --------        --------

Financing activities:
  Net repayments of capital lease obligations                                       (357)           (585)           (910)
  Borrowings                                                                         650            --              --
  Repayments of debt                                                                (157)           (175)           (372)
  Proceeds from issuance of common stock                                             238           1,072           1,498
                                                                                --------        --------        --------
Net cash provided by financing activities                                            374             312             216
                                                                                --------        --------        --------

Net increase (decrease) in cash and cash equivalents                                 282             137          (1,169)
Cash and cash equivalents at beginning of period                                     480             343           1,512
                                                                                --------        --------        --------
Cash and cash equivalents at end of period                                      $    762        $    480        $    343
                                                                                ========        ========        ========

Supplemental disclosures of cash flow information:
  Interest paid                                                                 $    892        $    941        $    896
  Income taxes refunded                                                         $   --          $   --          $    (60)
Supplemental disclosures of non-cash investing and financing activities:
  Capital expenditures financed through capital lease obligations               $   --          $    163        $  1,455
  Unrealized gain (loss) on securities                                          $     (3)       $    (20)       $     29

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

                                                                 24

<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 1999, 1998, and 1997 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,
except for amounts related to the Company's  non-qualified deferred compensation
program  described in Note 15, 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 shareholders'  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.

                                       25

<PAGE>


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

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.

Advertising

The Company expenses all advertising as incurred.

Common Stock

On December 16, 1996, the Company reduced the previously issued 1,500,000 shares
of common  stock  being held in trust to 608,696  shares to reflect  the revised
settlement of shareholder class actions. 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 of  Notes to
Financial Statements.

Net Income (Loss) Per Share

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.  Options to purchase 2,478,000 and
2,315,000 shares of common stock at  weighted-average  prices of $3.58 and $5.44
per share were outstanding  during fiscal 1999 and 1998  respectively,  but were
not included in the  computation  of diluted net income per common share because
the effect in years with a net loss would be  antidulitive.  In fiscal  1997,  a
total of 807,300 shares of common stock at a weighted-average  exercise price of
$8.44 per share were not included in the  computation  of diluted net income per
common share  because the  exercise  price was greater than the market price and
the effect would have been antidilutive.

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.

                                       26

<PAGE>


Comprehensive Income

Effective  in the first  quarter  of  fiscal  year  1999,  the  Company  adopted
Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive
Income"  ("SFAS  130").  SFAS 130  established  new rules for the  reporting and
display of  comprehensive  income and its components;  however,  the adoption of
SFAS 130 had no impact on the Company's net income (loss) or total shareholders'
equity.   Accumulated  other  comprehensive   income  (loss)  presented  in  the
accompanying balance sheets consists of the accumulated net unrealized losses on
available-for-sale securities.

Recent Accounting Pronouncements

In  June  1998,  the  Financial  Accounting  Standards  Board  issued  Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities"  ("SFAS  133").  The  Company is  required to adopt SFAS 133 for all
fiscal  quarters of all fiscal years  beginning  after June 15,  1999.  SFAS 133
establishes  methods of accounting  for  derivative  financial  instruments  and
hedging  activities  related  to  those  instruments  as well as  other  hedging
activities.   Because  the  Company  currently  holds  no  derivative  financial
instruments  and does not currently  engage in hedging  activities,  adoption of
SFAS 133 is  expected  to have no  material  impact on the  Company's  financial
condition or results of operations.

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.


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 may share in a
percentage  of the actual  expenditures  for mutually  agreed upon joint product
development. The Company includes HML's share of product development expenses in
the Statements of Operations line labeled  "Technology  related  revenues".  The
Company  expects 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,  $0.7  million,  and $2.1 million in fiscal 1999,  1998,  and
1997, respectively. Trade accounts receivable from all HML entities at March 31,
1999 and 1998 were $26,000 and $154,000, respectively.

