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                         UNITED STATES SECURITIES AND
                              EXCHANGE COMMISSION
                            WASHINGTON, D.C. 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 JUNE 30, 1998
 
                                      OR
 
       [_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE TRANSITION PERIOD FROM      TO
 
                         COMMISSION FILE NUMBER 0-2287
 
                               ----------------
 
                               SYMMETRICOM, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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        <S>                                              <C>
                       CALIFORNIA                           NO. 95-1906306
            (STATE OR OTHER JURISDICTION OF                (I.R.S. EMPLOYER
             INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)
                 2300 ORCHARD PARKWAY,
                  SAN JOSE, CALIFORNIA                        95131-1017
        (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)              (ZIP CODE)
</TABLE>
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 943-9403
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
                                     NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                          COMMON STOCK, NO PAR VALUE
                               (TITLE OF CLASS)
 
                               ----------------
 
  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
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 FILERS PURSUANT TO ITEM
405 OF REGULATION S-K ((S)29.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_]
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant at September 10, 1998 was approximately $76,032,192. The number of
shares outstanding of the registrant's Common Stock at September 10, 1998 was
15,798,897.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the Symmetricom, Inc. Proxy Statement for the 1998 Annual
Meeting of Shareholders filed with the Commission on or about September 23,
1998 are incorporated by reference into Part III of this Annual Report on Form
10-K.
 
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  The trend analyses and other non-historical information contained in this
Form 10-K are "forward looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbor
provisions of those Sections. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
identify such forward looking statements. Such forward looking statements
include, without limitation, statements concerning the Company's future net
sales, net earnings and other operating results. The Company's actual results
could differ materially from those discussed in the forward looking statements
due to a number of factors including, without limitation, the factors listed
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Business Outlook and Risk Factors" included below in Part II, Item
7.
 
                                    PART I
 
ITEM 1. BUSINESS
 
  Symmetricom, Inc. (the "Company") was incorporated in California in 1956.
The Company conducts its business through two separate operations, each of
which operates in a different industry segment. Telecom Solutions, a division
of the Company, designs, manufactures and markets advanced network
synchronization systems and intelligent access systems for the
telecommunications industry. Linfinity Microelectronics Inc. (Linfinity), a
subsidiary of the Company, designs, manufactures and markets linear and mixed
signal integrated circuits as well as systems-engineered modules primarily for
use in power management and communication applications in commercial,
industrial, and defense and space markets.
 
TELECOM SOLUTIONS
 
  Telecom Solutions offers a broad range of time and frequency reference, or
synchronization, systems and intelligent access, or transmission, systems for
the worldwide telecommunications industry.
 
 Synchronization
 
  Reliable synchronization is fundamental to telecommunications services, as
it ensures error-free transmission of data throughout a network.
Synchronization allows digital switching and transmission systems to operate
at a common, or synchronized, clock rate, thereby minimizing signal
degradation. Poor synchronization can cause digital signal impairments such as
jitter, wander and phase transients, resulting in loss of data, decreased
network efficiency and increased costs for the network operator. High quality
synchronization is an essential requirement for telecommunications service
providers as they move to high capacity, high speed digital transmission
technologies such as the Synchronous Optical Network (SONET) and the
Synchronous Digital Hierarchy (SDH) network. Synchronization also plays a
critical role in many Asynchronous Transfer Mode (ATM) equipment applications.
 
  The Company's core synchronization products consist principally of Digital
Clock Distributors (DCDs) based on quartz, rubidium and Global Positioning
System (GPS) technologies, which provide highly accurate and uninterruptible
timing that meets the synchronization requirements of digital networks.
Telecom Solutions has established itself as a leader in telephone network
synchronization and has introduced a series of DCDs and related products.
These products provide for the generation of a stable primary timing reference
and distribution of that timing reference throughout a network, enabling
telecommunications service providers to synchronize precisely such diverse
telephone network elements as digital switches, digital cross-connect systems
and multiplexers for customers who are dependent upon high quality data
transmission.
 
  Telecom Solutions' DCD product family consists of three product platforms:
the DCD 500 Series, the DCD Local Primary Reference (LPR) Series, and the GPS
1100 Series. The DCD 500 Series is a third generation synchronization and
timing distribution platform that provides the accurate clock references
needed throughout a
 
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network to ensure reliable synchronization. The DCD filters the input timing
signal to virtually eliminate digital signal impairments. If the input timing
reference is lost or out of tolerance, the clock provides highly stable backup
timing, or "holdover," to allow the network to operate error-free for several
hours or days, depending on the accuracy of the installed clock. The platform
can be equipped with additional cards to provide interfaces for a variety of
applications, including network management, synchronization performance
monitoring, and status and control measurement, which are becoming
increasingly important for network maintenance and revenue protection. The
Maintenance Interface System (MIS) card provides a communications gateway for
both local maintenance personnel and remote network management systems,
gathering all system alarm information in real time. The Precision
Synchronization Monitor (PSM) card provides synchronization and performance
monitoring, detecting early indications of network degradation and related
troubles in network elements. The Multiple Reference Controller (MRC) card
directly accepts up to four reference sources, based on cesium, local primary
reference sources, local clock(s), and/or network feeds and selects the most
desirable reference based on a number of quality parameters. The DCD 500
platform is designed to provide maximum flexibility and meets both domestic
and international standards.
 
  The DCD-LPR Series provides the capability to effectively use either GPS or
Long Range Navigation version C (LORAN-C) to provide direct Stratum 1
traceable synchronization to network sites equipped with DCD systems. The DCD-
LPR employs an integrated, roof-mounted GPS antenna and Timing Receiver (GTR)
to receive precision Universal Coordinated Time (UTC) timing signals from GPS
satellites at virtually any location in the world or from LORAN-C radio
stations in a number of locations in the world. The DCD-LPR is usually fitted
with one or two GPS Timing Interface (GTI) cards, which receive timing inputs
from the GPS receiver and output two T1 or E1 signals, and, optionally, time-
of-day. For LORAN-C based timing, the LORAN-C Timing Interface card (LTI)
provides similar functionality. The DCD-LPR can also be used with a Local
Oscillator Unit (LOU) to provide a complete stand-alone timing generation and
distribution system for facilities where a DCD 500 distribution system is
unavailable or not needed.
 
  The GPS 1100 Series is a low-cost, compact timing unit that uses proprietary
BesTime(TM) Multiple Input Frequency Locked Loop (MIFLL) technology to combine
frequency inputs from GPS satellites, a built-in oscillator, and network T1
references to deliver a re-timed T1 reference with improved accuracy. GPS 1100
is designed for network locations where one or two key network elements need
precise timing.
 
  The Company's ability to provide network management is essential as
Telecommunications Management Network (TMN) standards, established by the
International Telecommunications Union (ITU), have gained acceptance among
major telecommunications service providers. Telecom Solutions has introduced
TimeScan/TMN, a Unix-based TMN and Q3 compliant full element management system
for synchronization networks, TimeScan/NMS, a Windows NT-based proprietary
network management system, and TimeScan/Craft, a Windows 95-based local craft
maintenance terminal. TimeScan/TMN and TimeScan/NMS provide scaleable,
centralized real-time security monitoring, performance monitoring, fault
management, remote configuration, and inventory of a synchronization network.
The TimeScan/TMN graphical user interface presents status at the network level
and at the element level, providing real-time representations of configuration
and status of both logical and physical properties of the network. The
TimeScan/NMS graphical user interface presents network status using
hierarchical overviews of both logical and geographical network topologies.
TimeScan/Craft is a local craft maintenance terminal designed to provide local
management and maintenance of one DCD at a time. Each of these products
features tools for identifying customer troubles before they affect service.
 
  In August 1993, the Company acquired Navstar Limited, a United Kingdom
company, and its U.S. affiliate (collectively "Navstar"). Navstar designs,
manufactures and markets GPS receivers and systems that use global positioning
technology to provide a very accurate synchronization source, time-of-day
information, and/or precise geographic location. A significant percentage of
Navstar's GPS receivers is purchased for timing applications, including direct
Navstar sales to the Digitally Enhanced Cordless Telephone (DECT) market and
intercompany sales to Telecom Solutions for incorporation in its
synchronization products.
 
 
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  Telecom Solutions synchronization systems are typically priced from $3,000
to $40,000. Navstar products are typically priced from $300 to $5,000.
 
 Transmission Products
 
  Telecom Solutions transmission products include Secure7(R), Secure7 Lite and
the Integrated Digital Services Terminal (IDST). Secure7 is a multi-bandwidth,
intelligent, fault-tolerant, digital transmission terminal that automatically
reroutes disrupted high priority telephone data links such as those used in
the Signaling System Seven (SS7) network and the 911 emergency network.
Secure7 is designed to provide nearly 100% availability for these critical
data applications.
 
  Secure7 Lite is designed to protect SS7 networks from switch isolations and
simplex events and may be used as a standard replacement for channel banks in
SS7 applications. Both Secure7 and Secure7 Lite make use of the Company's
BestPath(TM) technology to take advantage of the existing SS7 network
architecture to automatically route around problem areas and maintain links
between network elements.
 
  The IDST is a network access system designed for use in telephone company
central offices which has principally been deployed as a transmission,
monitoring and test access vehicle for SS7 networks. The IDST provides
maintenance personnel with flexible, centralized remote access to SS7 links
for troubleshooting and performance verification, resulting in a comprehensive
solution to the monitoring and transport of links requiring increased
reliability.
 
  Transmission products are typically priced at less than $5,000 for a small
system to more than $300,000 for a large system.
 
  The Company supplies its synchronization systems and transmission products
predominantly to the Regional Bell Operating Companies (RBOCs), interexchange
carriers, independent telephone companies, Competitive Local Exchange Carriers
(CLECs), private network operators, wireless service providers and
international telecommunications service providers. Navstar predominantly
sells its products to Telecom Solutions, the U.S. Government and original
equipment manufacturers (OEMs).
 
LINFINITY MICROELECTRONICS INC.
 
  Linfinity products principally include linear and mixed signal integrated
circuits (ICs) as well as systems-engineered modules primarily for use in
power management and communication applications in commercial, industrial, and
defense and space markets.
 
  ICs are generally divided into three categories: digital, linear (also
referred to as analog) and mixed signal circuits. Digital circuits, such as
memory devices and microprocessors, process and compute information in the
form of "on-off" electronic signals represented by binary digits "1" or "0".
Linear circuits process, monitor, measure or control continuous analog signals
associated with physical functions such as temperature, pressure, sound,
weight, light and speed, and play an important role in bridging real world
phenomena and a variety of electronic systems. Analog devices are used in
virtually all electronic systems. Some of the largest markets for such
circuits are computers, data communications, telecommunications, industrial
equipment, and military, consumer and automotive electronics. For each
application, users often have unique requirements for circuits with specific
speed, power, resolution and signal amplitude capabilities. Therefore, due to
numerous applications, the demand for analog devices designed to manage real
world functionality continues to grow and has resulted in a high degree of
market fragmentation, which has provided an opportunity for smaller companies
to compete against larger suppliers in certain market segments. Mixed signal
ICs are circuits that combine both analog and digital signal processing
techniques.
 
  The analog and mixed-signal market is served by three product types:
standard linear IC's (SLICs), application specific standard products (ASSPs)
and custom ICs. Linfinity is focused on the power management
 
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segment of the overall market and competes with both SLIC and ASSP products.
Linfinity's SLIC power management products include pulse width modulators
(PWMs) which shape and manage the characteristics of voltage, low dropout
regulators (LDOs) which convert unregulated input voltage to regulated output
voltage with a minimum amount of overhead voltage, linear voltage regulators
which control power supply output levels, supervisory circuits which monitor
power supply, switching regulators which efficiently convert power by managing
voltage and current and are used to power advanced microprocessors, and power
factor correction ICs which reduce energy consumption in fluorescent lighting
and other power management product applications. SLIC products are used in
computer and data storage, lighting, automotive, telecommunications, test,
instrumentation, and defense and space equipment. In recent years, the
definition of power management has broadened to encompass other devices and
modules, often ASSPs, which address particular aspects of power management,
such as audio or display related ICs. Newer differentiated ASSP products at
Linfinity include backlight inverters, Class D audio amplification ICs, and
Small Computer Systems Interface (SCSI) terminators. The backlight inverters
incorporate Linfinity's proprietary technology and are single-stage cold
cathode fluorescent lamp inverter modules that provide dimmable backlighting
for Liquid Crystal Display (LCD) products. Class D audio amplification ICs
provide high-quality sound reproduction with small form-factor and improved
efficiency for sophisticated multi-media and wireless applications.
Linfinity's SCSI terminators, both Single Ended (SE) and Low Voltage
Differential (LVD), enable high data transfer rates between computers and
various peripheral devices such as hard disk drives, host adapter cards,
motherboards, bus extenders, cables and connectors.
 
  Linfinity's marketing strategy has been one of leveraging its custom and
military programs first into higher volume SLIC opportunities, followed by
market entries with several ASSP products. Linfinity now offers a catalog of
approximately 450 standard catalog products and has introduced numerous ASSPs.
However, the market for new products sold by Linfinity has been very
competitive and characterized by pricing pressures.
 
  Linfinity has developed bipolar wafer fabrication processes in its in-house
manufacturing facility which provide a range of high-voltage processes for
certain power management applications. In addition, Linfinity has developed
bipolar complementary metal oxide semiconductor (BiCMOS) wafer fabrication
processes. The BiCMOS process combines the high-performance bipolar process
with a CMOS process for mixed signal applications such as certain power
management ICs. However, because Linfinity's in-house BiCMOS wafer fabrication
capacity is limited, the Company utilizes IMP, Inc., an outside semiconductor
fabrication facility, for most of its BiCMOS wafer requirements. Reliance on
outside fabrication facilities minimizes fixed costs and capital expenditures
but increases certain operational risks, including the lack of an assured
wafer supply and limited control over delivery schedules and manufacturing
yields. See Part II, Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Business Outlook and Risk
Factors--Dependence on Foundries, Assembly and Test Services."
 
  Linfinity products are generally priced from $0.20 to $5.00 for commercial
and industrial applications, $2.50 to $22.00 for defense applications and $100
to $500 for high reliability space applications.
 
  Linfinity sells its products in the commercial, industrial, and defense and
space markets to OEMs and distributors.
 
  In July 1998, the Company began a process to identify alternatives to
broaden Linfinity's market access for its products and to provide greater
financial resources for executing Linfinity's marketing strategy. The Company
has engaged BT Alex. Brown Inc. to assist in evaluating potential partnerships
that address these goals.
 
INDUSTRY SEGMENT INFORMATION
 
  Information as to net sales, gross profit margin, research and development
expense, selling, general and administrative expense, operating income (loss),
identifiable assets, accounts receivable (net), inventories (net),
depreciation and amortization expense, and capital expenditures attributable
to each of the Company's two industry segments for each year in the three-year
period ended June 30, 1998, is contained in Note J of the Notes
 
                                       5
<PAGE>
 
to Consolidated Financial Statements. See Part IV, Item 14. "Exhibits,
Financial Statement Schedule and Reports on Form 8-K."
 
MARKETING
 
  In the United States, Telecom Solutions markets and sells most of its
products through its own sales force to the RBOCs, major interexchange
carriers, independent telephone companies, CLECs, private network operators
and wireless service providers. Internationally, Telecom Solutions markets and
sells its products to telecommunications service providers through its own
sales force in the United Kingdom and independent sales representatives and
distributors elsewhere. In the United States and internationally, Linfinity
sells its products through its own sales force and independent sales
representatives to OEMs and distributors.
 
