<PAGE>

FINANCIAL HIGHLIGHTS AND STOCK INFORMATION

<TABLE>
<CAPTION>
                                                                         Years ended March 31,
                                                 2000             1999            1998            1997            1996
                                            ---------------------------------------------------------------------------------
                                                     (in thousands, except per share data and number of employees)
<S>                                           <C>             <C>              <C>            <C>              <C>
Net sales                                     $     300,503   $     236,499    $     345,116  $     213,441    $     174,380
Net income (loss)                             $      12,136   $    (96,729)    $      18,818  $       6,461    $    (13,533)
Diluted earnings (loss) per share             $        0.17   $      (1.57)    $        0.35  $        0.13    $      (0.35)
Total assets                                  $     337,441   $     202,164    $     297,196  $     200,504    $     113,597
Working capital                               $     209,161   $      85,247    $     167,623  $     105,233    $      43,684
Stockholders' equity                          $     264,392   $     131,213    $     226,600  $      87,947    $      24,802
Total employees at year end                             974             873            1,324            939              670
-----------------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares
outstanding                                          71,642          61,601           54,459         50,464           38,604
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Factors That May Affect Future Financial
Results" and elsewhere in this Annual Report.

OVERVIEW

Digital Microwave Corporation designs, manufactures, and markets advanced
wireless solutions for worldwide telephone network interconnection and access.
The Company was founded in 1984 and has shipped over 163,000 microwave radios
worldwide.

The Company has equipment installed in over 90 countries, and a significant
portion of the Company's revenue is derived from sales outside the United
States. The Company's revenues from sales for equipment and services outside the
United States were 79% in Fiscal 2000, 87% in Fiscal 1999, and 93% in Fiscal
1998.


                                  Page 1 of 35
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth the percentage relationships of certain items
from the Company's Consolidated Statements of Operations as a percentage of net
sales for the periods indicated:

<TABLE>
<CAPTION>
                                                                  Years ended March 31,
                                                       --------------------------------------------
                                                           2000            1999            1998
                                                       --------------------------------------------
<S>                                                    <C>             <C>             <C>
Net sales                                                     100.0%          100.0%          100.0%
Cost of sales                                                  69.8            78.4            64.0
Inventory valuation charges                                       -            16.0             1.7
                                                       --------------------------------------------
Gross profit                                                   30.2             5.6            34.3
Research and development                                        8.1            10.2             7.1
Selling, general and administrative                            17.3            23.4            18.9
Merger and restructuring                                          -            12.7             2.5
                                                       --------------------------------------------
Operating income (loss)                                         4.8           (40.7)            5.8
Other income, net                                               0.2             0.1             0.8
                                                       --------------------------------------------
Income (loss) before provision for income taxes

                                                                5.0           (40.6)            6.6
Provision for income taxes                                      1.0             0.3             1.1
                                                       --------------------------------------------
Net income (loss)                                               4.0%          (40.9)%           5.5%
                                                       --------------------------------------------
</TABLE>

YEAR ENDED MARCH 31, 2000 COMPARED TO THE YEAR ENDED MARCH 31, 1999

NET SALES. Net sales for Fiscal 2000 were $300.5 million, a 27% increase
compared to net sales of $236.5 million in Fiscal 1999. The increase in net
sales occurred across all the Company's major product families which includes
SPECTRUMTM II, XP4, DXRTM and the AltiumTM product lines. Net sales of the
Altium product lines, which began volume shipments in January 1999, increased to
$47.5 million in Fiscal 2000 from $5.3 million in Fiscal 1999. Net sales of the
XP4 product line increased to $61.7 million in Fiscal 2000 from $32.3 million in
Fiscal 1999. Net sales for other products, including older product lines that
have been phased out, amounted to $13.6 million in Fiscal 2000 compared to $33.7
million in Fiscal 1999. Service revenue declined to $15.1 million in Fiscal 2000
from $ 21.0 million in Fiscal 1999. The decline in service revenue was primarily
attributable to the sale of the Granger, Inc. operation in the last quarter of
Fiscal 1999.

The increase in net sales for Fiscal 2000 compared to Fiscal 1999 occurred
across all the Company's geographic regions, except for the Europe/Middle East
region. Sales to Europe/Middle East region customers decreased slightly to $81.8
million in Fiscal 2000 compared to $83.2 million in Fiscal 1999. Net sales
increased in the Americas to $119.3 million in Fiscal 2000 from $84.0 million in
Fiscal 1999. Net sales to U.S. customers, included in the Americas region,
increased to $63.0 million in Fiscal 2000 from $31.8 million in Fiscal 1999. Net
sales to customers in Mexico, which also is included in the Americas region,
increased to $32.1 million in Fiscal 2000 from $14.6 million in Fiscal 1999. Net
sales in the Asia/Pacific region increased to $80.4 million in Fiscal 2000 from
$50.3 million in Fiscal 1999. Net sales to China, included in the Asia/Pacific
region, increased to $48.3 million in Fiscal 2000 from $18.1 million in Fiscal
1999. See Note 6 of the Notes to Consolidated Financial Statements.


                                  Page 2 of 35
<PAGE>

New orders for Fiscal 2000 were $351.1 million, an increase of 49% compared to
orders during Fiscal 1999 of $234.9 million. The backlog at March 31, 2000, was
$111.8 million compared to $63.9 million at March 31, 1999.

The Company includes in its backlog purchase orders with respect to which a
delivery schedule has been specified for product shipment within one year.
Orders in the Company's current backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser without significant
penalty. Accordingly, although useful for scheduling production, backlog as of
any particular date may not be a reliable measure of sales for any future
period.

GROSS PROFIT. Gross profit as a percentage of net sales increased in Fiscal 2000
to 30.2% from 5.6% in Fiscal 1999. The Company's gross profit in Fiscal 1999 was
adversely affected by inventory valuation charges of $37.7 million, or 16.0% of
net sales. As a result of the merger with Innova in Fiscal 1999 and the planned
introduction of new product lines, the obsolescence of the Company's SPECTRUM II
product line was accelerated, requiring the Company to record a $30.3 million
reserve for excess and obsolescence in Fiscal 1999. Also, liabilities of $7.4
million were recognized in Fiscal 1999 to account for vendor cancellation
charges on purchase order commitments resulting from the reduction in the
Company's sales volume compared to the prior year.

