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 September 30, 1998
                                     OR
[   ]   Transition Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934.

                     Commission File Number 000-28276
                ------------------------------------------
                                 SAWTEK INC.
        (Exact name of registrant as specified in its charter)
        ------------------------------------------------------
         Florida                                         59-1864440
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)
1818 S. Highway 441, Apopka, Florida                        32703
(Address of principal executive offices)                 (Zip Code)

Registrant's telephone number, including area code:  (407) 886-8860

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

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

                         Common Stock, $.0005 Par Value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                Yes   X      No
                                    -----       -----

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  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. [ X ]

The  aggregate  market value of the Common Stock held by  non-affiliates  of the
registrant as of October 30, 1998 was: Common Stock, $.0005 par value:
$239,024,300.

There were 20,858,597 shares of the registrant's  Common Stock outstanding as of
October 30, 1998.
                     --------------------------------------

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions  of  the  definitive   proxy   statement  of  the  registrant  for  the
registrant's  Annual  Meeting  of the  Shareholders  for the  fiscal  year ended
September 30, 1998,  which  definitive  proxy  statement  will be filed with the
Securities   and  Exchange   Commission  not  later  than  120  days  after  the
registrant's  fiscal  year  end of  September  30,  1998,  are  incorporated  by
reference into Part III.

 <PAGE>

                               TABLE OF CONTENTS

                                     PART I
                                                                           Page

Item 1.  Business (including Risk Factors and Uncertainties)..........     3-19
Item 2.  Properties...................................................      19
Item 3.  Legal Proceedings............................................      20
Item 4.  Submission of Matters to a Vote of Security Holders..........      20

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related
           Shareholder Matters........................................    20-21
Item 6.  Selected Financial Data......................................    21-22
Item 7.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations........................    22-28
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...      28
Item 8.  Financial Statements and Supplementary Data..................      28
Item 9.  Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure........................      28


                                     PART III

Item 10. Directors and Executive Officers of the Registrant...........    29-31
Item 11. Executive Compensation.......................................      31
Item 12. Security Ownership of Certain Beneficial Owners and
           Management.................................................      31
Item 13. Certain Relationships and Related Transactions...............      31


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on
           Form 8-K...................................................      32
         Exhibit Index................................................    32-36
         Signatures...................................................      37

<PAGE>

PART I.

     Except for the  historical  information  contained  in this Form 10-K,  the
discussion includes certain forward-looking statements made pursuant to the Safe
Harbor provisions of the Private  Securities  Litigation Act of 1995.  Investors
are  cautioned  that  forward-looking  statements  such  as  statements  of  the
Company's  plans,  objectives,  expectations  and  intentions  involve risks and
uncertainties.  The cautionary  statements made in this Form 10-K should be read
as being  applicable  to all related  forward-looking  statements  wherever they
appear.  Statements containing terms such as "believes," "does not believe," "no
reason to believe," "expect," "plans,"  "projected,"  "intends,"  "estimates" or
"anticipates"  are  considered to contain  uncertainty  and are  forward-looking
statements.  The Company's  actual  results could differ  materially  from those
discussed.  Factors that could cause or contribute to such  differences  include
those  discussed  below,  as well as those  discussed  under the  caption  "Risk
Factors and Uncertainties."

ITEM 1.  BUSINESS
-----------------
     Sawtek  designs,  develops,  manufactures  and  markets  a broad  range  of
electronic signal  processing  components based on surface acoustic wave ("SAW")
technology. The Company's primary products are custom-designed, high performance
bandpass filters, resonators, delay lines, oscillators and SAW-based subsystems.
These  products are used in a variety of microwave and RF systems,  such as Code
Division  Multiple Access  ("CDMA") and Global System for Mobile  communications
("GSM")-based  digital  wireless  mobile and fixed  systems,  digital  microwave
radios,  wireless  local area networks  ("WLAN"),  cable  television  equipment,
various  defense and  satellite  systems and  chemical  sensors.  The  Company's
products offer key advantages such as lower distortion, reduced size and weight,
high  reliability and precise  frequency  control  compared to products based on
alternative    technologies    and   address    rapidly    growing    needs   in
telecommunications,  data communications, video transmission, military and space
systems and other markets.  The Company's  proprietary CAD and analysis software
tools  support  rapid and precise  SAW device  design and  simulation,  enabling
Sawtek  and its  customers  to  achieve  timely  new  product  development.  The
Company's  commercial  customer base accounts for approximately 92% of net sales
for the current  fiscal year and  includes  major  telecommunications  equipment
producers such as Ericsson, LGIC, Lucent Technologies,  Motorola, Nokia, Nortel,
Philips, Qualcomm, Samsung and Sony.


Industry  Background
--------------------
     Electronic  systems  which  transmit or receive  voice,  data or video must
contain  various  signal   processing   components  such  as  bandpass  filters,
resonators,  delay lines and oscillators.  These components modify and condition
the desired signals while rejecting  unwanted signals which cause distortion and
interference.  The  frequency  at  which  these  systems  transmit  and  receive
information is referred to as the microwave or RF frequency. However, before the
information  can be used,  the signal must  generally  be  converted  to a lower
intermediate  frequency  ("IF")  and  finally to the  lowest  system  frequency,
commonly  referred to as baseband.  While the  microwave and RF  frequencies  at
which voice, data and video systems operate are generally dictated by regulatory
bodies  such as the FCC,  system  designers  have  considerable  flexibility  in
selecting one or more IF frequencies  which suit the  requirements of a specific
application  and design  approach.  Consequently,  IF  components,  particularly
filters,  are developed  specifically  for each customer and  application,  even
though they  frequently  must be produced in large  quantities.  The performance
demands placed on these components by increasingly  complex systems have changed
dramatically over the past few years, particularly in wireless applications.


                                       3

<PAGE>

     The wireless communications industry is experiencing  significant worldwide
growth.  Cost  reductions  and  technological   improvements  in  such  wireless
communications  products as cellular,  PCS, wireless local loop ("WLL"),  global
satellite  telephones and wireless data systems are contributing to this growth.
Wireless  communications  systems can offer the  functional  advantages of wired
systems without the costly and time consuming  development of an extensive wired
infrastructure,  which is of particular  importance  in developing  parts of the
world. Rapidly emerging digital telecommunications standards and technology will
provide  the  performance  improvements  necessary  to address  overcrowding  of
existing  cellular  systems and will  provide  increased  functionality.  Unless
carriers adopt the emerging digital standards,  they will be forced to build new
cellular base station sites and continue to suffer from dropped calls due to the
overcrowding  problem.  These  standards  include CDMA,  which is  predominately
utilized in the United States,  South Korea and is showing  success in Japan and
other countries,  and GSM, adopted  throughout  Europe and many other countries.
These new  approaches  are being  utilized  to provide  cellular  and PCS mobile
services as well as fixed WLL networks.  As demands for wireless  communications
subscriber  services  grow,  service  providers  are offering  digital  handheld
products and expanding the associated  infrastructure.  These  factors,  coupled
with regulatory  changes in the United States and abroad, as well as advances in
wireless communications  technology, are leading to substantial worldwide growth
in existing systems and the emergence of new markets and applications.

     As  the  wireless  telecommunications  industry  has  expanded,  previously
allocated  frequency bands have become increasingly  congested,  and the need to
precisely  control  transmission  frequencies  and to  filter  unwanted  signals
without distortion has become critically important. In response to this crowding
of existing  frequency bands,  regulatory  agencies have allocated new blocks of
spectrum at higher frequencies and more stringently  regulated  allowable signal
bandwidths.  Systems  operating at these  higher  microwave  and RF  frequencies
require   higher   frequency  IF  components  to  simplify  the  overall  system
architecture,  thereby reducing cost, complexity and power consumption.  To make
more efficient use of the crowded  frequency bands, the spacing between adjacent
signal  channels  must be  reduced,  placing  the  desired  signal very close to
unwanted interfering  signals.  Highly selective IF filters are required to pass
the desired signal without distortion,  while rejecting interfering signals from
adjacent channels and other sources.

     Telecommunications   systems,  including  cellular  and  PCS,  are  rapidly
evolving from traditional analog to more efficient digital modulation techniques
to improve system performance and capacity.  These digital approaches call for a
wider  range  of  bandwidths,  higher  frequencies  and more  precise  bandwidth
control.   Furthermore,  for  highly  bandwidth-efficient  digital  transmission
systems to operate  properly,  all frequency  components of the signal must pass
through the system with essentially the same time delay or severe distortion may
result.

     The  development  of RF  integrated  circuits,  coupled with surface  mount
packaging  ("SMP")  technology,  has facilitated a significant  reduction in the
size of portable wireless products. These developments have, in turn, driven the
demand for rugged,  miniature,  surface mount IF signal  processing  components,
particularly for use in handheld applications such as cellular telephones.


                                       4
<PAGE>

     Traditional signal processing  technologies  include lumped element ("LC"),
ceramic  and  bulk  acoustic  wave  ("BAW")  crystal  filters,   resonators  and
oscillators. While these basic approaches have been improved to address changing
demands, the improvements have been largely incremental and evolutionary, rather
than  revolutionary.  It is generally  difficult to build traditional LC filters
with the high  selectivity  and  precision  required  by many  new  systems.  In
addition,  most LC filters tend to drift in frequency and degrade in performance
with  changes in operating  temperature.  Conventional  BAW crystal  filters are
difficult to build in the higher IF frequency  ranges and increasing  bandwidths
required  for many  emerging  communications  applications  because  the crystal
elements of these  filters  must be made  increasingly  thinner,  resulting in a
device that is both delicate and  difficult to  manufacture.  Many  conventional
types of filters,  including  both BAW crystal and LC,  which are  suitable  for
filtering analog signals, may produce significant distortion when used to filter
digital  signals.  Another  inherent  limitation  of  these  traditional  filter
technologies is the inability to adequately reduce their physical size to suit
many emerging applications.

     The SAW  solution  to  signal  processing  relies  on the  propagation  and
interaction of acoustic  waves on the surface of a  piezoelectric  crystal.  SAW
technology offers a number of advantages over competing technologies,  including
precise  frequency  control  and  selectivity,  reduced  size and  weight,  high
reliability,  environmental stability and the ability to pass RF signals without
significant  distortion.  Perhaps the most  significant  benefit inherent in SAW
technology is the relative ease in producing large  quantities of high precision
components  that are  comparatively  small in size and are  passive  (no current
required). SAW devices are routinely manufactured for higher IF frequency ranges
and  broader  bandwidths  required  for  emerging  systems.  The range of signal
bandwidths  that  can be  accommodated  with  SAW  technology  is  quite  large,
permitting SAW components to address almost all viable applications. 

     As  the  use  of  wireless   communications   systems   increases  and  new
applications  develop,  there  is a  need  for  large  quantities  of IF  signal
processing components which can meet demanding performance, size and reliability
requirements.  SAW technology is an enabling  solution,  possessing all of these
attributes, with applications in nearly all wireless communications systems.

Markets and Applications
------------------------
     SAW devices may be utilized in most applications  which transmit or receive
microwave  or RF signals.  Sawtek  designs,  manufactures  and markets  bandpass
filters,  resonators,  delay lines, oscillators and SAW-based subsystems to both
domestic  and  international  original  equipment  manufacturers  ("OEMs")  that
integrate  these products into receivers,  transmitters  and other equipment for
commercial,   industrial,  military  and  space  applications.  Sawtek  provides
products to the following  markets:  communications,  military and space systems
and other markets.

     Communications
     -------------- 
     Applications for the communications  market accounted for approximately 81%
of Sawtek's net sales in 1998. The Company's  communications  product  offerings
consist primarily of IF bandpass filters for CDMA and GSM base station equipment
and CDMA  subscriber  handsets.  Additional  applications  include  base station
repeaters,  global  satellite  systems,  digital  radios,  and  data  and  video
applications.  The  Company  offers many  custom SAW  components  to serve these
market applications.

     Cellular.  In cellular  applications,  calls are placed through  subscriber
handsets by establishing a connection with a base station via RF channels in the
800-1000 MHz frequency  range. The Company supplies IF bandpass filters for CDMA
and  GSM-based  cellular  base  stations  and  for  certain  subscriber  handset
applications.


                                       5
<PAGE>


     PCS.  PCS  systems  are  enhanced  cellular  networks  which  operate  in a
frequency   band  of  1,800  to  2,000  MHz  and   provide  a  broad   range  of
telecommunications  services.  The Company supplies IF bandpass filters for CDMA
and  GSM-based  PCS  base  station  equipment,  and  bandpass  filters  for CDMA
subscriber handsets.

     Wireless  Local Loop  ("WLL").  WLL systems  eliminate  the need for a wire
(loop) connecting users to the public switched telephone network by transmitting
voice  messages  over radio  waves for the "last  mile"  connection  between the
location of the customers' telephone and a base station connected to the network
equipment.  The  Company  supplies  bandpass  filters to both base  station  and
subscriber handset applications for WLL.

     Data Communications. The data communications market encompasses a number of
applications  involving the  transmission  and reception of data through  wired,
wireless or satellite networks.  As the usage of these networks increases,  OEMs
are pursuing broader bandwidths,  faster data rates and improved data integrity.
OEMs typically  specify custom SAW filters based on these  requirements and as a
result,  the Company  designs  unique  products  for each OEM. As  international
standards are adopted to meet these requirements,  the Company will support both
standard and custom  applications.  These  applications  include  digital radio,
wireless  local area networks,  handheld data  terminals and global  positioning
systems.

     Video  Transmission.  OEM products  utilizing  relatively low frequency SAW
filter designs for cable television  ("CATV")  head-end  equipment are purchased
worldwide by cable operating companies.  Sawtek manufactures a variety of custom
SAW  devices to serve the various  standards  required  by the  worldwide  video
transmission market.  Emerging technologies within the video transmission market
include digital high definition television ("HDTV") and interactive  television.
The Company has designed custom products for both of these applications.

     Military and Space
     ------------------
     Sawtek has been a provider to the military and space systems  markets since
the Company's inception in 1979. Sawtek's components and subsystems can be found
in major applications that include electronic warfare,  defense  communications,
missile guidance, military and commercial space systems, radar and surveillance.

     Other Markets
     ------------- 
     The  Company  designs  and  produces  SAW  components  for  other  markets,
including  commercial  avionics,  test equipment and identification and security
systems.   Commercial   avionics   applications   include  collision   avoidance
transponders and radar for line-of-flight weather information. Sawtek's products
are  utilized in various  test  equipment  applications  for circuit  design and
system performance analysis,  such as signal generators,  spectrum analyzers and
cellular  telephone system test equipment.  In the  identification  and security
system  industry,  the Company's  products enable OEMs to provide passive SAW RF
identification labels (or tags) for a variety of applications, such as toll road
vehicle identification and personnel monitoring.  The Company also markets three
families of standard  SAW filters and offers  these  products  for sale  through
distribution networks in North America and Europe.




                                       6
<PAGE>

     The  Company has been  developing  SAW-based  chemical  sensors for several
years and has been a leading  supplier of SAW resonators and delay lines used in
sensor development  programs. In February 1998, the Company acquired Microsensor
Systems,  Inc. of Bowling Green,  Kentucky, a leading supplier in the developing
SAW-based chemical sensor instrument market.

     Sawtek has a  concentrated  customer  base with three  customers  that each
accounted for over 15% of net sales in 1998.  They are, in  alphabetical  order,
Motorola,  Nokia and  Qualcomm.  The  Company's  top 10 customers  accounted for
approximately  76% of net  sales in 1998  and in 1997.  The loss of any of these
customers  could  have a  material  adverse  effect on the  Company's  business,
operating  results  and  financial  condition.  There is no  assurance  that the
Company will obtain future business from these customers.

Products
--------
     The Company has produced unique SAW products at frequencies ranging from 10
MHz to  nearly  3 GHz.  Products  are  organized  into six  product  categories:
bandpass filters, resonators, delay lines, oscillators, SAW-based subsystems and
SAW  chemical  sensors.  While some  product  standardization  exists,  the vast
majority  of the  Company's  products  are custom  developed  for an  individual
application or customer,  for which a non-recurring  engineering  ("NRE") fee is
generally charged.

     Bandpass Filters
     ----------------  
     Sawtek currently offers three types of SAW bandpass filters: bi-directional
transversal, low loss transversal and coupled resonator filters.

     Bi-directional  Transversal  Filters.  This class of filters represents the
most widely used  application of SAW  technology.  Because these filters operate
over a  fairly  wide  and  useful  frequency  range  (10 MHz to 2.5  GHz)  and a
relatively  large range of possible  fractional  bandwidths  (0.1% to 67% of the
center  frequency),  they are the  filter  component  of choice  in many  modern
communications  systems.  The  largest  emerging  market for this  product is in
support of cellular and PCS infrastructure and handheld subscriber applications.
Numerous  bi-directional filter products,  supplied in low profile surface mount
packages,  have been produced for high volume  subscriber  applications  such as
CDMA-based cellular and PCS, WLL, WLAN and handheld data terminals.

     Low Loss  Transversal  Filters.  Sawtek offers high  performance,  low loss
transversal filters for use in both  infrastructure and subscriber  applications
in CDMA and GSM-based digital cellular systems,  wireless PBX, wireless handheld
data terminals and WLANs.

     Coupled  Resonator  Filters.  The Company offers coupled  resonator  filter
products  which include  in-line  coupled,  waveguide  coupled and combined mode
resonator  filters.  The Company currently supplies filters of this type for use
in GSM,  PCS and  numerous  other  commercial  and  military  telecommunications
systems.




                                       7

<PAGE>


     Resonators
     ----------
     The  Company  currently  offers two types of  resonators:  SAW and  surface
transverse  wave  ("STW").  Products  operating  from  100 MHz to 1.5  GHz,  are
available and are generally used as stable,  high-Q  frequency  control elements
that determine the operating  frequencies of oscillators.  The Company generally
chooses to offer these products for use in high performance commercial, military
and  space  applications,   where  the  demand  for  more  stringent  electrical
requirements  is not  served by high  volume  SAW  resonator  manufacturers.  In
addition  to  offering  these  products  as  individual   components,   Sawtek's
resonators  are  also  used  by the  Company  in  the  manufacture  of its  high
performance oscillator products.

     Delay Lines
     ----------- 
     Sawtek   currently   offers  SAW  delay  line   products,   consisting   of
non-dispersive,  dispersive and multi-tap  delay line  configurations.  Sawtek's
delay line products are primarily used in military communications and electronic
warfare  applications,  such as pulse expansion and compression radar.  However,
they also find uses in  commercial  applications,  such as  commercial  avionics
collision  avoidance  transponders,  RF identification  tag systems and wireless
handheld data terminal products. All SAW delay lines make use of the fact that a
surface acoustic wave travels 100,000 times more slowly than an  electromagnetic
wave.  This  permits SAW delay lines to be much smaller for a given signal delay
than those of most competing technologies.

     Oscillators
     -----------
     Sawtek currently offers fixed frequency and voltage controlled  oscillators
based  on both  SAW and STW  resonator  technologies.  Oscillators  are  used to
generate a pure RF tone or signal.  This signal  often  determines,  directly or
through frequency multiplication, the final operating frequency of the system in
which it is used.  Oscillators,  in conjunction with additional  circuitry,  are
also used in converting or mixing RF signals from one frequency to another.  The
Company's  oscillators  are used in high  performance  commercial  and  military
applications such as instrumentation, avionics and electronic warfare.

     SAW-based Subsystems
     --------------------
     Among the  Company's  most  complex  and  highly  integrated  products  are
SAW-based  subsystems.   In  general,   these  subsystems  consist  of  key  SAW
components,  surrounded by additional circuitry,  that provide a higher level of
system functionality than that provided by the SAW devices alone. These products
are highly  specialized  and are custom  developed  for  specific  applications.
Sawtek's  subsystem products are largely used in military and space applications
and include channelized filter banks, switched filter and delay line modules and
pulse expansion and compression subsystems.

     SAW Chemical Sensor Products
     ----------------------------  
     Through its wholly-owned subsidiary,  Microsensor Systems, Inc., Sawtek has
a line of SAW-based chemical sensor instruments for the chemical warfare market.
The  customer  base for  chemical  agent  detectors  include the U.S.  military,
various  Federal  agencies,  and  state and  local  municipalities.  Microsensor
Systems  also offers an ethylene  oxide  detector  that is commonly  used in the
hospital  sterilization  market and a fuel  dilution  meter for the oil analysis
market. In addition, Sawtek continues to be a leading supplier of SAW resonators
and delay lines used in sensor development programs throughout the world.


                                       8

<PAGE>

New Product Development
-----------------------
     The Company's research and development and engineering teams are developing
new SAW-based products on an ongoing basis to serve the needs of our current and
potential  customers.  Much of the effort is involved  in reducing  the size and
increasing  the  performance  of our  devices.  Examples  of recent  development
efforts  that are  generating  new revenue for the Company  include  filters for
wireless LAN and WLL  applications,  and  significantly  smaller  surface  mount
filters for GSM and CDMA applications.

     Sawtek  has   identified   SAW  chemical   sensors  and   subsystems  as  a
strategically  promising  technology  for new product  development.  Substantial
market   opportunities   exist  in   applications   that   include   groundwater
contamination analysis,  process control,  incipient fire detection,  biosensors
for medical  applications,  electronic  noses,  soil gas analysis,  dry cleaning
monitors, fugitive emission monitors, analysis of gases in bulk chemical storage
containers,  OSHA workplace  health and safety  monitoring and respirator  alarm
systems,  and chemical  warfare agent  detection.  The Company believes there is
currently  no  widely  available   technology  which  meets  all  of  the  cost,
performance and applications  requirements for most of these areas.  Thus, there
is a need for a  cost-effective  technology  that can be customized for specific
applications.  SAW  chemical  sensor  systems have the  potential  for costing a
fraction  of  currently   available   transportable   analytical  vapor  testing
equipment,  while  providing  a  suitable  level  of  chemical  selectivity  and
sensitivity,  in an instrument that is handheld. These sensor systems could also
be fitted with  sampling  attachments  for sensing  volatile  organic  compounds
("VOCs") in soil and water.

     A majority of Sawtek's sensor  development work is being conducted  through
its subsidiary,  Microsensor Systems,  Inc. To date, Sawtek scientists have made
fundamental  improvements  in three major  technical areas necessary for product
development, namely temperature compensation, polymer development and metrology.

     The SAW-based  chemical  sensor market is a developing  market.  For fiscal
year 1998, sales of chemical  sensor-based products are less then 3% of Sawtek's
consolidated revenue.  Sawtek successfully  completed a Technology  Reinvestment
Program ("TRP") project for a gas and industrial application that allowed Sawtek
to deliver a version of the instrument to a commercial  chemical company.  There
is no assurance  that the Company will be successful  in developing  new sensing
products for commercial or military applications.

Technology
----------
     SAW Technology.  A simple SAW filter has two  transducers  which consist of
interdigital arrays of thin metal electrodes  photolithographically defined on a
highly polished  piezoelectric  wafer. A piezoelectric  material is one in which
there exists a reciprocal, linear relationship between the electric field in the
material and the strain in the material.  When a signal of the proper  frequency
is  applied  across  the  interdigital  transducers  ("IDTs"),  the  alternating
electrode voltages cause the surface of the device to expand and contract due to
the varying electric fields induced in the piezoelectric  material.  This causes
the generation of a mechanical (or acoustic) wave  propagating at the surface of
the device. Reciprocally, the acoustic wave generates an electrostatic wave with
potentials  at the surface of the device  which can be  detected by an IDT.  The
operating frequency of the device is determined by the electrode spacing and the
material's  surface acoustic wave velocity.  This  relationship  places physical
limitations  on the  frequency  of  operation  of  practical  SAW devices due to
limitations in photolithographic  resolution.  The configuration of the IDTs and
properties of the substrate  material  determine the signal processing  function
and response characteristics of the device.