LICENSING AND PATENTS
 
  The Company incorporates a combination of trademark, copyright and patent
registration, contractual restrictions and internal security to establish and
protect its proprietary rights. The Company has United States and
international patents and patent applications pending covering certain
technology used by its Telecom Solutions and Linfinity operations. In
addition, both operations use technology licensed from others. However, while
the Company believes that its patents have value, the Company relies primarily
on innovation, technological expertise and marketing competence to maintain
its competitive advantage. The telecommunications and semiconductor industries
are both characterized by the existence of a large number of patents and
frequent litigation based on allegations of patent infringement. The Company
intends to continue its efforts to obtain patents, whenever possible, but
there can be no assurance that patents will be issued or that any existing
patents or patents that are obtained will not be challenged, invalidated or
circumvented or that the rights granted will provide any commercial benefit to
the Company. Additionally, if any of the Company's processes or designs are
identified as infringing upon patents held by others, there can be no
assurances that a license will be available or that the terms of obtaining any
such license will be acceptable to the Company.
 
MANUFACTURING
 
  The Telecom Solutions manufacturing process consists primarily of in-house
electrical assembly and test performed by the Company's subsidiary in Aguada,
Puerto Rico. Additionally, the Company's subsidiary, Navstar, in England
performs in-house electrical assembly and test of its GPS receivers and
products.
 
  The Linfinity manufacturing process consists primarily of bipolar wafer
fabrication, component assembly and final test. Its bipolar ICs are
principally fabricated in the Company's wafer fabrication facility in Garden
Grove, California. Linfinity also utilizes outside services to perform certain
operations during the fabrication process. In addition, Linfinity utilizes
IMP, Inc., an outside semiconductor fabrication facility, for most of its
BiCMOS wafer requirements. Component assembly and final test are performed in
Southeast Asia by independent subcontract manufacturers or in Garden Grove by
Linfinity employees. Reliance on independent assembly and test subcontractors
can lengthen manufacturing cycle times, especially if the Company is required
to compete against other manufacturers for these contractors' services.
 
  The manufacturing of Linfinity's ICs is a highly precise and complex
process. Minute impurities, contaminants, errors or difficulties in the
manufacturing process, defects in the masks used to print circuits on a wafer,
or equipment failure among other factors can cause a substantial number of
wafers to be rejected or numerous die on each wafer to be nonfunctional. There
can be no assurance that current manufacturing yields can be maintained or
that better yields will be achieved in the future.
 
  The Company primarily uses standard parts and components as well as standard
subcontract assembly and test, which are generally available from multiple
sources. The Company, to date, has not experienced any significant delays in
obtaining needed standard parts, single source components or services from its
suppliers but there can be no assurance that such problems will not develop in
the future. However, the Company maintains a
 
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reserve of certain ICs and certain single source components and seeks
alternative suppliers where possible. The Company believes that a lack of
availability of ICs or single source components would have an adverse effect
on the Company's operating results. See Part II, Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Business Outlook and Risk Factors--Dependence on Foundries, Assembly and Test
Services."
 
BACKLOG
 
  The Company's backlog was approximately $15.2 million at June 30, 1998
compared to approximately $26.2 million at June 30, 1997. Backlog consists of
customer orders which are expected to be shipped within the next twelve
months. The Company does not believe that current or future backlog levels are
meaningful indicators of future net sales. Most orders included in backlog can
be rescheduled or canceled by customers without significant penalty. Telecom
Solutions' backlog was approximately $6.3 million and $7.3 million at June 30,
1998 and 1997, respectively. Historically, a substantial portion of Telecom
Solutions' net sales in any fiscal period has been derived from orders
received during that fiscal period. Linfinity's backlog was approximately $8.9
million and $18.9 million at June 30, 1998 and 1997, respectively. The
semiconductor industry has recently experienced a change towards significantly
shorter lead times resulting in an increased dependence by Linfinity upon
orders received and shipped during the same quarter. Linfinity's backlog may
be affected by the cancelation or delay of customer orders, the overall
condition of the semiconductor industry, overall worldwide economic conditions
and the cyclical nature of customer demand in each of its markets. See Part
II, Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Business Outlook and Risk Factors."
 
KEY CUSTOMERS AND EXPORT SALES
 
  No customer accounted for 10% or more of the Company's net sales in fiscal
years 1998 and 1996. In fiscal 1997, one of Telecom Solutions' customers, AT&T
Corporation, accounted for 16% of the Company's total net sales. The Company's
export sales, which were primarily to the Far East, Western Europe, Canada and
Latin America accounted for 27%, 26% and 28% of the Company's net sales in
fiscal years 1998, 1997 and 1996, respectively. Export sales to the Far East
accounted for 12%, 16%, and 13% of the Company's net sales in fiscal years
1998, 1997 and 1996, respectively.
 
  International sales may be subject to certain risks, including but not
limited to, foreign currency fluctuations, export restrictions, longer payment
cycles and unexpected changes in regulatory requirements or tariffs. See
Part II, Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Business Outlook and Risk Factors--Risks Associated
with International Sales." Gains and losses on the conversion to U.S. dollars
of foreign currency accounts receivable and accounts payable arising from
international operations may in the future contribute to fluctuations in the
Company's business and operating results. Sales and purchase obligations
denominated in foreign currencies have not been significant. Accordingly, the
Company does not currently engage in foreign currency hedging activities or
derivative arrangements but may do so in the future to the extent that such
obligations become more significant. Additionally, currency fluctuations could
have an adverse effect on the demand for the Company's products in foreign
markets.
 
COMPETITION
 
  The telecommunications and semiconductor industries and the markets which
they serve are highly competitive. Many of the Company's competitors or
potential competitors are more established than the Company and have greater
financial, manufacturing, technical and marketing resources. In the
telecommunications market, Telecom Solutions' primary competitors are Datum
Inc. and Hewlett-Packard Company. In addition, the enactment of The
Telecommunications Act of 1996, which permits RBOCs, under certain conditions,
to manufacture telecommunications equipment may result in competition from
these customers of the Company. In the semiconductor market, Linfinity
competes with a number of large multinational companies and smaller niche
companies. In addition, as part of its license and supply agreement
 
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with Linfinity, IMP, Inc. has the right to manufacture, market and sell the
SCSI line of products through its own sales force in direct competition with
Linfinity.
 
  Telecom Solutions competes primarily on product reliability and performance,
product features, adherence to standards, customer service and price.
Linfinity competes primarily on price, product reliability and performance,
delivery time, and customer service. Product life cycles in the semiconductor
industry typically experience declining average selling prices (ASPs) over the
life of a product. Several of the Company's product lines, including LDOs and
PWMs, are undergoing such price erosion. Linfinity's response has been to
increase the volume of units shipped and introduce new products with higher
ASPs, but there can be no assurance that the Company will be able to fully
offset the impact of future declines in ASPs. The Company believes that both
Telecom Solutions and Linfinity have generally competed favorably with respect
to their respective competitive factors, except in limited segments of the
semiconductor market where Linfinity products are under extreme price pressure
due to intense price competition.
 
  There can be no assurance that either Telecom Solutions or Linfinity will be
able to compete successfully in the future. The Company's ability to compete
successfully is dependent upon its response to the entry of new competitors,
the average selling prices received for its products, changing technology and
customer requirements, development or acquisition of new products, the timing
of new product introductions by the Company or its competitors, continued
improvement of existing products, changes in overall worldwide market and
economic conditions, cost effectiveness, quality, service and market
acceptance of the Company's products.
 
RESEARCH AND DEVELOPMENT
 
  The Company has actively pursued the application of new technology in the
industries in which it competes and has its own staff of engineers and
technicians who are responsible for the design and development of new
products. In fiscal years 1998, 1997 and 1996, the Company's overall research
and development expenditures were $18,810,000, $18,457,000 and $15,413,000,
respectively. All research and development expenditures were expensed as
incurred. At June 30, 1998, 93 engineering and engineering support employees
were engaged in development activities. Telecom Solutions continued to focus
its development efforts in fiscal year 1998 on new products as well as the
enhancement of core synchronization and transmission products. The new product
development program included wireline and wireless synchronization, network
management software and core GPS, antenna and clock technologies. Telecom
Solutions' research and development expenditures were $12,387,000, $12,866,000
and $9,581,000 in fiscal years 1998, 1997 and 1996, respectively. Linfinity
focused its investment efforts in fiscal year 1998 on new product development,
enhancement of existing products and design capabilities, and improvement of
its wafer fabrication process technologies. Its new product development
program has been focused heavily on ASSPs and other desktop power management
products. Linfinity's product development program is dependent upon its
ability to recruit and retain design and applications engineers. Linfinity's
research and development expenditures were $6,423,000, $5,591,000 and
$5,832,000 in fiscal years 1998, 1997 and 1996, respectively. The Company will
continue to have significant research and development expenditures in order to
maintain its competitive position, although there can be no assurance that the
Company will be able to successfully develop new products or enhance existing
products or that such new or enhanced products will achieve market acceptance.
 
GOVERNMENT REGULATION
 
  The telecommunications industry is subject to government regulatory policies
regarding pricing, taxation and tariffs which may adversely impact the demand
for the Company's telecommunications products. These policies are continuously
reviewed and subject to change by the various governmental agencies. The
Company is also subject to government regulations which set installation and
equipment standards for newly installed hardware.
 
 
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ENVIRONMENTAL REGULATION
 
  The Company's operations are subject to numerous federal, state and local
environmental regulations related to the storage, use, discharge and disposal
of toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. Failure to comply with such regulations could result in suspension or
cessation of the Company's operations, or could subject the Company to
significant future liabilities. Although the Company periodically reviews its
facilities and internal operations for compliance with applicable
environmental regulations, such reviews are necessarily limited in scope and
frequency and, therefore, there can be no assurance that such reviews have
revealed or will reveal all potential instances of noncompliance. The
liabilities arising from any noncompliance with such environmental regulations
could materially adversely affect the Company's business, financial condition
and results of operations.
 
EMPLOYEES
 
  At June 30, 1998, the Company had 642 employees, including 345 in
manufacturing, 115 in engineering and 182 in sales, marketing and
administration. At June 30, 1998, Telecom Solutions had 426 employees and
Linfinity had 216 employees. The Company believes that its future success is
highly dependent on its ability to attract and retain highly qualified
management, sales, marketing and technical personnel. Accordingly, the Company
maintains employee incentive and stock plans for certain of its employees.
Additionally, Linfinity maintains a separate employee stock option plan for
certain Linfinity employees. No Company employees are represented by a labor
union, and the Company has experienced no work stoppages. The Company believes
that its employee relations are good.
 
ITEM 2. PROPERTIES
 
  The following are the principal facilities of the Company as of June 30,
1998:
 
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<CAPTION>
                                                       APPROXIMATE  OWNED/LEASE
                                                       FLOOR AREA   EXPIRATION
 LOCATION                     PRINCIPAL OPERATIONS      (SQ. FT.)      DATE
 --------                     --------------------     ----------- -------------
 <C>                       <S>                         <C>         <C>
 San Jose, California..... Symmetricom Corporate         118,000   April 2009
                            Offices and Telecom
                            Solutions
                            administration, sales,
                            engineering and
                            manufacturing
 Aguada, Puerto Rico...... Telecom Solutions              45,000   September
                            manufacturing                          1999
 Aguada, Puerto Rico...... Telecom Solutions              22,000   September
                            manufacturing                          2000
 Northampton, England..... Navstar administration,        18,000   April 1999
                            sales, engineering and
                            manufacturing
 Garden Grove, California. Linfinity administration,      96,000   Owned
                            sales, engineering and
                            manufacturing
 Garden Grove, California. Linfinity wafer                 9,000   Owned
                            fabrication
</TABLE>
 
  During fiscal 1997, the Company leased a newly constructed 118,000 square
foot facility in San Jose, California to replace its previous San Jose
facility, for which the lease expired in July 1997. The Company has sublet
approximately 35,000 square feet of this facility through November 2000. The
Company believes that its current facilities are well maintained and generally
adequate to meet short-term requirements.
 
ITEM 3. LEGAL PROCEEDINGS
 
  In January 1994, a securities class action complaint was filed against the
Company and certain of its present or former officers or directors in the
United States District Court, Northern District of California. The action was
filed on behalf of a putative class of purchasers of the Company's stock
during the period April 6, 1993 through November 10, 1993. The complaint seeks
unspecified money damages and alleges that the Company and certain of its
present or former officers or directors violated federal securities laws in
connection with various public statements made during the putative class
period. The Court dismissed the first and second amended complaints with leave
to amend. The plaintiff filed a third amended corrected complaint in August
1997. The Company filed a motion to dismiss this third amended complaint which
was denied in January 1998. Discovery is proceeding. The Company and its
officers believe that the complaint is entirely without merit, and intend to
continue to defend the action vigorously. The Company is also a party to
certain other claims in the normal course of its operations. While the results
of such claims cannot be predicted with any certainty, management, after
 
                                       9
<PAGE>
 
consultation with counsel, believes that the final outcome of such matters
will not have a material adverse effect on the Company's financial position or
results of operations.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matters were submitted to a vote of the security holders of the Company
during the last quarter of the fiscal year ended June 30, 1998.
 
EXECUTIVE OFFICERS OF THE COMPANY
 
  Following is a list of the executive officers of the Company as of September
1, 1998 and brief summaries of their business experience. All officers,
including executive officers, are elected annually by the Board of Directors
at its meeting following the annual meeting of shareholders. The Company is
not aware of any officer who was elected to the office pursuant to any
arrangement or understanding with another person.
 
<TABLE>
<CAPTION>
             NAME           AGE                                POSITION
             ----           ---                                --------
   <S>                      <C> <C>
   Roger A. Strauch........  42 Chief Executive Officer and Chief Financial Officer
   Mary A. Rorabaugh.......  39 Vice President, Finance and Secretary
   Thomas W. Steipp........  49 President and Chief Operating Officer, Telecom Solutions
   James J. Peterson.......  43 President and Chief Operating Officer, Linfinity Microelectronics Inc.
</TABLE>
 
  Mr. Strauch has served as Chief Executive Officer and Chief Financial
Officer of the Company since June 1998 and July 1998, respectively. In
addition, Mr. Strauch is Chairman of the Board of The Roda Group, a venture
development firm based in Berkeley, California. In June of 1997, Mr. Strauch
retired from his position as Chairman of the Board and Chief Executive Officer
of TCSI Corporation (TCSI), a telecommunications software company. Mr. Strauch
co-founded TCSI in 1983 and served initially as the general manager of this
Teknekron Corporation division. Once established as a separate corporation,
Mr. Strauch was elected as TCSI's President in 1987 and, in addition, its
Chief Executive Officer in 1989 and Chairman of the Board in 1996. For five
years prior thereto, Mr. Strauch served as a senior staff engineer and project
manager for Hughes Aircraft Company's Space and Communications Group. Mr.
Strauch is on the Board of Directors of Ask Jeeves, an internet navigation
company, NightFire Software, a telecommunications software company, and
Plynetics Express, a rapid prototyping and tooling manufacturer. He is a
member of the Board of Trustees of the Math Sciences Research Institute, the
Industrial Advisory Board of the Department of Electrical Engineering and
Computer Sciences at the University of California, Berkeley, and a member of
Cornell University's College of Engineering Advisory Council.
 
  Ms. Rorabaugh has served as Vice President, Finance and Secretary of the
Company since July 1998 and as Vice President, Finance of Telecom Solutions, a
division of the Company, from April 1997 to June 1998. From April 1993 to
March 1997, Ms. Rorabaugh served as Controller, Telecom Solutions. Prior to
joining the Company, from April 1989 to March 1993, Ms. Rorabaugh was Director
of Corporate Finance and Manager of Financial Planning at VLSI Technology,
Inc., a semiconductor company. From April 1988 to March 1989, Ms. Rorabaugh
was Division Controller for Conner Peripherals, Inc., a manufacturer of hard
disk drives. From May 1984 to March 1988, Ms. Rorabaugh held various positions
with VLSI Technology, Inc., including Operations Planning Manager,
Manufacturing Controller and Senior Manufacturing Analyst. Previously,
Ms. Rorabaugh was a consultant for two years with Putnam, Hayes, & Bartlett,
Inc., a management consulting firm.
 