Cost of sales, excluding inventory valuation charges, decreased to 69.8% of net
sales in Fiscal 2000 from 78.4% in Fiscal 1999. The decrease in cost of sales
was primarily the result of improved manufacturing capacity utilization and cost
reductions resulting from reductions in facilities and personnel in Fiscal 1999.

RESEARCH AND DEVELOPMENT EXPENSES. In Fiscal 2000, research and development
expenses increased slightly to $24.4 million from $24.1 million in Fiscal 1999.
As a percentage of net sales, research and development expenses were 8.1% in
Fiscal 2000 compared to 10.2% in Fiscal 1999. Research and development expenses
in Fiscal 2000 were primarily incurred for further development of the Altium
product line as well as the DXR 700 and XP4PLUS product lines. New product
announcements in Fiscal 2000 include the ultra-high capacity modem chip set
termed VELOCITY. The Company intends to continue its new product rollouts in
order to maintain and enhance its competitive position.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. In Fiscal 2000, selling, general,
and administrative expenses decreased to $52.0 million from $55.3 million in
Fiscal 1999. As a percentage of net sales, selling, general and administrative
expenses decreased to 17.3% in Fiscal 2000 from 23.4% in Fiscal 1999. The
decrease in selling, general, and administrative expenses in absolute dollars
and as a percentage of net sales for Fiscal 2000 compared to Fiscal 1999 was
attributable to workforce reductions and other cost initiatives undertaken in
Fiscal 1999.

MERGER AND RESTRUCTURING EXPENSES. Merger and restructuring charges of $29.9
million were recorded in Fiscal 1999. These charges consisted of $2.7 million
for investment banker, legal and accounting fees related to the Innova merger
consummated in October 1998, $4.2 million for severance costs, $4.1 million for
facility consolidation costs, a write-off of $5.8 million related to the
discontinuance of several projects related to the implementation of software
purchased for internal use, and a write-off of goodwill and certain assets
related to the Company's subsidiary, Granger, Inc., totaling $13.1 million. The
assets of Granger, Inc., were sold in March 1999.

In Fiscal 2000, the Company paid $2.3 million in facility consolidation costs,
$0.4 million for extended severance pay and benefits elected by the employee in
lieu of a lump sum distribution at date of termination,


                                  Page 3 of 35
<PAGE>

and $0.4 million for future software commitments. In Fiscal 2001, the Company is
obligated to pay the remaining $0.5 million of extended pay and benefits and
$0.4 million in software commitments.

INTEREST INCOME AND OTHER, NET. Interest income was $2.5 million in Fiscal 2000
compared to $1.5 million in Fiscal 1999. The increase was primarily due to more
cash available for investing as a result of approximately $100 million in
proceeds from the sale of Company stock in the third and fourth quarter of
Fiscal 2000. Other expenses of $1.1 million in Fiscal 2000 and $1.0 million in
Fiscal 1999 were primarily due to foreign exchange gains and losses, net.

INTEREST EXPENSE. Interest expense for Fiscal 2000 was $0.7 million compared to
$0.5 million in Fiscal 1999. The increase is primarily attributed to higher
average debt in Fiscal 2000.

PROVISION FOR INCOME TAXES. The Company recorded an income tax provision in each
of Fiscal 2000 and Fiscal 1999 primarily related to taxable income at certain of
the Company's foreign subsidiaries. Additionally, the Fiscal 2000 tax provision
includes certain Federal and state minimum taxes. This was less than the
statutory rate, primarily due to the utilization of net operating losses, tax
credits, and other tax-attributable carry-forwards.

YEAR ENDED MARCH 31, 1999 COMPARED TO THE YEAR ENDED MARCH 31, 1998

NET SALES. Net sales for Fiscal 1999 were $236.5 million, a 31% decrease
compared to net sales of $345.1 million in Fiscal 1998. The decrease in net
sales was in part due to a slowdown in demand for the Company's products in
Asia, which began with the downturn in Asian economies. However, such decrease
in the Company's net sales was accelerated by the heightened pricing and
competitive pressures of the telecommunications market in Europe and other
regions of the world. For Fiscal 1999, net sales were $83.2 million in the
Europe/Middle East region, $50.3 million in the Asia/Pacific region, $84.0
million in the Americas, and $19.0 million in Africa. In Fiscal 1998, net sales
were $146.8 million in the Europe/Middle East region, $96.1 million in the
Asia/Pacific region, $85.9 million in the Americas, and $16.3 million in Africa.
See Note 6 of the Notes to Consolidated Financial Statements.

Net sales for Fiscal 1999 of SPECTRUM II decreased to $111.8 million from $175.3
million in Fiscal 1998. Net sales of the DXR(TM) product line increased to $32.5
million in Fiscal 1999 from $30.6 million in Fiscal 1998. Net sales of the XP4
product line decreased to $32.2 million in Fiscal 1999 from $36.1 million in
Fiscal 1998. Net sales of the new Altium product line, which started shipping in
Fiscal 1999, were $5.3 million. Net sales for other products and services,
including older product lines that have been phased out, amounted to $54.7
million in Fiscal 1999 compared to $103.1 million in Fiscal 1998.