                                       9


<PAGE>


     The appeal of SAW devices as  preferred  signal  processing  components  is
based on the  inherent  advantages  of the  technology.  SAW devices can provide
complex signal processing functions in a single,  compact device. One example of
this is the outstanding bandpass filter  characteristics  which can routinely be
achieved  using  SAW  technology.  Comparable  performance  utilizing  LC filter
technology would require numerous components and could occupy many square inches
of PC board space. Because surface acoustic waves propagate 100,000 times slower
than electromagnetic waves, the realization of relatively long electrical delays
on devices of limited dimensions is possible.  Additional performance advantages
of SAW  technology,  which vary based on the  application,  include  small size,
linear phase, high selectivity,  excellent rejection and temperature  stability.
The ruggedness and reliability of SAW devices are characteristic of the physical
device  structure.  Because  device  operating  frequencies  are  determined  by
photolithographic  processes,  SAW  devices do not  require  complicated  tuning
procedures,  nor  do  they  become  detuned  in  the  field.  The  semiconductor
microfabrication  techniques used in manufacturing  SAW components allow for the
volume  production of  economical  and  reproducible  devices.  The  outstanding
reproducibility  of these  devices  makes  them  ideal for  military  electronic
warfare  applications  such as channelized  filter banks for spectral  analysis.
Small size and ruggedness  make SAW devices  useful for cellular  communications
and  related  applications.  Finally,  the  relative  radiation  hardness of SAW
devices makes them ideal for space-based applications.

     Computer  Aided  Design  and  Analysis  Software.  Sawtek's  versatile  and
user-friendly proprietary software fully supports the design and simulation of a
broad range of SAW device  structures,  allowing  Sawtek's  design  engineers to
select the optimum SAW device type for a particular  application with respect to
performance, size and cost.

Manufacturing
-------------
     The  manufacturing  techniques  utilized  by the  Company  to  produce  its
products are very similar to those used by the integrated  circuit industry.  In
general,   SAW  devices  are  more  straightforward  to  manufacture  than  most
integrated  circuits but involve  certain highly  complex and precise  processes
that are  unique.  While the  Company  controls  a  substantial  portion  of the
manufacturing process, some activities are outsourced. The primary raw materials
used to manufacture Sawtek's products,  purchased from outside sources,  include
piezoelectric wafers and metal or ceramic packages used to house and protect the
SAW die.  Manufacturing  scheduling and control is achieved through the use of a
computer-based  manufacturing  resource planning ("MRP II") system.  The Company
segregates  the  manufacturing   process  into  two  functional   areas:   wafer
fabrication and assembly.

     Wafer Fabrication. The wafer fabrication process involves the deposition of
a very thin,  uniform  coating of  aluminum  onto  piezoelectric  wafers.  These
metallized  wafers  are  coated  with  a  light  sensitive   material  known  as
photoresist.  The wafer is exposed to light  through a master  glass  plate,  or
photomask, which contains multiple images of the SAW devices to be produced. The
image from the photomask is replicated on the wafer through a  photolithographic
develop and etch  process.  Each device on the wafer is referred to as a SAW die
and each  wafer  may  contain  from two to 600 or more die,  depending  upon the
design and  performance of the final product.  All of the Company's  fabrication
processes are conducted at the Company's principal facility in Orlando, Florida.


                                       10


<PAGE>



     Assembly.  In assembly,  the wafer is cut into the  individual SAW die with
high  precision,  diamond  wheel  dicing  saws and  placed  in metal or  ceramic
packages.  The SAW die and  associated  components,  if any, are attached to the
base of the package using specialized adhesives. Electrical connections are made
between  the SAW die and the pins,  pads or leads of the  package  using  either
manual or automatic wirebonding equipment.  The packages are hermetically sealed
using specialized  welding equipment in a dry nitrogen  atmosphere to ensure the
long term  reliability of the device.  After  sealing,  the units are tested for
hermeticity  and labeled with a laser  marking  system.  Finally,  the units are
tested with automated  network  analyzers to ensure that the devices  conform to
the desired electrical specifications.

     In 1996,  the  Company  established  a  subsidiary  in  Costa  Rica for the
production of SAW components.  In 1998, the Costa Rican subsidiary accounted for
approximately 37.5% of net sales.

     The Company has built a new SMP production facility in Orlando, Florida and
in Costa Rica to automate,  in large part, the assembly process of SMP products.
Utilizing robotic assembly equipment, the Company has automated the functions of
SAW die attach, wire bond, package seal, hermetic leak test, electrical test and
package marking.

Sales and Marketing
-------------------
     Due to OEM requirements  for custom devices,  the Company uses a team-based
sales  approach to develop  relationships  at multiple  levels of the customer's
organization,  including  management,  engineering and  purchasing.  The Company
utilizes 15 domestic and 10 international  independent sales  representatives to
identify  opportunities  which are then managed by the Company's  internal sales
force.  Direct sales are handled by the Company's sales and marketing  personnel
and management.  The Company also utilizes  distributors to generate  additional
sales for the  Company's  standard  product  families.  Once an  opportunity  is
identified,  members of the  Company's  engineering  design  team and sales team
coordinate close technical collaboration with the customer during the design and
qualification  phase of their  program.  The  Company's  executive  officers are
actively  involved in all  aspects of the sales and  marketing  process  working
closely with the senior management of its customers.

Foreign and Domestic Operations and Export Sales
------------------------------------------------
     See Notes 11 and 12 to Consolidated  Financial Statements on pages F-15 and
F-16.

Competition
-----------
     The markets for Sawtek's products are  characterized by price  competition,
rapid  technological   change,   product   obsolescence  and  heightened  global
competition.  Historically,  the NRE investment required to produce a SAW design
and technical  incompatibility issues between various SAW suppliers has led many
SAW  customers to single source their  requirements.  In each of the markets for
Sawtek's products, the Company competes with large international firms that have
substantially greater financial,  technical, sales, marketing,  distribution and
other resources than the Company. In addition,  the Company may face competition
from  companies   that   currently   produce  SAW  devices  for  their  internal
requirements,  as well as from a number of the Company's customers that have the
potential  to  develop  an  internal  supply  capability  for SAW  devices.  The
following  North  American  companies  compete  with the Company to a greater or
lesser degree depending on the strengths and product focuses of each company:



                                       11


<PAGE>


Andersen  Laboratories  (a  unit  of  Sawgrass  Microelectronics),   Phonon,  RF
Monolithics  and  Vectron.   Competition  from  European  companies  principally
includes  Siemens  Matsushita  Components and Thomson  Microsonics.  The Company
anticipates  that it will  experience  increasing  competition  from Pacific Rim
companies  as  it  expands  into  handheld  and  other  high  volume  subscriber
applications.  Major Asia  suppliers  of  SAW-based  products  include  Fujitsu,
Murada, NDK, and several other Japanese and Korean manufacturers principally for
their internal  consumption.  The Company  expects  competition to increase from
both established and emerging competitors as well as from internal  capabilities
developed by certain  customers.  Additional  competition  could have a material
adverse  effect on the Company's  business,  results of operations and financial
condition  through  price  reductions,  loss of market  share and  delays in the
timing of customers' orders.

     The Company's ability to compete  effectively in its target markets depends
on a variety  of factors  both  within and  outside  of the  Company's  control,
including timing and success of new product introductions by the Company and its
competitors, availability of manufacturing capacity, the rate at which customers
incorporate the Company's components into their products,  the Company's ability
to respond to price competition, availability of technical personnel, sufficient
supplies of raw materials,  the quality,  reliability  and price of products and
general economic conditions.  There can be no assurance that the Company will be
able to compete successfully in the future.

Research and Development
------------------------
     Sawtek's   research  and   development   efforts  are  primarily  aimed  at
discovering new and innovative SAW device structures and SAW-based  technologies
that uniquely  address  market needs in those areas selected as strategic by the
Company.  The goal of the Company's research and development group is to develop
the technological tools necessary to meet emerging market requirements.

     Sawtek currently employs 25 scientists,  technicians and consultants in its
research  and  development  efforts.  In addition to its staff and  consultants,
Sawtek is involved in cooperative research with outside organizations, including
individuals,   research   groups,   universities,    institutes   and   national
laboratories.  This approach allows Sawtek's  research and development  group to
benefit from the ideas and talents of a group of scientists larger than Sawtek's
internal  staff,  and to maintain a highly  creative,  stimulating  intellectual
environment for its scientists.

     Research and  development  expenses were $4.3 million in 1998, $3.8 million
for 1997 and $2.0 million in 1996.  The Company  anticipates  that  research and
development expenses will continue to increase in total dollars as personnel and
programs  are  added.  A  significant  portion  of  the  Company's   development
activities is conducted in connection  with the design and development of custom
devices, which is paid for by customers and classified as NRE items. The revenue
generated from these items is included in net sales and the cost is reflected in
cost of sales rather than in research and development expenses.

Proprietary Rights
------------------
    
     Sawtek relies on a combination of patents,  copyrights and trade secrets to
establish and protect its proprietary rights. Sawtek owns 13 U.S. patents (which
expire  from  2003 to  2015),  relating  to SAW  device,  oscillator,  packaging
technologies and SAW-based chemical sensors. Sawtek also owns a substantial body
of  proprietary  techniques and trade  secrets.  Sawtek  recognizes the benefits
associated  with  developing  a portfolio of  corporate  intellectual  property,
particularly  during the new product  development  process,  and is aggressively
pursuing  patents on several  technologies.  Over the past two years,  18 patent
applications  were  filed  and six  patents  have been  issued.  There can be no
assurance that patents will issue from any of the pending applications,  or that
any claims allowed from existing or pending patents will be  sufficiently  broad
to protect the Company's technology.
                                                               

                                       12


<PAGE>


     Sawtek also seeks to protect its trade secrets and proprietary  technology,
in part,  through  confidentiality  agreements with  employees,  consultants and
other  parties.  There can be no  assurance  that these  agreements  will not be
breached,  that the Company will have adequate  remedies for any breach, or that
the Company's trade secrets will not otherwise  become known to or independently
developed  by others.  In addition,  the laws of some  foreign  countries do not
offer protection of the Company's  proprietary  rights to the same extent as the
laws of the United States.

Backlog
------- 
     Sawtek's backlog as of September 30, 1998 was  approximately  $15.8 million
compared to the backlog at September 30, 1997 of $27.4 million.  The Company has
reduced customer  delivery times  significantly  over the past two years through
its capacity expansion  efforts.  Customers are now placing orders based on this
reduced  lead time  resulting  in a lower  backlog  compared  to last year.  The
Company  includes  in its backlog  only  customer  orders and  certain  purchase
agreements with firmly scheduled deliveries within the subsequent 12 months. The
Company  expects to ship  substantially  all of its backlog by the end of fiscal
1999.  Shortly after  September 30, 1998,  the Company  received an order from a
major customer for $4.6 million,  which is to be shipped over a 27 month period.
The Company's backlog is not necessarily indicative of future product sales, and
the Company may be materially adversely affected by a delay or cancellation of a
small number of purchase orders.  Backlog cancellations are negotiated with each
customer in writing and form a part of the contract with the customer.

     Most of the orders from the Company's  largest customers allow the customer
to cancel the order with a certain amount of required notice;  and, from time to
time,  the  Company has  experienced  cancellations  of orders in backlog.  This
notice  is  negotiated  with  each  customer  and is  generally  related  to the
manufacturing cycle time of the product which the customer ordered, typically 60
to 90 days.  If there is any work in  process at the time of  cancellation,  the
customer  may be required to pay  customary  termination  charges.  If customers
over-order to secure delivery dates and eventually  cancel orders,  the customer
may be subject to price renegotiation as a result of the lower quantity of units
taken.

Employees
---------
     As of  September  30,  1998,  the  Company  had a total  of 549  employees,
including 370 in manufacturing and operations;  96 in research,  development and
engineering;  29 in  quality  assurance;  19 in sales and  marketing;  and 35 in
administration.  There are 151  employees  located in San Jose,  Costa Rica,  10
employees located in Bowling Green,  Kentucky,  and the remaining  employees are
based in Orlando,  Florida.  The Company  believes its future  performance  will
depend in large  part on its  ability  to  attract  and  retain  highly  skilled
employees. None of the Company's employees are represented by a labor union, and
the Company has not experienced any work  stoppages.  The Company  considers its
employee relations to be good.


                                       13


<PAGE>

                         RISK FACTORS AND UNCERTAINTIES

     There are forward-looking statements in this report. Any statement relating
to plans,  intentions,  expectations  or other  forward-looking  expression is a
forward-looking statement. The Company may make other forward-looking statements
either  orally or in writing in the  future.  A reader of this Form 10-K  should
understand that it is not possible to predict or identify all such risk factors.
Consequently,  the  reader  should  not  consider  this  list  to be a  complete
statement of all potential risks or  uncertainties.  The Company does not assume
the  obligation to update any  forward-looking  statement.  The following  "Risk
Factors and Uncertainties" are intended to be cautionary statements  identifying
important  factors that could cause  actual  results to differ  materially  from
those in the forward-looking statements.

     Dependence on Continuing  Demand for Wireless  Communications  Services and
CDMA  Technology.  Approximately  74% of the  Company's  net  sales for 1998 and
approximately  71% of net sales for 1997 were  derived from sales of SAW devices
for applications in wireless communications systems. Any economic, technological
or other force that causes a reduction in demand for wireless services may cause
a reduction in the need for  performance  upgrades to existing base stations and
in the  installation of new base stations,  which would have a material  adverse
effect on the Company's business, financial condition and results of operations.
Approximately  46% of the Company's net sales for fiscal 1998 and  approximately
54%  of  net  sales  for  the  fiscal  1997  were   derived  from  base  station
applications.  As base stations are installed  and  upgraded,  domestically  and
internationally,  the market for SAW devices installed in such base stations may
ultimately become  saturated.  The life of SAW devices is typically in excess of
20  years,  and a market  for  replacement  devices  for base  stations  may not
develop.

     Sales of products  for  CDMA-based  systems,  including  base  stations and
subscriber  handset  phones,  accounted  for  approximately  56% of net sales in
fiscal 1998 and  approximately  48% of net sales for 1997.  CDMA  technology  is
relatively new to the  marketplace and there can be no assurance that unforeseen
complications will not arise in the scale-up and operation of CDMA-based systems
that could  materially  delay or limit the  commercial use or acceptance of CDMA
technology. Such delay or limitation would have a material adverse effect on the
Company's business, operating results and financial condition.

     Economic Turmoil in South Korea and Other Asian-Pacific  Countries or Other
Geographic  Areas  of  the  World  and  Risks   Associated  with   International
Operations.  The South Korean economy and the economies of many other  countries
in Asia and around the world have  experienced  economic  turmoil and  recession
over the past year. Sawtek has grown its revenues over the past several years in
part due to  shipments  to South  Korean  customers.  In fiscal  1997,  Sawtek's
revenue to South Korean customers was approximately $13.4 million,  equal to 16%
of total revenue, and in fiscal 1998 it was approximately $14 million, or 14% of
revenue.  However,  in the last quarter of fiscal year 1998,  revenue from South
Korean customers  declined to $1.1 million or approximately 5% of total revenue.
Sawtek has been  informed  by its major  customers  in South Korea that they are
experiencing  a slow down and that  orders to Sawtek  will be  reduced in fiscal
1999  compared to fiscal 1998.  Sawtek is  uncertain,  when or if,  revenue from
South  Korean  customers  will  return to levels  experienced  over the past two
years.

     Some of the  Company's  other  major  customers  are  relying  on growth in
international  markets,  including  Asia and Latin  America,  for sales of their
products.  If the economies in these regions  continue to decline,  it is likely
that the demand for their products will be reduced, which will reduce the demand
for Sawtek's products.


                                       14


<PAGE>


     Overall,   Sawtek's   revenue   from   international   sales   account  for
approximately  37%,  43% and 54% of net sales for  fiscal  1998,  1997 and 1996,
respectively.  Nokia,  based in Finland,  accounted for approximately 15% of net
sales. The sale of products in foreign countries  involves risks associated with
currency exchange rate fluctuations and restrictions, import-export regulations,
customs  matters,  ability to secure credit and funding,  longer payment cycles,
foreign collection problems,  political and transportation risks, as well as the
previously  mentioned  economic  turmoil.  In addition,  foreign  sales  involve
uncertainties arising from local business practices and cultural considerations,
and risks associated with  international  trade  transactions.  For a portion of
foreign sales, the Company depends upon independent  sales  representatives  who
are not subject to the  Company's  control and are  generally  free to terminate
their relationships with the Company on 30 days notice.

     Fluctuations  in the Value of Foreign  Currency.  Over the past  year,  the
valuations of many foreign currencies have devalued relative to the U.S. dollar.
The Korean won and Japanese yen, in particular,  have fluctuated in value due in
part to the economic problems experienced by these countries over the past year.
The  stronger  U.S.  dollar has made it more  difficult  for  companies in these
countries to purchase U.S. products and it has made it more difficult for Sawtek
to compete against SAW producers based in these countries.

     The  Company's  international  sales  are  generally  denominated  in  U.S.
dollars. However, the Company may be required in the future, due to competition,
to denominate sales in the foreign currencies of certain countries. As a result,
fluctuations  in currency  exchange  rates may have a significant  effect on the
Company's sales, even in the absence of an increase or decrease of unit sales to
foreign customers.  A strong U.S. dollar could have a material adverse effect on
the Company's ability to compete internationally.  The Company has not, to date,
engaged in hedging a portion of its foreign  exchange risk. If, however,  any of
the Company's future  international sales are denominated in foreign currencies,
the Company may find it  necessary  to engage in rate  hedging  activities  with
respect to certain  exchange  rate  risks.  There can be no  assurance  that the
Company will engage in such  exchange  rate hedging or that any such  activities
will successfully protect against such risks.

     Dependence on a Limited Number of Customers. Historically, a limited number
of customers  have  accounted  for a  significant  portion of the  Company's net
sales.  In both  fiscal  1998 and fiscal  1997,  sales to the  Company's  top 10
customers  accounted for  approximately 76% of net sales. In 1998, the Company's
top four  customers  accounted  for  approximately  17%,  15%, 15% and 9% of net
sales.  In 1997,  the Company's top four customers  accounted for  approximately
14%,  12%,  11% and 11% of net  sales.  The  Company  expects  that sales of its
products to a limited  number of customers  will  continue to account for a high
percentage  of  its  net  sales  in  the  foreseeable  future.  In  addition,  a
substantial  portion of the Company's products are designed to address the needs
of individual  customers.  Accordingly,  the Company's  future  success  depends
largely upon the  decisions of the  Company's  current  customers to continue to
purchase  products  from the Company,  as well as the  decisions of  prospective
customers to develop and market systems that incorporate the Company's products.

     Adverse  developments  relating  to  the  wireless   communications  market
involving one or more of the Company's  large  customers,  including  litigation
among such  customers,  could have an adverse  effect on the market price of the
Company's Common Stock even though the actual impact of such developments  could
be immaterial to the Company's results of operations and financial condition.


                                       15


<PAGE>


     Fluctuations  in  Quarterly  Results;   Backlog.  The  Company's  quarterly
operating  results have  fluctuated in the past and are expected to fluctuate in
the future as a result of a variety of factors.  There are a number of operating
factors  that may  cause  fluctuations  in  quarterly  results,  one of which is
product mix,  which is determined  by different  customer  requirements.  If the
product mix changes,  the average  selling  price and gross margin may be lower.
Other factors that may affect quarterly  results are delays in production caused
by the installation of new equipment,  the level of orders that are received and
can be shipped in any quarter, price competition,  fluctuations in manufacturing
yields,  availability of manufacturing  capacity,  market acceptance of product,
increased  direct  labor  and  overhead,  delays  in  receiving  equipment  from
suppliers,   customer  over-ordering   followed  by  order  cancellations,   and
cancellation or rescheduling of orders for any reason.

     Purchase  orders  for  the  Company's  products  may be  terminated  by the
Company's customers with prior notice,  typically 60 to 90 days. Such orders may
be large and intended to satisfy customers'  long-term needs.  Accordingly,  the
Company's backlog is not necessarily indicative of future product sales, and the
Company may be materially  adversely  affected by a delay or  cancellation  of a
small number of purchase orders.  In addition,  the Company's expense levels are
based in significant part on the Company's  expectations of future product sales
and  therefore  are  relatively  fixed in the short term. If net sales are below
expectations,   operating  results  would  be  materially   adversely  affected.
Consequently,  the  Company's  results of  operations  for any  quarter  are not
necessarily  indicative  of results  for any  future  period.  Furthermore,  the
Company's  results of  operations  may be subject to economic  downturns  in the
electronics  industry.  Due to the foregoing factors,  it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market  analysts and  investors.  In such event,  the price of the Common
Stock would likely be materially adversely affected.

     Dependence  on New  Products;  Technological  Change.  Future growth of the
Company's  business  is  dependent  on the  Company's  ability to develop new or
improved  SAW  devices on a timely  basis.  The  Company's  product  development
resources are limited,  requiring the Company to allocate such resources among a
limited  number of  product  development  projects.  Failure  by the  Company to
allocate its product  development  resources to products  that meet market needs
could have a material adverse effect on the Company's future growth. The success
of new products  may also depend on timely  completion  of new product  designs,
quality of new products and market acceptance of customer products.

     The  markets for  products  offered by the  Company  are  characterized  by
rapidly  changing  technology  and evolving  industry  standards.  If technology
supported by the Company's products becomes obsolete or fails to gain widespread
commercial  acceptance,  the  Company's  business  may be  materially  adversely
affected.   Accordingly,   the  Company  believes  that  continued   significant
expenditures  for research and  development  will be required.  In the past, the
Company has depended on customer funded non-recurring  engineering charges for a
significant  portion of its product  development  expenditures.  There can be no
assurance  that such  customer  funding will  continue in the future,  which may
require the Company  either to reduce the scope of its  product  development  or
allocate  increased  internal  resources  for such  purposes.  If the Company is
unable to design,  develop and introduce competitive products on a timely basis,
its  future  financial  condition  and  operating  results  could be  materially
adversely  affected.   Competing   technologies,   including  digital  filtering
technology,  could  develop  which  could  replace  or  reduce  the  use  of SAW
technology for certain  applications.  Any development of a cost effective,  new
technology that replaces SAW filtering  technology could have a material adverse
effect on the Company's business, financial condition and results of operations.



                                       16


<PAGE>


     Pressure on Gross Profit  Margins.  The markets for the Company's  products
are intensely  competitive and are  characterized  by price  competition,  rapid
technological   change,   product   obsolescence  and  heightened  domestic  and
international  competition.  In each of the markets for the Company's  products,
the Company competes with large international  companies that have substantially
greater financial, technical, sales, marketing, distribution and other resources
than the Company.  In addition,  the Company may face competition from companies
that currently manufacture SAW devices for their own internal  requirements,  as
well as from a number of the  Company's  customers  that have the  potential  to
develop an internal  supply  capability  for SAW  devices.  The Company  expects
competition to increase from both established and emerging competitors,  as well
as from internal capabilities  developed by certain customers.  The Company also
believes  that a significant  source of  competition  may come from  alternative
technological  approaches.  The Company's ability to compete  effectively in its
target  markets  depends on a variety of factors  both within and outside of the
Company's control,  including timing and success of new product introductions by
the Company and its  competitors,  availability of manufacturing  capacity,  the
rate  at  which  customers  incorporate  the  Company's  components  into  their
products,  the Company's ability to respond to price decreases,  availability of
technical  personnel,   sufficient  supplies  of  raw  materials,  the  quality,
reliability and price of products and general economic conditions.  There can be
no  assurance  that the  Company  will be able to  compete  successfully  in the
future.