  Mr. Steipp has served as President and Chief Operating Officer, Telecom
Solutions, a division of the Company, since March 1998. Prior to joining the
Company, from February 1996 to February 1998, Mr. Steipp served as Vice
President and General Manager of Broadband Data Networks, a division of
Scientific-Atlanta. From January 1979 to January 1996, Mr. Steipp held various
management positions in operations and marketing
 
                                      10
<PAGE>
 
with Hewlett-Packard. Mr. Steipp served as General Manager of the Federal
Computer Division from January 1991 to January 1996 and Manager of Federal
Sales & Marketing from August 1990 to January 1991. From January 1989 to
August 1990, Mr. Steipp was Manager, Systems Integration Operations.
 
  Mr. Peterson has served as President and Chief Operating Officer for
Linfinity Microelectronics Inc., a subsidiary of the Company, since February
1997. From August 1996 to February 1997, Mr. Peterson served as Vice
President, Sales at Linfinity. Prior to joining the Company, from 1983 until
August 1996, Mr. Peterson held various positions with Silicon Systems, Inc., a
microelectronics company. From March 1992 to August 1996, Mr. Peterson served
as Senior Vice President, Worldwide Sales & Corporate Communications. From
June 1990 to March 1992, Mr. Peterson was the Vice President, International
Sales. From January 1987 to June 1990, Mr. Peterson was Director, Far East
Sales. From January 1983 to January 1987, Mr. Peterson was Product Marketing
Manager, Telecommunications. Previously, Mr. Peterson was Product Marketing
Engineer and Industry Marketing Specialist with Rockwell Corporation and
General Instruments Microelectronics Division, respectively.
 
                                      11
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
 
  The information required by this Item is described in Note K of the Notes to
Consolidated Financial Statements. See Part IV, Item 14. "Exhibits, Financial
Statement Schedule and Reports on Form 8-K."
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The following selected financial data should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto included in
Part IV, Item 14. "Exhibits, Financial Statement Schedule and Reports on Form
8-K," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Part II, Item 7.
 
<TABLE>
<CAPTION>
                                               YEAR ENDED JUNE 30,
                                   --------------------------------------------
                                     1998      1997     1996     1995    1994
                                   --------  -------- -------- -------- -------
                                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                <C>       <C>      <C>      <C>      <C>
Operating Results:
 Net sales:
  Telecom Solutions                $ 73,311  $ 89,718 $ 68,243 $ 62,814 $59,215
  Linfinity Microelectronics Inc.    47,270    54,637   37,795   40,294  39,170
                                   --------  -------- -------- -------- -------
   Total                            120,581   144,355  106,038  103,108  98,385
 Operating income (loss)             (5,121)   15,998    8,263   10,868   8,331
 Earnings (loss) before income
  taxes                              (4,140)   17,337    9,476   11,599   8,125
 Net earnings (loss)                 (1,530)   13,454    7,478   10,346   6,551
 Basic earnings (loss) per share       (.10)      .85      .48      .71     .47
 Diluted earnings (loss) per share     (.10)      .83      .47      .66     .43
Balance Sheet:
 Cash and investments                34,342    41,587   34,270   33,205  21,250
 Working capital                     55,556    58,325   55,522   50,739  38,503
 Total assets                       114,893   129,305   93,531   85,326  69,054
 Long-term obligations                8,368     8,583    5,709    5,766   5,818
 Shareholders' equity                84,357    87,603   70,403   60,125  46,786
</TABLE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
  The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto.
 
BUSINESS OUTLOOK AND RISK FACTORS
 
  Fluctuations in Operating Results. The Company's quarterly and annual
operating results have fluctuated in the past and may continue to fluctuate in
the future due to several factors, including, without limitation, the volume
and timing of orders from customers and shipments to customers, the
cancelation or rescheduling of customer orders, changes in the product or
customer mix of sales, the gain or loss of significant customers, the
Company's ability to introduce new products on a timely and cost-effective
basis, level and value of the Company's inventories, the timing of new product
introductions by the Company and its competitors, customer delays in
qualification of new products, increased competition and competitive pricing
pressures, fluctuations, especially declines, in the average selling prices
received for its products, market acceptance of new or enhanced versions of
the Company's and its competitors' products, the long sales cycles associated
with the Company's products, cyclical conditions in the telecommunications and
semiconductor industries, fluctuations in manufacturing yields and other
factors. For example, net sales for the fourth quarter of fiscal 1998 were
$28.1 million compared to $39.1 million for the fourth quarter of fiscal 1997
due, in part, to the factors described
 
                                      12
<PAGE>
 
above. A significant portion of the Company's operating and manufacturing
expenses are relatively fixed in nature and planned expenditures are based in
part on anticipated orders. If the Company is unable to adjust spending in a
timely manner to compensate for any unexpected future sales shortfall, the
Company's business, financial condition and results of operations could be
materially and adversely affected. The Company's operations entail a high
level of fixed costs and require an adequate volume of production and sales to
achieve and maintain reasonable gross profit margins and positive net
earnings. Accordingly, any significant decline in demand for the Company's
products or reduction in the Company's average selling prices, or any material
delay in customer orders would have a material adverse effect on the Company's
business, financial condition and results of operations. For example, when net
sales declined to $120.6 million for fiscal 1998 from $144.4 million for
fiscal 1997, the Company's earnings before income taxes fell to a loss of $4.1
million (including $9.2 million in non-recurring charges incurred in the third
quarter of fiscal 1998) for fiscal 1998 from earnings before income taxes of
$17.3 million in fiscal 1997 due, in part, to the factors described above. In
addition, the Company's future results depend in large part on growth in the
markets for the Company's products. The growth in each of these markets may
depend on, among other things, changes in general economic conditions, or
conditions which relate specifically to the markets in which the Company
competes, changes in regulatory conditions, legislation, export rules or
conditions, interest rates and fluctuations in the business cycle for any
particular market segment.
 
  Uncertainty of Timing of Product Sales; Limited Backlog. A substantial
portion of the Company's quarterly net sales is often dependent upon orders
received and shipped during that quarter, of which, a significant portion may
be received during the last month or even the last few days of that quarter.
The semiconductor industry has recently experienced a change towards
significantly shorter lead times resulting in an increased dependence by
Linfinity upon orders received and shipped during the same quarter. The timing
of the receipt and shipment of even one large order may have a significant
impact on the Company's net sales and results of operations for such quarter.
Furthermore, most orders in backlog can be rescheduled or canceled without
significant penalty. As a result, it is difficult to predict the Company's
quarterly results even during the final days of a quarter. However, based on
orders received through the first two months of fiscal 1999, the Company
expects that net sales for the first quarter of fiscal 1999 will decline as
compared to net sales for the first quarter of fiscal 1998.
 
  Customer Concentration. A relatively small number of customers has
historically accounted for, and is expected to continue to account for, a
significant portion of the Company's net sales in any given fiscal period. In
fiscal 1997, AT&T Corporation (AT&T), a Telecom Solutions customer, accounted
for 16% of the Company's total net sales. No customer accounted for 10% or
more of net sales in fiscal years 1998 and 1996. The timing and level of sales
to the Company's largest customers have fluctuated significantly in the past
and are expected to continue to fluctuate significantly from quarter-to-
quarter and year-to-year in the future. For example, the Company's sales to
AT&T increased to $22.5 million in fiscal 1997 from $2.6 million in fiscal
1996 but decreased to $8.1 million in fiscal 1998. There can be no assurance
as to the timing or level of future sales to the Company's customers. The loss
of one or more of the Company's significant customers or a significant
reduction or delay in sales to any such customer, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
  New Product Development. The market for the Company's products is
characterized by rapidly changing technologies, frequent new product
introductions, evolving industry standards and changes in end-user
requirements. Technological advancements could render the Company's products
obsolete and unmarketable. The Company's success will depend on its ability to
respond to changing technologies and customer requirements and on its ability
to develop and introduce new and enhanced products, in a cost-effective and
timely manner. Delays in new product development or delays in production
startup could have a material adverse effect on the Company's business,
financial condition and results of operations. Such delays have happened in
the past, and there can be no assurance that such delays will not recur or
that the Company will successfully respond to technological changes and
develop and introduce new or enhanced products, or that such new or enhanced
products will achieve market acceptance.
 
 
                                      13
<PAGE>
 
  Product Performance and Reliability. The Company's customers establish
demanding specifications for product performance and reliability. The
Company's products are complex and often use state of the art components,
processes and techniques. Undetected errors and design flaws have occurred in
the past and there can be no assurance that new products or enhancements of
existing products will not contain undetected errors, design flaws or other
failures due to the complexities of such products. In addition to higher
product service, warranty and replacement costs, such product defects may
seriously harm the Company's customer relationships and industry reputation,
further magnifying the adverse impact of such defects. Any such product
performance or reliability problems could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
  Competition; Pricing Pressure. The Company believes that competition in the
telecommunications and semiconductor industries in general, and in the new and
existing markets served by the Company in particular, is intense and likely to
increase substantially. The Company's ability to compete successfully in the
future will depend on, among other things: the cost effectiveness, quality,
price, service and market acceptance of the Company's products; its response
to the entry of new competitors or the introduction of new products by the
Company's competitors; its ability to keep pace with changing technology and
customer requirements; the timely development or acquisition of new or
enhanced products; and the timing of new product introductions by the Company
or its competitors. In the telecommunications market, Telecom Solutions'
primary competitors are Datum Inc. and Hewlett-Packard Company. In addition,
due, in part, to the enactment of The Telecommunications Act of 1996, which
permits Regional Bell Operating Companies (RBOCs), which are among Telecom
Solutions' largest customers, to manufacture telecommunications equipment,
RBOCs may increasingly become significant competitors of Telecom Solutions. In
the semiconductor market, Linfinity competes with a number of large
multinational companies and smaller niche companies. In addition, as part of
its license and supply agreement with Linfinity, IMP, Inc. has the right to
manufacture, market, and sell the SCSI line of products through its own sales
force in direct competition with Linfinity. Many of the Company's competitors
or potential competitors are more established than the Company and have
greater financial, manufacturing, technical and marketing resources.
Furthermore, the Company expects its competitors to continually improve their
design and manufacturing capabilities and to introduce new products and
services with enhanced performance characteristics and/or lower prices. The
Company continues to experience significant pricing pressures in all of its
markets and has experienced price erosion in several product lines, including
LDOs and PWMs. In addition, the continuing trend toward lower-priced personal
computers has intensified pricing pressures in certain related markets served
by Linfinity. Linfinity's response has been to attempt to increase the volume
of units shipped and to attempt to introduce new products with higher average
selling prices, but there can be no assurance that the Company will be able to
fully offset the impact of this severe price erosion. This competitive
environment could result in significant price reductions or the loss of orders
from current and/or potential customers which, in each case, could materially
adversely affect the Company's business, financial condition and results of
operations.
 
  Dependence on Foundries, Assembly and Test Services. Although Linfinity uses
its own semiconductor fabrication facility to manufacture bipolar wafers, it
utilizes IMP, Inc., an independent semiconductor foundry located in San Jose,
California, to supply most of its BiCMOS wafers. While reliance on an outside
foundry may reduce capital expenditures and fixed costs, it increases certain
risks significantly, including limited control of: delivery schedules;
manufacturing yields; production costs; and wafer supply, particularly during
periods of rapidly fluctuating demand. In the event that Linfinity's outside
foundry, as a result of financial or operating difficulties or otherwise, is
unable or unwilling to continue supplying wafers to Linfinity in the
quantities and with the yields required by Linfinity, there can be no
assurance that Linfinity will be able to identify and qualify additional
manufacturing sources in a timely manner, that any such additional
manufacturing sources would be able to produce wafers with acceptable
manufacturing yields or that Linfinity would not experience delays in product
availability, quality problems, increased costs or disruption in product
development activities. Irrespective of cause, delayed or reduced wafer supply
or reduced manufacturing yields could result in delayed shipments or canceled
orders which, in either case, could materially and adversely affect the
Company's business, financial condition and results of operations.
 
 
                                      14
<PAGE>
 
  Linfinity also increasingly relies on independent contract manufacturers in
the Far East to assemble and test a significant percentage of its integrated
circuits and most of its electronic modules. Reliance on independent
contractors can lengthen manufacturing cycle times, especially if Linfinity is
required, due to contractors' capacity constraints, to compete against others
for these contractors' services. Any inability to obtain sufficient
manufacturing capacity through existing or alternative sources at favorable
prices, if and as required, could result in delays or reductions in product
shipments which, in turn, could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
  Proprietary Technology. The Company's success will depend, in part, on its
ability to protect trade secrets, obtain or license patents and operate
without infringing on the rights of others. The Company relies on a
combination of trademark, copyright and patent registration, contractual
restrictions and internal security to establish and protect its proprietary
rights. There can be no assurance that such measures will provide meaningful
protection for the Company's trade secrets or other proprietary information.
The Company has United States and international patents and patent
applications pending covering certain technology used by its Telecom Solutions
and Linfinity operations. However, while the Company believes that its patents
have value, the Company relies primarily on innovation, technological
expertise and marketing competence to maintain its competitive position. The
telecommunications and semiconductor industries are both characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement. While the Company intends to continue its
efforts to obtain patents whenever possible, there can be no assurance that
patents will be issued or that new or existing patents will not be challenged,
invalidated or circumvented or that the rights granted will provide any
commercial benefit to the Company. The Company is also subject to the risk of
adverse claims and litigation alleging infringement of the intellectual
property rights of others. Although the Company is not currently party to any
intellectual property litigation, from time to time it has received claims
asserting that the Company has infringed the proprietary rights of others.
There can be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such claims will not
result in costly litigation or require the Company to obtain a license for
such intellectual property rights regardless of the merit of such claims. No
assurance can be given that any necessary licenses will be available or that,
if available, such licenses can be obtained on commercially reasonable terms.
 
  Environmental Matters. The Company's operations are subject to numerous
federal, state and local environmental regulations related to the storage,
use, discharge and disposal of toxic, volatile or otherwise hazardous
chemicals used in its manufacturing process. While the Company has not
experienced any materially adverse effects on its operations from
environmental regulations, there can be no assurance that changes in such
regulations will not impose the need for additional capital equipment or other
requirements or restrict the Company's ability to expand its operations.
Failure to comply with such regulations could result in suspension or
cessation of the Company's operations, or could subject the Company to
significant liabilities. Although the Company periodically reviews its
facilities and internal operations for compliance with applicable
environmental regulations, such reviews are necessarily limited in scope and
frequency and, therefore, there can be no assurance that such reviews have
revealed or will reveal all potential instances of noncompliance. The
liabilities arising from any noncompliance with such environmental regulations
could materially adversely affect the Company's business, financial condition
and results of operations.
 
  Governmental Regulations. Federal and state regulatory agencies, including
the Federal Communications Commission and the various state public utility
commissions and public service commissions, regulate most of the Company's
domestic telecommunications customers. Although the Company is generally not
directly affected by such legislation, the effects of such regulation on the
Company's customers may, in turn, adversely impact the Company's business,
financial condition and results of operations. For instance, the sale of the
Company's products may be affected by the imposition upon certain of the
Company's customers of common carrier tariffs and the taxation of
telecommunications services. These regulations are continuously reviewed and
subject to change by the various governmental agencies. Changes in current or
future laws or regulations, in the United States or elsewhere, could
materially and adversely affect the Company's business, financial condition
and results of operations.
 