GROSS PROFIT. Inventory valuation charges, included in cost of sales, totaled
$37.7 million in Fiscal 1999 and $5.9 million in Fiscal 1998. In Fiscal 1999,
these inventory valuation charges consisted primarily of two main components: an
excess and obsolescence adjustment, and cancellation charges to vendors for
purchase commitments. The merger with Innova and planned introduction of new
product lines accelerated the obsolescence of the SPECTRUM II product line.
Accordingly, inventory-related charges of $30.3 million were recorded. The
reduction in the Company's sales volume compared to the prior year had an
adverse effect on purchase order commitments to vendors. Accordingly,
liabilities of $7.4 million were recognized to account for vendor cancellation
and related charges on purchase order commitments. In Fiscal 1998, the inventory
valuation charges were for the phase-out of older product lines. Gross profit
margin percentage in Fiscal 1999, excluding inventory valuation charges, was
lower than in Fiscal 1998 primarily due to under utilization of manufacturing
capacity and lower average selling prices of the SPECTRUM II product line. The
Company reduced its workforce at the end of the first quarter of Fiscal 1999 and
in the third quarter of Fiscal 1999 to minimize the impact of unfavorable
capacity utilization and lower sales.


                                  Page 4 of 35
<PAGE>

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for Fiscal
1999 of $24.1 million were slightly lower than the $24.5 million reported in
Fiscal 1998. However, as a percentage of sales, research and development
expenses increased from 7.1% for Fiscal 1998 to 10.2% for Fiscal 1999. This
increase was due primarily to the decrease in net sales over the comparable
period. Research and development expenses for Fiscal 1999 were primarily
attributable to the Company's development and improvements of its XP4, DART, and
DXR 700 product offerings and its new Altium high-capacity wireless product
platform.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses for Fiscal 1999 decreased by $10.0 million to $55.3
million from $65.3 million in Fiscal 1998. As a percentage of net sales,
selling, general, and administrative expenses were 23.4% in Fiscal 1999 compared
to 18.9% in Fiscal 1998. This increase in percentage was due primarily to the
decrease in net sales over the comparable period. The decrease in selling,
general, and administrative expenses in absolute dollars was mostly attributable
to the workforce reductions in the first and third quarters of Fiscal 1999.
Partially offsetting this decrease is an increase in the provision for bad debts
for specific customers, which was included in selling, general, and
administrative expenses. The provision for bad debts included in Fiscal 1999 was
$4.6 million compared to $0.4 million in Fiscal 1998. The increase in the
provision for bad debts from Fiscal 1998 was the result of write-offs taken
relating to two customer accounts which totaled $4.3 million.

MERGER AND RESTRUCTURING EXPENSES. Merger and restructuring charges of $29.9
million were recorded in Fiscal 1999. As a result of the slowdown in the demand
for the Company's products, which began with the downturn in various Asian
economies in which the Company sells its products, and which was accelerated by
the heightened pricing and competitive pressures of the telecommunications
market in Europe and other regions of the world in Fiscal 1998 and Fiscal 1999,
the Company undertook strategic cost savings measures to reflect reduced sales
levels and to make the Company more competitive. The Company consolidated its
facilities in San Jose, California, and reduced its occupancy, primarily for
manufacturing, from approximately 230,000 square feet to 132,000 square feet.
Also, the Company discontinued its manufacturing operation in Scotland and
subsequently established a regional service and repair. Additionally, the
Company closed various worldwide sales offices, some of which, as a result of
the merger with MAS Technology in March 1998, were duplications of regional
coverage. The closing of the facilities discussed above were completed in Fiscal
1999. Facility consolidation costs totaled $4.1 million of which $1.8 million
was paid in Fiscal 1999 and, $2.3 million was paid in Fiscal 2000.

Concurrent with the facilities closures, the Company reduced its workforce by
312 employees or 27% of its average Fiscal 1998 workforce of 1,147. Of the 312
employees affected, 71% were manufacturing related positions, 7% were research
and development positions and 22% were in sales, marketing and administration.
The workforce reductions were completed by March 31, 1999. Severance costs
totaled $4.2 million in Fiscal 1999 of which $3.3 million was paid in Fiscal
1999 and $0.4 million was paid in Fiscal 2000 and $0.5 million remains to be
paid during and Fiscal 2001. Future severance payments are for extended
severance pay and benefits elected by the employee in lieu of a lump sum
distribution at date of termination.

The Company also discontinued projects related to the implementation of
enterprise-wide software purchased for internal use totaling $5.8 million, of
which $0.6 million was paid in Fiscal 1998, $4.4 million was paid in Fiscal 1999
and the remaining $0.4 million will be paid during Fiscal 2001 and consists of
software commitments.

Merger costs expensed in Fiscal 1999, related to the merger of Innova
consummated in October 1998, totaled $2.7 million and consisted of $1.6 million
to investment bankers, $0.7 million for legal and accounting services, and $0.4
million for other direct merger related expenses. All expenses were paid in
Fiscal 1999.


                                  Page 5 of 35
<PAGE>

As part of the restructuring in the third quarter of Fiscal 1999, the Company
concluded that the carrying value of the Company's investment in Granger, Inc.,
a wholly owned subsidiary, was impaired due to changes in business conditions,
including the slowdown in demand for its products in the U.S. PCS market.
Accordingly, the Company wrote-off $9.6 million of goodwill related to the
Granger acquisition. In addition, the Company wrote-off other assets, primarily
assets of Granger, Inc., totaling $3.5 million. No facilities were closed or
employees terminated as part of the write-down of assets. In March 1999, Granger
was subsequently sold at net book value for $3.2 million with extended payment
terms to Granger's former managers.

INTEREST AND OTHER INCOME, NET. Interest income was $1.5 million in Fiscal 1999
compared to $3.1 million in Fiscal 1998. This decrease resulted primarily from
lower average cash balances. Other Income, Net is primarily due to foreign
exchange gains and losses and the cost of foreign currency hedge contracts.

INTEREST EXPENSE. Interest expense for Fiscal 1999 was $0.5 million compared to
$0.9 million in Fiscal 1998. The decrease in interest expense was primarily
attributable to lower average lease obligations and debt in Fiscal 1999.