     Lower Average Selling Prices on Sawtek's Products.  There is a trend toward
lower average selling prices for base station filters due to competitive pricing
pressures  and to the use of the newer surface mount package SAW filters for GSM
applications  that are  smaller  and less  expensive  than  previous  generation
filters.  The Company believes that the conversion to lower price, surface mount
package  filters may also occur in the CDMA base  station  market in the future.
The Company believes that its revenue from base station filters will be lower in
fiscal 1999 compared to fiscal 1998. The Company  believes that its sales of SAW
filters for subscriber  handsets in the CDMA market will increase in fiscal 1999
compared  to  fiscal  1998,  however,  the  Company  is  uncertain  whether  the
additional  revenue from handset filters will offset the projected lower revenue
from base station  filters in fiscal 1999.  Handset  filters  typically  produce
lower gross  margins than the gross  margins  produced by base station  filters.
Prices for  handset  filters  will also  decline as they  become  smaller and as
competitive pricing pressure increases.

     Risks Associated with Costa Rica Operations.  The Company bears significant
manufacturing  risks  associated  with its  operations in San Jose,  Costa Rica.
During  1998,  shipments  from  Sawtek's  Costa Rican  operation  accounted  for
approximately  37.5% of consolidated  net sales,  38.8% of operating  income and
29.8% of total  fixed  assets.  Operating  a  production  facility in Costa Rica
carries  unknown risks of disruption  resulting  from  government  intervention,
wars,  currency  devaluation,  labor disputes,  earthquakes,  volcanic eruption,
floods or other  events.  Any such  disruptions  could have a  material  adverse
effect on the Company's business, results of operations and financial condition.

     Limited  Sources of Supply.  The Company has a limited  number of suppliers
for certain critical raw materials, components and equipment used by the Company
in manufacturing SAW devices. While historically the Company has not experienced
difficulty  in  obtaining  needed  supplies  and  equipment,  synthetic  crystal
material  and wafer  fabrication  equipment  could  potentially  be difficult to
obtain.  The synthetic  quartz material used by the Company,  and purchased from
third  parties,  may  require  up to six  months to grow.  Currently,  few wafer
producers  have the  expertise  and capacity  necessary to satisfy the Company's
wafer  requirements.  A failure by the Company to anticipate  its needs for high
quality  quartz could result in a shortage of quartz  material  available to the
Company.  If the  Company is unable to satisfy  its  requirements  for quartz or
other raw  materials  or to  obtain  and  maintain  appropriate  equipment,  the
Company's  business,  financial  condition  and results of  operations  would be
materially  adversely affected.  There can be no assurance that the Company will
be able to secure adequate supplies of materials.

                                       17


<PAGE>



     Manufacturing  Risks.  The Company's  manufacture  of SAW devices  involves
processes  that may have reduced  yields from time to time,  the causes of which
are  often  difficult  to  determine.  While  reduced  yields  have  not  been a
significant factor in limiting  production  capacity in the past, a material and
continuing  reduction in yields at any stage of the manufacturing  process would
have a  material  adverse  effect on the  Company's  ability  to meet its quoted
delivery  times and cost of  production,  which  would have a  material  adverse
effect on the operations of the Company.

     Intellectual   Property  and  Proprietary   Rights.   Sawtek  relies  on  a
combination  of patents,  copyrights  and trade secrets to establish and protect
its proprietary  rights.  There can be no assurance that patents will issue from
any of its pending  applications  or that any claims  allowed  from  existing or
pending patents will be sufficiently broad to protect the Company's  technology.
In addition,  there can be no assurance  that any patents  issued to Sawtek will
not be  challenged,  invalidated  or  circumvented,  or that the rights  granted
thereunder will provide proprietary protection to the Company. Litigation may be
necessary to enforce  Sawtek's  patents,  trade  secrets and other  intellectual
property rights,  to determine the validity and scope of the proprietary  rights
of others or to defend against claims of  infringement.  Such  litigation  could
result in substantial costs and diversion of resources and could have a material
adverse  effect on the Company's  business,  results of operations and financial
condition regardless of the final outcome of the litigation.  The Company is not
currently engaged in any patent infringement suits nor has it threatened or been
threatened  with any such suits in recent  years.  Despite  Sawtek's  efforts to
maintain and safeguard its proprietary  rights,  there can be no assurances that
the Company will be  successful  in doing so or that the  Company's  competitors
will not  independently  develop or patent  technologies  that are substantially
equivalent or superior to Sawtek's technologies.

     The SAW industry is characterized by uncertain and conflicting intellectual
property  claims.  Sawtek has in the past and may in the future  become aware of
the intellectual  property rights of others that it may be infringing,  although
it does not believe that it is infringing any third party proprietary  rights at
this time. To the extent that it deemed necessary, Sawtek has licensed the right
to use certain technology  patented by others in certain of its products.  There
can be no  assurance  that Sawtek will not in the future be notified  that it is
infringing other patent and/or intellectual property rights of third parties. In
the event of such infringement,  there can be no assurance that a license to the
technology in question could be obtained on commercially reasonable terms, if at
all, that  litigation will not occur or that the outcome of such litigation will
not be adverse to Sawtek.  The  failure to obtain  necessary  licenses  or other
rights,  the  occurrence of litigation  arising out of such claims or an adverse
outcome from such  litigation  could have a material  adverse effect on Sawtek's
business.  In any event, patent litigation is expensive,  and Sawtek's operating
results  could  be  materially   adversely  affected  by  any  such  litigation,
regardless of its outcome.

     Environmental and Other Governmental Regulations. The Company is subject to
a variety of federal, state and local laws, rules and regulations related to the
discharge and disposal of toxic,  volatile and other toxic  hazardous  chemicals
used in its  manufacturing  processes.  The  failure to comply  with  present or
future  regulations  could  result  in  fines  being  imposed  on  the  Company,
suspension of production or a cessation of operations.  Such  regulations  could
require the Company to acquire  significant  equipment  or to incur  substantial
expenses in order to comply with environmental  regulations.  Any past or future
failure by the  Company to control  the use of, or to  restrict  adequately  the
discharge  of, toxic  hazardous  substances  could subject the Company to future
liabilities and could have a material adverse effect on the Company's  business,
results of operations and financial condition.



                                       18


<PAGE>


     
     In addition, the increasing demand for wireless  communications has exerted
pressure on regulatory bodies worldwide to adopt new standards for such products
and services,  generally following  extensive  investigation of and deliberation
over competing  technologies.  The delays inherent in this governmental approval
process  have  in the  past,  and may in the  future,  cause  the  cancellation,
postponement or rescheduling of the  installation of  communications  systems by
the Company's customers, which in turn may have a material adverse effect on the
sale of products by the Company to such customers.

     Volatility  of Stock Price.  There has been  significant  volatility in the
market price of the Company's  Common  Stock,  as well as in the market price of
securities  of  technology-based  companies and the U.S.  stock market  overall.
Factors such as announcements of new products by the Company or its competitors,
variations in the quarterly  operating  results of the Company and its customers
and  competitors,  the gain or loss of significant  contracts,  announcements of
technological  innovations or  acquisitions  by the Company or its  competitors,
changes  in  analysts'  financial   estimates  of  the  Company's   performance,
governmental  regulatory action,  other developments or disputes with respect to
proprietary rights, general trends in the industry, or general economic or stock
market conditions  unrelated to the Company's  operating  performance may have a
significant impact on the market price of the Common Stock.

     Certain Anti-Takeover  Provisions.  Certain anti-takeover provisions of the
Florida  Business  Corporation  Act  could  have the  effect  of  making it more
difficult for a third party to acquire,  or of  discouraging  a third party from
attempting to acquire,  control of the Company.  Such provisions  could limit or
depress the price that certain  investors  might be willing to pay in the future
for shares of Common Stock.  The Company is also  authorized to issue  preferred
stock,  with  rights  senior to the  Common  Stock,  without  the  necessity  of
shareholder  approval and with such rights,  preferences  and  privileges as the
Company's Board of Directors may determine.  Although the Company has no present
plans to issue these shares of preferred stock,  such issuance,  while providing
desirable  flexibility  in  connection  with  possible  acquisitions  and  other
corporate  purposes,  could  have the effect of making it more  difficult  for a
third  party to  acquire  a  majority  of the  outstanding  voting  stock of the
Company.

     Absence of Dividends.  The Company has  historically  not paid dividends on
its Common Stock. Because the Company believes it may require additional capital
in the future, the Company currently intends to retain its earnings and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.


ITEM 2.  PROPERTIES
-------------------
     The  Company's  principal  administrative,  engineering  and  manufacturing
facilities are located in one owned building of approximately 93,000 square feet
and one leased  building of  approximately  1,365 square  feet,  both located in
Orlando,  Florida. The Company also has a production facility in San Jose, Costa
Rica located in a 31,690 square foot  Company-owned  facility.  The Company also
has a 7,600 square foot leased facility in Bowling Green,  Kentucky used for its
chemical  sensor  development  operation  and a vacant 23,000 square foot leased
warehouse/office building in Pittsburgh,  Pennsylvania that is being marketed to
potential tenants.  The Company believes its facilities are adequate to meet its
current  needs  and  that  suitable  additional  or  alternative  space  will be
available,  as needed,  on commercially  reasonable terms. The Company's Orlando
facility is  encumbered by an  Industrial  Development  Revenue Bond maturing in
2010.

     Federal,  state and local laws and regulations  pertaining to the discharge
of materials into the  environment,  or otherwise  relating to the protection of
the environment,  have not had and are not expected to have a material effect on
capital expenditures, earnings or the competitive position of the Company.


                                       19


<PAGE>


ITEM 3.  LEGAL PROCEEDINGS
--------------------------
     There were no material legal  proceedings  either by or against the Company
during fiscal 1998 or ongoing as of the date of this Form 10-K.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
     No matters were  submitted to a vote of security  holders during the fourth
quarter of fiscal 1998.

     The Securities and Exchange  Commission  recently amended Rule 14a-4, which
governs the use by the Company of discretionary voting authority with respect to
shareholder proposals.  SEC Rule 14a-14(c)(1) provides that, if the proponent of
a shareholder proposal fails to notify the company at least 45 days prior to the
month and day of mailing the prior  year's proxy  statement,  the proxies of the
company's management would be permitted to use their discretionary  authority at
the company's next annual meeting of shareholders if the proposal were raised at
the meeting  without any  discussion of the matter in the proxy  statement.  For
purposes of the Company's 1999 Annual Meeting of Shareholders,  this deadline is
October 28, 1998.

PART II.

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER 
         MATTERS
--------------------------------------------------------------------------
     The shares of the Company are quoted on the Nasdaq  National  Market  under
the symbol  "SAWS." The following  table sets forth the high and low sales price
per share of the Common Stock of the Company as reported by the Nasdaq  National
Market for the periods indicated:

<TABLE>
<CAPTION>
                                                  High               Low
                                                 -------           -------                
<S>                                              <C>               <C> 
Fiscal Year Ended September 30, 1997
   1st Quarter                                   $42.75            $23.75
   2nd Quarter                                    46.50             28.00
   3rd Quarter                                    37.75             24.00
   4th Quarter                                    49.875            32.75
Fiscal Year Ended September 30, 1998
   1st Quarter                                    46.75             21.00
   2nd Quarter                                    31.00             20.9375
   3rd Quarter                                    32.50             12.375
   4th Quarter                                    19.25             10.25

</TABLE>


                                       20


<PAGE>

     The last  reported  sale price of the Common  Stock on the Nasdaq  National
Market on September 30, 1998 was $14.125 per share.

     As of October 30, 1998 there were 20,858,597 shares of the Company's Common
Stock  outstanding  (net of  475,500  shares  held in  treasury  stock)  held by
approximately 150 shareholders of record. Many shareholders hold their shares in
"street name." The Company believes it has more than 6,000 beneficial  owners of
its Common Stock.

     Historically,  the  Company  has not paid  dividends  on its Common  Stock.
Because the Company  believes it may require  additional  capital in the future,
the Company  currently  intends to retain its earnings  and does not  anticipate
paying cash dividends on its Common Stock in the foreseeable future.

ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------
     The  following is a summary of selected  financial  data of the Company and
its  subsidiaries as of and for each of the five years ended September 30, 1998.
The historical  consolidated financial data has been derived from the historical
financial  statements  of the  Company,  which  financial  statements  have been
audited by Ernst & Young LLP, independent auditors, as indicated in their report
included  elsewhere  herein.  These  data  should  be read in  conjunction  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  and  the  Company's  Consolidated  Financial  Statements  appearing
elsewhere in this document.

Consolidated Statements of Income Data:
<TABLE>
<CAPTION>
                                                                               Year Ended September 30,
                                                             --------------------------------------------------------
                                                             1998          1997         1996        1995         1994
                                                             ----          ----         ----        ----         ----
                                                                        (in thousands, except per share data)
<S>                                                        <C>           <C>          <C>         <C>          <C>     
Net sales                                                  $ 97,700      $ 85,041     $ 59,173    $ 32,473     $ 20,301
Cost of sales                                                44,811        38,569       28,338      14,148        9,816
                                                           --------      --------     --------    --------     --------
Gross profit                                                 52,889        46,472       30,835      18,325       10,485
Operating expenses:
  Selling expenses                                            6,008         5,384        4,024       3,139        2,689
  General and administrative expenses                         4,497         5,646        5,927       3,462        3,302
  ESOP compensation expense                                     196           196       12,925         782          610
  Research and development expenses                           4,285         3,756        1,954       1,669        1,116
                                                           --------      --------     --------    --------     --------
            Total operating expenses                         14,986        14,982       24,830       9,052        7,717
                                                           --------      --------     --------    --------     --------
  Operating income                                           37,903        31,490        6,005       9,273        2,768
  Interest expense                                              214           237          264         435          302
  Other income                                               (3,756)       (2,022)        (607)       (291)         (55)
                                                           --------      --------     --------     -------     --------
  Income before income taxes                                 41,445        33,275        6,348       9,129        2,521
  Income taxes                                               15,240        12,556        6,568       3,405          935
                                                           --------      --------     --------     -------     --------
  Net income (loss)                                        $ 26,205      $ 20,719     $   (220)    $ 5,724     $  1,586
                                                           ========      ========     ========     =======     ========
  
  Net income (loss) per share - basic (1)                  $   1.24      $   1.01     $  (0.01)    $  0.41     $   0.10
                                                           ========      ========     ========     =======     ========
  Net income (loss) per share - diluted (1)                $   1.21      $   0.97     $  (0.01)    $  0.31     $   0.08
                                                           ========      ========     ========     =======     ========
  Shares used in per share calculations - basic              21,180        20,546       17,367      13,908       15,955
                                                           ========      ========     ========     =======     ========
  Shares used in per share calculations - diluted            21,678        21,334       20,243      18,271       19,464
                                                           ========      ========     ========     =======     ========
<FN>
(1)Computed on the basis described in Notes to Consolidated Financial Statements.
</FN>
</TABLE>







                                       21


<PAGE>


<TABLE>
<CAPTION>
                                                                              September 30,
                                                       ----------------------------------------------------------   
                                                       1998          1997         1996           1995        1994
                                                       ----          ----         ----           ----        ----
                                                                             (in thousands)
<S>                                                  <C>           <C>          <C>            <C>          <C> 
Consolidated Balance Sheet Data:
Cash, cash equivalents, and short-term
 investments                                         $ 84,131      $ 58,073     $ 27,743       $ 2,821      $ 2,687
Working capital                                        98,929        68,658       36,307         7,490        5,353
Total assets                                          148,710       120,506       75,524        23,802       11,737
Long-term debt, less current maturities                 2,169         2,868        3,907         6,916        4,235
Total shareholders' equity                            123,877        98,218       62,086       (20,265)      (5,374)
</TABLE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
         AND RESULTS OF OPERATIONS
---------------------------------------------------------------------
     The Company  maintains  its records on a fiscal year ending on September 30
of each year and all  references  to a year refer to the fiscal  year  ending on
that date.

Overview
--------
     The  Company  was   incorporated  in  January  1979  to  design,   develop,
manufacture  and  market a broad  range of  electronic  components  based on SAW
technology  and  used  in   telecommunications,   data   communications,   video
transmission,  military and space systems and other applications.  The Company's
focus has been on the  high-end  performance  spectrum  of the  market,  and its
primary products are SAW bandpass filters, resonators, delay lines, oscillators,
SAW-based subsystems and chemical sensors. The Company's products were initially
concentrated  in the military and space  systems  market,  with over half of net
sales in 1992 attributable to this market segment.  Since then, the Company made
a  strategic  decision  to  target  commercial  markets,   which  accounted  for
approximately  92% of its net  sales in 1998.  The  Company  has also  witnessed
significant  growth  in its  international  markets  over the last  five  years.
International  sales  represented less than 20% of net sales in 1992, 43% of net
sales in 1997 and approximately 37% of net sales in 1998.

     The  Company  derives  revenue  from  high-volume   commercial   production
components,  military/industrial  production components and engineering services
and  products.  Non-recurring  engineering  revenue is included  in  engineering
services  and  products  and  relates to the design  and  development  of custom
devices and delivery of one or more prototype  parts.  In all cases,  revenue is
recognized  when the parts or services have been completed and units,  including
prototypes, have been shipped.

     Net sales  increased  43.7% from 1996 to 1997, and 14.9% from 1997 to 1998.
The growth in net sales is attributable to growth in the wireless communications
market to which the Company  supplies SAW bandpass  filters for cellular and PCS
telephone base stations and handheld  subscriber  telephones.  The Company has a
broad  product line of SAW filters and other  components  with  average  selling
prices ranging from under $2 to more than $300.

                                       22     

<PAGE>

     For both  1998  and  1997,  net  sales to the  Company's  top 10  customers
accounted  for  approximately  76% of net  sales  with  the top  four  customers
accounting for approximately 56% of net sales in 1998,  compared to 48% in 1997.
The Company  expects that sales of its products to a limited number of customers
will  continue  to  account  for a high  percentage  of  its  net  sales  in the
foreseeable future.

     During 1998,  and in particular in the 4th quarter of the fiscal year,  the
Company  experienced  the impact of several factors that caused it to have lower
revenue  and  profits  than the  Company  originally  contemplated.  The factors
affecting the Company  include the continued  financial  turmoil in South Korea,
Asia and other developing markets; currency fluctuations that have resulted in a
strong dollar  compared to the Japanese yen, which affect the Company's  ability
to compete with Japanese  suppliers of surface  acoustic  wave devices;  reduced
prices on GSM base  station  filters due to the  conversion  to next  generation
products which are smaller, less expensive, surface mount filters; and a lowered
forecast  for the fourth  quarter of fiscal 1998 for CDMA  filters for both base
station  and handset  filters  from  several of the  Company's  customers.  As a
result,  the Company  took steps to match  production  capacity  to  anticipated
customer  demand  including:  i)  elimination of its weekend work shifts in June
1998, which were primarily  staffed with temporary  employees,  ii) reduction of
certain general and administrative  costs and iii) transition of more production
to the Costa Rica operation.

     The Company  believes that the  financial  turmoil in Asia will continue to
impact the  Company in fiscal 1999 and that other  factors may impact  sales and
results of operations  throughout the year. The Company is uncertain if the cost
savings  measures  enacted in late fiscal 1998 will be  sufficient to offset the
impact of potential revenue reductions.

Results of Operations
---------------------
     The following table sets forth, for the periods  indicated,  the percentage
relationship  of certain  items from the  Company's  statements of income to net
sales: 
<TABLE>
<CAPTION>
                                                            Percentage of Net Sales
                                                            -----------------------
                                                            Year Ended September 30,
                                                      -----------------------------------
                                                      1998           1997            1996
                                                      ----           ----            ----
<S>                                                   <C>            <C>             <C>   
Net sales . . . . . . . . . . . . . . . . . . .       100.0%         100.0%          100.0%
Cost of sales . . . . . . . . . . . . . . . . .        45.9           45.4            47.9
                                                      -----          -----           -----
Gross margin  . . . . . . . . . . . . . . . . .        54.1           54.6            52.1
Operating expenses:
  Selling expenses  . . . . . . . . . . . . . .         6.1            6.3             6.8
  General and administrative expenses . . . . .         4.6            6.6            10.0
  ESOP compensation expense . . . . . . . . . .         0.2            0.2            21.9
  Research and development expenses . . . . . .         4.4            4.4             3.3
                                                      -----          -----           -----
            Total operating expenses  . . . . .        15.3           17.5            42.0
                                                      -----          -----           -----
Operating income  . . . . . . . . . . . . . . .        38.8           37.1            10.1
Interest expense  . . . . . . . . . . . . . . .         0.2            0.3             0.4
Other income  . . . . . . . . . . . . . . . . .        (3.8)          (2.4)           (1.0)
                                                      -----          -----           -----
Income before income taxes  . . . . . . . . . .        42.4           39.2            10.7
Income taxes  . . . . . . . . . . . . . . . . .        15.6           14.8            11.1
                                                      -----          -----           -----
Net income (loss) . . . . . . . . . . . . . . .        26.8%          24.4%           (0.4)%
                                                      =====          =====           =====
</TABLE>

                                       23

<PAGE>

Comparison of Years Ended September 30, 1997 and 1998
-----------------------------------------------------
     Net Sales.  Net sales  increased  14.9% from $85.0 million in 1997 to $97.7
million in 1998.  The  increase  was due to an  increase  in  shipments  of CDMA
subscriber  handset filters which increased from 16% of net sales in 1997 to 28%
of net sales in 1998.  Sales of GSM base  station  filters  declined  from $16.1
million in 1997 to $14.8 million in 1998 due to the conversion to smaller, lower
cost,  surface mount package filters in 1998 compared to larger,  higher dollar,
dual-in-line  package  filters sold in 1997.  Sales of CDMA base station filters
were essentially  unchanged from last year.  International  sales decreased from
43% of total  sales in 1997 to 37% of  total  sales in 1998 due to the  economic
recession  in Asia and  reduced  sales of GSM base  station  filters to European
customers.  Sales to South Korean customers  decreased from 16% of total revenue
in 1997 to 14% of total revenue in 1998 and sales in the fourth  quarter of 1998
dropped  to  approximately  5% of  total  sales  due  to  the  economic  turmoil
experienced  in that  country  and the  slow  down in  consumer  and  industrial
spending.  Sales for military and space systems  decreased  from $9.8 million in
1997 to $8.8 million in 1998.

     Gross Margin.  Gross margin decreased  slightly from 54.6% in 1997 to 54.1%
in 1998 due to lower gross  profit  margin on filters for  subscriber  handsets,
which increased as a percentage of overall revenue, lower gross profit margin on
surface  mount  GSM base  station  filters  and  competitive  pricing  pressure.
Offsetting these factors were improvements in manufacturing automation, improved
yields and higher  productivity per worker in 1998 compared to 1997. The Company
believes that gross profit margins will decline in fiscal 1999 due to a shift in
product sales to lower profit margin subscriber  handset filters and competitive
pricing pressure.