                                       27

<PAGE>


4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

<TABLE>
The following is a summary of cash, cash  equivalents and marketable  securities
at March 31, 1999 and March 31, 1998, respectively (amounts in thousands):

<CAPTION>
                                                                          March 31,          March 31,
                                                                            1999               1998
                                                                           -------            -------
<S>                                                                        <C>                <C>
Cash equivalents
  Money market funds                                                       $ 2,250            $ 1,960
  Commercial paper                                                             535                520
Less:
  Amount classified as restricted cash in connection with class action      (2,000)            (2,000)
                                                                           -------            -------
Total cash equivalents                                                     $   785            $   480
                                                                           =======            =======
Short-term investments
  U. S. Treasuries & U.S. Government agencies                              $ 2,257            $ 3,198
  Corporate bonds                                                            1,914              1,912
                                                                           -------            -------
Total short-term investments                                               $ 4,171            $ 5,110
                                                                           =======            =======
Long-term investments:
  Mutual funds                                                             $   300            $  --
                                                                           =======            =======

<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, 1999
and March 31, 1998, respectively, (amounts in thousands):

<CAPTION>
                                                                  Gross            Gross           Estimated
                                                               Unrealized       Unrealized           Fair
                                                  Cost            Gains            Losses            Value
                                                -------          -------          -------           -------
<S>                                             <C>              <C>              <C>               <C>
March 31, 1999:
  Commercial paper                              $   535          $  --            $  --             $   535
  Mutual funds                                      300             --               --                 300
  U.S. Treasuries & U.S. government agencies      2,254                4               (1)            2,257
  Corporate bonds                                 1,914                3               (3)            1,914
                                                -------          -------          -------           -------
    Total                                       $ 5,003          $     7          $    (4)          $ 5,006
                                                =======          =======          =======           =======

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
                                                =======          =======          =======           =======
</TABLE>


Of the fiscal 1999 securities  listed above, $4.6 million of debt securities (at
estimated  fair market  value)  mature  within one year and $0.4 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.  Amounts listed as mutual funds and
$23,000  of  money  market  funds  are  included  in  the   Company's   deferred
compensation program.

                                       28

<PAGE>


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, the aforementioned  industries and economic influences
of customers'  geographic  locations affect collection of receivables.  However,
the Company  monitors  extensions  of credit and  requires  collateral,  such as
letters of credit, whenever deemed necessary.


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

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, process changes, as well as other factors that can affect yields.

Subcontractors

The Company uses  subcontractors in Asia,  primarily Thailand and 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.

                                       29

<PAGE>


7. INVENTORIES

Inventories consist of the following (amounts in thousands):

                                                     March 31,         March 31,
                                                       1999               1998
                                                      ------             ------
          Raw materials                               $  428             $  775
          Work-in-process                              5,263              5,480
          Finished goods                               2,747              1,837
                                                      ------             ------
                                                      $8,438             $8,092
                                                      ======             ======


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.


8. PROPERTY AND EQUIPMENT

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

                                                          March 31,   March 31,
                                                            1999        1998
                                                           -------     -------
Land                                                       $   137     $   137
Buildings                                                    3,030       3,030
Machinery, equipment and tooling                            22,772      21,282
Leasehold improvements                                         714         708
Furniture and fixtures                                         367         367
                                                           -------     -------
                                                            27,020      25,524
Less accumulated depreciation and amortization              15,480      12,599
                                                           -------     -------
                                                           $11,540     $12,925
                                                           =======     =======


9. SHORT-TERM BORROWINGS

As of April 1999,  the  Company has a $3.0  million  revolving  secured  line of
credit  agreement that expires on July 31, 2000.  Under the terms of the line of
credit,  the  Company  can  borrow up to $3.0  million  at prime  plus  one-half
percent,  collateralized  by  eligible  receivables.  This  line of  credit is a
replacement for a $3.0 million facility,  collateralized  by cash,  scheduled to
expire on July 31, 1999.  There were no bank borrowings at March 31, 1999, 1998,
and 1997 and there were no borrowings  during fiscal 1999,  1998,  and 1997. The
Company is in compliance with its financial covenants.

                                       30

<PAGE>


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)            $7,809      $8,689


11. LONG-TERM DEBT

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


                                                          March 31,    March 31,
                                                            1999        1998
                                                           ------      ------
Industrial revenue bonds at 10.5%, due
  through March 1, 2018                                    $7,185      $7,315
Equipment financing agreement due through
  June 14, 2002                                               624        --
                                                           ------      ------
                                                            7,809       7,315
Less current maturities                                       306         130
                                                           ------      ------
                                                           $7,503      $7,185
                                                           ======      ======


In  January  1999,  the  Company  borrowed  $650,000  under a  credit  agreement
collateralized by certain of the Company's equipment.  The agreement extends for
42 months, carries an interest rate of 9.9%, and has a prepayment option.

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 $140,000 in fiscal 2000 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,  1999,  with  penalties
declining from 1% on March 1, 1999, to zero at March 1, 2000. At March 31, 1999,
cash of $900,000 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, 1999. As a result of these covenants, the Company's
ability to pay dividends is restricted.