PROVISION FOR INCOME TAXES. The Company recorded an income tax provision in
Fiscal 1999 related to taxable income at certain of the Company's foreign
subsidiaries. In Fiscal 1998, the Company recorded an income tax provision at an
effective rate of 17%. This was less than the statutory rate, primarily due to
the utilization of net operating losses, tax credits, and other tax-attributable
carry-forwards.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities in Fiscal 2000 was $5.9 million,
compared to net cash used for operating activities of $10.7 million in Fiscal
1999. The improvement in cash flows from operating activities was primarily the
result of a substantial loss for Fiscal 1999 of $96.7 million, compared to net
income of $12.1 million for Fiscal 2000. Accounts receivable in Fiscal 2000
increased $41.4 million, or 65%, from Fiscal 1999. The increase in accounts
receivable is primarily due to the increase in sales volume in the fourth
quarter of Fiscal 2000, to $88.6 million from $59.7 million in the fourth
quarter of Fiscal 1999 and the timing of shipments as approximately 60% of the
Company's fourth quarter shipments occurred in the last month of the quarter
compared to 43% in the same quarter a year ago. Accounts payable increased $15.1
million in support of the increase in purchase volume in Fiscal 2000. Other
accrued liabilities in Fiscal 2000 decreased $17.3 million from Fiscal 1999
primarily as a result of the Company's payment of the accrued purchase order
cancellation and other costs, $10.2 million, set up as part of merger and
restructuring expenses in Fiscal 1999.

Purchases of property and equipment decreased to $23.9 million in Fiscal 2000
from $24.7 million in Fiscal 1999. Purchases in Fiscal 2000 were primarily for
new test equipment and the installation of new enterprise wide business and
manufacturing systems. In Fiscal 2000 the Company invested $7.3 million for a
minority interest in Ensemble Communications, a supplier of broadband wireless
access equipment. The Company also placed in escrow an additional $3.0 million
for a subsequent investment in August 2000. The subsequent investment is at the
option and sole discretion of Ensemble Communications.

On October 1, 1999, the Securities and Exchange Commission declared the
Company's registration statement on Form S-3 effective. Under the registration
statement, the Company could sell up to $100 million in debt securities, common
stock, debt warrants and common stock warrants. During Fiscal 2000 the Company
used its shelf registration statement to sell 4,797,368 shares of its common
stock and received approximately $99.8 million, net of costs of $0.2 million.
The Company currently intends to use the net proceeds for general corporate
purposes, including working capital and strategic investments and acquisitions.
Additionally, the


                                  Page 6 of 35
<PAGE>

Company received $22.4 million from the exercise of employee stock options and
warrants in Fiscal 2000 compared to $1.2 million in Fiscal 1999.

In December 1999, the Company elected not to renew its $40.0 million asset-based
borrowing facility with a U.S. lender and repaid $2.6 million outstanding under
the facility.

At March 31, 2000, the Company's principal sources of liquidity consisted of
$123.9 million in cash, cash equivalents and short-term investments. In the
future, the Company may require additional financing; however, there can be no
assurance that the Company will be able to obtain such additional financing in
the required time frame on commercially reasonable terms, or at all. However,
the Company believes that it has the financial resources needed to meet its
business requirements for the foreseeable future.

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software that
records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. Residual Year 2000 problems may
result in miscalculations, data corruption, system failures or disruption of
operations. To date the Company has not experienced any significant Year 2000
problems in its internal technology systems or with vendors of systems the
Company believes to be critical to its business. In addition, the Company
believes that it is unlikely it will experience any significant Year 2000
problems in the future.

However, the Company's applications operate in complex network environments and
directly and indirectly interact with a number of other hardware and software
systems. The Company cannot predict whether Year 2000 unknown errors or defects
that affect the operation of software and systems that it uses in operating its
businesses will arise in the future. If residual Year 2000 problems cause the
failure of any of the technology, software or systems necessary to operate its
business, the Company could lose customers, suffer significant disruptions in
its business, lose revenues and incur substantial liabilities and expenses. The
Company could also become involved in costly litigation resulting from Year 2000
problems. This could seriously harm the Company's business, financial condition
and results of operations.

The Company spent approximately $0.8 million investigating and remedying issues
related to Year 2000 readiness involving internal operations, including
purchases of software test tools, software upgrades, and upgrading a security
system related to Year 2000 readiness. In addition, the Company estimates that
$0.5 million of internal personnel costs were incurred to support the Company's
Year 2000 readiness plan.

RECENT ACCOUNTING STANDARDS

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 is effective for companies with fiscal years beginning
after June 15, 2000, and requires the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities or
firm commitments through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The Company believes that the
adoption of this new pronouncement will not have a material effect on the
Company's financial statements.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The Company will adopt


                                  Page 7 of 35
<PAGE>

SAB 101 as required in the first quarter of 2001 and is evaluating the effect
that such adoption may have on its consolidated results of operations and
financial position.

EUROPEAN MONETARY UNION. In January 1999, a new currency called the "euro" was
introduced in certain Economic and Monetary Union ("EMU") countries. During
2002, all EMU countries are expected to be operating with the euro as their
single currency. Uncertainty exists as to the effect the euro currency will have
on the marketplace. Additionally, all of the rules and regulations have not yet
been defined and finalized by the European Commission with regard to the euro
currency. The Company has assessed the effect the euro formation will have on
its internal systems and the sale of its products. The Company's European sales
and operating transactions are based primarily in U.S. dollars or U.K. pounds
sterling, neither of which are subject to the euro conversion. While the Company
does have some sales denominated in the European Currency Unit, this currency is
successfully being converted in the market to the new European Monetary Unit at
parity. In addition, the Company upgraded its internal computer systems to
convert the European currency to the euro. The cost of upgrading the Company's
systems in connection with the euro conversion was not material and no material
adverse effect on the Company's business, financial condition, and results of
operations is expected due to the upgrade.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK. It is Digital Microwave's policy not to enter into
derivative financial instruments except for hedging of foreign currency
exposures. The Company hedges certain portions of its exposure to foreign
currency fluctuations through the use of forward foreign exchange contracts. The
Company enters into forward foreign exchange contracts for purposes other than
trading; however, the Company does not engage in any foreign currency
speculation. Forward foreign exchange contracts represent agreements to buy or
sell a specified amount of foreign currency at a specified price in the future.
These contracts generally have maturities that do not exceed one month. At March
31, 2000, the Company had forward foreign exchange contracts to exchange various
foreign currencies for U.S. dollars in the aggregate amount of $45.8 million,
primarily in New Zealand dollars, British pounds, and European Monetary Units.
Gains and losses associated with currency rate changes on forward foreign
exchange contracts are recorded currently in income as they offset corresponding
gains and losses on the foreign currency-denominated assets and liabilities
being hedged. Therefore, the carrying value of forward foreign exchange
contracts approximates their fair value. The Company believes that the credit
risk with respect to its forward foreign exchange contracts is minimal because
the Company enters into contracts with major financial institutions. Market risk
with respect to forward foreign exchange contracts is offset by the
corresponding exposure related to the underlying assets and liabilities.