     Selling  Expenses.  Selling  expenses  increased 11.6% from $5.4 million in
1997 to $6.0  million  in 1998  due to  commissions  paid to  independent  sales
representatives and increased costs for the internal sales personnel and related
expenses.  Selling expenses decreased as a percentage of overall sales from 6.3%
in 1997 to 6.1% in 1998.

     General and Administrative  Expenses.  General and administrative  expenses
decreased 20.4% from $5.6 million in 1997 to $4.5 million in 1998 due to reduced
corporate  administrative  staff in 1998 compared to 1997,  lower bonus payments
and no grants of compensatory stock options in 1998 compared to 1997.

     Research  and  Development  Expenses.  Research  and  development  expenses
increased  14.1%  from  $3.8  million  in 1997 to $4.3  million  in 1998  due to
additional personnel and expanded research and development efforts, particularly
for the development of SAW-based chemical sensors.  The Company anticipates that
research and development  expenses will continue to increase in total dollars as
personnel  and  programs  are added.  A  significant  portion  of the  Company's
development   activities  are  conducted  in  connection  with  the  design  and
development  of  custom  devices,  which  are  paid  for by  customers  and  are
classified as NRE items.  The revenue  generated from these items is included in
net sales and the cost is reflected in cost of sales rather than in research and
development expenses.

     Interest Expense and Other Income. Interest expense decreased from $237,000
in 1997 to $214,000 in 1998 due to repayment of debt.  Other income increased in
1998 due to interest  earned on the higher cash and investment  balances in 1998
compared to 1997.

     Income Tax Expense.  The  provision  for income  taxes as a  percentage  of
income  before tax was 36.8% in 1998  compared  to 37.7% in 1997.  The  slightly
lower  effective  tax rate for 1998  relates  to  increased  interest  earned on
tax-exempt securities,  benefit from the Company's foreign sales corporation and
a lower  effective  rate for state income  taxes.  The Company  expects that its
effective tax rate will be between 34% and 36% for fiscal 1999.

                                       24
<PAGE>


Comparison of Years Ended September 30, 1996 and 1997
-----------------------------------------------------
     Net Sales.  Net sales  increased  43.7% from $59.2 million in 1996 to $85.0
million in 1997. The increase was a result of increased product shipments to the
wireless  communications  market,  specifically sales of high volume filters for
base station  applications and subscriber  handsets based on CDMA technology for
the telecommunications  industry.  International sales increased by $5.2 million
in 1997  compared to 1996  principally  due to  increased  product  shipments to
Korea.  Sales of military and space systems  decreased  from 15% of net sales in
1996 to 12% of net sales in 1997 due to the  increase in overall net sales.  The
dollar volume of military sales,  however,  actually increased from $8.7 million
to $9.8 million from 1996 to 1997.

     Gross Margin.  Gross margin  increased  from 52.1% in 1996 to 54.6% in 1997
primarily due to improved yields,  lower manufacturing costs associated with the
Costa Rican operation and economies of scale with the increased volume.

     Selling  Expenses.  Selling  expenses  increased 33.8% from $4.0 million in
1996 to $5.4 million in 1997, and decreased as a percentage of net sales at 6.3%
in 1997 compared to 6.8% in 1996.  The increased cost is a result of commissions
paid to  independent  sales  representatives  associated  with the higher  sales
volume and increased cost for additional sales personnel and related expenses.

     General and Administrative  Expenses.  General and administrative  expenses
decreased  4.7% from $5.9 million in 1996 to $5.6 million in 1997, and decreased
as a percentage  of net sales from 10.0% to 6.6% for the same  periods.  The net
decrease was due to higher expenses  incurred in 1996 for start-up costs for the
Costa Rica operation and compensatory stock option expense.

     ESOP Compensation  Expense.  ESOP compensation expense decreased from $12.9
million in 1996 to $196,000 in 1997.  This decrease of $12.7 million is a result
of  the  release  and  allocation  of  all  ESOP  shares  acquired  in  1994  to
participants'  accounts  based on their  compensation  earned in the first seven
months of 1996. These shares are accounted for in accordance with SOP 93-6 which
uses market  value as the basis of valuing  shares as they are  committed  to be
released.  In the fourth quarter of FY97, the Company restructured its loan with
the ESOP  providing for a repayment  and  allocation of shares over a seven-year
period ending in 2003. As a result,  the  remaining  unearned ESOP  compensation
expense at September 30, 1997 of $1,170,870 will be spread over this period. The
Company recorded ESOP compensation  expense of $196,000 for the full fiscal year
of 1997  and a  credit  of  $391,000  for the  fourth  quarter  due to the  loan
restructuring that was undertaken in that quarter.

     Research  and  Development  Expenses.  Research  and  development  expenses
increased  92.2%  from  $2.0  million  in 1996 to $3.8  million  in 1997.  These
expenses  increased  due to  additional  personnel  and  expanded  research  and
development  efforts.  A  significant  portion  of  the  Company's   development
activities are conducted in connection with the design and development of custom
devices,  which are paid for by customers and are  classified as NRE items.  The
revenue  generated  from these  items is  included  in net sales and the cost is
reflected in cost of sales rather than in research and development expenses.

     Interest Expense and Other Income. Interest expense decreased from $264,000
in 1996 to $237,000 in 1997 due to  repayment of debt.  Other income  represents
interest  income and  non-operating  expenses.  Other  income  increased  as the
Company  recorded  increased  interest income earned on its cash balances during
1997.

                                       25
<PAGE>
   
     Income Tax Expense.  The  provision  for income  taxes as a  percentage  of
income before income taxes was 37.7% for 1997. In 1996,  the Company  incurred a
non-deductible  charge  for ESOP  compensation  expense of  approximately  $12.9
million.  Had it not been for this  charge,  the tax  provision  would have been
approximately 37% for this period.

Liquidity and Capital Resources
-------------------------------
     The Company has financed its operations to date through cash generated from
operations,  bank borrowings,  lease financing,  the private sale of securities,
its May 1, 1996 initial public  offering and the July 1, 1997  follow-on  public
offering.  The Company requires capital principally for equipment,  financing of
growth in accounts  receivable and inventory,  investment in product development
activities  and new  technologies,  repurchase  of Common  Stock  and  potential
acquisitions of new technologies or compatible companies.  For 1998, the Company
generated  net  cash  from  operating  activities  of $39.4  million  consisting
primarily  of net income of $26.2  million,  $6.0  million of  depreciation  and
amortization, $9.4 million of increases in current and deferred taxes, partially
offset by  increases  in  inventory  of $1.3  million and a decrease in accounts
payable and accrued  liabilities of $2.0 million.  Cash flow from operations was
$35.3 million and $13.6 million in 1997 and 1996, respectively.

     The  Company  has a credit  line  agreement  totaling  $20.0  million  from
SunTrust Bank, Central Florida,  N.A. renewable  annually.  There was no balance
outstanding on this credit line at September 30, 1998.

     The Company made capital  expenditures of $7.9 million during 1998 compared
to $14.6 million and $24.4 million in 1997 and 1996,  respectively.  The Company
plans to spend  between  $8.0  million  and  $12.0  million  in 1999 on  capital
equipment and facilities.

     The Company repurchased 385,500 shares of its Common Stock for $4.6 million
in the fourth  quarter of fiscal 1998 through open market  purchases.  In August
1998, the Board of Directors  authorized to repurchase up to 1,000,000 shares of
Common Stock which includes the 385,500  repurchased in fiscal 1998. The Company
expects to continue to  repurchase  shares of its Common Stock from time to time
in the  future.  The  repurchased  shares will be used to satisfy  stock  option
exercises and issuance of shares under other stock related benefit programs.

     The Company  believes  that its present cash  position,  together  with its
credit  facility and funds  expected to be generated  from  operations,  will be
sufficient to meet its working capital and other cash requirements through 1999.
Thereafter,  the Company  may require  additional  equity or debt  financing  to
address  its  working   capital   needs  or  to  provide   funding  for  capital
expenditures.  There can be no  assurance  that  events in the  future  will not
require the Company to seek additional  capital sooner or, if so required,  that
it will be available on terms acceptable to the Company, if at all.

Foreign Operations and Export Sales
-----------------------------------
     The  Company  established  a  subsidiary  in  Costa  Rica  in  1996,  began
operations in the second quarter and commenced shipments in the third quarter of
1996.  As  of  September  30,  1998,   the  Company  had  a  net  investment  of
approximately  $14.9  million  in this  operation  and  recorded  net  sales  of
approximately  $36.6  million with an operating  profit of  approximately  $14.7
million for 1998 compared to a net  investment of $13.4 million at September 30,
1997,  net  sales of $28.4  million  for 1997 and an  operating  profit of $13.4
million for 1997. The functional  currency for the Costa Rican subsidiary is the
U.S.  dollar  as  sales,  most  material  cost and  equipment  are  U.S.  dollar
denominated.  The  effects of  currency  fluctuations  of the local  Costa Rican
currency are not considered significant and are not hedged.

                                       26
<PAGE>

     In 1996, the Company established a "foreign sales corporation"  pursuant to
the  applicable  provisions  in the Internal  Revenue Code to take  advantage of
income tax reductions on export sales.  Through  September 30, 1998, the cost to
operate this  subsidiary was less than $10,000,  and it has less than $10,000 in
identifiable assets.

     International  sales are denominated in U.S.  dollars and represented  37%,
43% and 54% of net sales for the years ended  September 30, 1998, 1997 and 1996,
respectively.  Sales to the European market  accounted for 18%, 22%, and 38% for
these same periods, respectively and sales to the Asian and Pacific Rim markets,
principally  to  South  Korea  were  16%,  17% and 9% for  these  same  periods,
respectively. See Notes 11 and 12 to the Consolidated Financial Statements.

Recently Issued Accounting Standards
------------------------------------
     Please see Note 1 to the Consolidated Financial Statements for a discussion
of new pronouncements.

Impact of Inflation on the Company
----------------------------------
     Management  does not believe that  inflation  has had a material  impact on
operating costs and earnings of the Company.

Year 2000 Compliance
--------------------
     The Year 2000 issue  relates to the method  used by  computer  systems  and
software for displaying  dates using two digits to represent a four-digit  year.
Computer  hardware and software  describes  traditional  information  technology
systems such as enterprise resource planning systems,  accounting  systems,  fax
servers,  print  servers,  desktop  computers  and  applications,  telephone/PBX
systems,  as well as other systems such as manufacturing  equipment,  facilities
equipment and security systems.  Some of Sawtek's computer hardware and software
may  recognize a year  represented  by "00" as 1900 instead of 2000.  This could
result in  unexpected  behavior  in the  affected  hardware or  software.  These
systems will need to be able to accept  four-digit  entries to distinguish years
beginning  with 2000 from prior years.  As a result,  systems that do not accept
four-digit year entries will need to be upgraded or replaced to comply with such
"Year 2000" requirements.

Sawtek's State of Readiness
---------------------------
     Sawtek's Year 2000 inventory, assessment,  remediation and testing began in
January  1998 and is planned to be  completed  in June 1999.  As of October  30,
1998, it is estimated that 50% of the issues that are necessary for a successful
Year 2000  transition  are  resolved.  The  remaining  50% of the  issues are in
progress and are planned to be completed by June 1999.

     To certify  Year 2000  compliance,  Sawtek  employed  two  methods.  Vendor
certification  was the  primary  method  utilized.  In order  for a system to be
considered  compliant  from  vendor  certification,  Sawtek  required  a written
statement from the vendor, as well as a description of the testing methods used.
If this  information  was not available or was not considered  thorough  enough,
Sawtek  performed an internal  test.  These tests include the use of a certified
hardware test program,  the  examination of the software source code by Sawtek's
Software Engineering  department or Information Systems department and advancing
the date past January 1, 2000.

                                       27
<PAGE>

     Sawtek also surveyed key  suppliers.  As of October 30, 1998,  90% of those
surveyed have responded.  Of those surveyed, 70% are either already compliant or
will be compliant by Q4 1998. The remainder  expect to be compliant some time in
1999. No suppliers responded that they would fail to be Year 2000 compliant.

     Sawtek is in the process of surveying  key  customers.  The results of this
survey are expected to be completed by December 1998.

Costs to Address the Company's Year 2000 Issues
-----------------------------------------------
     The bulk of the  Company's  costs to address  Year 2000 issues are internal
staff time estimated at less than $100,000 for the past fiscal year and the cost
to upgrade its main MRP software which is certified as Year 2000 compliant.  The
cost of this  upgrade,  which was  purchased  in fiscal 1998,  was $48,000.  The
estimated cost to complete the Year 2000  compliance and transition is less than
$200,000 for fiscal 1999, which will be funded out of fiscal 1999 operating cash
flow.

The Risks of the Company's Year 2000 Issues
-------------------------------------------
     The Company's products are not date sensitive and therefore are not subject
to Year  2000  defects  or  problems.  The  Company  believes  that its  primary
manufacturing,  engineering,  and financial and administrative  systems are Year
2000 compliant.  The greatest  potential risk from Year 2000 issues relates to a
major supplier or customer whose systems are not Year 2000 compliant and who may
be unable  to meet  delivery  requirements  for an  important  raw  material  or
equipment or who may not be able to accept  shipment of the  Company's  products
until they correct their Year 2000 problem.

     The  Company  presently  believes  that the Year 2000  issue  will not pose
significant  operational  problems  for the Company.  However,  if all Year 2000
issues are not properly identified,  or assessment,  remediation and testing are
not effected timely, there can be no assurance that the Year 2000 issue will not
materially  adversely  impact the  Company's  results of operations or adversely
affect relationships with customers, vendors, or others. Additionally, there can
be no  assurance  that the Year 2000  issues of other  entities  will not have a
material adverse impact on the Company's systems or results of operations.

The Company's Contingency Plans
-------------------------------
     The Company has begun, but not yet completed,  a comprehensive  analysis of
the  operational  problems and costs  (including loss of revenues) that would be
reasonably  likely to result from the  failure by the Company and certain  third
parties to complete  efforts  necessary  to achieve  Year 2000  compliance  on a
timely  basis.  A contingency  plan has not been  developed for dealing with the
most reasonably  likely worst case scenario,  and such scenario has not yet been
clearly  identified.  The Company  currently plans to complete such analysis and
contingency planning by June 30, 1999.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
     Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
     See Index to Consolidated  Financial Statements,  which appears on page F-1
herein.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
------------------------------------------------------------------------
     None.

                                       28
<PAGE>


Index to Consolidated Financial Statements
------------------------------------------
Report of Ernst & Young LLP, Independent Auditors...........................F-2
Consolidated Balance Sheets.................................................F-3
Consolidated Statements of Income (Loss)....................................F-4
Consolidated Statements of Shareholders' Equity.............................F-5
Consolidated Statements of Cash Flows.......................................F-6
Notes to Consolidated Financial Statements..................................F-7

Financial Statement Schedules
-----------------------------
     All required information is included in the Notes to Consolidated Financial
Statements.



































                                       F-1


<PAGE>






Report of Ernst & Young LLP, Independent Auditors



Board of Directors and Shareholders
Sawtek Inc. and subsidiaries

         We have audited the accompanying  consolidated balance sheets of Sawtek
Inc.  and  subsidiaries  as of  September  30,  1998 and 1997,  and the  related
consolidated  statements of income (loss),  shareholders'  equity and cash flows
for each of the three  years in the  period  ended  September  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, the consolidated financial statements referred to above
present fairly, in all material respects,  the financial position of Sawtek Inc.
and subsidiaries at September 30, 1998 and 1997, and the consolidated results of
their  operations and their cash flows for each of the three years in the period
ended  September 30, 1998,  in conformity  with  generally  accepted  accounting
principles.

                                                              ERNST & YOUNG LLP


Orlando, Florida
October 23, 1998
















                                       F-2


<PAGE>
<TABLE>
                                      Sawtek Inc. and Subsidiaries
                                      Consolidated Balance Sheets
                            (dollars in thousands, except per share data)
                                                  ASSETS
<CAPTION>
                                                                                      September 30,
                                                                                    ----------------
                                                                                    1998        1997
                                                                                    ----        ----
<S>                                                                               <C>         <C>   
Current Assets:                                                                       
  Cash, cash equivalents, and short-term investments                              $ 84,131    $ 58,073
  Accounts receivable net of allowance for doubtful accounts and
    returns of $1,399 at September 30, 1998 and $684 at September 30, 1997          11,569      12,327
  Inventories                                                                        8,453       7,120
  Deferred income taxes                                                              1,179       1,275
  Other current assets                                                               1,075         671
                                                                                  --------    --------
            Total current assets                                                   106,407      79,466
Other assets                                                                           109         150
Property, plant and equipment, net                                                  42,194      40,890
                                                                                  --------    --------
            Total assets                                                          $148,710    $120,506
                                                                                  ========    ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
  Accounts payable                                                                $  1,830    $  2,887
  Accrued wages and benefits                                                         3,198       3,391
  Other accrued liabilities                                                          1,912       2,672
  Current maturities of long-term debt                                                 469       1,790
  Income taxes payable                                                                  69          68
                                                                                  --------    --------
            Total current liabilities                                                7,478      10,808
Long-term debt, less current maturities                                              2,169       2,868
Deferred income taxes                                                               15,186       8,612
Shareholders' Equity:
  Common Stock; $.0005 par value; 120,000,000 authorized shares; 
  issued and outstanding shares 21,334,097 at September 30, 1998
  and 20,931,616 at September 30, 1997                                                  11          11
  Capital surplus                                                                   72,816      68,937
  Unearned ESOP compensation                                                          (975)     (1,171)
   Retained earnings                                                                56,646      30,441
  Less Common Stock held in treasury,  at cost;  385,500 shares at
   September 30, 1998, none at September 30, 1997                                   (4,621)
                                                                                  --------    --------
            Total shareholders' equity                                             123,877      98,218
            Total liabilities and shareholders' equity                            $148,710    $120,506
                                                                                  ========    ========

                              See notes to consolidated financial statements
</TABLE>


                                       F-3


<PAGE>
<TABLE>
                                      Sawtek Inc. and Subsidiaries
                                Consolidated Statements of Income (Loss)
                                 (in thousands, except per share data)
<CAPTION>
                                                                             Year Ended September 30,
                                                                        --------------------------------
                                                                        1998           1997         1996
                                                                        ----           ----         ----
<S>                                                                   <C>            <C>          <C>     
Net sales                                                             $ 97,700       $ 85,041     $ 59,173
Cost of sales                                                           44,811         38,569       28,338
                                                                      --------       --------     --------
Gross profit                                                            52,889         46,472       30,835
Operating expenses:
  Selling expenses                                                       6,008          5,384        4,024
  General and administrative expenses                                    4,497          5,646        5,927
  ESOP compensation expense                                                196            196       12,925
  Research and development expenses                                      4,285          3,756        1,954
                                                                      --------       --------     --------
            Total operating expenses                                    14,986         14,982       24,830
                                                                      --------       --------     --------
Operating income                                                        37,903         31,490        6,005
Interest expense                                                           214            237          264
Other income                                                            (3,756)        (2,022)        (607)
                                                                      --------       --------     --------
Income before income taxes                                              41,445         33,275        6,348
Income taxes                                                            15,240         12,556        6,568
                                                                      --------       --------     --------
Net income (loss)                                                     $ 26,205       $ 20,719     $   (220)
                                                                      ========       ========     ========

Net income (loss) per share - basic                                   $   1.24       $   1.01     $  (0.01)
                                                                      ========       ========     ========
Net income (loss) per share - diluted                                 $   1.21       $   0.97     $  (0.01)
                                                                      ========       ========     ========
Shares used in per share calculations - basic                           21,180         20,546       17,367
                                                                      ========       ========     ========
Shares used in per share calculations - diluted                         21,678         21,334       20,243
                                                                      ========       ========     ========

                                         See notes to consolidated financial statements.

</TABLE>











                                       F-4


<PAGE>
<TABLE>

                                                          Sawtek Inc. and Subsidiaries
                                                 Consolidated Statements of Shareholders' Equity
                                                                  (in thousands)
<CAPTION>
                               6% Cumulative                                     Unearned      Retained
                                 Preferred       Common Stock        Capital       ESOP        Earnings   Treasury Stock
                              Shares   Amount   Shares   Amount      Surplus   Compensation    (Deficit)  Shares   Amount      
                              ------   ------   ------   ------      -------   ------------    ---------  ------   ------
<S>                             <C>    <C>       <C>      <C>        <C>         <C>          <C>            <C>   <C>              
Balance at October 1, 1995      150    $  300    5,415    $  4       $ 1,942                  $(22,502)
  Net loss                                                                                        (220)
  Reclassification of
    redeemable ESOP
    Common Stock in
    connection with the
    initial public offering                      9,843       5         1,851     $ (3,023)      33,287
  ESOP allocation                                                     11,269        1,656
  Sale of Common Stock in
    the initial public                           3,000       2        35,218
    offering
  Sale of Common Stock
    other than in the initial
    public offering                              1,813                   382
  Purchase of Common Stock                         (56)                  (21)                     (145)
  Compensatory stock option
    tax benefit                                                        2,021
  Stock option compensation                                              195
  Preferred stock dividends                                                                        (27)
  Redemption of preferred
     stock                     (150)     (300)       9                   200
                               ----    ------   ------    ----       -------     --------     --------    ------   -------
Balance at Sept. 30, 1996                       20,024      11        53,057       (1,367)      10,393
  Net Income                                                                                    20,719
  Sale of Common Stock                             908                10,627
  Compensatory stock option
    tax benefit                                                        4,700
  Stock option compensation                                              553
  ESOP allocation                                                                     196
  Adjustment for the net loss
    of  MSI for the three
    months ended
    September 30, 1997                                                                            (671)
                               ----    ------   ------    ----       -------     --------     --------    ------   -------
Balance at  Sept. 30, 1997                      20,932      11        68,937       (1,171)      30,441
  Net income                                                                                    26,205
  Sale of Common Stock                             402                 1,171
  Compensatory stock option
     tax benefit                                                       2,708
  Purchase of treasury stock                                                                                 386   $(4,621)
  ESOP allocation                                                                     196
                               ----    ------   ------    ----       -------     --------     --------    ------   -------
Balance at Sept. 30, 1998                       21,334    $ 11       $72,816     $  ( 975)    $ 56,646       386   $(4,621)
                               ====    ======   ======    ====       =======     ========     ========    ======   =======

                                                     See notes to consolidated financial statements.
</TABLE>


                                       F-5


<PAGE>

<TABLE>

                                              Sawtek Inc. and Subsidiaries
                                         Consolidated Statements of Cash Flows
                                                      (in thousands)
<CAPTION>
                                                                                    Year Ended September 30,
                                                                                   --------------------------
                                                                                   1998       1997       1996
                                                                                   ----       ----       ----
<S>                                                                             <C>         <C>        <C> 
Operating activities:
Net income (loss)                                                               $ 26,205    $ 20,719   $  (220)
Adjustments  to reconcile  net income  (loss) to net cash
 provided by operating activities:
    Depreciation and amortization                                                  6,036       3,995     2,179
    Deferred income taxes                                                          6,670       7,646       402
    ESOP allocation                                                                  196         196    12,925
    Stock option compensation                                                                    553       195
    Loss on disposal of fixed assets                                                 616          87
    Changes in operating assets and liabilities:
   (Increase) decrease in assets:
     Accounts receivable                                                             758      (3,656)   (2,959)
     Inventories                                                                  (1,333)       (464)   (3,288)
     Other current assets                                                           (404)       (155)     (370)
     Increase (decrease) in liabilities:
     Accounts payable                                                             (1,057)        764     1,064
     Accrued liabilities                                                            (953)      1,701     1,427
     Income taxes payable                                                          2,709       3,923     2,202
                                                                                --------    --------   -------
   Net cash provided by operating activities                                      39,443      35,309    13,557

Investing activities:
Purchase of property, plant and equipment                                         (7,915)    (14,641)  (24,397)
Increase in Industrial Revenue Bond assets                                                                 (48)
Reduction in Industrial Revenue Bond assets                                                              2,654
Short-term investments                                                           (26,235)    (15,764)
Other                                                                                             17         2
                                                                                --------    --------   -------
Net cash used in investing activities                                            (34,150)    (30,388)  (21,789)

Financing activities:
Proceeds from long-term debt                                                         146         309     8,241
Principal payments on long-term debt                                              (2,166)     (1,279)  (10,406)
Sale of Common Stock                                                               1,171      10,627    35,602
Purchase of Common Stock for treasury                                             (4,621)                 (166)
Redemption of preferred stock                                                                             (100)
Preferred stock dividends paid                                                                             (27)
                                                                                --------    --------   -------
Net cash provided by (used in) financing activities                               (5,470)      9,657    33,144
                                                                                --------    --------   -------
Increase (decrease) in cash and cash equivalents                                    (177)     14,578    24,912
Cash and cash equivalents at beginning of period                                  42,309      27,731     2,819
                                                                                --------    --------   -------
Cash and cash equivalents at end of period                                        42,132      42,309    27,731
Short-term investments                                                            41,999      15,764
                                                                                --------    --------   -------
Cash, cash equivalents and short-term investments                               $ 84,131    $ 58,073   $27,731
                                                                                ========    ========   =======


                                     See notes to consolidated financial statements.