                                      15
<PAGE>
 
  Risks Associated with International Sales. The Company's export sales, which
were primarily to the Far East, Western Europe, Canada and Latin America
accounted for 27%, 26% and 28% of the Company's net sales in fiscal years
1998, 1997 and 1996, respectively. Export sales to the Far East accounted for
12%, 16% and 13% of the Company's net sales in fiscal years 1998, 1997 and
1996, respectively. International sales subject the Company to increased risks
associated with political and economic instability and changes in diplomatic
and trade relationships. For example, the Company believes that the recent
economic instability being experienced by certain Asian countries may continue
to adversely affect export sales to the Far East during the first quarter of
fiscal 1999 and beyond. In addition to the loss of direct sales to the region,
the economic instability in Asia could have a material adverse effect on the
Company's business, financial condition and results of operations indirectly
if, for example, the current situation in Asia adversely affects the Company's
distributors, customers and suppliers in the Asia region or elsewhere in the
world, causing more widespread reductions in sales, delays in collection and
supply difficulties.
 
  International sales may be subject to certain additional risks, including
but not limited to, foreign currency fluctuations, export restrictions, longer
payment cycles and unexpected changes in regulatory requirements or tariffs.
To date, sales and purchase obligations denominated in foreign currencies have
not been significant. However, if, in the future, a higher portion of such
sales and purchases are denominated in foreign currencies, gains and losses on
the conversion to U.S. dollars of foreign currency accounts receivable and
accounts payable arising from international operations may contribute to
fluctuations in the Company's business and operating results. The Company does
not currently engage in foreign currency hedging activities or derivative
arrangements but may do so in the future to the extent that such obligations
become more significant. Additionally, currency fluctuations could have an
adverse effect on the demand for the Company's products in foreign markets.
There can be no assurance that such factors will not materially and adversely
affect the Company's business, financial condition or results of operations in
the future or require the Company to modify significantly its current business
practices. In addition, the laws of certain foreign countries may not protect
the Company's proprietary technology to the same extent as do the laws of the
United States.
 
  Inventory Risks. In the third quarter of fiscal 1998, the Company recorded
an $8.5 million inventory provision in view of lower sales prices and sales
volumes experienced by Linfinity. Although the Company believes that it
currently has appropriate provisions for inventory that has declined in value,
become obsolete or is in excess of anticipated demand, there can be no
assurance that such provisions will be adequate. The Company's business,
financial condition and operating results may be materially adversely affected
if significant inventories become obsolete or are otherwise not able to be
sold at favorable prices.
 
  Uncertainties Regarding Sales to Distributors. The percentage of the
Company's sales sold through distributors, particularly at Linfinity, has
generally increased over the past several years, although such percentage
fluctuates from quarter to quarter. Sales to distributors, either
contractually or by industry custom, may be subject to certain rights of
return and other allowances for which the Company maintains reserves. However,
there can be no assurance that such reserves will be adequate. The Company's
business, financial condition and operating results may be materially
adversely affected if actual allowances significantly exceed amounts reserved
therefor.
 
  Changes to Effective Tax Rate. The Company's effective tax rate is affected
by the proportion of earnings (loss) before income taxes that the Company
derives from its Telecom Solutions operation compared to its Linfinity
operation. The effective tax rate in fiscal 1998 was magnified by the
significant loss at Linfinity which was subject to higher tax rates from its
United States jurisdictions offset by the earnings at Telecom Solutions. Most
of Telecom Solutions' Puerto Rico earnings are taxed under Section 936 of the
U.S. Internal Revenue Code which exempts qualified Puerto Rico earnings from
federal income taxes. This results in an overall lower effective tax rate for
Telecom Solutions. This exemption is subject to certain wage-based limitations
and expires at the end of fiscal 2006. In addition, this exemption will be
subject to further limitations during fiscal years 2003 through 2006.
 
  Fluctuations in Stock Price. The Company's stock price has been and may
continue to be subject to significant volatility. Many factors, including any
shortfall in sales or earnings from levels expected by securities analysts and
investors could have an immediate and significant adverse effect on the
trading price of the Company's common stock.
 
                                      16
<PAGE>
 
  Year 2000 Compliance Risks. The Company is aware that many existing
information technology (IT) systems, such as computer systems and software
products, as well as non-IT systems that include embedded technology, were not
designed to correctly process dates after December 31, 1999. The Company is
currently assessing the impact of such "Year 2000" issues on its internal IT
and non-IT systems as well as on its customers, suppliers and service
providers. The Company has formed a Year 2000 Project Team to identify and
address Year 2000 compliance issues, including those related to the Company's
significant non-IT systems used in the Company's buildings, plant, equipment
and other infrastructure. The Year 2000 Project Team is continuing its testing
and evaluation of the Company's products and the Company's IT systems and has
recently begun the process of compiling an inventory of all material Year 2000
issues related to the Company's non-IT systems. The Company has not identified
any significant areas of non-compliance with respect to its products or IT
systems and expects that the assessment and plans for remedial action for all
of its products, IT systems and non-IT systems will be completed by the end of
fiscal 1999. The Company has also initiated discussions with its significant
suppliers and service providers regarding their plans to investigate and
remediate their Year 2000 issues. Although the Company anticipates cooperation
in these efforts from most of the Company's significant suppliers and service
providers, the Company is also dependent on certain utility companies,
telecommunication service companies and other service providers that are
outside the Company's control. Therefore, it may be difficult for the Company
to obtain assurances of Year 2000 readiness from such third parties. Although
the Company believes that its Year 2000 Project Team will identify all of the
Company's material Year 2000 issues in the course of its assessments, given
the pervasiveness of Year 2000 issues and the complex interrelationships among
Year 2000 issues both internal and external to the Company, there can be no
assurance that the Company will be able to identify and accurately evaluate
all such issues.
 
  The Company estimates that the expenses it has incurred to date to address
Year 2000 issues have not been material and, although it has not completed its
full assessment of its Year 2000 readiness, it does not expect to incur
material expenses in connection with any required remediation efforts.
 
  As the process of compiling an inventory of non-IT systems proceeds and as
the other efforts of the Year 2000 Project Team continue, the Company may
identify situations that present material Year 2000 risks and/or that will
require substantial time and material expense to address. In addition, if any
customers, suppliers or service providers fail to appropriately address their
Year 2000 issues, such failure could have a material adverse effect on the
Company's business, financial condition and results of operations. For
example, because a significant percentage of the purchase orders received from
the Company's customers are computer generated and electronically transmitted,
a failure of one or more of the computer systems of the Company's customers
could have a significant adverse effect on the level and timing of orders from
such customers. Similarly, if Year 2000 problems experienced by any of the
Company's significant suppliers or service providers cause or contribute to
delays or interruptions in the delivery of products or services to the
Company, such delays or interruptions could have a material adverse effect on
the Company's business, financial condition and results of operations.
Finally, disruption in the economy generally resulting from Year 2000 issues
could also materially adversely affect the Company. Although the Year 2000
Project Team has not yet determined the most likely worst-case Year 2000
scenarios or quantified the likely impact of such scenarios, it is clear that
the occurrence of one or more of the risks described above could have a
material adverse effect on the Company's business, financial condition or
results of operations.
 
  The Company's Year 2000 Project Team's activities will include the
development of contingency plans in the event the Company has not completed
all of its remediation programs in a timely manner. In addition, the Year 2000
Project Team will develop contingency plans in the event that any third
parties who provide goods or services essential to the Company's business fail
to appropriately address their Year 2000 issues. The Year 2000 Project Team
expects to conclude the development of these contingency plans by the end of
fiscal 1999. Even if these plans are completed on time and put in place, there
can be no assurance that such plans will be sufficient to address any third
party failures or that unresolved or undetected internal and external Year
2000 issues will not have a material adverse effect on the Company's business,
financial condition and results of operations.
 
RESULTS OF OPERATIONS
 
  The Company operates in two different industry segments. Telecom Solutions,
a division of the Company, designs, manufactures and markets advanced network
synchronization systems and intelligent access systems for
 
                                      17
<PAGE>
 
the telecommunications industry. Linfinity Microelectronics Inc., a subsidiary
of the Company, designs, manufactures and markets linear and mixed signal
integrated circuits as well as systems-engineered modules primarily for use in
power management and communication applications in commercial, industrial, and
defense and space markets.
 
 Net Sales
 
  Net sales decreased by $23.8 million (16%) to $120.6 million in fiscal 1998
as compared to fiscal 1997 and increased by $38.3 million (36%) to $144.4
million in fiscal 1997 as compared to fiscal 1996. The decrease in fiscal 1998
sales was due to lower sales in both operations. The increase in fiscal 1997
sales was due to higher sales in both operations.
 
  Telecom Solutions' net sales decreased by $16.4 million (18%) to $73.3
million in fiscal 1998 as compared to fiscal 1997 and increased by $21.5
million (31%) to $89.7 million in fiscal 1997 as compared to fiscal 1996. The
decrease in fiscal 1998 was principally due to lower sales to AT&T Corporation
(AT&T), which decreased to $8.1 million in fiscal 1998 from $22.5 million in
fiscal 1997, and the completion of the Secure7 contract with SBC
Communications Inc., where Secure7 sales decreased to $0.9 million in fiscal
1998 from $8.1 million in fiscal 1997, partially offset by higher sales to
international accounts, particularly Italy, Germany and South Africa. The
Company expects sales to AT&T to fall further in fiscal 1999. The increase in
fiscal 1997 was principally due to higher sales to AT&T which increased to
$22.5 million in fiscal 1997 from $2.6 million in fiscal 1996.
 
  Linfinity's net sales decreased by $7.4 million (13%) to $47.3 million in
fiscal 1998 as compared to fiscal 1997 and increased by $16.8 million (45%) to
$54.6 million in fiscal 1997 as compared to fiscal 1996. The decrease in
fiscal 1998 was due to increased price pressure and weak demand from component
manufacturers supplying the personal computer markets as well as an overall
decline in the global semiconductor market. The increase in fiscal 1997 was
primarily due to higher unit volumes of new standard commercial products and a
shift in sales to higher priced products.
 
 Gross Profit Margin
 
  The Company's gross profit margin was 37%, 46% and 44% in fiscal 1998, 1997
and 1996, respectively.
 
  Telecom Solutions' gross profit margin was 50%, 49%, 46% in fiscal 1998,
1997 and 1996, respectively. In fiscal 1998, the higher gross margin reflects
a slightly more favorable product mix as compared to fiscal 1997. In fiscal
1997, the higher gross margin was principally attributable to higher unit
volumes and increased manufacturing efficiencies.
 
  Linfinity's gross profit margins were 17%, 40% and 40% in fiscal 1998, 1997
and 1996, respectively. The fiscal 1998 results include a one-time charge for
inventory provision of $8.5 million and a reduction in force charge of $0.3
million. Excluding the one-time charges of $8.8 million, the gross margin for
fiscal 1998 was 36%. Excluding the one-time charges, the decrease in gross
profit margin in fiscal 1998 was primarily attributed to lower production
volumes and sales prices. In fiscal 1997, gross profit margin was unchanged
from fiscal 1996, reflecting efficiencies from higher unit sales volumes fully
offset by falling prices in some areas.
 
 Operating Expenses
 
  Research and development expense was $18.8 million (or 16% of net sales),
$18.5 million (or 13% of net sales) and $15.4 million (or 15% of net sales) in
fiscal 1998, 1997 and 1996, respectively.
 
  Telecom Solutions' research and development expense was $12.4 million (or
17% of net sales), $12.9 million (or 14% of net sales) and $9.6 million (or
14% of net sales) in fiscal 1998, 1997 and 1996, respectively. The fiscal 1998
results reflect continued high investments in new products and core
technology,
 
                                      18
<PAGE>
 
with a slight reduction due to lower earnings-based incentive compensation.
During fiscal 1998, Telecom Solutions' new product development program was
focused on wireline and wireless synchronization, network management software
and core GPS, antenna and clock technologies. The increase in fiscal 1997 was
primarily due to higher expenditures for the development of new wireless
synchronization products and technologies and for the initial development
efforts related to network management software.
 
  Linfinity's research and development expense was $6.4 million (or 14% of net
sales), $5.6 million (or 10% of net sales) and $5.8 million (or 15% of net
sales) in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998, $0.5
million of the increase was due to purchased development from IMP, Inc.
Linfinity's new product development program was focused on developing its new
line of ASSPs and desktop power management products during fiscal 1998, 1997
and 1996.
 
  Selling, general and administrative expense was $30.6 million (or 25% of net
sales), $31.5 million (or 22% of net sales) and $22.5 million (or 21% of net
sales) in fiscal 1998, 1997 and 1996, respectively.
 
  Telecom Solutions' selling, general and administrative expense was $19.1
million (or 26% of net sales), $21.1 million (or 24% of net sales) and $15.8
million (or 23% of net sales) in fiscal 1998, 1997 and 1996, respectively. The
decrease in fiscal 1998 reflects lower selling expenses associated with lower
sales and lower earnings-based incentive compensation. The increase in fiscal
1997 was primarily due to higher marketing and sales expenses associated with
increased sales, expanded sales support and product promotion and higher
earnings-based incentive compensation.
 
  Linfinity's selling, general and administrative expense was $11.5 million
(or 24% of net sales), $10.4 million (or 19% of net sales) and $6.7 million
(or 18% of net sales) in fiscal 1998, 1997 and 1996, respectively. The
increase in fiscal 1998 was substantially due to an increase in bad debt
provision and a $0.4 million charge related to a reduction in force. The
increase in 1997 was substantially due to higher marketing and sales expenses
associated with increased sales, expanded sales support, new product promotion
and higher earnings-based incentive compensation.
 
 Operating Income (Loss)
 
  Operating loss was $5.1 million in fiscal 1998, a $21.1 million decrease in
operating income from fiscal 1997. Fiscal 1997 operating income increased by
94% to $16.0 million from $8.3 million in fiscal 1996.
 
  Telecom Solutions' operating income decreased by 52% to $4.8 million in
fiscal 1998 and increased 71% to $10.0 million in fiscal 1997 from $5.9
million in fiscal 1996. The decrease in fiscal 1998 is primarily attributable
to the unfavorable impact of lower net sales partially offset by reductions in
operating expenses. The increase in fiscal 1997 reflects the favorable impact
of higher net sales partially offset by increased operating expenses.
 
  Linfinity's operating loss was $9.9 million in fiscal 1998, a $15.9 million
decrease in operating income from fiscal 1997. Fiscal 1997 operating income
increased by 150% to $6.0 million from $2.4 million in fiscal 1996. The fiscal
1998 results reflect the unfavorable effect of lower net sales, the one-time
charge to inventory provision, the one-time charges for the reduction in force
and increased operating expenses. The increase in fiscal 1997 reflects the
favorable impact of higher net sales partially offset by higher operating
expenses.
 
 Interest Income (Expense)
 
  Interest income was $1.8 million, $1.9 million and $1.8 million in fiscal
1998, 1997 and 1996, respectively. The decrease in fiscal 1998 reflects lower
average invested cash balances offset by slightly higher interest rates.
Interest expense was $0.8 million, $0.6 million and $0.6 million in fiscal
1998, 1997 and 1996, respectively. Fiscal 1998 was predominantly due to
interest expense at Telecom Solutions, associated with the capital lease on
 
                                      19
<PAGE>
 
its building in San Jose. Interest expense in fiscal 1997 and fiscal 1996 was
associated with a note payable at Linfinity that was repaid in full in
September 1997.
 
 Income Taxes
 
  The income tax benefit was $2.6 million (effective tax rate of 63%) in
fiscal 1998. The income tax provision was $3.9 million (effective tax rate of
22%) and $2.0 million (effective tax rate of 21%) in fiscal 1997 and 1996,
respectively. The fiscal 1998 income tax benefit and effective tax rate were
primarily affected by the proportion of earnings (loss) before income taxes
between Telecom Solutions and Linfinity. The effective tax rate in fiscal 1998
was magnified by the significant loss at Linfinity netted against the earnings
at Telecom Solutions. Linfinity was subject to higher tax rates from its
United States jurisdictions, while most of the Telecom Solutions Puerto Rico
earnings are taxed under Section 936 of the U.S. Internal Revenue code which
exempts qualified Puerto Rico earnings from federal income taxes. The fiscal
1997 and 1996 effective tax rates were lower than the federal tax rate
principally due to the benefit of lower income tax rates resulting from the
federal exemption of qualified Puerto Rico earnings. However, this Section 936
exemption expires at the end of fiscal 2006 and is subject to certain wage
based limitations. Additionally, this benefit will be further limited during
fiscal 2003 to 2006, based on certain prior year Puerto Rico earnings.
 