FOREIGN CURRENCY RATE RISK. Although substantially all of Digital Microwave's
sales and expenses are denominated in U.S. dollars, Digital Microwave has
experienced some foreign exchange gains and losses to date, and expects to incur
additional gains and losses in Fiscal 2001. Digital Microwave did engage in
foreign currency hedging activities during Fiscal 2000, as explained above, and
intends to continue doing so as needed.

FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS

The Stockholders' Letter and discussions in this Annual Report concerning the
Company's future products, expenses, revenues, gross margins, liquidity, and
cash needs, as well as the Company's plans and strategies, contain
forward-looking statements concerning the Company's future operations and
financial results. These forward-looking statements are based on current
expectations, and the Company assumes no obligation to update this information.
Numerous factors -- such as economic and competitive conditions, timing and
volume of incoming orders, shipment volumes, product margins, and foreign
exchange rates -- could cause actual results to differ materially from those
described in these statements, and prospective investors and stockholders


                                  Page 8 of 35
<PAGE>

should carefully consider the factors set forth below in evaluating these
forward-looking statements. The Company's backlog may not be representative of
actual sales for any succeeding period because of timing of orders, delivery
intervals, customer and product mix, the possibility of changes in delivery
schedules, and additions or cancellation of orders.

The quarterly operating results of the Company can vary significantly depending
on several factors, any of which could have a material adverse effect on the
Company's business, financial condition, or results of operations. In
particular, the Company's quarterly results of operation can vary due to the
volume and timing of product orders received and delivered during the quarter,
the ability of the Company and its key suppliers to respond to changes made by
customers in their orders, and the timing of new product introductions by the
Company and its competitors. The quarterly operating results also may vary
significantly depending upon other factors, including the mix of product sold,
the cost and availability of components and subsystems, relative prices of the
Company's products, adoption of new technologies and industry standards,
competition, fluctuations in foreign currency exchange rates, regulatory
developments, and general economic conditions.

Manufacturers of digital microwave telecommunications equipment and other
wireless networking equipment are experiencing, and are likely to continue to
experience, intense pricing pressure that has resulted, and is expected to
continue to result, in downward pricing pressure on the Company's products. As a
result, the Company has experienced, and expects to continue to experience,
declining average sales prices for its products. The Company's future
profitability is dependent upon its ability to continue to improve manufacturing
efficiencies, reduce material costs of products, and introduce new products and
product enhancements.

The markets for the Company's products are extremely competitive, and the
Company expects that competition will increase. The Company's existing and
potential competitors include established and emerging companies, such as L.M.
Ericsson, Siemens AG, Sagem, Microwave Communications Division of Harris
Corporation, Alcatel, Nokia, Nera, NEC, and SIAE, many of which have more
extensive engineering, manufacturing, and marketing capabilities and
significantly greater financial, technical, and personnel resources than the
Company. The Company believes that its ability to compete successfully will
depend on a number of factors both within and outside its control, including
price, quality, availability, customer service and support, breadth of product
line, product performance and features, rapid delivery, reliability, timing of
new product introductions by the Company, its customers and its competitors, and
the ability of its customers to obtain financing. The Company continues to
experience customer demands for shorter delivery cycles.

The Company expects that international sales will continue to account for the
majority of its net product sales for the foreseeable future. As a result, the
Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements, fluctuations in foreign currency
exchange rates, imposition of tariffs and other barriers and restrictions, the
burdens of complying with a variety of foreign laws, and general economic and
geopolitical conditions, including inflation and trade relationships. There can
be no assurance that currency fluctuations, changes in the rate of inflation, or
any of the aforementioned factors will not have a material adverse effect on the
Company's business, financial conditions, or results of operations.

The Company's manufacturing operations are highly dependent upon the delivery of
materials by outside suppliers in a timely manner. In addition, the Company
depends in part upon subcontractors to assemble major components and subsystems
used in its products in a timely and satisfactory manner. The Company does not
generally enter into long-term or volume purchase agreements with any of its
suppliers, and no assurance can be given that such materials, components, and
subsystems will be available in the quantities required by the Company, if at
all. The inability of the Company to develop alternative sources of supply
quickly and on a cost-effective basis could materially impair the Company's
ability to manufacture and deliver its products in a timely


                                  Page 9 of 35
<PAGE>

manner. There can be no assurance that the Company will not experience material
supply problems or component or subsystem delays in the future.

The Company has pursued, and will continue to pursue, growth opportunities
through internal development and acquisitions of complementary businesses and
technologies. Acquisitions may involve difficulties in the retention of
personnel, diversion of management's attention, unexpected legal liabilities,
and tax and accounting issues. There can be no assurance that the Company will
be able to successfully identify suitable acquisition candidates, complete
acquisitions, integrate acquired businesses into its operations, or expand into
new markets. Once integrated, acquired businesses may not achieve comparable
levels of revenues, profitability, or productivity as the existing business of
the Company or otherwise perform as expected. The Company's failure to manage
its growth effectively could have a material adverse impact on the Company's
business, financial condition, and results of operations.