</TABLE>



                                       F-6


<PAGE>


                          Sawtek Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 1 - Summary of Significant Accounting Policies
---------------------------------------------------
     Description  of Business.  Sawtek Inc.  and  subsidiaries  (the  "Company")
designs,  develops,  manufactures and markets a broad range of electronic signal
processing  components  based on surface acoustic wave ("SAW")  technology.  The
Company's  primary  products  are  custom-designed,  high  performance  bandpass
filters, resonators, delay lines, oscillators, SAW-based subsystems and chemical
sensors.  These products are used in a variety of microwave and RF systems, such
as   Code   Division    Multiple   Access   and   Global   System   for   Mobile
communications-based  digital wireless systems,  digital microwave radios, WLAN,
cable television  equipment and various defense and satellite systems. In fiscal
1998, the Company acquired Microsensor Systems,  Inc. ("MSI"), a manufacturer of
SAW-based   chemical   sensors,   in   a   transaction   accounted   for   as  a
pooling-of-interests.  The Company's  consolidated  financial statements for all
periods prior to this  acquisition have been restated to include MSI's financial
position, results of operations and cash flows.

     Initial Public Offering.  The Company  completed an initial public offering
("IPO") in May 1996,  whereby 3,000,000 shares of Common Stock, par value $.0005
per  share,  were  issued and sold at $13 per share.  The  Company  raised a net
amount of $35,220,000,  which was used for debt repayment, capital expenditures,
working capital and other general corporate purposes.

     Prior to the IPO,  the  Company  effected a  twenty-for-one  stock split of
issued and  outstanding  common shares and increased  the  authorized  number of
shares to  40,000,000  shares  of Common  Stock  which  was again  increased  to
120,000,000  shares in 1997.  All  share,  per  share,  ESOP,  and stock  option
information  in the  accompanying  financial  statements  have been  restated to
reflect the split and change in authorized  shares.  Also,  prior to the IPO the
Company redeemed the 6% cumulative preferred stock for $100,000 and 9,087 shares
of Common Stock.

     Basis of Presentation.  The consolidated  financial  statements include the
Company and its wholly-owned  subsidiaries.  All material  intercompany accounts
and  transactions  have  been  eliminated.  The  Company's  fiscal  year ends on
September 30 of each year, but its fiscal  quarters  generally end on the Sunday
nearest the close of a quarter.  For  convenience,  the  accompanying  financial
statements  reflect the end of the fiscal quarter as the last day of that fiscal
quarter.

     Use of Estimates. The preparation of the 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.

     Financial  Instruments.  The Company considers all liquid  interest-earning
investments  with a maturity of three  months or less at the date of purchase to
be cash  equivalents.  Short-term  investments  generally  mature  between three
months and 18 months from the purchase date. All cash equivalents and short-term
investments  are classified as held to maturity and are recorded at cost,  which
approximates market.

     Accounts  Receivable.  Potential  credit losses are  recognized as they are
identified and are reported as an increase to sales expenses.  Concentrations of
credit risk with respect to the  receivables are limited due to the large number
of  customers,  generally  short  payment  terms  and  their  dispersion  across
geographic areas and markets.

                                       F-7


<PAGE>



     Inventories.  Inventories  are  stated  at the  lower  of  cost  (first-in,
first-out  method)  or  market.  Cost  includes  materials,   direct  labor  and
manufacturing  overhead.  Market is defined principally as net realizable value.

     Property, Plant and Equipment.  Property, plant and equipment are valued at
cost (less accumulated depreciation) computed using the straight line method.

     The estimated  useful lives used in computing  depreciation  expense are as
follows:
<TABLE>
<S>                                                        <C> 
                  Building and Improvements                10 - 30 years
                  Production and Test Equipment             4 -  8 years
                  Computer Equipment                        4 -  8 years
                  Furniture and Fixtures                    5 - 10 years
</TABLE>

     Expenditures  for  maintenance,  repairs  and  renewals  of minor items are
expensed as incurred.  Major renewals and  improvements  are  capitalized.  Upon
disposition,  the cost and related accumulated depreciation are removed from the
accounts  and the  resulting  gain or loss is reflected  in  operations  for the
period.

     Intangibles.  Various fees incurred in the  acquisition  of two  Industrial
Revenue Bonds were capitalized and were amortized using the interest method over
the lives of the agreements.  Various fees incurred in the  establishment  of an
Employee Stock Ownership Plan were also capitalized and were amortized using the
interest method over the lives of the related debt.

     Earnings  Per  Share.  The  Company  has  adopted  Statement  of  Financial
Accounting  Standard  (SFAS) No. 128,  Earnings  per Share,  which  replaced the
calculation  of  primary  and fully  diluted  earnings  per share with basic and
diluted  earnings per share. All earnings per share amounts have been presented,
and where appropriate, restated to conform to SFAS 128 requirements.

     Revenue  Recognition.  Revenues from production contracts are recorded when
the product is completed and shipped.  Revenues from  non-recurring  engineering
("NRE") are recognized when the parts or services have been completed and units,
including prototypes,  have been shipped. Revenues from NRE are less than 10% of
total net sales for the periods reported.

     Income Taxes.  The provision  for income taxes  includes  Federal and State
taxes  currently  payable and deferred taxes arising from temporary  differences
between  income  for  financial  and tax  reporting  purposes.  These  temporary
differences  result   principally  from  the  use  of  accelerated   methods  of
depreciation  for tax  purposes,  earnings  of the Costa  Rican  subsidiary  not
currently  subject to tax, the provisions for losses on inventories and accounts
receivable, and the accounting for stock compensation.  Research and development
tax credits are applied as a reduction to the  provision for income taxes in the
year in which they are utilized.

     ESOP Compensation Expense. ESOP shares acquired after December 31, 1992 are
accounted for according to the  provisions of Statement of Position  (SOP) 93-6.
This SOP  requires  that  compensation  expense be measured  using a fair market
value basis when the shares are committed to be released to the  employees.  The
Company accounts for ESOP shares acquired prior to January 1, 1993 in accordance
with SOP 76-3,  which requires  compensation  expense be measured using the cost
basis of the shares when the shares are committed to be released to employees.



                                       F-8


<PAGE>



     Stock-Based  Compensation.  The  Company  accounts  for  compensation  cost
related to  employee  stock  options  and other  forms of  employee  stock-based
compensation  plans other than the ESOP in accordance  with the  requirements of
Accounting  Principles Board Opinion 25 ("APB 25") and related  interpretations.
APB 25  requires  compensation  cost for  stock-based  compensation  plans to be
recognized based on the difference, if any, between the fair market value of the
stock on the date of grant and the option exercise price.  The Company  provides
additional pro forma disclosures as required under SFAS No. 123, "Accounting for
Stock-Based Compensation."

     Impairment of Long Lived Assets.  In the event that facts and circumstances
indicate   that  the  cost  of  assets  may  be  impaired,   an   evaluation  of
recoverability would be performed.  If an evaluation is required,  the estimated
future  undiscounted  cash flows  associated with the asset would be compared to
the asset's  carrying  amount to determine  if a  write-down  to market value or
discounted cash flow value is required.

     SFAS No. 130,  "Reporting  Comprehensive  Income."  In June 1997,  the FASB
issued SFAS No. 130,  "Reporting  Comprehensive  Income," which is effective for
fiscal years beginning  after December 15, 1997. SFAS 130 establishes  standards
for  reporting  and  displaying  comprehensive  income  and  its  components  in
financial  statements.  The Company will adopt SFAS 130 in the first  quarter of
fiscal 1999. The application of the new rules is not expected to have a material
impact on the Company's financial statements.

     SFAS No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information."  Also in June 1997,  the FASB issued  SFAS No.  131,  "Disclosures
about Segments of an Enterprise and Related Information," which is effective for
fiscal years  beginning after December 15, 1997. SFAS 131 changes the way public
companies report segment information in annual financial statements and requires
those companies to report selected segment  information in quarterly  reports to
stockholders.  SFAS 131 also establishes standards for related disclosures about
products and services,  geographic areas, and major customers.  The Company will
adopt  SFAS 131 in  fiscal  1999  and the  adoption  may  result  in  additional
disclosures.  The  application  of SFAS 131 will have no impact on the Company's
consolidated results of operations, financial position or cash flows.

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

Note 2 - Acquisition of MSI
---------------------------
     On February 25, 1998, the Company acquired all of the outstanding shares of
MSI, a manufacturer of chemical  sensors,  in exchange for 169,811 shares of the
Company's  Common Stock plus assumption of  approximately  $900,000 of debt. The
business  combination  was  recorded  as a  pooling-of-interests.  Prior  to the
combination,  MSI's fiscal year ended on June 30 of each year.  In recording the
business combination, MSI's financial statements for the fiscal years ended June
30,  1996 and 1997 were  combined  with  Sawtek's  for the  fiscal  years  ended
September  30, 1996 and 1997,  respectively.  MSI's  unaudited net sales and net
loss for the three months  period ended  September  30, 1997 were  approximately
$423,000 and ($671,000),  respectively. In accordance with APB 16, MSI's results
of operations and cash flows for the three-month period ended September 30, 1997
have been added directly to the retained  earnings and cash flows of the Company
and excluded  from reported  fiscal 1998 results of  operations  and cash flows.
MSI's  revenue and net loss for the period from October 1, 1997 through the date
of acquisition were approximately $792,000 and ($438,000), respectively.



                                       F-9


<PAGE>



Note 3 - Cash, Cash Equivalents and Short-Term Investments
----------------------------------------------------------
     Cash,  cash  equivalents  and  short-term  investments  are composed of the
following:
<TABLE>
<CAPTION>
                                                                               September 30,
                                                                           --------------------
                                                                           1998            1997
                                                                           ----            ----
                                                                               (in thousands)
<S>                                                                      <C>             <C>  
Cash and equivalents:
Cash                                                                     $ 2,390         $ 1,846
Commercial paper and bankers acceptance under 90 days                     39,742          40,463
                                                                         -------         -------
Cash and equivalents                                                      42,132          42,309
Short-term investments:
Bankers acceptance over 90 days                                            8,761
Municipal securities                                                       7,775           5,766
Certificates of deposit                                                   11,401           4,998
Government agency securities                                              14,062           5,000
                                                                         -------         -------
Short-term investments                                                    41,999          15,764
                                                                         -------         -------
Cash, cash equivalents and short-term investments                        $84,131         $58,073
                                                                         =======         =======
</TABLE>

Note 4 - Allowance for Doubtful Accounts and Sales Returns
----------------------------------------------------------
     The  allowance  for doubtful  accounts and sales returns is composed of the
following:

<TABLE>
<CAPTION>
                                                                            September 30,
                                                                -------------------------------------
                                                                1998             1997            1996
                                                                ----             ----            ----   
                                                                            (in thousands)
<S>                                                           <C>               <C>            <C>   
Balance, beginning of period                                  $  684            $  654         $  277
Provision for doubtful accounts and sales returns              1,396               821            820
Sales returns and uncollectible accounts written off            (681)             (791)          (443)
                                                              ------            ------         ------
Balance, end of period                                        $1,399            $  684         $  654
                                                              ======            ======         ======
</TABLE>

Note 5 - Inventories
--------------------
     Net inventories are composed of the following:
<TABLE>
<CAPTION>

                              September 30,
                         ---------------------
                         1998             1997 
                         ----             ---- 
                             (in thousands)
<S>                    <C>              <C>    
Raw material           $ 3,809          $ 3,154
Work in process          1,969            2,216
Finished goods           2,675            1,750
                       -------          -------
          Total        $ 8,453          $ 7,120
                       =======          =======
</TABLE>

                                       F-10


<PAGE>



     The  allowance  for obsolete  and slow moving  inventory is composed of the
following:
<TABLE>
<CAPTION>
                                                   September 30,
                                      --------------------------------------
                                      1998              1997            1996
                                      ----              ----            ---- 
                                                  (in thousands)
<S>                                  <C>               <C>             <C>   
Balance, beginning of period         $1,935            $1,705          $  887
Charged to cost of sales                345               270             931
Disposal of inventory                  (162)              (40)           (113)
                                     ------            ------          ------ 
Balance, end of period               $2,118            $1,935          $1,705
                                     ======            ======          ======

</TABLE>

Note 6 - Property, Plant and Equipment
--------------------------------------
     Property, plant and equipment are composed of the following:
<TABLE>
<CAPTION>
                                                    September 30,
                                            ----------------------------
                                            1998                    1997
                                            ----                    ----       
                                                    (in thousands)
<S>                                       <C>                      <C>    
Land and improvements                     $   830                  $   671
Buildings                                  16,595                   14,076
Production and test equipment              37,235                   29,530
Computer equipment                          3,239                    2,997
Furniture and fixtures                      2,666                    1,862
Construction in progress                    1,043                    5,507
                                          -------                  -------
                                           61,608                   54,643
Less accumulated depreciation              19,414                   13,753
                                          -------                  -------
      Total                               $42,194                  $40,890
                                          =======                  =======
</TABLE>

     Approximately  $98,000,  $159,000  and  $380,000  of  interest  costs  were
capitalized  as part of property,  plant and  equipment in 1998,  1997 and 1996,
respectively.

Note 7 - Line of Credit
-----------------------
     The Company has a line of credit with a bank for working capital, equipment
purchases,  plant expansion and other general  business  purposes of $20,000,000
with  interest at LIBOR plus 125 basis  points.  The line of credit is unsecured
and renewable annually. Covenants in connection with the line of credit and with
long-term  debt  agreements  impose  restrictions  with  respect to, among other
things, the maintenance of certain financial ratios, additional indebtedness and
disposition  of assets.  The Company was in compliance  with the covenants as of
September 30, 1998 and 1997.

     There were no  borrowings  against the line of credit at September 30, 1998
and 1997.




                                       F-11


<PAGE>


Note 8 - Long-Term Debt and Lease Obligations
---------------------------------------------
     Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                           September 30,
                                       --------------------- 
                                       1998             1997
                                       ----             ---- 
                                          (in thousands)
<S>                                   <C>               <C>   
Industrial Revenue Bond (a)           $  375            $  490
ESOP Note (b)                                              780
Industrial Revenue Bond (c)            2,263             2,617
Other (d)                                                  771
                                      ------            ------ 
                                       2,638             4,658
Less Current Maturities                  469             1,790
                                      ------            ------
                                      $2,169            $2,868
                                      ======            ======
</TABLE>




     (a) In 1982,  the Company  obtained  $1,800,000  in  financing  through the
Orange County  Industrial  Development  Authority.  The obligation is secured by
land and land  improvements,  the building and related equipment with a carrying
value of approximately  $738,000 at September 30, 1998 and $780,000 at September
30, 1997. The obligation is payable in varying  quarterly  installments  through
2001 plus interest at 68% of the prime rate.

     (b) In 1991,  the Company  established  an Employee  Stock  Ownership  Plan
(ESOP).  The Company borrowed  $4,000,000 from a bank and loaned it to the ESOP.
The remaining loan balance was repaid in 1998.

     (c) In 1995,  the Company  obtained  $3,500,000  in  financing  through the
Orange County Industrial Development  Authority.  The obligation is secured by a
building  expansion and related equipment with a carrying value of approximately
$7,023,000  at September  30, 1998 and  $7,505,000  at September  30, 1997.  The
obligation is payable in quarterly  installments  of $88,334 through March 2000,
thereafter in quarterly  installments  of $43,334  through March 2010, both plus
interest at LIBOR plus 150 basis points.

     (d) Relates to debt of MSI which was repaid in 1998.

     The Company leases  equipment under a noncancelable  agreement that expires
in 1998.  Rental expense was  approximately  $843,000,  $461,000 and $481,000 in
1998, 1997 and 1996, respectively.

     Required  future  payments for long-term  debt and operating  leases are as
follows:
<TABLE>
<CAPTION>

                             Debt                    Leases
                             ----                    ------
                                     (in thousands)
<C>                         <C>                      <C>   
1999                        $  469                   $  433
2000                           379                      352
2001                           288                      119
2002                           202                       89
2003                           173                       68
Thereafter                   1,127                        0
                            ------                   ------
                            $2,638                   $1,061
                            ======                   ======
</TABLE>

                                       F-12



<PAGE>

     The Company made interest payments of approximately $228,000,  $313,000 and
$550,000 on long-term debt in 1998, 1997 and 1996, respectively.

     The fair value of the Company's  long-term debt  approximates  the carrying
amount.

Note 9 - Income Taxes
---------------------
     The income tax provision is composed of the following:
<TABLE>
<CAPTION>

                                                Year Ended September 30,
                                       ----------------------------------------
                                       1998              1997              1996
                                       ----              ----              ----
                                                     (in thousands)
<S>                                  <C>                <C>               <C>  
Current:
  Federal                            $ 7,908            $ 4,537           $ 5,230
  State                                  662                373               936
                                     -------            -------           -------
                                       8,570              4,910             6,166
Deferred:
  Federal                              6,024              6,554               343
  State                                  646              1,092                59
                                     -------            -------           -------
                                       6,670              7,646               402
                                     -------            -------           -------
     Total Income Tax Provision      $15,240            $12,556           $ 6,568
                                     =======            =======           =======
</TABLE>

     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes  and the  amounts  used for income  tax  purposes.  The tax  effects of
significant  temporary differences giving rise to year-end deferred tax balances
were as follows:
<TABLE>
<CAPTION> 
                                                                 September 30,
                                                            ----------------------
                                                            1998              1997
                                                            ----              ----
                                                                (in thousands)
<S>                                                     <C>                 <C> 
Current:
  Accruals not currently deductible                     $    481            $    381
  Inventory costs capitalized for tax purposes               120                 195
  Inventory loss provision                                   578                 699
                                                        --------            --------
            Deferred Tax Asset                          $  1,179            $  1,275
                                                        ========            ========
Non-Current:
  Stock option compensation not currently deductible    $    245            $    664
  Earnings of subsidiary not currently taxed             (12,630)             (6,940)
  Excess tax over book depreciation                       (2,801)             (2,336)
                                                        --------            --------
            Deferred Tax Liability                      $(15,186)           $ (8,612)
                                                        ========            =========

</TABLE>


                                       F-13

<PAGE>

     A reconciliation of statutory Federal income taxes to reported income taxes
is as follows:
<TABLE>
<CAPTION>
                                                           Year Ended September 30,
                                                    --------------------------------------
                                                    1998             1997             1996
                                                    ----             ----             ----
                                                                 (in thousands)
<S>                                               <C>              <C>              <C>   
Income taxes computed at the Federal
 statutory rate of 35%                            $ 14,506         $ 11,652         $ 2,215
State income taxes, net of Federal benefit             850              952             646
Non-deductible ESOP compensation expense                                              3,944
Other                                                 (116)             (48)           (237)
                                                  --------         --------         -------
Total Income Tax Provision                        $ 15,240         $ 12,556         $ 6,568
                                                  ========         ========         =======
</TABLE>

     In 1998 and 1997,  the  Company's tax liability was reduced and its capital
surplus was increased by $2,708,000 and $4,700,000, respectively, as a result of
transactions involving stock options.

     The  Company  made  income  tax  payments  of   approximately   $6,276,000,
$1,007,000 and $3,959,000 in 1998, 1997 and 1996, respectively.

     The Company provides for deferred taxes on the non-repatriated  earnings of
its subsidiary in Costa Rica. The subsidiary  benefits from a complete exemption
from Costa  Rican  income  taxes  through  2003 and a 50%  exemption  thereafter
through 2007.

Note 10 - Earnings Per Share (in thousands, except per share data)
------------------------------------------------------------------
     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
                                                        Year Ended September 30,
                                                        -------------------------
                                                        1998      1997       1996
                                                        ----      ----       ----
<S>                                                    <C>       <C>        <C>     
Net income (loss) available to Common stockholders     $26,205   $20,719    $  (220)
                                                       =======   =======    =======
Weighted average Common Stock outstanding
 for basic earnings per share                           21,180    20,546     17,367
Dilutive effect of employee stock options                  498       788      2,876
                                                       -------   -------    -------
Weighted average Common Stock outstanding,
 for diluted earnings per share                         21,678    21,334     20,243
                                                       =======   =======    =======
Basic earnings (loss) per share                        $  1.24   $  1.01   ($  0.01)
Diluted earnings (loss) per share                      $  1.21   $  0.97   ($  0.01)
</TABLE>


     The  weighted  average  Common Stock  outstanding  includes all ESOP shares
outstanding.   In  accordance  with  Security  and  Exchange   Commission  staff
accounting bulletins,  Common and common equivalent shares issued by the Company
at prices below the public  offering  price during the one-year  period prior to
the  filing  date of the  initial  public  offering  have been  included  in the
calculation  as if they were  outstanding  for all periods prior to the offering
(using the treasury stock method and the initial public offering price).