 Net Income (Loss)
 
  As a result of the factors discussed above, net loss was $1.5 million, or
$0.10 per share (diluted), in fiscal 1998 compared to net earnings of $13.5
million, or $0.83 per share (diluted), in fiscal 1997 and net earnings of $7.5
million, or $0.47 per share (diluted), in fiscal 1996.
 
 New Accounting Pronouncements
 
  Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share," which requires
the presentation of basic and diluted earnings per share information. Basic
earnings per share, which replaces primary earnings per share, is computed by
dividing net earnings by the weighted average number of common shares
outstanding during the period. Diluted earnings per share, which replaces
fully diluted earnings per share, is computed by dividing net earnings by the
weighted average number of common shares outstanding and common equivalent
shares from dilutive stock options, using the treasury stock method. All prior
period earnings per share data presented have been restated to conform with
the provisions of this Statement.
 
  In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income" and Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information," were issued which require the Company to report and
display certain information related to comprehensive income and operating
segments, respectively. Both statements are effective for fiscal years
beginning after December 15, 1997. Accordingly, the Company will adopt SFAS
130 and SFAS 131 starting with its fiscal year ending June 30, 1999. Adoption
of these statements will not impact the Company's financial position and
results of operations.
 
  In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities," was
issued which defines derivatives, requires all derivatives be carried at fair
value, and provides for hedging accounting when certain conditions are met.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Although the Company has not fully assessed the
implications of this new statement, the Company does not believe adoption of
this statement will have a material impact on the Company's financial
statements.
 
                                      20
<PAGE>
 
 Liquidity and Capital Resources
 
  Working capital decreased to $55.6 million at June 30, 1998 from $58.3
million at June 30, 1997, while the current ratio increased to 3.8 to 1.0 from
2.9 to 1.0. The increase in the current ratio resulted primarily from the
repayment of a $5.7 million note. During the same period, cash, cash
equivalents and short-term investments decreased to $34.3 million from $41.6
million, principally due to $6.5 million used for capital expenditures, the
repayment of the $5.7 million note, and $1.8 million used for the net
repurchase of the Company's common stock which more than offset $7.5 million
in cash provided by operating activities.
 
  At June 30, 1998, the Company had a capital lease obligation entered during
fiscal 1997 for a facility as described in Note D of the Notes to Consolidated
Financial Statements See Part IV, Item 14. "Exhibits, Financial Statement
Schedule and Reports on Form 8-K." At June 30, 1998, the Company had $7.0
million of unused credit available under its bank line of credit.
 
  The Company believes that cash, cash equivalents, short-term investments,
funds generated from operations and funds available under its bank line of
credit will be sufficient to satisfy working capital requirements, short-term
loan repayment and capital expenditures in fiscal 1999. At June 30, 1998, the
Company had no material outstanding commitments to purchase capital equipment.
 
 Year 2000 Issue
 
  The Company is aware that many existing information technology (IT) systems,
such as computer systems and software products, as well as non-IT systems that
include embedded technology, were not designed to correctly process dates
after December 31, 1999. The Company is currently assessing the impact of such
"Year 2000" issues on its internal IT and non-IT systems as well as on its
customers, suppliers and service providers. The Company has formed a Year 2000
Project Team to identify and address Year 2000 compliance issues, including
those related to the Company's significant non-IT systems used in the
Company's buildings, plant, equipment and other infrastructure. The Year 2000
Project Team is continuing its testing and evaluation of the Company's
products and the Company's IT systems and has recently begun the process of
compiling an inventory of all material Year 2000 issues related to the
Company's non-IT systems. The Company has not identified any significant areas
of non-compliance with respect to its products or IT systems and expects that
the assessment and plans for remedial action for all of its products, IT
systems and non-IT systems will be completed by the end of fiscal 1999. The
Company has also initiated discussions with its significant suppliers and
service providers regarding their plans to investigate and remediate their
Year 2000 issues. Although the Company anticipates cooperation in these
efforts from most of the Company's significant suppliers and service
providers, the Company is also dependent on certain utility companies,
telecommunication service companies and other service providers that are
outside the Company's control. Therefore, it may be difficult for the Company
to obtain assurances of Year 2000 readiness from such third parties. Although
the Company believes that its Year 2000 Project Team will identify all of the
Company's material Year 2000 issues in the course of its assessments, given
the pervasiveness of Year 2000 issues and the complex interrelationships among
Year 2000 issues both internal and external to the Company, there can be no
assurance that the Company will be able to identify and accurately evaluate
all such issues.
 
  The Company estimates that the expenses it has incurred to date to address
Year 2000 issues have not been material and, although it has not completed its
full assessment of its Year 2000 readiness, it does not expect to incur
material expenses in connection with any required remediation efforts.
 
  As the process of compiling an inventory of non-IT systems proceeds and as
the other efforts of the Year 2000 Project Team continue, the Company may
identify situations that present material Year 2000 risks and/or that will
require substantial time and material expense to address. In addition, if any
customers, suppliers or service providers fail to appropriately address their
Year 2000 issues, such failure could have a material adverse effect on the
Company's business, financial condition and results of operations. For
example, because a significant percentage of the purchase orders received from
the Company's customers are computer generated
 
                                      21
<PAGE>
 
and electronically transmitted, a failure of one or more of the computer
systems of the Company's customers could have a significant adverse effect on
the level and timing of orders from such customers. Similarly, if Year 2000
problems experienced by any of the Company's significant suppliers or service
providers cause or contribute to delays or interruptions in the delivery of
products or services to the Company, such delays or interruptions could have a
material adverse effect on the Company's business, financial condition and
results of operations. Finally, disruption in the economy generally resulting
from Year 2000 issues could also materially adversely affect the Company.
Although the Year 2000 Project Team has not yet determined the most likely
worst-case Year 2000 scenarios or quantified the likely impact of such
scenarios, it is clear that the occurrence of one or more of the risks
described above could have a material adverse effect on the Company's
business, financial condition or results of operations.
 
  The Company's Year 2000 Project Team's activities will include the
development of contingency plans in the event the Company has not completed
all of its remediation programs in a timely manner. In addition, the Year 2000
Project Team will develop contingency plans in the event that any third
parties who provide goods or services essential to the Company's business fail
to appropriately address their Year 2000 issues. The Year 2000 Project Team
expects to conclude the development of these contingency plans by the end of
fiscal 1999. Even if these plans are completed on time and put in place, there
can be no assurance that such plans will be sufficient to address any third
party failures or that unresolved or undetected internal and external Year
2000 issues will not have a material adverse effect on the Company's business,
financial condition and results of operations.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  The Company is exposed to market risk related to fluctuations in interest
rates and in foreign currency exchange rates:
 
  Interest Rate Exposure. The Company's exposure to market risk due to
fluctuations in interest rates relates primarily to its short-term investment
portfolio, which consists of corporate debt securities which are classified as
available-for-sale and were reported at an aggregate fair value of $3.0
million as of June 30, 1998. These available-for-sale securities are subject
to interest rate risk inasmuch as their fair value will fall if market
interest rates increase. If market interest rates were to increase immediately
and uniformly by 10% from the levels prevailing at June 30, 1998, the fair
value of the portfolio would not decline by a material amount. The Company
does not use derivative financial instruments to mitigate the risks inherent
in these securities. However, the Company does attempt to reduce such risks by
typically limiting the maturity date of such securities to no more than nine
months, placing its investments with high credit quality issuers and limiting
the amount of credit exposure with any one issuer. In addition, the Company
believes that it currently has the ability to hold these investments until
maturity, and, therefore, believes that reductions in the value of such
securities attributable to short-term fluctuations in interest rates would not
materially affect the financial position, results of operations or cash flows
of the Company.
 
  Foreign Currency Exchange Rate Exposure. The Company's exposure to market
risk due to fluctuations in foreign currency exchange rates relates primarily
to the intercompany balance with its U.K. subsidiary. Although the Company
transacts business in various foreign countries, settlement amounts are
usually based on U.S. currency. Transaction gains or losses have not been
significant in the past and there is no hedging activity on sterling or other
currencies. Based on the intercompany balance of $1.5 million at June 30,
1998, a hypothetical 10% adverse change in sterling against U.S. dollars would
not result in a material foreign exchange loss. Consequently, the Company does
not expect that reductions in the value of such intercompany balances or of
other accounts denominated in foreign currencies resulting from even a sudden
or significant fluctuation in foreign exchange rates would have a direct
material impact on the Company's financial position, results of operations or
cash flows.
 
  Notwithstanding the foregoing analysis of the direct effects of interest
rate and foreign currency exchange rate fluctuations on the value of certain
of the Company's investments and accounts, the indirect effects of such
fluctuations could have a material adverse effect on the Company's business,
financial condition and results of
 
                                      22
<PAGE>
 
operations. For example, international demand for the Company's products is
affected by foreign currency exchange rates. In addition, interest rate
fluctuations may affect the buying patterns of the Company's customers.
Furthermore, interest rate and currency exchange rate fluctuations have broad
influence on the general condition of the U.S., foreign and global economies
which could materially adversely affect the Company.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The Company's financial statements follow Part IV, Item 14.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  Not applicable.
 
                                      23
<PAGE>
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Information regarding directors appearing under the caption "Proposal No.
One--Election of Directors--Nominees" of the Company's Proxy Statement for the
1998 Annual Meeting of Shareholders filed with the Commission on September 23,
1998, (the "Proxy Statement") is incorporated herein by reference.
 
  Information regarding executive officers is included in Part I hereof under
the heading "Executive Officers of the Company" immediately following Item 4
in Part I hereof.
 
  Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated herein by reference from the
section entitled "Other Information--Section 16(a) Beneficial Ownership
Reporting Compliance" of the Proxy Statement.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  Incorporated herein by reference to the Proxy Statement under the captions
"Proposal No. One--Election of Directors--Nominees," "Executive Officer
Compensation," "Proposal No. One--Election of Directors--Director
Compensation," and "Certain Transactions."
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  Incorporated herein by reference to the Proxy Statement under the caption
"Other Information--Share Ownership by Principal Shareholders and Management."
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Incorporated herein by reference to the Proxy Statement under the caption
"Certain Transactions."
 
                                      24
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
 
  (a) Financial Statements and Financial Statement Schedule
 
    1. Financial Statements. The following financial statements of the
  Company and the report of Deloitte & Touche LLP, Independent Auditors, are
  included in this report on Form 10-K on the pages indicated.
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
   <S>                                                                     <C>
   Consolidated Balance Sheets at June 30, 1998 and 1997..................  26
   Consolidated Statements of Operations for the years ended June 30,
    1998, 1997 and 1996...................................................  27
   Consolidated Statements of Shareholders' Equity for the years ended
    June 30, 1998, 1997 and 1996..........................................  28
   Consolidated Statements of Cash Flows for the years ended June 30,
    1998, 1997 and 1996...................................................  29
   Notes to Consolidated Financial Statements.............................  30
   Independent Auditors' Report...........................................  42
</TABLE>
 
    2. Financial Statement Schedule. The following financial statement
  schedule of the Company for the years ended June 30, 1998, 1997, and 1996
  is filed as part of this report on Form 10-K and should be read in
  conjunction with the financial statements.
 
  Schedule II--Valuation and Qualifying Accounts and Reserves
 
    All other schedules have been omitted because they are not applicable,
  not required, or the required information is included in the Consolidated
  Financial Statements or notes thereto.
 
    3. Exhibits:
 
      See Item 14(c) below.
 
  (b) Reports on Form 8-K
 
    No reports on Form 8-K were filed during the last quarter of the fiscal
  year ended June 30, 1998.
 
  (c) Exhibits
 
    The exhibits listed on the accompanying index immediately following the
  signature page are filed as a part of this report.
 
  (d) Financial Statement Schedules
 
    See Item 14(a) above.
 
                                      25
<PAGE>
 
                               SYMMETRICOM, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 JUNE 30,
                                                             -----------------
                                                               1998     1997
                                                             -------- --------
<S>                                                          <C>      <C>
ASSETS
Current assets:
 Cash and cash equivalents                                   $ 31,369 $ 28,203
 Short-term investments                                         2,973   13,384
                                                             -------- --------
  Cash and investments                                         34,342   41,587
 Accounts receivable, net of allowance for doubtful accounts
  of $479 and $457                                             16,347   21,349
 Inventories, net                                              16,798   22,023
 Other current assets                                           8,257    3,830
                                                             -------- --------
  Total current assets                                         75,744   88,789
Property, plant and equipment, net                             38,334   39,617
Other assets, net                                                 815      899
                                                             -------- --------
                                                             $114,893 $129,305
                                                             ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 Accounts payable                                            $  5,585 $  8,189
 Accrued liabilities                                           14,388   16,546
 Current maturities of long-term obligations                      215    5,729
                                                             -------- --------
  Total current liabilities                                    20,188   30,464
Long-term obligations                                           8,368    8,583
Deferred income taxes                                           1,980    2,655
Commitments and contingencies (Notes D & F)
Shareholders' equity:
 Preferred stock, no par value;
  500 shares authorized, none issued                               --       --
 Common stock, no par value;
  32,000 shares authorized, 15,772 and 15,879 shares issued
  and outstanding                                              23,892   25,608
 Retained earnings                                             60,465   61,995
                                                             -------- --------
  Total shareholders' equity                                   84,357   87,603
                                                             -------- --------
                                                             $114,893 $129,305
                                                             ======== ========
</TABLE>
 
 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                       26
<PAGE>
 
                               SYMMETRICOM, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED JUNE 30,
                                              ----------------------------
                                                1998      1997      1996
                                              --------  --------  --------
<S>                                           <C>       <C>       <C>
Net sales                                     $120,581  $144,355  $106,038
Cost of sales                                   76,306    78,411    59,824
                                              --------  --------  --------
  Gross profit                                  44,275    65,944    46,214
Operating expenses:
 Research and development                       18,810    18,457    15,413
 Selling, general and administrative            30,586    31,489    22,538
                                              --------  --------  --------
  Operating income (loss)                       (5,121)   15,998     8,263
Interest income                                  1,819     1,928     1,807
Interest expense                                  (838)     (589)     (594)
                                              --------  --------  --------
 Earnings (loss) before income taxes            (4,140)   17,337     9,476
Income tax provision (benefit)                  (2,610)    3,883     1,998
                                              --------  --------  --------
 Net earnings (loss)                          $ (1,530) $ 13,454  $  7,478
                                              ========  ========  ========
Basic earnings (loss) per share               $   (.10) $    .85  $    .48
                                              ========  ========  ========
Weighted average shares outstanding--basic      15,845    15,755    15,449
                                              ========  ========  ========
Diluted earnings (loss) per share             $   (.10) $    .83  $    .47
                                              ========  ========  ========
Weighted average shares outstanding--diluted    15,845    16,275    16,034
                                              ========  ========  ========
</TABLE>
 
 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                       27
<PAGE>
 