During any given quarter, a small number of customers may account for a
significant portion of the Company's net sales. In Fiscal 2000, one customer
(Beijing Telecommunications Equipment Factory) accounted for 16% of the
Company's net sales and three customers accounted for 59% of the Company's March
31, 2000 backlog. The Company's customers typically are not contractually
obligated to purchase any quantity of products in any particular period, and
product sales to major customers have varied widely from period to period. The
loss of any existing customer, a significant reduction in the level of sales to
any existing customer, or the failure of the Company to gain additional
customers could have a material adverse effect on the Company's business,
financial condition, and results of operations.


                                 Page 10 of 35
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                  Years ended March 31,
                                                          ----------------------------------------------------------------------
                                                              2000          1999          1998          1997           1996
                                                          ----------------------------------------------------------------------
                                                                        (in thousands, except per share amounts)
<S>                                                           <C>           <C>           <C>            <C>           <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales                                                     $300,503      $236,499      $345,116       $213,441      $174,380
Net income (loss)                                               12,136      (96,729)        18,818          6,461      (13,533)
Diluted earnings (loss) per share                                 0.17        (1.57)          0.35           0.13        (0.35)

CONSOLIDATED BALANCE SHEETS DATA:

Total assets                                                  $337,441      $202,164      $297,196       $200,504      $113,597
Long-term liabilities                                                -         2,236         1,174            700        10,097
</TABLE>


                                 Page 11 of 35
<PAGE>

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                             March 31,
                                                                                    2000                    1999
                                                                            -----------------------------------------
ASSETS                                                                      (in thousands, except share and per share
                                                                                              amounts)
<S>                                                                             <C>                      <C>
CURRENT ASSETS:

Cash and cash equivalents                                                       $     58,339             $     21,518
Short-term investments                                                                65,603                    5,745
Accounts receivable, net of allowances of $4,652 in 2000 and $3,261 in 1999           98,520                   60,253
Inventories                                                                           48,547                   50,610
Deferred tax asset                                                                     1,285                    3,009
Other current assets                                                                   9,916                   12,827
                                                                            -----------------------------------------
         Total current assets                                                        282,210                  153,962
                                                                            -----------------------------------------
PROPERTY AND EQUIPMENT:

Machinery and equipment                                                               94,533                   77,236
Land and buildings                                                                     6,484                    6,090
Furniture and fixtures                                                                11,252                   10,327
Leasehold improvements                                                                 4,774                    4,597
                                                                            -----------------------------------------
                                                                                     117,043                   98,250
Accumulated depreciation and amortization                                            (73,242)                 (55,225)
                                                                            -----------------------------------------
Net property and equipment                                                            43,801                   43,025
                                                                            -----------------------------------------

Other assets                                                                          11,430                    5,177
                                                                            -----------------------------------------
                                                                                $    337,441             $    202,164
                                                                            -----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Current portion of long-term debt                                               $          -             $        725
Current maturities of capital lease obligations                                          167                      862
Accounts payable                                                                      39,582                   25,116
Income taxes payable                                                                   2,330                    1,399
Accrued liabilities                                                                   30,970                   40,613
                                                                            -----------------------------------------
         Total current liabilities                                                    73,049                   68,715
LONG-TERM LIABILITIES:
Long-term debt                                                                             -                    1,896
Capital lease obligations, net of current maturities                                       -                      340
                                                                            -----------------------------------------
         Total liabilities                                                            73,049                   70,951
                                                                            -----------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 per value; 5,000,000 shares authorized; none                         -                        -
outstanding
Common Stock, $.01 per value; 95,000,000 shares authorized 72,691,668 shares in
2000 and 62,144,171 shares in 1999 issued and outstanding

                                                                                         727                      621
Additional paid-in capital                                                           372,762                  250,602
Deferred stock compensation expense                                                      (12)                     (88)
Accumulated deficit                                                                 (103,288)                (115,424)
Accumulated other comprehensive loss                                                  (5,797)                  (4,498)
                                                                            -----------------------------------------
         Total stockholders' equity                                                  264,392                  131,213
                                                                            -----------------------------------------
                                                                                $    337,441             $    202,164
                                                                            -----------------------------------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                 Page 12 of 35
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                             Years ended March 31,
                                                           ----------------------------------------------------------
                                                                 2000                1999                1998
                                                           ----------------------------------------------------------
                                                                   (in thousands, except per share amounts)
<S>                                                          <C>                  <C>                 <C>
NET SALES                                                    $       300,503      $      236,499      $      345,116
Cost of sales                                                        209,653             185,493             221,021
Inventory valuation charges                                                -              37,739               5,850
                                                           ----------------------------------------------------------
         Gross profit                                                 90,850              13,267             118,245
                                                           ----------------------------------------------------------
OPERATING EXPENSES:

Research and development                                              24,372              24,131              24,482
Selling, general and administrative                                   51,953              55,342              65,280
Merger and restructuring                                                   -              29,941               8,752
                                                           ----------------------------------------------------------
         Total operating expenses                                     76,325             109,414              98,514
                                                           ----------------------------------------------------------
         Income (loss) from operations                                14,525            (96,147)              19,731
OTHER INCOME (EXPENSE):

Interest income                                                        2,510               1,474               3,080
Interest expense                                                       (729)               (479)               (856)
Other income, net                                                    (1,136)               (970)                 720
                                                           ----------------------------------------------------------
         Total other income, net                                         645                  25               2,944
                                                           ----------------------------------------------------------
         Income (loss) before provision for
         Income taxes                                                 15,170            (96,122)              22,675
Provision for income taxes                                             3,034                 607               3,857
                                                           ----------------------------------------------------------
NET INCOME (LOSS)                                            $        12,136      $     (96,729)      $       18,818
                                                           ----------------------------------------------------------

Basic earnings (loss) per share                              $          0.18      $       (1.57)      $         0.37
Diluted earnings (loss) per share                            $          0.17      $       (1.57)      $         0.35

Basic weighted average shares outstanding                             65,922              61,601              51,285
Impact of dilutive stock options and warrants                          5,720                 N/A               3,174
                                                           ----------------------------------------------------------
Diluted weighted average shares outstanding                           71,642              61,601              54,459

</TABLE>

        The accompanying notes are an integral part of these consolidated
financial statements.