Future maturities of long-term debt at March 31, 1999 are as follows (amounts in
thousands):

                         2000                          $     306
                         2001                                338
                         2002                                372
                         2003                                257
                         2004                                205
                         2005 and thereafter               6,331
                                                       ---------
                                                       $   7,809
                                                       =========

                                       31

<PAGE>


12. LEASE COMMITMENTS

Operating Leases

The Company leases  certain  manufacturing  facilities  under  operating  leases
expiring in 2001 and 2002. The Company  sublets a 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 ending
March 31 are as follows (amounts in thousands):


                         2000                          $     560
                         2001                                544
                         2002                                413
                         2003                                 69
                                                       ---------
                                                           1,586
                         Sublease receipts                  (294)
                                                       ---------
                                                       $   1,292
                                                       =========


Rent  expense net of sublease  income was  $450,000,  $417,000,  and $524,000 in
fiscal 1999, 1998, and 1997, respectively.

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 ending March 31, are as follows (amounts in thousands):

        2000                                           $     455
        2001                                                 455
        2002                                                 181
                                                       ---------
        Total minimum lease payments                       1,091
          Less amount representing interest                  117
                                                       ---------
        Present value of net minimum lease payments          974
          Less current portion                               379
                                                       ---------
                                                       $     595
                                                       =========


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

                                                      March 31,       March 31,
                                                        1999            1998
                                                       ------          ------
Cost                                                   $1,619          $1,619
Less accumulated depreciation                             377             145
                                                       ------          ------
                                                       $1,242          $1,474
                                                       ======          ======

                                       32

<PAGE>


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, 1999,  1998,
and 1997.

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


                                                      Years Ended March 31,
                                                   1999        1998        1997
                                                   ----        ----        ----
Federal statutory tax rate                         (34)%       (34)%        34%
Losses with no current benefit                      34          34         --
Utilization of loss carryforward                   --          --          (34)
                                                   ---         ---         ---
Effective income tax rate                            0%          0%          0%
                                                   ====        ====        ====


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,
                                                           1999          1998
                                                         --------      --------
Deferred tax assets:
  Net operating loss carryforwards                       $ 10,500      $ 10,000
  Tax credit carryforwards                                    450           350
  Inventory reserves                                        3,500         3,500
  Other non-deductible accruals and reserves                  900           750
                                                         --------      --------
Total deferred tax assets                                  15,350        14,600
  Less valuation allowance                                (15,050)      (14,100)
                                                         --------      --------
Net deferred tax asset                                        300           500
                                                         --------      --------

Deferred tax liabilities:
  Tax over book depreciation                                  300           500
                                                         --------      --------
Total net deferred tax asset                             $   --        $   --
                                                         ========      ========


The valuation  allowance  increased by $950,000 and $5,046,000  during the years
ended  March 31,  1999 and 1998,  respectively.  Approximately  $450,000  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.

FASB  Statement No. 109 provides for the  recognition  of deferred tax assets if
realization  of such  assets is more  likely  than not.  Based on the  weight of
available evidence, the Company has provided a valuation allowance against total
deferred  tax assets.  The  Company  will  continue  to evaluate  the ability to
realize the deferred tax asset on a quarterly basis.

At March 31,  1999,  the  Company  had  federal  and state  net  operating  loss
carryforwards  of  approximately  $29,000,000  and $7,000,000  respectively.  In
addition,  the  Company  had  federal and  California  credit  carryforwards  of
approximately  $350,000 and $150,000,  respectively.  These  carryforwards  will
expire at various dates beginning in 2008 through 2018, except for certain state
net operating losses which expire from 2000 through 2004.

                                       33

<PAGE>


14. INTEREST INCOME AND OTHER, NET

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


                                                  Years Ended March 31,
                                              1999           1998          1997
                                             ------         ------        ------
Interest income                              $  295         $  403        $1,024
Other (expense) income                          (76)           108           330
                                             ------         ------        ------
                                             $  219         $  511        $1,354
                                             ======         ======        ======


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.


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.  During fiscal 1999,
1998,  and  1997,  the  Company  expensed  $217,000,   $210,000,  and  $136,000,
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 1999 and 1998, the Company  expensed  $8,000 and $21,000,
respectively,  for this plan.  No expense was  recognized  in fiscal 1997 as the
plan was not implemented until fiscal 1998.