                               SYMMETRICOM, INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                    TOTAL
                                         COMMON STOCK               SHARE-
                                        ---------------  RETAINED  HOLDERS'
                                        SHARES  AMOUNT   EARNINGS   EQUITY
                                        ------  -------  --------  --------
<S>                                     <C>     <C>      <C>       <C>
Balance at June 30, 1995                15,097  $19,062  $41,063   $60,125
 Issuance of common stock:
  Stock option exercises, net of shares
   tendered upon exercise                  407    1,079       --     1,079
  Employee stock purchase plan              66      710       --       710
  Tax benefit from stock option plans       --    1,011       --     1,011
 Net earnings                               --       --    7,478     7,478
                                        ------  -------  -------   -------
Balance at June 30, 1996                15,570   21,862   48,541    70,403
 Issuance of common stock:
  Stock option exercises, net of shares
   tendered upon exercise                  325    1,730       --     1,730
  Employee stock purchase plan              74      817       --       817
  Tax benefit from stock option plans       --    2,394       --     2,394
 Repurchase of common stock                (90)  (1,195)      --    (1,195)
Net earnings                                --       --   13,454    13,454
                                        ------  -------  -------   -------
Balance at June 30, 1997                15,879   25,608   61,995    87,603
 Issuance of common stock:
  Stock option exercises                    75      590       --       590
  Employee stock purchase plan              86      942       --       942
  Tax benefit from stock option plans       --      109       --       109
  Repurchase of common stock              (268)  (3,357)      --    (3,357)
 Net earnings (loss)                        --       --   (1,530)   (1,530)
                                        ------  -------  -------   -------
Balance at June 30, 1998                15,772  $23,892  $60,465   $84,357
                                        ======  =======  =======   =======
</TABLE>
 
 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                       28
<PAGE>
 
                               SYMMETRICOM, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED JUNE 30,
                                                 ----------------------------
                                                   1998      1997      1996
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Cash flows from operating activities:
 Cash received from customers                    $125,428  $137,463  $103,056
 Cash paid to suppliers and employees            (114,873) (115,244)  (94,035)
 Interest received                                  1,216     1,332     1,148
 Interest paid                                       (838)     (589)     (594)
 Income taxes paid                                 (3,475)   (1,702)     (559)
                                                 --------  --------  --------
  Net cash provided by operating activities         7,458    21,260     9,016
                                                 --------  --------  --------
Cash flows from investing activities:
 Purchases of short-term investments              (19,289)  (33,941)  (24,644)
 Maturities of short-term investments              29,700    23,500    35,552
 Purchases of plant and equipment, net             (6,490)  (15,136)   (9,092)
 Increase in notes receivable, net                   (800)       --        --
 Other                                                141        45      (596)
                                                 --------  --------  --------
  Net cash provided by (used for) investing
   activities                                       3,262   (25,532)    1,220
                                                 --------  --------  --------
Cash flows from financing activities:
 Repayment of long-term obligations                (5,729)     (204)      (52)
 Proceeds from issuance of common stock             1,532     2,547     1,789
 Repurchase of common stock                        (3,357)   (1,195)       --
                                                 --------  --------  --------
  Net cash provided by (used for) financing
   activities                                      (7,554)    1,148     1,737
                                                 --------  --------  --------
  Net increase (decrease) in cash and cash
   equivalents                                      3,166    (3,124)   11,973
  Cash and cash equivalents at beginning of year   28,203    31,327    19,354
                                                 --------  --------  --------
  Cash and cash equivalents at end of year       $ 31,369  $ 28,203  $ 31,327
                                                 ========  ========  ========
Reconciliation of net earnings (loss) to net
 cash
provided by operating activities:
 Net earnings (loss)                             $ (1,530) $ 13,454  $  7,478
 Depreciation and amortization                      8,386     6,548     5,171
 Net deferred income taxes                         (4,767)     (512)      (98)
 Changes in assets and liabilities:
  Accounts receivable                               5,002    (6,805)   (2,699)
  Inventories                                       5,225    (4,176)        8
  Accounts payable                                 (2,604)    2,645     1,236
  Accrued liabilities                              (2,158)    7,361    (2,336)
  Tax benefit from employee stock plans               109     2,394     1,011
  Other                                              (205)      351      (755)
                                                 --------  --------  --------
  Net cash provided by operating activities      $  7,458  $ 21,260  $  9,016
                                                 ========  ========  ========
Noncash investing and financing activity:
 Facility acquired under capital lease                     $  8,750
                                                           ========
</TABLE>
 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                       29
<PAGE>
 
                               SYMMETRICOM, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Business. Symmetricom, Inc. (the Company) operates in two different industry
segments. Telecom Solutions, a division of the Company, designs, manufactures
and markets advanced network synchronization systems and intelligent access
systems for the telecommunications industry. Linfinity Microelectronics Inc.,
a subsidiary of the Company, designs, manufactures and markets linear and
mixed signal integrated circuits as well as systems-engineered modules
primarily for use in power management and communication applications in
commercial, industrial, and defense and space markets.
 
  Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions are eliminated.
 
  Fiscal Period. The Company, for presentation purposes, presents each fiscal
year as if it ended on June 30. However, the Company's fiscal year ends on the
Sunday closest to June 30. All references to years refer to the Company's
fiscal years. Fiscal years 1998, 1997 and 1996 consisted of 52 weeks.
 
  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 amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
 
  Cash Equivalents. The Company considers all highly liquid debt investments
purchased with an original maturity of three months or less to be cash
equivalents.
 
  Short-term Investments. Short-term investments, consisting of corporate debt
securities which mature through October 1998, are classified as available-for-
sale and reported at fair value. Net unrealized gains and losses, if
significant, are excluded from earnings and included as a separate component
of shareholders' equity. The cost of securities sold is based on the specific
identification method.
 
  Fair Values of Financial Instruments. The estimated fair value of the
Company's financial instruments, which include cash equivalents, short-term
investments, accounts receivable and long-term obligations, approximate their
carrying value.
 
  Concentrations of Credit Risk. Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
cash equivalents, short-term investments and accounts receivable. The Company
places its investments with high-credit-quality corporations and financial
institutions. Accounts receivable are derived primarily from sales to
telecommunications service providers, original equipment manufacturers and
distributors. Management believes that its credit evaluation, approval and
monitoring processes substantially mitigate potential credit risks.
 
  Inventories. Inventories are stated at the lower of cost (first-in, first-
out) or market.
 
  Property, Plant and Equipment. Property, plant and equipment are stated at
cost. Depreciation and amortization are computed using the straight-line
method based on the estimated useful lives of the assets (three to thirty
years) or the lease term if shorter.
 
  Long-lived assets. Effective July 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which requires recognition of impairment loss of long-lived assets and certain
identifiable intangibles assets in the event the net book value of such assets
exceeds the estimated future cash flows. The adoption of SFAS 121 had no
material impact on the Company's financial position or results of operations.
 
                                      30
<PAGE>
 
  Foreign Currency Translation. Foreign currency translation gains and losses
and the effect of foreign currency exchange rate fluctuations have not been
significant.
 
  Revenue Recognition. Sales are generally recognized upon shipment.
Provisions are made for warranty costs, sales returns and price protection.
 
  Stock Options. In October 1995, Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," was issued
which establishes a fair value based method of accounting for compensation
costs related to stock option plans and other forms of stock based
compensation plans as an alternative to the intrinsic value based method of
accounting defined under Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." Effective July 1, 1996, the
Company adopted SFAS 123 by electing to continue to apply the accounting
provisions of APB 25 and providing the pro forma disclosure requirements of
SFAS 123.
 
  Net Earnings (loss) Per Share. Basic earnings (loss) per share is computed
by dividing net earnings (loss) by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share is
calculated by dividing net earnings (loss) by the weighted average number of
common shares outstanding and common equivalent shares from dilutive stock
options using the treasury method except when antidilutive. The following
table reconciles the number of shares utilized in the earnings (loss) per
share calculations.
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED JUNE 30,
                                                 ------------------------
                                                  1998     1997    1996
                                                 -------  ------- -------
                                                  (IN THOUSANDS, EXCEPT
                                                   PER SHARE AMOUNTS)
   <S>                                           <C>      <C>     <C>
   Net earnings (loss)                           $(1,530) $13,454 $ 7,478
   Weighted average shares outstanding--basic     15,845   15,755  15,449
   Dilutive stock options                             --      520     585
                                                 -------  ------- -------
   Weighted average shares outstanding--diluted   15,845   16,275  16,034
   Basic earnings (loss) per share               $  (.10) $   .85 $   .48
   Diluted earnings (loss) per share             $  (.10) $   .83 $   .47
</TABLE>
 
  Reclassifications. Certain reclassifications have been made to the prior
year consolidated financial statements to conform to the 1998 presentation.
Such reclassifications had no effect on previously reported results of
operations or retained earnings.
 
  Recent Accounting Pronouncements. Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings per Share," which requires the presentation of basic and diluted
earnings per share information. Basic earnings per share, which replaces
primary earnings per share, is computed by dividing net earnings by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share, which replaces fully diluted earnings per share,
is computed by dividing net earnings by the weighted average number of common
shares outstanding and common equivalent shares from dilutive stock options,
using the treasury stock method. All prior period earnings per share data
presented have been restated to conform with the provisions of this Statement.
 
  In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income" and Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information," were issued which require the Company to report and
display certain information related to comprehensive income and operating
segments, respectively. Both statements are effective for fiscal years
beginning after December 15, 1997. Accordingly, the Company will adopt SFAS
130 and SFAS 131 starting with its fiscal year ending June 30, 1999. It is not
expected that the adoption of these statements will have any material impact
on the Company's financial position and results of operations.
 
                                      31
<PAGE>
 
  In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities," was
issued which defines derivatives, requires all derivatives be carried at fair
value, and provides for hedging accounting when certain conditions are met.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Although the Company has not fully assessed the
implications of this new statement, the Company does not believe adoption of
this statement will have a material impact on the Company's financial
statements.
 
NOTE B--LINFINITY MICROELECTRONICS INC.
 
  In July 1993, substantially all of the assets and liabilities of the
Company's Semiconductor Group were transferred to Linfinity, a newly-formed
subsidiary, in exchange for 6,000,000 shares of Linfinity Series A preferred
stock and 2,000,000 shares of Linfinity common stock. Each Series A preferred
share is convertible into one share of common stock. During September 1997,
the Company increased its investment in Linfinity by $6.3 million in exchange
for another 2,000,000 shares of Linfinity common stock. The proceeds were used
by Linfinity for repayment of a note payable which was collateralized by land,
building and related personal property.
 
  In addition, 2,500,000 shares of Linfinity's common stock have been reserved
for issuance under Linfinity's employee stock option plan. All options have
been granted at the fair market value on the date of grant as determined by
Linfinity's Board of Directors based upon independent appraisal. Outstanding
stock options generally vest 25% per year from date of grant and expire no
later than ten years from date of grant. See Note I for information concerning
Linfinity's outstanding stock options.
 
NOTE C--BALANCE SHEET DETAIL
 
<TABLE>
<CAPTION>
                                                    JUNE 30,
                                                 ----------------
                                                  1998     1997
                                                 -------  -------
                                                 (IN THOUSANDS)
     <S>                                         <C>      <C>
     Inventories:
      Raw materials                              $ 3,875  $ 6,454
      Work-in-process                              6,215    8,450
      Finished goods                               6,708    7,119
                                                 -------  -------
                                                 $16,798  $22,023
                                                 =======  =======
     Property, plant and equipment, net:
      Land                                       $ 1,247  $ 1,247
      Buildings and improvements                  17,938   23,413
      Machinery and equipment                     50,188   46,733
      Leasehold improvements                       7,959    2,599
                                                 -------  -------
                                                  77,332   73,992
      Accumulated depreciation and amortization  (38,998) (34,375)
                                                 -------  -------
                                                 $38,334  $39,617
                                                 =======  =======
</TABLE>
 
  Building and improvements includes $8,750,000 of costs capitalized under a
capital lease for the Company's facility in San Jose, California which was
completed in June 1997. At June 30, 1998, accumulated amortization for this
lease totaled $761,000. No amortization expense was recorded in 1997.
 
 
                                      32
<PAGE>
 
<TABLE>
<CAPTION>
                                             JUNE 30,
                                          ----------------
                                           1998     1997
                                          -------  -------
                                          (IN THOUSANDS)
     <S>                                  <C>      <C>
     Accrued liabilities:
      Employee compensation and benefits  $ 4,249  $ 8,925
      Accrued warranty expense              3,994    2,741
      Other                                 6,145    4,880
                                          -------  -------
                                          $14,388  $16,546
                                          =======  =======
     Long-term obligations:
      Note payable                        $    --  $ 5,709
      Capital lease                         8,583    8,603
                                          -------  -------
                                            8,583   14,312
      Current maturities                     (215)  (5,729)
                                          -------  -------
                                          $ 8,368  $ 8,583
                                          =======  =======
</TABLE>
 
  The note payable bearing interest at 10.25% per annum was repaid in
September 1997. The note was collateralized by land, building, and related
personal property.
 
  The Company has a $7,000,000 unsecured bank line of credit which expires on
May 1, 2000 and bears interest at the bank's prime rate, 8.5% at June 30,
1998. The line of credit agreement contains certain financial ratios to be
maintained by the Company. It also requires the Company to have positive net
income during the quarter ending March 31, 1999 and to maintain net income
greater than zero not less than every other quarter after such period. The
line of credit has not been utilized during the last three years.
 
NOTE D--LEASE COMMITMENTS
 
  During 1997, the Company leased a facility in San Jose, California under
which the land and building were accounted for as an operating lease and a
capital lease, respectively. This lease expires in April 2009. A section of
the facility has been sublet and accounted for as an operating lease. This
sublease expires in November 2000. The minimum future sublease payments to be
received at June 30, 1998 were $736,000 in 1999, $757,000 in 2000, and
$324,000 in 2001. The Company leases certain other facilities and equipment
under operating lease agreements which expire at various dates through 2001.
Rental expense charged to operations was $1,406,000 in 1998, $1,923,000 in
1997, and $1,741,000 in 1996, respectively. Future minimum lease payments at
June 30, 1998 are as follows:
 
<TABLE>
<CAPTION>
                                              CAPITAL  OPERATING
                                               LEASE     LEASE
                                              -------  ---------
                                               (IN THOUSANDS)
     <S>                                      <C>      <C>
     FOR THE YEARS:
     1999                                     $   930   $1,091
     2000                                         991      837
     2001                                       1,055      652
     2002                                       1,121      595
     2003                                       1,189      595
     Thereafter                                 8,401    3,454
                                              -------   ------
     Total minimum lease payments              13,687   $7,224
                                                        ======
     Amount representing interest (8.5%)       (5,104)
                                              -------
     Present value of minimum lease payments    8,583
     Current portion                             (215)
                                              -------
     Long-term obligation                     $ 8,368
                                              =======
</TABLE>
 
                                      33
<PAGE>
 
NOTE E--INCOME TAXES
 
  Income tax provision (benefit) consists of:
 
<TABLE>
<CAPTION>
                    YEAR ENDED JUNE 30,
                   -----------------------
                    1998     1997    1996
                   -------  ------  ------
                      (IN THOUSANDS)
     <S>           <C>      <C>     <C>
     Current:
      Federal      $   791  $3,511  $1,250
      State            242     (78)    (56)
      Puerto Rico    1,034     588     902
      Foreign           90     374      --
                   -------  ------  ------
                     2,157   4,395   2,096
                   -------  ------  ------
     Deferred:
      Federal       (3,325)   (817)    386
      State           (975)    134    (114)
      Puerto Rico     (467)    171    (370)
                   -------  ------  ------
                    (4,767)   (512)    (98)
                   -------  ------  ------
                   $(2,610) $3,883  $1,998
                   =======  ======  ======
</TABLE>
 
  Deferred income tax provision (benefit) is recorded when income and expenses
are recognized in different periods for financial reporting and tax purposes.
The significant components of deferred income tax provision (benefit) are as
follows:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED JUNE 30,
                                                      ----------------------
                                                       1998     1997   1996
                                                      -------  ------  -----
                                                         (IN THOUSANDS)
     <S>                                              <C>      <C>     <C>
     Tax credit and net operating loss carryforwards  $(1,335) $1,064  $(156)
     Reserves and accruals                             (3,045)   (824)    32
     Depreciation and amortization                       (375)   (614)   (93)
     Deferred taxes on Puerto Rico earnings              (294)    481   (688)
     Change in valuation allowance                        282    (619)   807
                                                      -------  ------  -----
                                                      $(4,767) $ (512) $ (98)
                                                      =======  ======  =====
</TABLE>
 