                                 Page 13 of 35
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                              Years ended March 31, 2000, 1999 and 1998
                              ----------------------------------------------------------------------------------------------------
                              Common     Amount     Additional     Deferred Stock    Accumulated      Accumulated        Total
                              Stock                 Paid-In       Compensation       Deficit           Other       Stockholders'
                              Shares                Capital                                        Comprehensive       Equity
                                                                                                       Loss
                              ----------------------------------------------------------------------------------------------------
                                                                (in thousands)
<S>                           <C>     <C>        <C>             <C>               <C>            <C>               <C>
BALANCE MARCH 31, 1997        38,010  $     380  $     126,871   $             -   $     (39,317) $             13  $      87,947
Components of comprehensive
income:

  Net income                       -          -              -                 -          18,818                 -         18,818
  Unrealized holding
  gain on available-for-
  sale securities                  -          -              -                 -               -                46             46
  Translation adjustment           -          -              -                 -               -            (1,620)        (1,620)
                                                                                                                       -----------
     Total comprehensive
     Income                                                                                                                17,244

                                                                                                                       -----------
Proceeds from sale of stock   11,649        117         62,054                 -               -                 -         62,171
Conversion of preferred        9,116         91         47,678                 -               -                 -         47,769
stock
Stock issued for options &     2,252         22          9,652           (1,590)               -                 -          8,084
warrants
Amortization of deferred           -          -              -             1,193               -                 -          1,193
stock compensation
Tax benefit related to
employee stock transactions        -          -          2,192                 -               -                 -          2,192
                              ----------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1998        61,027        610        248,447              (397)        (20,499)           (1,561)       226,600
Components of comprehensive
income:

  Net loss                         -          -              -                 -         (96,729)                -        (96,729)
  Unrealized holding
  loss on available-for-
  sale securities                  -          -              -                 -               -            (1,613)        (1,613)
  Translation adjustment           -          -              -                 -               -            (1,324)        (1,324)
                                                                                                                       -----------
     Total comprehensive
     Loss                                                                                                                 (99,666)

                                                                                                                       -----------
Proceeds from sale of stock      372          4            904                 -               -                 -            908
Stock issued for options &       745          7          1,187                 -               -                 -          1,194
warrants
Amortization of deferred           -          -              -               309               -                 -            309
stock compensation
Tax benefit related to
employee stock transactions        -          -             64                 -               -                 -             64
Adjustment to conform
year-end of pooled company         -          -              -                 -           1,804                 -          1,804
                              ----------------------------------------------------------------------------------------------------
Balance March 31, 1999        62,144        621  $     250,602               (88)       (115,424)           (4,498)       131,213


                                 Page 14 of 35

<PAGE>

Components of comprehensive
income:

  Net income                       -          -              -                 -          12,136                  -        12,136
  Unrealized holding
     Gain on available-
     for-sale securities           -          -              -                 -               -              1,841         1,841
  Translation adjustment           -          -              -                 -               -             (3,140)       (3,140)
                                                                                                                       -----------
     Total comprehensive
     Income                        -          -              -                 -               -                  -        10,837
                                                                                                                       -----------
Proceeds from sale of
stock, net of expense          4,797         48         99,823                 -               -                  -        99,871
Stock issued for options &
warrants                       5,751         58         22,337                 -               -                  -        22,395
Amortization of deferred
stock compensation                 -          -              -                76               -                  -            76
                              ----------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 2000        72,692  $     727  $     372,762   $           (12)  $    (103,288)  $         (5,797)  $   264,392
                              ----------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                 Page 15 of 35
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            Years ended March 31,
                                                              ------------------------------------------------
                                                                   2000              1999             1998
                                                              ------------------------------------------------
                                                                              (in thousands)
<S>                                                           <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                             $     12,136      $    (96,729)     $     18,818
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
    Adjustment to conform year-end of pooled company                     -             1,804                 -
    Depreciation and amortization                                   16,594            25,912            13,411
    Provision for uncollectable accounts                               853             4,608               356
    Provision for inventory reserves                                 3,262            20,305            12,862
    Provision for warranty reserves                                  8,146             7,023             5,310
    Tax benefit of disqualifying dispositions                            -                64             2,192
    Changes in assets and liabilities:
        Decrease (increase) in accounts receivable                 (41,391)           20,620           (27,744)
        Decrease (increase) in inventories                          (2,185)            1,503           (33,024)
        Decrease (increase) in deferred taxes                        1,701             3,639            (6,496)
        Decrease (increase) in tax refund
            Receivable                                               4,001            (4,553)                -
        Decrease (increase) in other current assets                 (1,287)              786            (3,864)
        Decrease in other assets                                     5,292            11,624                 6
        Increase (decrease) in accounts payable                     15,120           (14,283)            9,890
        Increase (decrease) in income tax payable                      931               102            (1,065)
        Increase (decrease) in other accrued
            Liabilities                                            (17,279)            6,841            (5,810)
                                                              ------------------------------------------------
    Net cash provided by (used for)
    operating activities                                             5,894           (10,734)          (15,158)
                                                              ------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities                         (118,029)          (16,621)          (27,990)
Maturity/sale of available-for-sale securities                      58,171            45,374            11,327
Purchase of property and equipment                                 (23,928)          (24,711)          (30,471)
Investments in Ensemble Communications                              (7,256)                -                 -
Acquisition of business, net of cash received                            -            (2,286)          (11,491)
Investment in Granger Associates, Ltd.                                   -                 -            (4,000)
Proceeds from the sale of other assets                               2,082               610                 -
Proceeds from disposal of fixed assets                                   -             1,194                 -
                                                              ------------------------------------------------
    Net cash provided by (used for) investing
         Activities                                                (88,960)            3,560           (62,625)
                                                              ------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from banks                                                     -             2,600                 -
Repayments to banks                                                 (2,600)                -            (6,665)
Payment of assumed Granger, Inc. debt                                    -                 -            (3,286)
Payments of capital lease obligations                               (1,035)           (1,314)           (1,951)
Proceeds from sale of Common Stock                                 122,266             2,166            77,143
                                                              ------------------------------------------------
    Net cash provided by financing activities                      118,631             3,452            65,241
                                                              ------------------------------------------------
Effect of exchange rate changes on cash                              1,256            (2,345)             (420)
                                                              ------------------------------------------------
Net increase (decrease) in cash and cash equivalents
                                                                    36,821            (6,067)          (12,962)
Cash and cash equivalents at beginning of year                      21,518            27,585            40,547
                                                              ------------------------------------------------
Cash and cash equivalents at end of year                      $     58,339      $     21,518      $     27,585
                                                              ------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                 Page 16 of 35
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Description of Business