Stock Option Plans

The 1995 Employee Stock Option Plan, Amended as of July 26, 1996, July 18, 1997,
and August 7, 1998 (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, July 18, 1997, and
August 7, 1998,  (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, 1999 and 1998,
2,433,563  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.

                                       34

<PAGE>


Under the Directors Plan, for fiscal year-ended March 31, 1999 and 1998, 274,875
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 Board of Directors may terminate the 1981 Plan at
any time.  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.

In  January  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.  A
total of 692,150  options were repriced.  The repricing did not apply to options
held by directors or other non-employee option holders.

On December  10,  1998,  the Board of  Directors  ratified  the  decision of the
Compensation Committee to reprice all current non-officer employee stock options
with an exercise price in excess of $2.8125.  The repricing was to be the higher
of $2.8125 or the closing  market price of the Company's  stock on the effective
date of the  repricing,  December 10, 1998. The closing price on December 10 was
$2.75;  therefore the applicable  options were repriced at $2.8125.  Pursuant to
the terms of the repriced options,  the repriced options may not be exercised in
whole or in part until December 10, 1999,  that is, one year after the effective
date.

On December 10, 1998,  the Board of Directors  also ratified the decision of the
Compensation  Committee to reprice all current  officer  employee  stock options
with an exercise price in excess of $4.00. The repricing was to be the higher of
20% above either $2.8125 or the closing  market price of the Company's  stock on
the effective  date of the  repricing,  December 10, 1998.  The closing price on
December 10 was $2.75;  therefore the  applicable  options were repriced at 20 %
above the $2.8125 price or $3.30. Pursuant to the terms of the repriced options,
the repriced options may not be exercised in whole or in part until December 10,
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 the
incentive value of options with significantly higher exercise prices. A total of
1,325,742 options were repriced.  The repricing did not apply to options held by
non-employee directors or other non-employee option holders.

                                       35

<PAGE>


<TABLE>
The  following  is a summary of stock option  activity and related  information,
including the effect of repricing in grants and cancellations during fiscal 1999
and 1998 of 1,325,742 shares and 692,150 shares, respectively:

                                   1999                            1998                            1997
                        --------------------------        ------------------------        ------------------------
                                          Weighted-                      Weighted-                        Weighted-
                                           Average                        Average                          Average
                                           Exercise                       Exercise                         Exercise
                          Options           Price          Options         Price          Options           Price
                        ----------        --------        --------        --------        --------        --------
<S>                      <C>              <C>            <C>              <C>            <C>              <C>
Options:
  Outstanding at
  beginning of year      2,315,331        $ 5.4395       2,032,446        $ 6.1255       1,841,864        $ 5.7560
Granted                  1,756,742        $ 3.0222       1,178,297        $ 6.1174         515,517        $ 6.7402
Exercised                   (6,600)       $ 3.9300         (51,742)       $ 4.1914        (214,389)       $ 4.1285
Canceled                (1,587,878)       $ 5.6772        (843,670)       $ 8.1121        (110,546)       $ 6.4146
                        ----------        --------       ---------        --------       ---------        --------
Outstanding at
  end of year            2,477,595        $ 3.5837       2,315,331        $ 5.4395       2,032,446        $ 6.1255
                        ==========        ========       =========        ========       =========        ========

Available for grant*:
  Beginning                182,016                         137,454                          68,198
  Ending                   325,760                         182,016                         137,454

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


<TABLE>
The following table summarizes  information  about options  outstanding at March
31, 1999:

<CAPTION>
                                           Options Outstanding                     Options Exercisable
                            -------------------------------------------       -----------------------------
                                            Weighted-Average  Weighted-                          Weighted-
                                                 Remaining     Average                            Average
                               Number           Contractual    Exercise         Number            Exercise
Range of Exercise Prices    Outstanding        Life (Years)     Price         Exercisable          Price
------------------------    -----------        ------------     -----         -----------          -----
<S>                          <C>                   <C>         <C>             <C>               <C>
$2.6573 - $2.6573               26,500             9.87        $ 2.6573           --                --
$2.8125 - $2.8125            1,045,220             7.46        $ 2.8125           --                --
$2.8750 - $3.3000              543,047             7.86        $ 3.2120           --                --
$3.5000 - $3.8500               81,665             8.63        $ 3.5531           6,665          $  3.6250
$3.9300 - $12.7500             781,163             6.03        $ 4.9088         710,536          $  4.6868
                             ---------           ------        --------        ---------         ---------
                             2,477,595             7.16        $ 3.5837         717,201          $  4.6770
                             =========           =======       ========        =========         =========
</TABLE>


Employee Stock Purchase Plan

The 1995 Employee Stock Purchase Plan as Amended August 7, 1998,  (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 460,000  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, 1999, 1998, and 1997,  64,571,  5,564 and 141,049 shares were
reserved for issuance, respectively.