  The effective income tax rate differs from the federal statutory income tax
rate as follows:
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED JUNE
                                                           30,
                                                    --------------------
                                                    1998    1997   1996
                                                    -----   -----  -----
     <S>                                            <C>     <C>    <C>
     Federal statutory income tax rate              (35.0)%  35.0%  35.0%
     Federal tax benefit of Puerto Rico operations  (20.8)  (13.0) (17.2)
     Puerto Rico taxes                               13.7     4.4    5.6
     Research and development tax credit             (4.8)   (1.5)    --
     State income taxes, net of federal benefit     (17.7)     .3   (1.8)
     Other                                            1.6    (2.8)   (.5)
                                                    -----   -----  -----
     Effective income tax rate                      (63.0)%  22.4%  21.1%
                                                    =====   =====  =====
</TABLE>
 
                                      34
<PAGE>
 
  The principal components of deferred tax assets and liabilities are as
follows:
 
<TABLE>
<CAPTION>
                                          JUNE 30,
                                       ----------------
                                        1998     1997
                                       -------  -------
                                       (IN THOUSANDS)
     <S>                               <C>      <C>
     Deferred tax assets:
      Tax credit carryforwards         $ 5,831  $ 4,496
      Reserves and accruals              6,561    3,516
      Depreciation and amortization        174       --
                                       -------  -------
                                        12,566    8,012
      Valuation allowance               (4,778)  (4,496)
                                       -------  -------
                                         7,788    3,516
                                       -------  -------
     Deferred tax liabilities:
      Depreciation and amortization         --      201
      Unremitted Puerto Rico earnings    2,483    2,777
                                       -------  -------
                                         2,483    2,978
                                       -------  -------
     Net deferred tax assets           $ 5,305  $   538
                                       =======  =======
</TABLE>
 
  Net deferred tax assets (liabilities) are comprised of the following:
 
<TABLE>
<CAPTION>
                                 JUNE 30,
                              ----------------
                               1998     1997
                              -------  -------
                              (IN THOUSANDS)
     <S>                      <C>      <C>
     Current assets           $ 7,285  $ 3,193
     Non-current liabilities   (1,980)  (2,655)
                              -------  -------
     Net deferred tax assets  $ 5,305  $   538
                              =======  =======
</TABLE>
 
  At June 30, 1998, for federal income tax purposes, the Company had research
and development and investment tax credit carryforwards of approximately
$3,231,000 which expire in the years 1999 through 2013, and alternative
minimum tax credit carryforwards of approximately $1,356,000 which have no
expiration date. Additionally, for state income tax purposes, the Company had
research and development tax credit carryforwards of approximately $1,244,000
which have no expiration date.
 
  Based on the Company's assessment of the future realizability of deferred
tax assets, a valuation allowance has been provided as it is more likely than
not that sufficient taxable income will not be generated to realize certain
tax credit carryforwards. At June 30, 1998, approximately $4,419,000 of the
valuation allowance was attributable to the potential tax benefit of stock
option transactions, which would be credited to common stock if realized.
 
  The Company operates a subsidiary in Puerto Rico under a grant providing for
a partial exemption from Puerto Rico taxes through fiscal 2008. In addition,
this subsidiary is taxed under Section 936 of the U.S. Internal Revenue Code
which exempts qualified Puerto Rico source earnings, subject to certain wage-
based limitations, from federal income taxes through fiscal 2006. This
exemption will be further limited during the fiscal years 2003 through 2006
based on certain prior year Puerto Rico earnings. Appropriate taxes have been
provided on this subsidiary's earnings all of which are intended to be
remitted to the parent company. At June 30, l998, the total unremitted
earnings of the Puerto Rico subsidiary and the related tax liability were
approximately $15,425,000 and $2,483,000, respectively.
 
                                      35
<PAGE>
 
NOTE F--CONTINGENCIES
 
  In January 1994, a securities class action complaint was filed against the
Company and certain of its present or former officers or directors in the
United States District Court, Northern District of California. The action was
filed on behalf of a putative class of purchasers of the Company's stock
during the period April 6, 1993 through November 10, 1993. The complaint seeks
unspecified money damages and alleges that the Company and certain of its
present or former officers or directors violated federal securities laws in
connection with various public statements made during the putative class
period. The Court dismissed the first and second amended complaints with leave
to amend. The plaintiff filed a third amended corrected complaint in August
1997. The Company filed a motion to dismiss this third amended complaint,
which was denied in January 1998. Discovery is proceeding. The Company and its
officers believe that the complaint is entirely without merit, and intend to
continue to defend the action vigorously. The Company is also a party to
certain other claims in the normal course of its operations. While the results
of such claims cannot be predicted with any certainty, management, after
consultation with counsel, believes that the final outcome of such matters
will not have a material adverse effect on the Company's financial position or
results of operations.
 
NOTE G--RELATED PARTY TRANSACTIONS
 
  In March 1998, the Company extended two loans in the amounts of $400,000 and
$500,000 to an executive officer in connection with his employment by the
Company. The $400,000 loan, together with interest at 6% per annum, is to be
forgiven in four equal installments on June 25, 1998, 1999, 2000 and 2001. The
Company recognizes compensation expense in the amount of both the loan and
interest to be forgiven during the applicable fiscal period. The $500,000 loan
is interest free with a term of ten years to be repaid in 2008. Both loans are
secured by a deed of trust pertaining to the executive officer's principal
home in California. Pursuant to the loan agreements, any loan balance and/or
accrued interest amount will become due and payable if the executive officer
resigns or is terminated for cause. In July 1998, the Company funded an
unsecured loan of $150,000, which is payable upon demand, to another executive
officer. The loan is interest free and may be forgiven subject to certain
conditions.
 
  During 1998, the Company paid $10,000 for consulting fees to a director of
the Company. The Company paid $47,000 and $36,000 for marketing research in
1997 and 1996, respectively, to a firm whose managing director was also a
director of the Company until August 1996. During 1995, two executive officers
exercised stock options in exchange for notes of $43,000 bearing interest at
approximately 6% per annum, payable annually. The notes were collateralized by
the stock issued upon exercise of the stock options and were recorded as an
offset against common stock. Such notes were repaid in 1997 and 1998,
respectively. During 1993, the Company made a $95,000 unsecured 5% loan to an
executive officer which was repaid in 1996.
 
NOTE H--BENEFIT PLANS
 
  401(k) Plans. The Company's U.S. and Puerto Rico employees are eligible to
participate in the Company's 401(k) plans. The Company's discretionary
contributions vest immediately and were $143,000, $105,000 and $102,000 in
1998, 1997 and 1996, respectively.
 
NOTE I--SHAREHOLDERS' EQUITY
 
  Stock Options. The Company has a stock option plan under which employees and
consultants may be granted non-qualified and incentive options to purchase
shares of the Company's authorized but unissued common stock. Stock
appreciation rights may also be granted under this plan, however, none has
been granted. The Company's shareholders have approved a plan under which the
number of shares reserved for issuance under the stock option plan will
automatically increase each July by an amount equal to 3% of the Company's
outstanding shares as of the last trading day of the Company's immediately
preceding fiscal year. In July 1998, the number of shares reserved for
issuance increased by 473,000. In addition, the Company has a director stock
option plan under which non-employee directors are granted options each
January to purchase 10,000 shares of
 
                                      36
<PAGE>
 
the Company's authorized but unissued common stock. All options have been
granted at the fair market value of the Company's common stock on the date of
grant and expire no later than ten years from the date of grant. Options
granted to employees and consultants prior to fiscal 1999 and options granted
to non-employee directors are generally exercisable in annual installments of
25%, 25% and 50% at the end of each of the three years following the date of
grant. Options granted to employees and consultants after fiscal 1998 are
generally exercisable at 25% at the end of the first year and 2.08% for each
month thereafter for the following three years.
 
  Stock option activity for the three years ended June 30, 1998 is as follows:
 
<TABLE>
<CAPTION>
                                           OPTIONS OUTSTANDING
                               SHARES   --------------------------
                              AVAILABLE  NUMBER   WEIGHTED AVERAGE
                              FOR GRANT OF SHARES  EXERCISE PRICE
                              --------- --------- ----------------
                                (IN THOUSANDS, EXCEPT PER SHARE
                                            AMOUNTS)
   <S>                        <C>       <C>       <C>
   Balances at June 30, 1995     280      1,577        $ 7.52
    Authorized                   650         --            --
    Granted                     (871)       871         17.64
    Exercised                     --       (427)         3.67
    Canceled                     370       (370)        21.12
                                ----      -----
   Balances at June 30, 1996     429      1,651         10.80
    Authorized                   467         --            --
    Granted                     (483)       483         14.57
    Exercised                     --       (333)         5.47
    Canceled                     262       (262)        15.30
                                ----      -----
   Balances at June 30, 1997     675      1,539         12.37
    Authorized                   476         --            --
    Granted                     (789)       789         12.61
    Exercised                     --        (75)         7.45
    Canceled                     123       (123)        14.80
    Expired                       --         (5)         1.75
                                ----      -----
   Balances at June 30, 1998     485      2,125         12.49
                                ====      =====
</TABLE>
 
  At June 30, 1998, 1997 and 1996, the number of shares and weighted average
exercise price underlying exercisable options were 867,000 at $11.48, 573,000
at $11.08 and 593,000 at $7.24, respectively. The weighted average fair value,
using the Black-Scholes method, of options granted was $5.17 in 1998, $6.62 in
1997 and $9.02 in 1996.
 
  The stock option activity includes the cancelation of options for 297,000
shares in April 1996 and the corresponding grant of new options in April 1996
at an exercise price of $11.98, the fair market value on the date of the new
grants. The new options began revesting in April 1996. At the beginning of
fiscal 1999, the Company offered its employees and directors a stock option
repricing program in which new options were granted at an exchange rate of
three shares for every four shares and one share for every two shares,
respectively, of unexercised options as of July 14, 1998. The corresponding
grant of new options in July 1998 was at an exercise price of $6.44, the fair
market value on the date of the new grants. The new options retain the same
vesting and expiration dates as the old options. The new options also contain
a blackout period and are not exercisable until January 14, 1999. As a result,
1,260,000 old options were surrendered by employees for 945,000 new options,
and 262,000 old options were returned by directors for 131,000 new options.
 
                                      37
<PAGE>
 
  Additional information regarding options outstanding as of June 30, 1998 is
as follows:
 
<TABLE>
<CAPTION>
                        OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
 ------------------------------------------------------------------------------------------------
                                  WEIGHTED AVERAGE                                    WEIGHTED
     RANGE OF          NUMBER        REMAINING     WEIGHTED AVERAGE    NUMBER         AVERAGE
 EXERCISE PRICES     OF SHARES    CONTRACTUAL LIFE  EXERCISE PRICE    OF SHARES    EXERCISE PRICE
 ------------------------------------------------------------------------------------------------
                   (IN THOUSANDS)    (IN YEARS)                     (IN THOUSANDS)
 <S>               <C>            <C>              <C>              <C>            <C>
 $ 2.38 -- $ 8.94        664            7.3             $ 7.44           373           $ 7.58
   9.00 --  13.25        587            7.8              12.26           241            11.87
  13.50 --  16.00        606            8.9              15.52            61            14.19
  16.25 --  22.75        268            6.4              18.68           192            17.74
                       -----                                             ---
   2.38 --  22.75      2,125            7.8              12.49           867            11.48
                       =====                                             ===
</TABLE>
 
  As discussed in Note A, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB 25 and its
related interpretations. Compensation expense has been recognized in the
financial statements for employee stock arrangements when the fair market
value of the stock exceeds the exercise price at the date of grant. SFAS 123
requires the disclosure of pro forma net income and earnings per share as if
the Company had adopted the fair value method as of the beginning of 1996.
Under SFAS 123, the fair value of stock based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions for 1998, 1997 and 1996: expected life,
six months after vesting in 1998, one year after vesting in 1997 and one and
one half years after vesting in 1996; stock volatility, 58% in both 1998 and
1997, and 63% in 1996; risk free interest rate, 5% to 6.5%; and no dividends
during the expected term. The Company's calculations are based on the multiple
option valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the 1998, 1997 and 1996 awards had been amortized to
expense over the vesting period of the awards, pro forma consolidated net loss
would have been $5,647,000 ($0.36 per share--basic, $0.36 per share--diluted)
in 1998, pro forma consolidated net earnings would have been $10,527,000
($0.67 per share--basic, $0.66 per share--diluted) in 1997 and $4,776,000
($0.31 per share--basic, $0.30 per share--diluted) in 1996. However, the
impact of outstanding nonvested stock options granted prior to 1996 has been
excluded from the pro forma calculation; accordingly, the 1998, 1997 and 1996
pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock options.
 
  In addition, Linfinity has a stock option plan under which options may be
granted to purchase shares of Linfinity's authorized but unissued common stock
with similar terms to the Company's stock option plan. During September 1997,
Linfinity reserved an additional 500,000 shares of common stock for issuance
under this plan, for a total of 2,500,000 shares of common stock. As of June
30, 1998, there were options outstanding to purchase 1,763,000 shares of
Linfinity common stock at exercise prices ranging from $0.50 to $3.15 with a
weighted average exercise price of $2.61 and 544,000 shares available for
grant. As of June 30, 1998, there were exercisable options to purchase 757,000
shares of common stock at a weighted average exercise price of $2.08. The fair
values of fiscal 1998, 1997 and 1996 option awards were not significant.
 
  Employee Stock Purchase Plan. The Company has an employee stock purchase
plan under which eligible employees may authorize payroll deductions of up to
10% of their compensation to purchase shares of the Company's common stock at
85% of the fair market value at certain specified dates. Under this plan,
205,000 shares of common stock have been reserved and were available for
issuance as of June 30, 1998.
 
  Under SFAS 123, the fair value of the employees' purchase rights was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, 6 months; stock volatility,
 
                                      38
<PAGE>
 
58% in both 1998 and 1997 and 63% in 1996; risk free interest rates, 4.8% to
5.9%; and no dividends during the expected term. The weighted average fair
value of those purchase rights granted in 1998, 1997 and 1996 was $4.51, $4.68
and $4.94, respectively.
 
  Common Share Purchase Rights. The Company has a shareholder rights plan
which authorizes the issuance of one common share purchase right for each
share of common stock. The rights expire in December 2000 and are not
exercisable or transferable apart from the common stock until the occurrence
of certain events. Such events include the acquisition of 20% or more of the
Company's outstanding common stock or the commencement of a tender or exchange
offer for 30% or more of the Company's outstanding common stock. If the rights
become exercisable, each right entitles its holder to purchase one new share
of common stock at an exercise price of $25.00, subject to certain
antidilution adjustments. Additionally, if the rights become exercisable, a
holder will be entitled, under certain circumstances, to purchase, for the
exercise price, shares of common stock of the Company or in other cases, of
the acquiring company, having a market value of twice the exercise price of
the right. Under certain conditions, the Company may redeem the rights for a
price of $0.01 per right or exchange each right not held by the acquirer for
one share of the Company's common stock.
 
  Stock Repurchase Program. In April 1997, the Company's Board of Directors
authorized a program to repurchase up to 500,000 shares of the Company's
common stock to be used in conjunction with shares issued under the Company's
stock option and employee stock purchase plans. The Company repurchased
268,000 shares and 90,000 shares in 1998 and 1997, respectively. In September
1998, the Company's Board of Directors authorized a program to repurchase up
to 1,000,000 shares of the Company's common stock, once the April 1997 program
is completed.
 