                                       F-14

<PAGE>

Note 11 - Significant Customers
-------------------------------
     Sales to the United States  government (both as a prime contractor and on a
subcontract basis) to foreign markets and to significant  customers as a percent
of the Company's total revenues were as follows:
<TABLE>
<CAPTION>
                                                           Year Ended September 30,
                                                        ------------------------------
                                                        1998          1997        1996
                                                        ----          ----        ----
<S>                                                     <C>           <C>         <C>
U.S. Government (Inclusive of Significant Customers)     *            11%         15%
Foreign Markets (Inclusive of Significant Customers     37%           43%         54%
European Market (Inclusive of Significant Customers)    18%           22%         38%
Asian and Pacific Rim Market                            16%           17%          *
Significant Customer A                                  17%           14%          *
Significant Customer B                                   *            12%         24%
Significant Customer C                                   *            11%         11%
Significant Customer D                                  15%           11%          *
Significant Customer E                                  15%            *           *
<FN>
*Less than 10%
</FN>
</TABLE>

Note 12 - Segment Information
-----------------------------
     The Company operates predominately in one segment, the manufacture and sale
of  SAW-based  products  as  described  in Note 1.  Sales  are  reported  in the
geographic area where they originate.  Transfers from the U.S. to Costa Rica are
made on a basis  intended to reflect the market price of the products.  Prior to
1996, all sales,  operating  profit and assets were  attributable  to the United
States operation.
<TABLE>
<CAPTION>
                                  Net Sales                   Operating Income                    Assets
                          -------------------------      -------------------------      --------------------------
                          1998      1997       1996      1998      1997       1996      1998       1997       1996
                          ----      ----       ----      ----      ----       ----      ----       ----       ----
                                                               (in thousands)
<S>                     <C>       <C>        <C>       <C>        <C>       <C>       <C>        <C>        <C>     
United States           $ 70,960  $ 63,795   $ 55,712  $ 23,181   $18,096   $ 4,900   $117,973   $104,715   $ 73,627
Costa Rica                36,612    28,438      4,793    14,722    13,424     1,105     30,737     15,821      8,222
Transfers/Eliminations    (9,872)   (7,192)    (1,332)     -          (30)      -         -           (30)    (6,325)
                        --------  --------   --------  --------   -------   -------   --------   --------   --------
Consolidated Results    $ 97,700  $ 85,041   $ 59,173  $ 37,903   $31,490   $ 6,005   $148,710   $120,506   $ 75,524
                        ========  ========   ========  ========   =======   =======   ========   ========   ========
</TABLE>


     Transfers from the U.S. to Costa Rica are accounted for at amounts that are
above cost and are consistent with rules and regulations of taxing  authorities.
Such transfers are eliminated in the consolidated financial statements.







                                       F-15

<PAGE>

     All sales are denominated in U.S. dollars.  The functional currency for the
Costa Rican  operation is the U.S.  dollar as sales,  most  material  cost,  and
equipment are U.S. dollar  denominated.  The impact of currency  fluctuations of
the local Costa Rican currency is not considered significant and is not hedged.

     In 1996, the Company established a "foreign sales corporation"  pursuant to
the  applicable  provisions  in the Internal  Revenue Code to take  advantage of
income tax  reductions on export  sales.  For 1998,  1997 and 1996,  the cost to
operate this  subsidiary was less than $10,000,  and it had less than $10,000 in
identifiable assets for all years.

Note 13 - Employee Benefit Plans
--------------------------------
     In 1997,  the Company  merged the Sawtek Inc.  Code Section  401(k)  Profit
Sharing Plan into the Employee Stock Ownership Plan for Employees of Sawtek Inc.
and renamed the  combined  plan the Sawtek Inc.  Employee  Stock  Ownership  and
401(k) Plan. The merged plan has two principal elements: i) a profit sharing and
401(k) element and ii) an employee stock ownership ("ESOP") element.

     Profit  Sharing and 401(k)  Element.  In 1981,  the Company  established  a
profit sharing plan covering substantially all U.S. employees who work 500 hours
or more per year.  A 401(k)  feature was added to the plan in 1991 and a Company
matching feature was added effective  October 1, 1997. There have been no profit
sharing  contributions  by the  Company  to the  plan  since  1990.  The  401(k)
contribution expense in 1998 was approximately $368,000.

     Employee  Stock  Ownership  Element.  In 1991,  the Company  established an
Employee Stock Ownership Plan covering  substantially  all U.S.  employees.  The
ESOP purchased  3,376,640 shares of Common Stock from  substantially  all of the
common  shareholders  and  5,512,240  shares of Common Stock from the Company in
1991. The  transaction  was financed from the proceeds of a $4,000,000 loan from
the  Company.  The Company  accounts  for these ESOP shares in  accordance  with
Statement of Position 76-3. As of September 30, 1998,  2,048,161 of these shares
remain unallocated.  In 1994, the ESOP purchased an additional  1,610,600 shares
of Common Stock from the Company. The transaction was financed from the proceeds
of a $1,656,000  loan from the Company.  In April 1996, the Company  amended the
ESOP and  allocated the ESOP's  1,610,600  shares of Common Stock of the Company
acquired in 1994 to  employees  for services  rendered in the period  October 1,
1995 to April 28, 1996. As these shares were  accounted  for in accordance  with
SOP 93-6,  which the Company  adopted  October 1, 1994,  the Company  recorded a
charge to operating income of approximately  $12,925,000 for 1996. The effect of
the  adoption  of SOP 93-6 was to reduce  net income by  $11,269,000  ($0.56 per
diluted share) for fiscal 1996.

     The Company restructured the remaining balance of its loan with the ESOP in
1997  providing for a repayment of the loan and allocation of the related shares
through fiscal year 2003.

     The Company made  contributions  of  approximately  $279,000,  $293,000 and
$1,783,000  to the ESOP in 1998,  1997 and 1996,  respectively.  Allocations  to
participants' accounts were 482,063,  506,207 and 1,610,600 shares in 1998, 1997
and 1996, respectively.

     Employee  Stock  Purchase  Plan. In February  1996,  the Board of Directors
approved an Employee Stock  Purchase Plan and allotted  500,000 shares of Common
Stock to the plan.  The plan enables  eligible  employees  who have  completed a
service  requirement  to purchase  shares of Common Stock at a 15% discount from
the  fair  market  value  of  the  stock,  up  to a  maximum  of  10%  of  their
compensation.


                                      F-16


<PAGE>



     Costa Rica Profit  Sharing  Plan.  Effective  October 1, 1997,  the Company
adopted  a  Profit  Sharing  Plan  for  its  Costa  Rica   subsidiary   covering
substantially  all  employees  of  this  subsidiary.   The  Company  contributed
approximately $70,000 to this plan for 1998.

Note 14 - Stock Options
-----------------------
     The Company has granted  incentive  stock options and  non-qualified  stock
options  under the 1983 Stock Option Plan,  the Second Stock Option Plan and the
Stock  Option Plan for  Acquired  Companies.  The Second  Stock  Option Plan was
approved by the shareholders in 1996 with up to 2,000,000 shares of Common Stock
available  for options  and the Stock  Option Plan for  Acquired  Companies  was
approved by  shareholders  in 1998 with up to  1,000,000  shares of Common Stock
available for options. Incentive options granted are exercisable over a ten-year
period,  generally in four equal annual  installments  commencing one year after
the  date  of  grant.  A  majority  of the  non-qualified  options  granted  are
exercisable from the date of grant over a ten-year  period,  while the remainder
become exercisable in three or four equal annual installments.

     Information concerning options under these plans is as follows:

<TABLE>
<CAPTION>
                                                                                                    Weighted-Average
                                             Shares Under Option       Price Range of Options         Exercise Price
                                             -------------------       ----------------------       -----------------
<S>                                                <C>                    <C>                              <C>                    
Balance at October 1, 1995                         3,133,100              $ 0.13 - $ 1.34                  $ 0.44
Granted                                              175,000              $ 3.55 - $24.75                  $13.16
Terminated                                            (8,140)             $ 0.74 - $ 1.34                  $ 1.12
Exercised                                         (1,754,500)             $ 0.13 - $ 1.34                  $ 0.23
                                                  ----------
Balance at September 30, 1996                      1,545,460              $ 0.13 - $24.75                  $ 2.13
Granted                                              249,500              $11.05 - $33.25                  $25.47
Terminated                                           (11,580)             $ 0.74 - $24.75                  $11.25
Exercised                                           (568,250)             $ 0.13 - $11.05                  $ 0.98
                                                  ----------
Balance at September 30, 1997                      1,215,130              $ 0.13 - $33.25                  $ 7.37
Granted                                              258,000              $13.28 - $35.00                  $21.93
Terminated                                           (71,750)             $ 0.13 - $28.75                  $11.33
Exercised                                           (373,734)             $ 0.13 - $26.875                 $ 1.90
                                                  ----------
Balance at September 30, 1998                      1,027,646              $ 0.13 - $35.00                  $12.73
                                                  ==========
Exercisable at September 30, 1998                    373,023              $ 0.13 - $33.25                  $ 6.57
                                                  ==========
</TABLE>

     The  weighted-average  contractual life of stock options  outstanding as of
September 30, 1998 was 7.71 years.







                                       F-17

<PAGE>

     The  following  table  summarizes  information  about fixed  stock  options
outstanding at September 30, 1998:
<TABLE>
<CAPTION>

                                             Weighted-Avg.                               Number
      Range of              Number             Remaining         Weighted-Avg.        Exercisable         Weighted-Avg.
   Exercise Prices        Outstanding      Contractual Life     Exercise Price     at Sept. 30, 1998     Exercise Price
   ---------------        -----------      ----------------     --------------     -----------------     --------------
<C>                        <C>                    <C>             <C>                 <C>                  <C>   
$ 0.13 - $ 3.55              441,646              6.4             $ 0.80              249,980              $ 0.66
$11.05 - $35.00              586,000              8.7             $21.72              123,043              $18.57
                           ---------                                                  -------
                           1,027,646                                                  373,023
                           =========                                                  =======

</TABLE>

     The Company  applies APB  Opinion No. 25 in  accounting  for its plans and,
accordingly,  no  compensation  cost was  recognized  to the extent the exercise
price of the stock options  equaled the fair value.  Had the Company  determined
compensation  cost  based on the  fair  value at the  grant  date for its  stock
options  under SFAS No. 123, the  Company's  net income (loss) and income (loss)
per share would be the pro forma amounts indicated below:
<TABLE>
<CAPTION>

                                                            Year Ended September 30,
                                                        --------------------------------
                                                        1998          1997          1996
                                                        ----          ----          ---- 
                                                      (in thousands, except per share data)
<S>                                                   <C>            <C>           <C>    
Net income (loss) as reported                         $26,205        $20,719       $ (220)
Pro forma net income (loss)                           $24,376        $19,657       $ (222)
Pro forma basic earnings (loss) per share             $  1.15        $  0.96       $(0.01)
Pro forma diluted earnings (loss) per share           $  1.14        $  0.92       $(0.01)
</TABLE>


     The  weighted-average  fair value of options  granted during the year ended
September 30, 1998,  1997 and 1996 was $13.91,  $19.62 and $7.87,  respectively,
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:  1998 --- expected  volatility of 78%,  risk-free  interest rate of
5.71%,  no  expected  dividends  and an expected  life of 4.79  years;  1997 ---
expected  volatility  of 74%,  risk-free  interest  rate of 6.45%,  no  expected
dividends  and an expected  life of 4.5 years;  1996 --- expected  volatility of
76%,  risk-free  interest rate of 6.03%,  no expected  dividends and an expected
life of four years.

     The pro forma net income (loss) reflects only options granted in 1998, 1997
and 1996. Therefore,  the full impact of calculating compensation cost for stock
options  under SFAS No. 123 is not  reflected in the pro forma net income (loss)
amounts  presented above because  compensation cost is reflected over the option
vesting  periods of up to four years and  compensation  cost for options granted
prior to October 1, 1995 is not considered.







                                       F-18



<PAGE>



Note 15 - Capital Structure
---------------------------
     The  Company  is  authorized  to issue up to  120,000,000  shares of Common
Stock.  Holders of Common Stock i) are entitled to receive such dividends as may
from time to time be  declared by the Board of  Directors  of the Company out of
funds legally available to pay dividends, ii) are entitled to one vote per share
on all  matters  that are  subject  to  shareholder  voting  and do not have any
cumulative  voting rights,  iii) have no preemptive,  conversion,  redemption or
sinking  fund  rights,  and iv) in the event of a  liquidation,  dissolution  or
winding up of the  Company,  are  entitled  to share  equally and ratably in the
assets  of the  Company,  if any,  remaining  after  payment  of all  debts  and
liabilities  of the Company and the  liquidation  preference of any  outstanding
class or series of preferred stock.

     On  August  31,  1998,  the  Board of  Directors  approved  a Common  Stock
repurchase  program for up to  1,000,000  shares of Common  Stock in open market
transactions.  The  repurchased  shares  will be used to  satisfy  stock  option
exercises and issuance of shares under other stock related benefit programs.

     The Board of Directors  is  authorized  to issue up to 1,000,000  shares of
preferred stock, par value $0.01 per share, in one or more series and to fix the
number  of  shares   constituting  any  such  series,  and  the  voting  powers,
designations, preferences, and relative participating, optional or other special
rights and qualifications,  limitations or restrictions  thereof,  including the
dividend  rights,  dividend  rate,  terms  of  redemption,   redemption  prices,
conversion and voting rights, and liquidation  preferences,  without any further
vote or  action  by the  holders  of  Common  Stock.  To date,  no shares of the
preferred stock have been issued.




























                                       F-19


<PAGE>


Note 16 - Quarterly  Financial  Information  (unaudited)
--------------------------------------------------------
     Selected quarterly financial data is summarized below:
<TABLE>
<CAPTION>

                                                                          Quarter Ended
                                -------------------------------------------------------------------------------------------
                                                 Fiscal 1998                                     Fiscal 1997
                                ---------------------------------------------    ------------------------------------------  
                                Sept. 30,    June 30,    Mar. 31,    Dec. 31,    Sept. 30,   June 30,   Mar. 31,   Dec. 31,
                                  1998         1998       1998         1997        1997        1997      1997        1996
                                ---------    --------    --------    --------    ---------   --------   --------   --------
                                                             (in thousands, except per share data)
<S>                             <C>         <C>         <C>         <C>          <C>         <C>       <C>        <C>     
Net sales                       $ 21,522    $ 26,301    $ 25,183    $ 24,694     $ 23,623    $ 21,771  $ 20,577   $ 19,070
Cost of sales                      9,665      12,585      11,190      11,371       11,075       9,643     8,743      9,108
                                --------    --------    --------    --------     --------    --------  --------   -------- 
Gross profit                      11,857      13,716      13,993      13,323       12,548      12,128    11,834      9,962
Operating expenses:
 Selling expenses                  1,295       1,436       1,508       1,769        1,596       1,232     1,230      1,326
 General & administrative
   expenses                          481       1,178       1,460       1,378       1,254        1,352     1,846      1,194  
 ESOP compensation
   expense                            46          48          49          53        (391)         195       196        196
 Research and development
   expenses                        1,544         923         950         868       1,075        1,088       912        681
                                --------    --------    --------    --------     -------     --------  --------   --------
     Total operating expenses      3,366       3,585       3,967       4,068       3,534        3,867     4,184      3,397
                                --------    --------    --------    --------     -------     --------  --------   --------
Operating income                   8,491      10,131      10,026       9,255       9,014        8,261     7,650      6,565
Interest expense                      32          30          74          78          55           51        80         51
Other income                      (1,041)       (951)       (868)       (896)       (660)        (556)     (452)      (354)
                                --------    --------    --------    --------     -------     --------  --------   --------
Income before income taxes         9,500      11,052      10,820      10,073       9,619        8,766     8,022      6,868
Income taxes                       3,420       4,089       4,004       3,727       3,561        3,330     3,050      2,615
                                --------    --------    --------    --------     -------     --------  --------   --------
Net income                      $  6,080    $  6,963    $  6,816    $  6,346     $ 6,058     $  5,436  $  4,972   $  4,253
                                ========    ========    ========    ========     =======     ========  ========   ========
Net income per share -
  basic (1)                     $   0.29    $   0.33    $   0.32    $   0.30     $  0.29     $   0.26  $   0.24   $   0.21
                                ========    ========    ========    ========     =======     ========  ========   ========
Net income per share -
  diluted (1)                   $  0.28     $   0.32    $   0.31    $   0.29     $  0.28     $   0.26  $   0.23   $   0.20
                                =======     ========    ========    ========     =======     ========  ========   ========
Shares used in per share
calculations - basic             21,251       21,271      21,177      21,023      20,910       20,569    20,498     20,208
Shares used in per share
calculations - diluted           21,566       21,762      21,651      21,733      21,620       21,268    21,329     21,118
<FN>
     (1)  Earnings  per share for each  quarter  are  calculated  as a  discrete
period;  the sum of the four  quarters  may not equal the  calculated  full year
amount.  The fiscal 1997 earnings per share amounts have been restated to comply
with SFAS 128.
</FN>




</TABLE>










                                       F-20


<PAGE>




PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------------------
Management - Executive Officers and Directors

     The  executive  officers and  directors of the Company and their ages as of
September 30, 1998 are as follows:
<TABLE>
<CAPTION>

         Name                 Age                           Position
         ----                 ---                           --------
<S>                           <C>    <C>                                             
Steven P.Miller               50     Chairman, Chief Executive Officer and Director
Gary A. Monetti               39     President, Chief Operating Officer and Director
Neal J. Tolar (1)             57     Senior Vice President,  Chief Technical Officer and Director
Kimon  Anemogiannis           36     Vice President - Engineering
Brian P. Balut                33     Vice President - Sales and Marketing
John K. Bitzer                48     Vice President - Operations Support
Raymond A. Link               44     Vice President - Finance,  Treasurer and Chief Financial Officer
Azhar Waseem                  45     Vice President -  Manufacturing 
Robert C.  Strandberg (1)(2)  41     Director 
Bruce S. White (2)            65     Director
Willis C. Young (1) 2)        57     Director
-------------------------------------------------------------- 
<FN>
(1) Member of the Audit Committee. 
(2) Member of the Compensation Committee.
</FN>
</TABLE>

     Steven P. Miller  co-founded  the Company,  has served as a Director  since
1979,  Chief  Executive  Officer since 1986,  Chairman  since  February 1996 and
served as President  from 1979 to April 1997.  Prior to joining the Company,  he
was Manager of the SAW Device  Engineering and  Development  Laboratory at Texas
Instruments  Incorporated ("TI"), an electronics  manufacturer.  He joined TI in
1969.  Mr.  Miller has a B.S.  degree in Electrical  Engineering  from the South
Dakota School of Mines and Technology.

     Gary A. Monetti joined the Company in 1982,  has served as President  since
April  1997 and Chief  Operating  Officer  since  July  1995 and  served as Vice
President-Operations  from July 1995 to April  1997.  He has  served in  various
positions, since 1982, at the Company, including Filter Design Engineer, Manager
of   Filter   Technology,   Vice   President-Sales   and   Marketing   and  Vice
President-Engineering. Mr. Monetti has an M.B.A. degree from Rollins College and
a B.S.  degree in Electrical  Engineering  from the University of Illinois.  Mr.
Monetti was appointed to the Board of Directors in April 1998.

     Neal J.  Tolar  co-founded  the  Company  and has  served  as  Senior  Vice
President and Chief Technical Officer since June 1995 and a Director since 1979.
He served as Vice  President-Operations  and Engineering from 1979 to June 1995.
Prior to joining the Company,  he was a member of the technical  staff in the RF
Technology  Group of the  Corporate  Research  Laboratory at TI. He joined TI in
1967. Dr. Tolar has a Ph.D. in Ceramic  Engineering  from the University of Utah
and a B.S. degree in Ceramic Engineering from Mississippi State University.

                                       29


<PAGE>


     Kimon  Anemogiannis  joined Sawtek in July 1995 as Director of  Engineering
and was promoted to Vice  President-Engineering  in April 1998. Prior to joining
Sawtek, Dr.  Anemogiannis was in various  engineering  positions for the surface
acoustic wave (SAW) group at Siemens  Matsushita  based in Munich,  Germany from
August 1986 to July 1995.  Dr.  Anemogiannis  has a Ph.D.  and a M.S.  degree in
Electrical Engineering from the Technical University of Munich.

     Brian P.  Balut  joined  Sawtek in  October  1994 as a Sales  Manager,  was
promoted to Director of Sales and  Marketing  in November  1996 and  promoted to
Vice  President  Sales and Marketing in September  1998.  From 1987 to 1994, Mr.
Balut was in various sales,  marketing and  engineering  positions with REMEC, a
manufacturer of electronic components. Mr. Balut has a B.S. degree in Electrical
Engineering from the Massachusetts  Institute of Technology and a M.B.A.  degree
from Rollins College.

     John K. Bitzer  joined  Sawtek in August  1991 as  Director  of  Operations
Support  and was  promoted to Vice  President-Operations  Support in April 1998.
From December 1988 to July 1991,  Mr. Bitzer was the Director of Operations  for
the ESCO unit of Emerson Electric. From 1974 to December 1988, Mr. Bitzer was in
various  operations and management  positions with the General Electric Company.
Mr.  Bitzer  has a B.S.  degree in  Mechanical  Engineering  from West  Virginia
University.

     Raymond  A.  Link   joined  the   Company   in   September   1995  as  Vice
President-Finance  and Chief Financial Officer. From 1987 to September 1995, Mr.
Link  was  Vice   President-Finance  and  Chief  Financial  Officer  of  Hubbard
Construction  Company, a heavy/highway  construction company. From 1980 to 1987,
he  was  with  Harris  Corporation,  an  electronics  manufacturer,  in  various
financial  capacities.  Mr. Link has a M.B.A.  degree from the Wharton School at
the University of  Pennsylvania  and a B.S.  degree in Accounting from the State
University of New York at Buffalo. He is a Certified Public Accountant.

     Azhar Waseem joined  Sawtek in March 1995 as Director of Wafer  Fabrication
and was promoted to Vice  President-Manufacturing in April 1998. From 1989-1994,
Mr.  Waseem was in various  operation  and  engineering  positions of Siliconix,
Inc., a microelectronics manufacturer, based in Santa Clara, California and from
1986-1989  he was in various  engineering  positions  with the General  Electric
Company.  Mr. Waseem has a B.S. and M.S. degree in Electrical  Engineering and a
M.B.A. all from the University of Minnesota.

     Robert C. Strandberg has been a Director of the Company since October 1995.
Mr.  Strandberg  is President  and CEO of PSC Inc., a  manufacturer  of bar code
readers,  since June 1997 and served as Executive  Vice  President from November
1996 to June 1997. Mr. Strandberg is also a Director of Merix Corporation.  From
May 1996 to October 1996, he was  self-employed as a business  consultant.  From
September  1991 to April 1996,  Mr.  Strandberg was the Chairman of the Board of
Directors,  President  and Chief  Executive  Officer  of  Datamax  International
Corporation, a manufacturer of bar code printers. From 1988 to 1991, he was Vice
President-Finance of Datamax.  From 1986 to 1988, he worked for GTECH, a lottery
management  company,  in the  areas  of  finance  and  strategic  planning.  Mr.
Strandberg  has a  M.B.A.  degree  from  Harvard  Graduate  School  of  Business
Administration  and  a  B.S.  degree  in  Operations   Research  and  Industrial
Engineering from Cornell University.







                                       30

<PAGE>

     Bruce S. White has been a Director  of the Company  since  April 1996.  Mr.
White was a Corporate  Vice President of AVNET Inc., a distributor of electronic
components  from January 1996 to January 1998 and the  President of the Penstock
Division of AVNET Inc. from July 1994 to January  1998.  From 1974 to July 1994,
Mr. White was the  President  and Chief  Executive  Officer of Penstock  Inc., a
company he founded to distribute RF and microwave  components.  Mr. White is now
retired from both AVNET and Penstock. AVNET is a distributor of certain products
manufactured  by  Sawtek.  In fiscal  1998,  sales  from  Sawtek  to AVNET  were
approximately  $4.3 million.  Mr. White has a B.A.  degree in  Mathematics  from
Colgate  University and a B.S. and M.S.  degree in Electrical  Engineering  from
Michigan State University.