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

                                                  1999        1998        1997
                                                --------    --------    --------
Aggregate purchase price                        $211,000    $858,000    $592,000
Shares purchased                                 100,993     185,485     108,951
Employee participants as of March 31                 161         151         150

                                       36

<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 for the years ended March 31,
was estimated assuming no expected dividends and the following  weighted-average
assumptions:

<CAPTION>
                                         Options                                 Purchase Plan
                                ----------------------------                ---------------------------
                                1999       1998         1997                1999        1998       1997
                                ----       ----         ----                ----        ----       ----
<S>                             <C>        <C>          <C>                 <C>         <C>        <C>
Expected life years             2.81       3.02         3.17                 .21         .34         .5
Volatility                       .96%       .61%         .64%               1.29%        .64%       .64%
Risk-free interest rate         4.69%      5.77%        6.20%               5.00%       5.43%      5.25%
</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. The Company's pro forma  information  follows
(amounts in thousands except per share amounts):


                                                     Years Ended March 31,
                                               1999         1998         1997
                                            ---------    ---------    ---------
Net (loss) - pro forma                      $  (5,112)   $  (5,073)   $  (1,148)
Diluted net (loss) per share - pro forma    $   (0.51)   $   (0.51)   $   (0.11)


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
1999 and 1998 were $4.04 and $2.30 per share, respectively. The weighted-average
fair value of the option  element of the Purchase  Plan stock  granted in fiscal
1999 and 1998 was $0.95 and $1.88 per share, respectively.


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.

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 a three year period.  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

                                       37

<PAGE>


cease to be restricted,  without interest,  if and when the CVR is extinguished.
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.

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.


17. SEGMENT INFORMATION

During 1998, the Company adopted Financial  Accounting Standards Board Statement
of Financial  Standards No. 131 ("SFAS 131"),  "Disclosures About Segments of an
Enterprise  and Related  Information."  The Company's  operations are classified
into one reportable segment.  Substantially all of the Company's  operations and
long-lived  assets  reside in the United  States  although the Company has sales
operations  in Europe,  Japan,  Hong Kong and Taiwan.  In fiscal 1999, no single
customer  accounted  for greater  than 10% of net sales.  In fiscal  1998,  Bell
Milgray  Inc., a  distributor,  accounted for  approximately  10% of net product
sales,  and during  fiscal 1997,  Motorola  accounted for 11% of the net product
sales.  Other than the United States, no one country accounted for more than 10%
of net sales in fiscal 1999, 1998 and 1997.  Foreign currency  transaction gains
and losses are not significant.

Net sales to geographic  regions  reported  below are based upon the  customers'
locations (amounts in thousands):

                                                   Years Ended March 31,
                                            1999            1998           1997
                                           -------        -------        -------
Net product sales to geographic regions:
  United States                            $20,476        $21,776        $20,003
  Europe                                     3,126          3,411          3,288
  Far East and other                        10,015          7,287          8,213
                                           -------        -------        -------

Net product sales                          $33,617        $32,474        $31,504
                                           =======        =======        =======


ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

There were no  disagreements  with the  independent  auditors in the three years
ended March 31, 1999, March 31, 1998, and March 31, 1997.

                                       38

<PAGE>


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The  information  required by this Item is set forth in the 1999 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 1999 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 1999 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.

                                       39

<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 Report on Form
                                    amended.                                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
                                    Comerica Bank.

                 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 1999 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,  1999)
are incorporated by reference into Part III.

                                       40

<PAGE>


<TABLE>
                                                    SCHEDULE 2

                                       CALIFORNIA MICRO DEVICES CORPORATION
                                        VALUATION AND QUALIFYING ACCOUNTS


                                    Years Ended March 31, 1999, 1998, and 1997
                                              (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, 1999
  Allowance for doubtful accounts
    (deducted from accounts receivable)         $380          $--             $--          $156          $224
                                                ====          =====           ===          ====          ====


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
                                                ====          =====           ===          ====          ====

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

                                                                 41

<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
1999.

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 1999.

By:


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

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

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

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

        /s/ J. Daniel McCranie            Director
        -----------------------
        J. DANIEL MCCRANIE

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

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

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

                                       42