                                      39
<PAGE>
 
NOTE J--BUSINESS SEGMENT INFORMATION
 
  Industry Segment Information is as follows:
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED JUNE 30,
                                                 ---------------------------
                                                   1998      1997     1996
                                                 --------  -------- --------
                                                       (IN THOUSANDS)
   <S>                                           <C>       <C>      <C>
   Net Sales:
    Telecom Solutions                            $ 73,311  $ 89,718 $ 68,243
    Linfinity Microelectronics Inc.                47,270    54,637   37,795
                                                 --------  -------- --------
                                                 $120,581  $144,355 $106,038
                                                 ========  ======== ========
   Gross Profit Margin:
    Telecom Solutions                            $ 36,293  $ 44,015 $ 31,266
    Linfinity Microelectronics Inc.                 7,982    21,929   14,948
                                                 --------  -------- --------
                                                 $ 44,275  $ 65,944 $ 46,214
                                                 ========  ======== ========
   Research and development expense:
    Telecom Solutions                            $ 12,387  $ 12,866 $  9,581
    Linfinity Microelectronics Inc.                 6,423     5,591    5,832
                                                 --------  -------- --------
                                                 $ 18,810  $ 18,457 $ 15,413
                                                 ========  ======== ========
   Selling, general and administrative expense:
    Telecom Solutions                            $ 19,090  $ 21,101 $ 15,805
    Linfinity Microelectronics Inc.                11,496    10,388    6,733
                                                 --------  -------- --------
                                                 $ 30,586  $ 31,489 $ 22,538
                                                 ========  ======== ========
   Operating income (loss):
    Telecom Solutions                            $  4,816  $ 10,048 $  5,880
    Linfinity Microelectronics Inc.                (9,937)    5,950    2,383
                                                 --------  -------- --------
                                                 $ (5,121) $ 15,998 $  8,263
                                                 ========  ======== ========
   Identifiable assets:
    Telecom Solutions                            $ 84,688  $ 89,924 $ 62,574
    Linfinity Microelectronics Inc.                30,205    39,381   30,957
                                                 --------  -------- --------
                                                 $114,893  $129,305 $ 93,531
                                                 ========  ======== ========
   Accounts receivable, net:
    Telecom Solutions                            $ 10,541  $ 11,224 $ 10,653
    Linfinity Microelectronics Inc.                 5,806    10,125    3,891
                                                 --------  -------- --------
                                                 $ 16,347  $ 21,349 $ 14,544
                                                 ========  ======== ========
   Inventories, net:
    Telecom Solutions                            $ 11,589  $ 13,281 $ 10,530
    Linfinity Microelectronics Inc.                 5,209     8,742    7,317
                                                 --------  -------- --------
                                                 $ 16,798  $ 22,023 $ 17,847
                                                 ========  ======== ========
   Depreciation and amortization expense:
    Telecom Solutions                            $  5,056  $  3,575 $  2,654
    Linfinity Microelectronics Inc.                 3,330     2,973    2,517
                                                 --------  -------- --------
                                                 $  8,386  $  6,548 $  5,171
                                                 ========  ======== ========
   Capital expenditures:
    Telecom Solutions*                           $  2,962  $ 20,074 $  3,832
    Linfinity Microelectronics Inc.                 3,528     3,812    5,260
                                                 --------  -------- --------
                                                 $  6,490  $ 23,886 $  9,092
                                                 ========  ======== ========
</TABLE>
  --------
  * The 1997 amount includes $8,750 for a facility acquired under capital
     lease.
 
                                       40
<PAGE>
 
  Major Customers and Export Sales. No customer accounted for 10% or more of
the Company's net sales in 1998 and 1996. In 1997, one of Telecom Solutions'
customers accounted for 16% of the Company's total net sales. The Company's
export sales, which were primarily to the Far East, Western Europe, Canada and
Latin America accounted for 27%, 26% and 28% of the Company's net sales in
1998, 1997 and 1996, respectively. Export sales to the Far East accounted for
12%, 16%, and 13% of the Company's net sales in 1998, 1997 and 1996,
respectively.
 
NOTE K--QUARTERLY RESULTS AND STOCK MARKET DATA (UNAUDITED)
 
  Quarterly results and stock market data are as follows:
 
<TABLE>
<CAPTION>
                                     FIRST  SECOND   THIRD   FOURTH    TOTAL
                                    QUARTER QUARTER QUARTER  QUARTER    YEAR
                                    ------- ------- -------  -------  --------
                                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                 <C>     <C>     <C>      <C>      <C>
  Fiscal Year 1998
   Net sales:
    Telecom Solutions               $18,453 $19,737 $16,786  $18,335  $ 73,311
    Linfinity Microelectronics Inc.  15,530  14,600   7,422    9,718    47,270
                                    ------- ------- -------  -------  --------
     Total                           33,983  34,337  24,208   28,053   120,581
    Gross profit (loss)              16,181  16,716    (141)  11,519    44,275
    Operating income (loss)           3,437   4,288 (12,263)    (583)   (5,121)
    Earnings (loss) before income
     taxes                            3,665   4,567 (11,994)    (378)   (4,140)
    Net earnings (loss)               2,683   3,433  (7,483)    (163)   (1,530)
    Basic earnings (loss) per share     .17     .22    (.47)    (.01)     (.10)
    Diluted earnings (loss) per
     share                              .17     .21    (.47)    (.01)     (.10)
    Common stock price range (A):
     High                                18  18 5/8  12 1/4  7 13/16    18 5/8
     Low                             14 1/8  10 3/8 6 15/16    5 3/8     5 3/8
  Fiscal Year 1997
   Net sales:
    Telecom Solutions               $20,002 $21,551 $23,534  $24,631  $ 89,718
    Linfinity Microelectronics Inc.  12,021  13,896  14,220   14,500    54,637
                                    ------- ------- -------  -------  --------
     Total                           32,023  35,447  37,754   39,131   144,355
    Gross profit                     13,657  16,110  17,511   18,666    65,944
    Operating income                  2,600   3,896   4,424    5,078    15,998
    Earnings before income taxes      2,910   4,203   4,792    5,432    17,337
    Net earnings                      2,258   3,262   3,719    4,215    13,454
    Basic earnings per share            .14     .21     .23      .27       .85
    Diluted earnings per share          .14     .20     .23      .26       .83
    Common stock price range (A):
     High                            15 5/8  20 5/8  20 5/8   17 3/4    20 5/8
     Low                             11 7/8 14 7/16  13 7/8   12 1/2    11 7/8
</TABLE>
  --------
  (A) The Company's common stock trades on The Nasdaq Stock Market under the
      symbol SYMM. At June 30, 1998, there were approximately 1,300
      shareholders of record. Common stock prices are closing prices as
      reported on the Nasdaq Stock Market System. The Company has not paid
      cash dividends during the last two fiscal years and has no present
      plans to do so.
 
                                      41
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Shareholders
Symmetricom, Inc.
 
  We have audited the accompanying consolidated balance sheets of Symmetricom,
Inc. and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Symmetricom, Inc. and
subsidiaries at June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles.
 
/s/ Deloitte & Touche LLP
-----------------------
DELOITTE & TOUCHE LLP
 
San Jose, California
July 22, 1998
(September 3, 1998, as to the last sentence of Note I)
 
                                      42
<PAGE>
 
                                                                     SCHEDULE II
 
                               SYMMETRICOM, INC.
 
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                  BALANCE  CHARGED
                                    AT     TO COSTS            BALANCE
                                 BEGINNING   AND    DEDUCTIONS AT END
                                  OF YEAR  EXPENSES     (1)    OF YEAR
                                 --------- -------- ---------- -------
<S>                              <C>       <C>      <C>        <C>
Year ended June 30, 1998:
 Accrued warranty expense         $2,741    $2,051    $  798   $3,994
 Allowance for doubtful accounts  $  457    $  735    $  713   $  479
Year ended June 30, 1997:
 Accrued warranty expense         $2,088    $1,966    $1,313   $2,741
 Allowance for doubtful accounts  $  330    $  210    $   83   $  457
Year ended June 30, 1996:
 Accrued warranty expense         $2,520    $1,105    $1,537   $2,088
 Allowance for doubtful accounts  $  339    $   16    $   25   $  330
</TABLE>
--------
(1) Deductions represent costs charged or amounts written off against the
    reserve or allowance.
 
                                       43
<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.
 
                                     Symmetricom, Inc.
 
                                               /s/ Roger A. Strauch
Date: September 24, 1998             By________________________________________
                                                 (ROGER A. STRAUCH)
                                         CHIEF EXECUTIVE OFFICER AND CHIEF
                                                  FINANCIAL OFFICER
                                      (PRINCIPAL EXECUTIVE OFFICER, PRINCIPAL
                                                    FINANCIAL AND
                                                ACCOUNTING 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 AND ON THE DATES INDICATED.
 
<TABLE>
<CAPTION>
                SIGNATURES                              TITLE                    DATE
                ----------                              -----                    ----
 
<S>                                         <C>                           <C>
         /s/ Roger A. Strauch               Director, Chief Executive     September 24, 1998
___________________________________________  Officer and Chief Financial
            (ROGER A. STRAUCH)               Officer (Principal
                                             Executive Officer,
                                             Principal Financial and
                                             Accounting Officer)
 
         /s/ Mary A. Rorabaugh              Vice President, Finance and   September 24, 1998
___________________________________________  Secretary
            (MARY A. RORABAUGH)
 
         /s/ Richard W. Oliver              Chairman of the Board         September 24, 1998
___________________________________________
            (RICHARD W. OLIVER)
 
         /s/ William D. Rasdal              Director                      September 24, 1998
___________________________________________
            (WILLIAM D. RASDAL)
 
          /s/ Robert M. Wolfe               Director                      September 24, 1998
___________________________________________
             (ROBERT M. WOLFE)
 
</TABLE>
 
                                      44
<PAGE>
 
<TABLE>
<CAPTION>
   EXHIBIT
    NUMBER                            INDEX OF EXHIBITS
   -------                            -----------------
 <C>          <S>
 3.1(1)       Restated Articles of Incorporation.
 3.2(2)       Certificate of Amendment to Restated Articles of Incorporation
              filed December 11, 1990.
 3.3(9)       Certificate of Amendment to Restated Articles of Incorporation
              filed October 27, 1993.
 3.4(13)      Bylaws, as amended June 30, 1997.
 4.1(3)       Common Shares Rights Agreement dated December 6, 1990, between
              Silicon General, Inc. and Manufacturers Hanover Trust Company of
              California, including the form of Rights Certificate and the
              Summary of Rights attached thereto as Exhibits A and B,
              respectively.
 4.2(4)       Amendment to the Common Shares Rights Agreement dated February 5,
              1993 between Silicon General, Inc. and Chemical Trust Company of
              California, formerly Manufacturers Hanover Trust Company of
              California, including the form of Rights Certificate and the
              Summary of Rights attached thereto as Exhibits A and B,
              respectively.
 10.1(5)(14)  Amended and Restated Non-Qualified Stock Option Plan (1982), with
              form of Employee Non-Qualified Stock Option (1982 Plan).
 10.2(10)(14) 1990 Director Option Plan (as amended through October 25, 1995).
 10.3(5)(14)  Form of Director Option Agreement.
 10.4(14)     1990 Employee Stock Plan (as amended through June 29, 1998).
 10.5(5)(14)  Forms of Stock Option Agreement, Restricted Stock Purchase
              Agreement, Tandem Stock Option/SAR Agreement, and Stock
              Appreciation Right Agreement for use with the 1990 Employee Stock
              Plan.
 10.6(12)(14) 1994 Employee Stock Purchase Plan (as amended through December 1,
              1996).
 10.7(14)     Consulting Agreement between the Company and Richard W. Oliver
              dated June 1, 1998.
 10.8(14)     Consulting Agreement between the Company and William D. Rasdal
              dated August 1, 1998.
 10.9(9)      Lease Agreement by and between Navstar Systems Limited, a
              subsidiary of the Company, and Baker Hughes Limited dated April
              22, 1994.
 10.10(11)    Lease Agreement by and between the Company and Nexus Equity, Inc.
              dated June 10, 1996.
 10.11        Fourth Amendment to the Revolving Credit Loan Agreement between
              the Company and Comerica Bank-California dated June 26, 1998.
 10.12        First Amended and Restated Revolving Credit Loan Agreement
              between the Company and Comerica Bank-California dated June 29,
              1998.
 10.13(6)     Form of Indemnification Agreement.
 10.14(8)     Linfinity Microelectronics Inc. Common Stock and Series A
              Preferred Stock Purchase Agreement dated June 28, 1993.
 10.15(8)     Tax Sharing Agreement between Linfinity Microelectronics Inc. and
              the Company dated June 28, 1993.
 10.16(8)     Intercompany Services Agreement between Linfinity
              Microelectronics Inc. and the Company dated June 28, 1993.
 10.17(8)(14) Linfinity Microelectronics Inc. 1993 Stock Option Plan with form
              of Stock Option Agreement.
 10.18(8)     Linfinity Microelectronics Inc. Form of Indemnification
              Agreement.
 10.19(14)    Employment offer letter by and between the Company and Thomas W.
              Steipp, President and Chief Operating Officer, Telecom Solutions
              dated February 19, 1998.
 10.20(7)     Agreement for Sale and Purchase of the Navstar Business of Radley
              Services Limited.
 10.21(7)     Agreement for the Sale and Purchase of Certain Assets of Navstar
              Electronics, Inc.
</TABLE>
 
 
                                       45
<PAGE>
 
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                             INDEX OF EXHIBITS
  -------                            -----------------
 <C>       <S>
 10.22(14) Promissory Notes Secured by Deed of Trust issued by Thomas W. Steipp
           to the Company dated March 24, 1998.
 10.23     Intercompany Revolving Loan Agreement between Linfinity
           Microelectronics Inc. and the Company dated August 15, 1998.
 10.24(14) Promissory Note issued by James Peterson to Linfinity
           Microelectronics Inc. dated July 13, 1998.
 21.1      Subsidiaries of the Company.
 23.1      Independent Auditors' Consent and Report on Schedule.
 27.1      Financial Data Schedule.
</TABLE>
 
                                       46
<PAGE>
 
                             FOOTNOTES TO EXHIBITS
 
 (1) Incorporated by reference from Exhibits to Annual Report on Form 10-K for
     the fiscal year ended July 2, 1989.
 
 (2) Incorporated by reference from Exhibits to Annual Report on Form 10-K for
     the fiscal year ended June 30, 1991.
 
 (3) Incorporated by reference from Exhibits to Registration Statement on Form
     8-A filed with the Securities and Exchange Commission on December 8,
     1990.
 
 (4) Incorporated by reference from Exhibits to Registration Statement on Form
     8-A filed with the Securities and Exchange Commission on February 11,
     1993.
 
 (5) Incorporated by reference from Exhibits to Registration Statement on From
     S-8 filed with the Securities and Exchange Commission on December 24,
     1990.
 
 (6) Incorporated by reference from Exhibits to the 1990 Proxy Statement.
 
 (7) Incorporated by reference from Exhibits to Current Report on Form 8-K
     filed with the Securities and Exchange Commission on September 2, 1993.
 
 (8) Incorporated by reference from Exhibits to Annual Report on Form 10-K for
     the fiscal year ended June 30, 1993.
 
 (9) Incorporated by reference from Exhibits to Annual Report on Form 10-K for
     the fiscal year ended June 30, 1994.
 
(10) Incorporated by reference from Exhibits to Registration Statement on Form
     S-8 filed with the Securities and Exchange Commission on January 19,
     1996.
 
(11) Incorporated by reference from Exhibits to Annual Report on Form 10-K for
     the fiscal year ended June 30, 1996.
 
(12) Incorporated by reference from Exhibits to Quarterly Report on Form 10-Q
     for the quarter ended December 31, 1996.
 
(13) Incorporated by reference from Exhibits to Annual Report on Form 10-K for
     the fiscal year ended June 30, 1997.
 
(14) Indicates a management contract or compensatory plan or arrangement.
 
                                      47