     Willis C. Young has been a Director of the Company since  February 1996. He
has  been a Senior  Partner  of the  Atlanta  office  of BDO  Seidman,  LLP,  an
international  accounting and consulting  firm,  since January 1996.  From April
1995 to  December  1995,  Mr.  Young was the Chief  Financial  Officer for Hayes
Microcomputer  Products,  Inc.,  a  manufacturer  of  modems  and  communication
equipment,  where he was  engaged  to  assist  in the  implementation  of Hayes'
restructuring  in  bankruptcy.  From 1965 to March 1995,  Mr. Young held various
positions  with BDO  Seidman,  LLP,  and from  1988 to March  1995 he was a Vice
Chairman and a member of the Executive Committee. Mr. Young has a B.S. degree in
Accounting from Ferris State University. He is a Certified Public Accountant.

     Members of the  Company's  Board of Directors are each elected for one year
terms at the annual  shareholders  meeting.  Officers  are  elected at the first
Board of Directors meeting following the shareholders meeting at which directors
are elected and serve at the discretion of the Board of Directors.

     There are no family  relationships  between any of the Company's  executive
officers or directors.

ITEM  11.  EXECUTIVE COMPENSATION 
---------------------------------
     The information  required by this item is incorporated  herein by reference
to the Company's  proxy  statement to be filed not later than 120 days after the
end of the fiscal year.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT
------------------------------------------------------------
     The information  required by this item is incorporated  herein by reference
to the Company's  proxy  statement to be filed not later than 120 days after the
end of the fiscal year.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
     The information  required by this item is incorporated  herein by reference
to the Company's  proxy  statement to be filed not later than 120 days after the
end of the fiscal year.









                                       31


<PAGE>



PART IV.

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

(A) The following documents are filed as part of this report:

    1.  Financial statements - see index to Consolidated Financial Statements on
        page F-1 hereof.

    2.  Financial statement schedules:  All schedules have been omitted  because
        they are inapplicable or not material, or the information called for
        thereby is included in the Consolidated Financial Statements and notes
        thereto.

    3.  Exhibits required by Item 601 of Regulation S-K:

        (a) See Exhibit Index in (c) below.

        (b) Reports on Form 8K:  the Company did not file any report on Form 8K
            during the quarter ended September 30, 1998.

        (c) Exhibits:

            3.1    Amended and Restated Articles of Incorporation of Sawtek Inc.
                   (incorporated by reference to Registration Statement on Form
                   S-8, File No. 333-10579).

            3.2    1996 Bylaws of Sawtek Inc.

            4.1*   Specimen stock certificate.

            10.1   Sawtek Inc. 1983 Incentive Stock Option Plan (incorporated by
                   reference to Registration Statement on Form S-8, File No.
                   333-10579).

            10.2   Sawtek Inc. Second Stock Option Plan (incorporated by
                   reference to Registration Statement on Form S-8, File No.
                   333-11523).

            10.3   Sawtek Inc. Employee Stock Purchase Plan (incorporated by 
                   reference to Registration Statement on Form S-8, File No. 
                   333-11701).

            10.4*  Incentive Stock Option Agreement, dated December 12, 1994,
                   between the Company and Ronald M. Hays.

            10.5*  Incentive Stock Option Agreement, dated December 19, 1994,
                   between the Company and Neal J. Tolar.

            10.6*  Incentive Stock Option Agreement, dated December 19, 1994,
                   between the Company and Steven P. Miller.

                                       32


<PAGE>



            10.7   Employee Stock Ownership Plan and Trust Agreement for 
                   Employees of Sawtek Inc. (the "ESOP") (incorporated by
                   reference to Registration Statement on Form S-8, File No.
                   333-08281).

            10.8*  Sawtek Inc. 1994 Stockholders Agreement.

            10.9*  Restructuring Agreement, dated January 11, 1991, by and
                   between the Company, certain shareholders of the Company and
                   the ESOP.

            10.10* Agreement with respect to Stock Options, dated June 29, 1994,
                   between the Company and the ESOP.

            10.11* Second ESOP Loan Agreement, dated June 29, 1994.

            10.12* Second Amendment to ESOP Loan Agreement, dated June 29, 1994.

            10.13* Commercial Lease, dated March 1, 1994, between the Company as
                   Tenant and Piezo Technology, Inc. as Landlord.

            10.14* Lease, dated August 2, 1995, between the Company as Tenant
                   and Dr. Phillips, Inc. as Landlord.

            10.15* Lease Agreement dated November 19, 1995, between Sawtek, S.A.
                   as Lessee and Centro de Ciencia y Tecnolgia Ultrapark, S.A. 
                   as Lessor.

            10.16* Master Lease Agreement, dated as of March 21, 1995, between 
                   the Company as Lessee and General Electric Capital
                   Corporation, as Lessor.

            10.17* Company Loan Agreement dated January 11, 1991, between the
                   Company and Sun Bank, National Association ("Sun Bank").

            10.18* Company Note, dated January 11, 1991.

            10.19* Security Agreement dated January 11, 1991, between the 
                   Company and Sun Bank.

            10.20* Company Pledge Agreement dated January 11, 1991.

            10.21* Mortgage and Security Agreement, dated January 9, 1991, by
                   and between the Company, the Orange County Industrial
                   Development Authority ("OCIDA"), and Sun Bank.

            10.22* Fourth Amendment to Installment Sales and Security Agreement,
                   dated January 8, 1991, by and between the Company, OCIDA, and
                   Sun Bank.


                                       33


<PAGE>



            10.23* ESOP Pledge Agreement, dated January 11, 1991, by and between
                   the Company, ESOP, and Southeast Bank, National Association
                   ("Southeast").

            10.24* ESOP Loan Agreement, dated January 11, 1991, by and between 
                   the Company and Southeast.

            10.25* ESOP Note dated January 11, 1991.

            10.26* Amended and Restated Loan and Security Agreement, dated
                   November 15, 1995, between the Company and SunTrust Bank,
                   Central Florida, National Association ("SunTrust").

            10.27* Increase Promissory Note dated November 10, 1995.

            10.28* Renewal, Increase and Consolidation Promissory Note, dated
                   November 10, 1995.

            10.29* Promissory Demand Note, dated November 10, 1995.

            10.30* Fifth Amendment to Installment Sale and Security Agreement,
                   dated as of March 1, 1995, between the Company, Sun Bank and
                   OCIDA.

            10.31* Fourth Supplemental Trust Indenture, dated as of March 1, 
                   1995, between the Company, Sun Bank and OCIDA.

            10.32* Construction Loan Agreement, dated as of March 1, 1995, 
                   between the Company and Sun Bank.

            10.33* Eighth Amendment to Loan and Security Agreement, Fourth
                   Amendment to Company Loan Agreement and First Amendment to
                   Second Company Loan Agreement, dated as of March 11, 1995,
                   between the Company and Sun Bank.

            10.34* Bond Purchase Agreement dated as of December 1, 1981, between
                   OCIDA and the Company.

            10.35* Installment Sale and Security Agreement, dated as of December
                   1, 1981, between OCIDA and the Company and accepted by the
                   Guarantors.

            10.36* Guaranty Agreement dated as of December 1, 1981, among the
                   Guarantors and OCIDA.

            10.37* Trust Indenture dated as of December 1, 1981, between OCIDA
                   and the Trustee and accepted by the Company and the 
                   Guarantors.



                                       
                                       34


<PAGE>


            10.38* Sawtek Inc. Code ss.401(k) Profit Sharing Plan and Trust
                   Agreement, dated February 15, 1995.

            10.39  Letter from SunTrust Bank, Central Florida, N.A. for renewal
                   and pricing of unsecured line of credit for Sawtek Inc. dated
                   July 9, 1998 (incorporated by reference to Form 10-Q filed
                   July 20, 1998).

            10.40  First Amendment to Amended and Restated Loan and Security
                   Agreement dated December 9, 1996 between the Company and
                   SunTrust Bank, Central Florida, N.A. (incorporated by
                   reference to Form 10-Q filed January 21, 1997).

            10.41  First Amendment to Fourth Supplemental Trust Indenture dated
                   November 19, 1996 by and among the Company, SunTrust Bank,
                   Central Florida, N.A., and the Orange County Industrial
                   Development Authority (incorporated by reference to Form
                   10-Q filed April 21, 1997).

            10.42  Amendment to Employee Stock Ownership Plan and Trust
                   Agreement for Employees of Sawtek Inc.

            10.43  Modification of ESOP Loan Agreement dated as of September 26,
                   1997 between the Company and Marine Midland Bank. (1)

            10.44  Modification of ESOP Pledge Agreement dated as of September
                   26, 1997 between the Company and Marine Midland Bank. (1)

            10.45  Renewal ESOP Note dated as of September 26, 1997. (1)

            10.46  Implementation Agreement dated September 26, 1997 between the
                   Company and Marine Midland Bank that forms a part of the 
                   Sawtek Inc. Employee Stock Ownership and 401(k) Plan and 
                   Trust. (1)

            10.47  Sawtek Inc. Employee Stock Ownership and 401(k) Plan dated as
                   of July 16, 1997. (1)

            10.48  Sawtek Inc. Employee Stock Ownership and 401(k) Trust
                   Agreement dated July 16, 1997 between the Company and Marine 
                   Midland Bank. (1)

            10.49  Sawtek Inc. Stock Option Plan for Acquired Companies 
                   (incorporated by reference to proxy filed for 1998
                   shareholders meeting filed on Form 14A filed on 
                   December 3, 1997).

            21.1   List of subsidiaries of the Registrant.

            23.1   Consent of Ernst & Young LLP.



                                       35


<PAGE>



            24.1   Power of attorney.  Reference is made to page 37.

            27.0   Financial Data Schedule.

*        Incorporated by reference to Registration Statement on
         Form S-1, File No. 333-1860.
#        Incorporated by reference to Registration Statement on 
         Form S-3, File No. 333-26747.
(1)      Incorporated by reference to Form 10-K for 1997 filed on
         November 12, 1997.










































                                       36

<PAGE>

                                   SIGNATURES



         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its  behalf by the  undersigned,  thereunto  duly  authorized  on the 2nd day of
November, 1998.

                                           SAWTEK INC.

                                           By:/s/Steven P. Miller
                                           Steven P. Miller
                                           Chairman and Chief Executive Officer

                              
                                           By:/s/Raymond A. Link
                                           Raymond A. Link
                                           Vice President-Finance and
                                           Chief Financial Officer and
                                           Chief Accounting Officer


                                POWER OF ATTORNEY

         KNOW ALL MEN BY THESE  PRESENTS  , that  each  person  whose  signature
appears on the following page  constitutes  and appoints Steven P. Miller and or
Raymond A. Link to sign any  amendments to this report on Form 10-K, and to file
the same,  with exhibits  thereto and other  documents in connection  therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that the said  attorney-in-fact,  or his  substitute or  substitutes,  may do or
cause to be done by virtue hereof.

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities indicated on the 2nd day of November, 1998.


/s/Neal J. Tolar                             /s/Steven P. Miller
Neal J. Tolar                                Steven P. Miller
Senior Vice President and Director           Chairman, CEO and Director

/s/Robert C. Strandberg                      /s/Willis C. Young
Robert C. Strandberg                         Willis C. Young
Director                                     Director

/s/Bruce S. White                            /s/Gary A. Monetti
Bruce S. White                               Gary A. Monetti
Director                                     President and Director







                                       37


<PAGE>

                                                                   Exhibit 23.1

                         Consent of Independent Auditors


We consent to the  incorporation  by  reference  in the  following  Registration
Statements  of  our  report  dated  October  23,  1998,   with  respect  to  the
consolidated  financial  statements of Sawtek Inc. included in its Annual Report
(Form 10-K) for the year ended September 30, 1998.

<TABLE>
<CAPTION>

Registration
  Statement
   Number                                    Description
---------         --------------------------------------------------------------
<S>               <C>                                           
  333-11701       Form S-8 re: Sawtek Inc. Employee Stock Purchase Plan
  333-11523       Form S-8 re: Sawtek Inc. Second Stock Option Plan
  333-47773       Form S-8 re: Sawtek Inc. Second Stock Option Plan (amendment)
  333-10579       Form S-8 re: Sawtek Inc. Amended and Restated 1983 Incentive
                   Stock Option Plan
  333-08281       Form S-8 re: Sawtek Inc. Employee Stock Ownership and 401(k)
                   Plan, formerly known as the Employee Stock Ownership Plan for
                   Employees of Sawtek Inc.
  333-47771       Form S-8 re: Sawtek Inc. Stock Option Plan for Acquired 
                   Companies

</TABLE>

                                                           /s/Ernst & Young, LLP
Ernst & Young LLP



Orlando, Florida
November 9, 1998


<PAGE>


                                                                   Exhibit 21.1


                                   Sawtek Inc.
                              List of Subsidiaries
                            As of September 30, 1998
<TABLE>
<CAPTION>

        Entity Name                State of Other Jurisdiction of Incorporation
        -----------                --------------------------------------------
<S>                                                   <C>  
Sawtek S.A.                                           Costa Rica
Sawtek International, Inc.                            Barbados
Microsensor Sensor Systems, Inc.                      Kentucky
Analytix, Inc.                                        Pennsylvania
</TABLE>

         All of the above listed entities are 100% directly or indirectly  owned
by Sawtek Inc. and their results of operations are included in the  consolidated
financial statements.


<PAGE>


                                                                  Exhibit 10.42

                                   SAWTEK INC.

                         CERTIFIED CORPORATE RESOLUTIONS

         The  undersigned,  being the duly elected  Secretary  and  President of
Sawtek Inc., a Florida  corporation  (the  "Company"),  hereby  certify that the
following resolutions were duly adopted by the Board of Directors of the Company
at a meeting held on July 20, 1998:

                                Amendment of KSOP
                                -----------------

         RESOLVED,  that the Company  hereby amends Section 6.6(b) of the Sawtek
         Inc.  Employee  Stock  Ownership  and 401(k) Plan by deleting it in its
         entirety and amending it to read as follows:

                  6.6(b) The ESOP Account.  With respect to the  distribution of
                  the Participant's  ESOP Account,  effective February 15, 1996,
                  distribution  on account of retirement  (Section 6.1) or Total
                  and Permanent  Disability  (Section 6.3) shall be made in cash
                  or in kind (as determined by the Administrator, but subject to
                  Section  6.8)  in  one  lump  sum,  or in a  fixed  number  of
                  quarterly, semiannual or annual installments over a period not
                  to  exceed  the  Participant's  life  expectancy  (or the life
                  expectancy of the Participant and his designated Beneficiary).
                  The Participant shall have the right to determine whether such
                  distribution is in one lump sum or installments.  Furthermore,
                  the Participant  shall have the right to modify,  from time to
                  time,  the amount and  frequency of the  installments  and the
                  period over which such installments will be made in accordance
                  with   procedures   established   by  the   Administrator.   A
                  Participant  may make separate  payment  elections  under this
                  paragraph  with  respect to his Company  Stock  Account,  ESOP
                  Investment Account and Qualified Directed  Investment Account.
                  With  respect  to  distributions  to  Participants  that  have
                  terminated   employment  and  have  requested  a  distribution
                  pursuant  to Section  6.4,  unless the  Participant  elects in
                  writing a longer distribution period, such distribution of the
                  Participant's  ESOP  Account,   including  the  Company  Stock
                  Account,   ESOP  Investment  Account  and  Qualified  Directed
                  Investment  Account,  made  pursuant  to Section  6.4,  may be
                  distributed  in  cash  or  in  kind,  (as  determined  by  the
                  Administrator,  but subject to Section  6.8) in  substantially
                  equal periodic  payments (not less  frequently  than annually)
                  over a period of five years. In the case of a Participant with
                  a Participant's  ESOP Account in excess of $500,000,  the five
                  year period  shall be extended one  additional  year (up to an
                  additional five) for each $100,000,  or fraction  thereof,  by
                  which such account exceeds $500,000. Such dollar amounts shall
                  be adjusted at the same time in the same manner as provided in
                  Code ss. 415(d).

                  The Other Accounts. With respect to the Participant's Deferral
                  Account,  Participant's Matching Account, Participant's Profit
                  Sharing Account and  Participant's  Rollover  Account,  in the
                  event a Participant is entitled to a lifetime  distribution in
                  accordance   with   Sections   6.1,   6.3,  6.4  or  6.5,  the
                  Administrator,  pursuant to the  election of the  Participant,
                  shall direct the Trustee to distribute to the  participant  or
                  Former  Participant,  the Vested portion of his  Participant's
                  Deferral    Account,     Participant's    Matching    Account,
                  Participant's  Profit Sharing  Account,  and/or  Participant's
                  Rollover Account,  in one of the following methods selected by
                  the Participant or Terminated Participant;


<PAGE>



                           (1) One lump sum payment in cash or in kind;

                           (2) Payments over a period certain (not to exceed the
                           life  expectancy of the Participant or the joint life
                           expectancy of the Participant and his Beneficiary) in
                           monthly,    quarterly,     semiannual    or    annual
                           installments. Furthermore, the Participant shall have
                           the right to  modify,  from time to time,  the amount
                           and frequency of the installments and the period over
                           which such  installments  will be made in  accordance
                           with procedures  established by the Administrator.  A
                           Participant's  election  under this  paragraph  shall
                           apply   to  his   Participant's   Deferral   Account,
                           Participant's Matching Account,  Participant's Profit
                           Sharing Account and  Participant's  Rollover Account.
                           In order to provide such  installment  payments,  the
                           Administrator  may (A)  segregate  the  Participant's
                           Deferral  Account,  Participant's  Matching  Account,
                           Participant's    Profit    Sharing    Account,    and
                           Participant's   Rollover   Account  in  a   separate,
                           federally  insured  savings  account,  certificate of
                           deposit  in a bank or savings  and loan  association,
                           money market  certificate or other liquid  short-term
                           security or (B)  purchase a  nontransferable  annuity
                           contract   for  a  term   certain   (with   no   life
                           contingencies) providing for such payment;

                  contract  for a term  certain  (with  no  life  contingencies)
                  providing for such payment;

                           (3) A single life annuity  (payable over the lifetime
                           of the  Participant)  with or without a term certain;
                           or

                           (4) A joint and survivor  annuity  (with the survivor
                           benefit being 50%, 75% or 100%).


                                                    /s/William A. Grimm
July 20, 1998                                       William A. Grimm, Secretary




/s/Gary Monetti
Gary Monetti, President



<PAGE>




                                   SAWTEK INC.
                         CERTIFIED CORPORATE RESOLUTION

         The  undersigned,  being the duly elected  Secretary  and  President of
Sawtek Inc.,  a Florida  corporation  (the  "Company),  hereby  certify that the
following resolutions were duly adopted by the Board of Directors of the Company
at a meeting held on August 31, 1998.

                                Amendment of KSOP
                                -----------------

         RESOLVED, that effective immediately, the Company hereby amends Section
         1.51  ("Normal  Retirement  Date") of the Sawtek  Inc.  Employee  Stock
         Ownership  and 401(k) Plan (the "KSOP") by deleting such section in its
         entirety, and amending it to read as follows:

                  1.51 "Normal Retirement Date" means the first day of the month
                  coinciding  with or next  following the  Participant's  Normal
                  Retirement   Age.  For  purposes  of  this   Section,   Normal
                  Retirement   Age  means  the  earlier  of  the   Participant's
                  attainment  of (i)  age 65  with  five  (5)  years  or more of
                  participation  in the  Plan or (ii) age 55 with  seven  (7) or
                  more Years of Service. A Participant  shall become 100% Vested
                  in his Aggregate  Account upon attaining his Normal Retirement
                  Age.

         RESOLVED, that effective for the current Plan Year ending September 30,
         1998  and   thereafter,   the  Company   hereby  amends   Section  1.35
         ("Forfeiture")  of the KSOP by deleting  such section in its  entirety,
         and amending it to read as follows:

                  1.35 "Forfeiture"  means that portion of a Participant's  ESOP
                  Account,   Participant's  Matching  Account  or  Participant's
                  Profit Sharing  Account that is not Vested,  and occurs on the
                  earlier of:

                           (a) The  distribution of the entire Vested portion of
                           a Participant's ESOP Account,  Participant's Matching
                           Account or Participant's Profit Sharing Account; or

                           (b) The last day of the second  (2nd) Plan Year after
                           the Plan  Year in which  the  Participant  terminates
                           employment with the Employer or Affiliated Employer.

                  For  purposes  of  paragraph  (a)  above,  in  the  case  of a
                  Terminated   Participant   whose   Vested   interest   in  his
                  Participant's ESOP Account,  Participant's Matching Account or
                  Participant's  Profit Sharing Account is zero, such Terminated
                  Participant shall be deemed to have received a distribution of
                  his Vested interest in such account(s) upon the effective date
                  of his termination of employment.  Restoration of such amounts
                  shall occur pursuant to Section 3.4.


<PAGE>



         RESOLVED, that effective immediately, the Company hereby amends Section
         6.9(a) ("In Service Distribution") of the KSOP by deleting such section
         in its entirety, and amending it to read as follows:

                  6.9      IN SERVICE DISTRIBUTION

                  (a)  At  such  time  as  a  Participant   (but  not  a  Former
                  Participant  or Terminated  Participant)  becomes 100% Vested,
                  such   Participant   may   request   once  each  Plan  Year  a
                  distribution  not to exceed  five  percent  (5%) (ten  percent
                  (10%) for Participants with ten (10) or more Years of Service)
                  of such Participant's Company Stock Account,  determined as of
                  the Anniversary Date or Valuation Date  immediately  preceding
                  such  request.   For  those   Participants   (but  not  Former
                  Participants  or  Terminated  Participants)  that are not 100%
                  Vested,  such  Participant  may request  once each Plan Year a
                  distribution  not to exceed  five  percent  (5%) of the Vested
                  portion of the Participant's Company Stock Account, determined
                  as of the  Anniversary  Date  or  Valuation  Date  immediately
                  preceding  such  request,  that  has  been  allocated  to  the
                  Participant's  Company Stock Account at least two (2) years as
                  of the  date  of such  distribution.  Such  Participant  shall
                  continue to participate  in the Plan provided the  Participant
                  continues to meet the eligibility requirements of Article II.

         RESOLVED, that effective immediately, the Company hereby amends Section
         6.16 ("Loans to  Participants") of the KSOP by adding new paragraph (i)
         at the end thereof to read as follows:

                  (i) In the event a Participant  defaults on the repayment of a
                  Plan loan as provided in paragraph (g) above or in the event a
                  Plan  loan  becomes  due  and  payable  upon  a  Participant's
                  termination of employment,  the  Administrator  shall have the
                  authority to determine the  Participant  accounts that will be
                  reduced and offset to satisfy  such Plan loan,  provided  that
                  the Administrator makes such determination in a consistent and
                  nondiscriminatory  manner.  In the  event it is  necessary  to
                  reduce and offset all or any portion of the Participant's ESOP
                  Account to satisfy such Plan loan,  then  notwithstanding  the
                  deferred distribution  provisions of Section 6.4(b) that apply
                  to the Participant's ESOP Account,  the Administrator may then
                  treat  the  satisfaction  of such  Plan  loan as an  immediate
                  distribution   of   the   corresponding    portion   of   such
                  Participant's ESOP Account.


                                                 /s/William A. Grimm
Dated:  August 31, 1998                          William A. Grimm, Secretary


Attest:


/s/Gary Monetti
Gary Monetti, President







<PAGE>
                                                                    Exhibit 3.2

                                      1996

                                     BYLAWS

                                       OF

                                   SAWTEK INC.


                                    ARTICLE I

                                  Shareholders
                                  ------------

     1. Shareholder Meetings. The annual meeting shall be held on the date fixed
from time to time by the directors.  A special meeting shall be held on the date
fixed  from  time to time by the  directors  except  when the  Florida  Business
Corporation Act ("Business Corporation Act") confers the right to call a special
meeting upon the shareholders.

     2. Place and Call of  Shareholder  Meetings.  Annual  meetings  and special
meetings  shall be held at such place  within or without the State of Florida as
shall be stated in the notice of any such meeting. Annual meetings may be called
by the directors or the President or the Secretary or by any officer  instructed
by the directors or the President to call the meeting.  Special  meetings may be
called in like  manner or by the  holders  of at least  one-tenth  of the shares
issued and outstanding and entitled to vote thereat.

     3. Notice.  Written notice  stating the place,  day and hour of the meeting
and, in case of a special meeting, the purpose or purposes for which the meeting
is called,  shall be delivered to each shareholder not less than ten days (or as
prescribed by the Business  Corporation Act) nor more than sixty days before the
date of the  meeting,  either  personally  or by first class mail,  by or at the
direction of the President, the Secretary, or the officer or persons calling the
meeting.  The notice of any annual or special meeting shall also include,  or be
accompanied by, any additional statements,  information, or documents prescribed
by the Business  Corporation  Act. If mailed,  such notice shall be deemed to be
delivered when deposited in the United States mail addressed to the  shareholder
at his  address as it appears on the stock  transfer  books of the  Corporation,
with  postage  thereon  prepaid.  When a meeting is adjourned to another time or
place, it shall not be necessary to give any notice of the adjourned  meeting if
the time and  place to which the  meeting  is  adjourned  are  announced  at the
meeting at which the  adjournment  is taken;  and at the  adjourned  meeting any
business may be transacted  that might have been transacted on the original date
of the meeting.  If, however, the Board of Directors shall fix a new record date
for the adjourned  meeting,  notice of the adjourned meeting shall be given each
shareholder of record on the new record date. Whenever any notice is required to
be given to any shareholder,  a waiver thereof in writing signed by him, whether
before or after the time stated  therein,  shall be  equivalent to the giving of
such notice.  Attendance of a shareholder at a meeting shall constitute a waiver
of notice of the meeting,  except where the shareholder  attends the meeting for
the express  purpose of  objecting,  at the  beginning  of the  meeting,  to the
transaction  of any  business  because  the  meeting is not  lawfully  called or
convened.

     4. Voting List.  The officer or agent having  charge of the stock  transfer
books for shares of the  corporation  shall make,  at least ten days before each
meeting of shareholders, a complete list of the shareholders entitled to vote at
such meeting or any adjournment thereof,  with the address of and the number and
class and series, if any, of shares held by each. Such list, for a period of ten
days prior to such meeting,  shall be kept on file at the  registered  office of
the  corporation in the State of Florida,  at the principal place of business of
the  corporation,  or at the office of the  transfer  agent or  registrar of the
corporation,  and shall be subject to inspection by any  shareholder at any time
during usual business  hours.  Such list shall also be produced and kept open at
the time and place of the meeting and shall be subject to the  inspection of any
shareholder  at any time during the meeting.  The original  stock transfer books
shall be prima facie evidence as to who are the shareholders entitled to examine
such list or transfer books or to vote at any meeting of shareholders.


<PAGE>
     5.  Record  Date  for   Shareholders.   For  the  purpose  of   determining
shareholders  entitled to notice of or to vote at any meeting of shareholders or
any adjournment  thereof, or entitled to receive payment of any dividend,  or in
order to make a determination of shareholders  for any other purpose,  the Board
of Directors of the  corporation may provide that the stock transfer books shall
be closed for a stated period but not to exceed, in any case, sixty days. If the
stock  transfer  books  shall be  closed  for the  purpose  of  determining  the
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books shall be closed for at least ten days immediately  preceding such meeting.
In lieu of closing the stock transfer  books,  the Board of Directors may fix in
advance a date as the record date for any such  determination  of  shareholders,
such date in any case to be not more than sixty  days and,  in case of a meeting
of  shareholders,  not  less  than ten  days  prior  to the  date on  which  the
particular action, requiring such determination of shareholders, is to be taken.
If the stock  transfer  books are not closed and no record date is fixed for the
determination  of shareholders  entitled to notice of or to vote at a meeting of
shareholders,  or shareholders  entitled to receive  payment of a dividend,  the
date on  which  notice  of the  meeting  is  mailed  or the  date on  which  the
resolution of the Board of Directors  declaring such dividend is adopted, as the
case may be,  shall be the record date for the  determination  of  shareholders.
When a  determination  of  shareholders  entitled  to  vote  at any  meeting  of
shareholders has been made as provided in this section,  the determination shall
apply to any  adjournment  thereof,  unless the Board of  Directors  fixes a new
record date under this section for the adjourned meeting.

     6.  Meaning of  Certain  Terms.  As used  herein in respect of the right to
notice of a meeting of  shareholders  or a waiver  thereof or to  participate or
vote  thereat or to  consent or dissent in writing in lieu of a meeting,  as the
case may be, the term  "share" or "shares" or  "shareholder"  or  "shareholders"
refers to an outstanding share or shares and to a holder or holders of record of
outstanding shares when the corporation is authorized to issue only one class of
shares,  and said reference is also intended to include any outstanding share or
shares and any holder or  holders of record of  outstanding  shares of any class
upon which or upon whom the Articles of  Incorporation  confer such rights where
there are two or more  classes  or  series  of shares or upon whom the  Business
Corporation  Act  confers  such  rights  notwithstanding  that the  Articles  of
Incorporation  may provide  for more than one class or series of shares,  one or
more of which are limited or denied such rights thereunder.

     7. Conduct of Meeting.  Meetings of shareholders  shall be presided over by
one of the  following  officers  in the order of  seniority  and if present  and
acting:  the Chairman of the Board, if any, the  Vice-Chairman  of the Board, if
any, the  President,  or, if none of the  foregoing is in office and present and
acting,  by a chairman to be chosen by the  shareholders.  The  Secretary of the
corporation,  or in his absence, an Assistant Secretary,  shall act as secretary
of every  meeting,  but, if neither the Secretary nor an Assistant  Secretary is
present, the Chairman of the meeting shall appoint a secretary of the meeting.

     8.  Proxy   Representation.   Every  shareholder  or  his  duly  authorized
attorney-in-fact may authorize another person or persons to act for him by proxy
in all matters in which a shareholder  is entitled to  participate,  whether for
the purposes of  determining  his  presence at a meeting,  or whether by waiving
notice of any  meeting,  voting or  participating  at a meeting,  or  expressing
consent or dissent  without a meeting or otherwise.  Every proxy shall be signed
by the shareholder or by his duly authorized attorney-in-fact and filed with the
Secretary of the  corporation.  No proxy shall be valid after eleven months from
the  date  thereof,  unless  otherwise  provided  in the  proxy.  Except  as may
otherwise be provided by the Business Corporation Act, any proxy may be revoked.

     9.  Quorum and  Voting.  A majority  of the shares  entitled  to vote shall
constitute  a quorum.  Except as the Business  Corporation  Act, the Articles of
Incorporation,  or these Bylaws shall otherwise provide, the affirmative vote of
the majority of the shares  represented at the meeting,  a quorum being present,
shall be the act of the  shareholders.  After a quorum has been established at a
shareholders'  meeting,  the  subsequent  withdrawal of  shareholders,  so as to
reduce the number of shareholders at the meeting below the number required for a
quorum,  shall not affect the validity of any action taken at the meeting or any
adjournment thereof.

     10. Written  Action.  Any action required to be taken or which may be taken
at a meeting of the shareholders  may be taken without a meeting,  without prior
notice and without a vote, if a consent in writing,  setting forth the action so
taken,  shall be signed by all of the  shareholders  and shall be filed with the
Secretary of the corporation.  Less than all shareholders may act in like manner
upon  compliance  with  the  provisions  of  Section  607.0704  of the  Business
Corporation Act.
<PAGE>

     11. Share Certificates.  The shares of the corporation shall be represented
by  certificates  which shall set forth  thereon the  statements  prescribed  by
Section  607.0625 of the Business  Corporation  Act and by any other  applicable
provision of law, and which shall be signed by the President or a Vice President
and the Secretary or an Assistant Secretary of the corporation and may be sealed
with the seal of the corporation or a facsimile  thereof.  The signatures of the
President or a Vice President and the Secretary or an Assistant Secretary upon a
certificate  may be  facsimiles  if the  certificate  is manually  signed on his
behalf by a transfer agent or a registrar,  other than the corporation itself or
an  employee  of the  corporation.  In case any  officer who has signed or whose
facsimile  signature has been placed upon such certificate  shall have ceased to
be such  officer  before  such  certificate  is issued,  it may be issued by the
corporation  with the same effect as if he were such  officer at the date of its
issuance.

     12.  Fractional  Share  Interests  or  Scrip.  The  corporation  may,  when
necessary or desirable in order to effect share transfers,  share  distributions
or  reclassifications,  mergers,  consolidations,  or  reorganizations,  issue a
fraction of a share, make arrangements or provide reasonable opportunity for any
person  entitled to a  fractional  interest  in a share to sell such  fractional
interest or to purchase such additional fractional interests as may be necessary
to acquire a full share,  pay in cash the fair value of  fractions of a share as
of the time when those  entitled to receive such  fractions are  determined,  or
issue scrip in registered or bearer form, over the manual or facsimile signature
of an officer of the corporation or its agent, which shall entitle the holder to
receive  a  certificate  for a full  share  upon  the  surrender  of such  scrip
aggregating a full share. A certificate for a fractional  share shall, but scrip
shall not unless  otherwise  provided  therein,  entitle  the holder to exercise
voting rights,  to receive dividends  thereon,  and to participate in any of the
assets of the corporation in the event of liquidation.

     The  Board of  Directors  may  cause  scrip  to be  issued  subject  to the
condition  that  it  shall  become  void  if  not  exchanged  for   certificates
representing  full shares  before a specified  date, or subject to the condition
that the shares for which scrip is  exchangeable  may be sold by the corporation
and the proceeds thereof  distributed to the holders of scrip, or subject to any
other  conditions  which  the  Board  of  Directors  may  deem  advisable.  Such
conditions shall be stated or fairly summarized on the face of the certificate.

     13. Lost,  Stolen or  Destroyed  Certificates.  The Board of Directors  may
direct that a new share  certificate or  certificates  be issued in place of any
certificate or certificates  theretofore  issued by the  corporation  which have
been  mutilated or which are alleged to have been lost,  stolen,  or  destroyed,
upon presentation of each such mutilated certificate or the making by the person
claiming  any such  certificate  to have been lost,  stolen,  or destroyed of an
affidavit as to the fact and  circumstances  of the loss,  theft, or destruction
thereof. The Board of Directors,  in its discretion and as a condition precedent
to the issuance of any new certificate, may require the owner of any certificate
alleged to have been lost, stolen, or destroyed, or his legal representative, to
furnish  the  corporation  with a bond,  in such sum and  with  such  surety  or
sureties  as it may  direct,  as  indemnity  against  any claim that may be made
against  the  corporation  in  respect  of  such  lost,   stolen,  or  destroyed
certificate.

     14. Share  Transfers.  Upon compliance with any provisions  restricting the
transferability   of  shares   that  may  be  set  forth  in  the   Articles  of
Incorporation,  these  Bylaws,  or any  written  agreement  in respect  thereof,
transfers  of shares of the  corporation  shall be made only on the books of the
corporation  by the  registered  holder  thereof,  or by his attorney  thereunto
authorized  by power of attorney  duly  executed and filed with the Secretary of
the  corporation or with a transfer agent or a registrar and on surrender of the
certificate or certificates for such shares properly endorsed and the payment of
all taxes  thereon,  if any.  Except as may be  otherwise  provided by law,  the
person  in whose  name  shares  stand on the books of the  corporation  shall be
deemed the owner thereof for all purposes as regards the  corporation;  provided
that whenever any transfer of shares shall be made for collateral security,  and
not absolutely,  such fact, if known to the Secretary of the corporation,  shall
be so expressed in the entry of transfer.
<PAGE>
                                   ARTICLE II

                               Board of Directors
                               ------------------

     1.  Functions  Generally -  Compensation.  All  corporate  powers  shall be
exercised  by or under the  authority  of, and the  business  and affairs of the
corporation shall be managed under the direction of, its Board of Directors. The
Board may fix the compensation of directors.

     2.  Qualifications  and Number.  Each director shall be a natural person of
not less than 18 years of age. A director need not be a  shareholder,  a citizen
of the United States, or a resident of the State of Florida, but directors shall
be  required  to  execute  and  deliver  a  trade  secrets   agreement  in  form
satisfactory  to  counsel  for the  corporation.  The Board of  Directors  shall
consist of not less than five (5) nor more than ten (10) persons.  The number of
directors  may be  increased  or decreased by an amendment of these Bylaws or by
resolution of the Board of Directors, but no decrease in the number of directors
shall have the effect of shortening the term of any incumbent director.

     3.  Election  and Term.  Each member of the Board of  Directors  shall hold
office until the next annual meeting of shareholders  following his election and
until  his  successor  has been  elected  and  qualified  or until  his  earlier
resignation,  removal from office,  or death.  Thereafter,  each director who is
elected at an annual meeting of shareholders, and any director who is elected in
the interim to fill a vacancy or a newly-created directorship, shall hold office
until the next succeeding annual meeting of shareholders and until his successor
has been elected and  qualified or until his earlier  resignation,  removal from
office,  or death.  In the interim between annual meetings of shareholders or of
special  meetings of  shareholders  called for the  election of  directors,  any
vacancies in the Board of Directors, including vacancies created by reason of an
increase in the number of directors,  and including vacancies resulting from the
removal of  directors  by the  shareholders  which have not been  filled by said
shareholders,  may be  filled  by the  affirmative  vote  of a  majority  of the
remaining directors, although less than a quorum exists.

     4.  Meetings.  Meetings  shall be held at such time as the Board shall fix,
except  that the first  meeting of a newly  elected  Board shall be held as soon
after its election as the directors may conveniently assemble. Meetings shall be
held at such place  within or without  the State of Florida as shall be fixed by
the Board. No call shall be required for regular meetings for which the time and
place have been fixed.  Special  meetings  may be called by the  Chairman of the
Board, if any, the Vice Chairman of the Board,  if any, or the President,  or by
any two directors.

     5. Notice.  No notice shall be required for regular  meetings for which the
time and place have been fixed.  Written,  oral,  or any other mode of notice of
the time and place shall be given for special  meetings in  sufficient  time for
the convenient assembly of the directors thereat. The notice or waiver of notice
of any meeting need not specify the business to be  transacted or the purpose of
the  meeting.  Any  requirement  of  furnishing  a notice shall be waived by any
director who signs a waiver of notice before or after the meeting. Attendance of
a director at a meeting shall  constitute a waiver of notice of such meeting and
a waiver of any and all  objections  to the place of a meeting,  the time of the
meeting,  or the manner in which it has been called or  convened,  except when a
director  states,  at  the  beginning  of  the  meeting,  any  objection  to the
transaction of business because the meeting is not lawfully called or convened.

     6.  Quorum and  Action.  A majority  of the full Board of  Directors  shall
constitute  a quorum,  except as may be  otherwise  provided in the  Articles of
Incorporation.  Except  as  herein  otherwise  provided,  and  except  as may be
otherwise  provided  by  the  Business   Corporation  Act  or  the  Articles  of
Incorporation,  the  act of the  Board  shall  be the act of a  majority  of the
directors  present  at a meeting  at which a quorum is  present.  Members of the
Board of  Directors  may  participate  in a meeting  of said Board by means of a
conference telephone or similar  communications  equipment by means of which all
persons  participating  in the meeting can hear each other at the same time, and
participation by such means shall be deemed to constitute  presence in person at
a meeting. A majority of the directors present,  whether or not a quorum exists,
may  adjourn any meeting of the Board of  Directors  to another  time and place.
Notice of any such  adjourned  meeting  shall be given to the directors who were
not present at the time of the adjournment and, unless the time and place of the
adjourned  meeting are  announced at the time of the  adjournment,  to the other
directors.
<PAGE>

     (a) Quorum and Action/Classified  Information. A majority of the members of
the  Board  of  Directors  possessing  security  clearance  to the  level of the
Corporation,  shall  constitute  a quorum for any action to be  considered  at a
meeting  of the  Board of  Directors  relating  to the  security  of  classified
information in possession of the Corporation.  Classified information shall mean
information  released to the  Corporation by the  Department of Defense,  or any
classified  contracts or programs for the  Department  of Defense and other User
Agencies.

     7.  Chairman of the Meeting.  Meetings of the Board of  Directors  shall be
presided  over by the  following  directors  in the  order of  seniority  and if
present and acting:  the Chairman of the Board, if any, the Vice-Chairman of the
Board, if any, the President, or any other person chosen by the Board.

     8. Removal of Directors.  At a meeting of shareholders called expressly for
that purpose,  the entire Board of Directors or any  individual  director may be
removed  from  office  with or  without  cause by the  vote of the  shareholders
holding at least a majority  of the shares of Common  Stock.  In case the entire
Board or any one or more  directors is so removed,  new directors may be elected
at the same meeting.

     9.  Committees.  Whenever the number of directors shall consist of three or
more, the Board of Directors  may, by resolution  adopted by a unanimous vote of
the full Board,  designate from among its members an Executive Committee and one
or  more  other  committees,  each  of  which,  to the  extent  provided  in the
resolution,  shall have and may  exercise  all of the  authority of the Board of
Directors  except such  authority  as may not be  delegated  under the  Business
Corporation Act.

     10.  Written  Action.  Any  action  required  to be taken at a  meeting  of
directors,  or any action  which may be taken at a meeting of  directors or of a
committee  thereof,  if any,  may be taken  without  a meeting  if a consent  in
writing,  setting  forth the  action to be taken,  shall be signed by all of the
directors or all of the members of the committee, as the case may be.

                                   ARTICLE III

                                    Officers
                                    --------

     The  corporation  shall  have a  Chairman  of the  Board,  a  President,  a
Secretary, and a Treasurer,  each of whom shall be elected by the directors from
time to time,  and may have one or more Vice  Presidents and such other officers
and  assistant  officers and agents as may be deemed  necessary,  each or any of
whom may be  elected  or  appointed  by the  directors  or may be chosen in such
manner as the directors shall determine.  Any two or more offices may be held by
the same person.

     Unless  otherwise  provided in the  resolution of election or  appointment,
each  officer  shall hold  office  until the  meeting of the Board of  Directors
following the next annual  meeting of  shareholders  and until his successor has
been elected and qualified.

     The officers and agents of the  corporation  shall have the  authority  and
perform the duties in the  management  of the  corporation  as determined by the
resolution electing or appointing them, as the case may be.

     The Board of  Directors  may remove any officer or agent  whenever,  in its
judgment, the best interests of the corporation will be served thereby.

     The Board of Directors may authorize employment contracts with officers and
other employees of this corporation for periods of more than one year.

                                   ARTICLE IV

                Registered Office and Agent - Shareholders Record
                ------------------------------------------------- 

     The address of the  registered  office of the  corporation is 300 East Park
Avenue,  c/o The Prentice Hall  Corporation  System,  Inc.,  City of Tallahassee
32301,  County of Leon; and the name of the registered  agent of the corporation
is The Prentice Hall Corporation System, Inc., whose address is the same as that
of the registered office.
<PAGE>

     The corporation shall keep at its registered office in the State of Florida
or at its principal place of business, or at the office of its transfer agent or
registrar,  a record of its shareholders,  giving the names and addresses of all
shareholders and the number,  class,  and series,  if any, of the shares held by
each  shareholder,  and shall keep on file at said registered  office the voting
list of  shareholders  for a period of at least ten days prior to any meeting of
shareholders.

                                   ARTICLE V

                                 Corporate Seal
                                 --------------

     The corporate seal shall have inscribed thereon the name of the corporation
and shall be in such form and  contain  such other words  and/or  figures as the
Board of Directors shall determine or the law require.

                                   ARTICLE VI

                                   Fiscal Year
                                   -----------

     The fiscal year of the corporation  shall be fixed, and shall be subject to
change, by the Board of Directors.

                                   ARTICLE VII

                               Control Over Bylaws
                               -------------------

     The Board of Directors shall have power to adopt,  alter,  amend, or repeal
the Bylaws.

                                  ARTICLE VIII

                         Director Deadlocks; Arbitration
                         -------------------------------

     If  the  Board  of  Directors  shall  be  equally  divided  respecting  the
management of the property,  business,  and affairs of the  corporation,  or any
aspect thereof or any transaction  involved therein, or shall be equally divided
on any question,  dispute,  or controversy,  and such equal division  concerns a
proper  subject for action by the Board,  no  shareholder or director shall have
the right to have the corporation  dissolved or shall have any other legal right
in a suit at law or in equity because of such deadlock.  Any such equal division
shall be submitted to arbitration in the following manner:

     (1) Upon  written  request by any director  submitted  at a duly  organized
meeting of the Board of Directors, the Board shall select two arbitrators,  each
director  having in such  selection the right to two (2) votes under a system of
cumulative  voting,   whereupon  such  two  arbitrators  shall  select  a  third
arbitrator;  but if they shall be unable to agree  within 15 days upon the third
arbitrator,  he shall be appointed by them from the Panel of  Arbitrators of the
American Arbitration Association in accordance with its rules then in effect.

     (2) The  arbitrators  shall  decide,  resolve,  and  determine  the matters
respecting  which the Board may be equally  divided,  including (but not limited
to) all  collateral  matters such as whether such matter is a proper subject for
action  by the Board of  Directors,  whether  such  matters  have been  properly
submitted to them for decision,  whether the Board is actually  equally divided,
and whether  this  section and the  provisions  for  arbitration  hereunder  are
properly  invoked and  applicable,  to the end that all questions,  disputes and
controversies be resolved,  determined and adjudged by the arbitrators;  and the
decision of such arbitrators on all matters submitted to them hereunder shall be
conclusive  and binding upon the Board of Directors,  the  corporation,  and the
parties.

     (3) The arbitrators shall conduct the arbitration proceedings in accordance
with the  rules of the  American  Arbitration  Association,  as then in  effect,
insofar as such rules are not in conflict with this section.
<PAGE>

     (4) The decision of the arbitrators shall be final and conclusive, shall be
the equivalent of a resolution unanimously passed by the full Board at a meeting
duly  convened,  and shall not be revoked or  amended  or  overruled,  except by
unanimous  action  of  the  Board  of  Directors  or  the  shareholders  of  the
corporation.  Such decision  shall be forthwith  filed with the Secretary of the
corporation;  and judgment on such  decision may be entered in the highest court
of the forum having jurisdiction.

     The  denial  in this  section  of the  Bylaws  of the  right  to  have  the
corporation  dissolved,  and of other legal rights,  shall be inoperative in the
event that any shareholder of the corporation shall have given written notice to
the members of the Board of Directors that he intends to seek dissolution of the
corporation  or other  legal  remedy  because  of  deadlock  among  the Board of
Directors,  and such notice remains unrevoked for two years from the date it was
given. If such notice is given and (a) no such  proceedings are commenced within
three years  thereafter,  or (b) such notice is revoked,  or (c) proceedings are
commenced and are determined adversely to the party seeking dissolution or other
legal remedy because of such deadlock, the said denial of rights in this section
shall again become fully operative as before.