Digital Microwave Corporation (the "Company") designs, manufactures, and markets
advanced wireless solutions for worldwide communications network interconnection
and access. The Company's high-performance digital wireless systems carry
high-speed data and voice across a full spectrum of frequencies and capacities.
The Company has sold more than 163,000 radios that operate in nearly every kind
of environment around the world. The Company was founded in January 1984 and is
traded under the symbol DMIC on the Nasdaq National Market.

NOTE 2. Summary of Significant Accounting Policies

BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Digital Microwave Corporation and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated. Certain prior-year
amounts have been reclassified to conform to the current-year presentation.

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

CASH AND CASH EQUIVALENTS. For purposes of the Consolidated Statements of Cash
Flows, the Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consisted of cash, money market funds, and short-term securities as
of March 31, 2000 and 1999.

SHORT-TERM INVESTMENTS. The Company invests its excess cash in high-quality and
easily marketable instruments to ensure cash is readily available for use in its
current operations. Accordingly, all of the Company's marketable securities are
classified as "available-for-sale" in accordance with the provisions of the
Statement of Financial Accounting Standards ("SFAS") No. 115. At March 31, 2000,
the Company's available-for-sale securities had contractual maturities ranging
from 1 month to 21 months, with a weighted average maturity of 5 months.

All investments are reported at fair market value with the related unrealized
holding gains and losses reported as a component of stockholders' equity.
Unrealized holding gains on the portfolio of approximately $176,000 were
recorded as of March 31, 2000, and $1,665,000 of unrealized holding losses were
recorded as of March 31, 1999. There were realized gains of approximately
$397,000 on the sale of securities during Fiscal 2000 and realized losses of
$6,000 in each of Fiscal 1999 and Fiscal 1998.


                                 Page 17 of 35
<PAGE>

The following is a summary of short-term and long-term investments as of
March 31:

<TABLE>
<CAPTION>
                                                                          2000
                                                 --------------------------------------------------------
                                                      COST AT        MARKET VALUE AT       UNREALIZED
                                                    EACH ISSUE      BALANCE SHEET DATE    HOLDING GAIN
                                                                                             (LOSS)
                                                 --------------------------------------------------------
                                                                     (in thousands)
<S>                                                <C>                  <C>                 <C>
       CORPORATE NOTES                             $        53,280      $       53,103      $      (177)
       AUCTION RATE PREFERRED NOTES                         12,500              12,500                 -
       INVESTMENT IN
           GRANGER ASSOCIATES, LTD.(1)                       1,796               2,149               353
                                                 --------------------------------------------------------
       TOTAL                                       $        67,576      $       67,752      $        176
                                                 --------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                          1999
                                                 --------------------------------------------------------
                                                      Cost at        Market Value at       Unrealized
                                                    Each Issue      Balance Sheet Date    Holding Gain
                                                                                             (Loss)
                                                 --------------------------------------------------------
                                                                     (in thousands)
<S>                                                <C>                  <C>                 <C>
       Corporate notes                             $         5,753      $        5,745      $        (8)
       Investment in
           Granger Associates, Ltd.(1)                       3,399               1,742           (1,657)
                                                 --------------------------------------------------------
       Total                                       $         9,152      $        7,487      $    (1,665)
                                                 --------------------------------------------------------
</TABLE>

         (1) Classified as other assets

SUPPLEMENTAL STATEMENTS OF CASH FLOWS DISCLOSURES. Cash paid for interest and
income taxes for each of the three fiscal years presented in the consolidated
statements of cash flows was as follows:

<TABLE>
<CAPTION>
                                                                  Years ended March 31,
                                                 --------------------------------------------------------
                                                       2000                1999               1998
                                                 --------------------------------------------------------
                                                                     (in thousands)
<S>                                                <C>                  <C>                 <C>
       Interest expense                            $           702      $          762      $        856
       Income taxes                                $           559      $        2,003      $      8,885
</TABLE>


                                 Page 18 of 35
<PAGE>

The following non-cash transactions occurred during the fiscal years ended:

<TABLE>
<CAPTION>
                                                                        March 31,
                                                 --------------------------------------------------------
                                                       2000                1999               1998
                                                 --------------------------------------------------------
                                                                     (in thousands)
<S>                                              <C>                 <C>                <C>
       Notes payable to stockholders
            converted into redeemable
            preferred stock                        $             -      $            -      $      1,500
       Estimated fair value of warrant
           issued in connection with notes
           payable                                 $             -      $            -      $         67
       Capital lease obligations incurred
           to acquire equipment                    $             -      $            -      $      1,922
       Conversion of redeemable
           preferred stock into common
           stock                                   $             -      $            -      $     47,769
</TABLE>

INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out)
or market, where cost includes material, labor, and manufacturing overhead.
Inventories consisted of:

<TABLE>
<CAPTION>
                                                                March 31,
                                                 --------------------------------------
                                                       2000                1999
                                                 --------------------------------------
                                                              (in thousands)
<S>                                                <C>                  <C>
       Raw materials                               $        22,558      $       25,616
       Work-in-process                                      13,833               9,537
       Finished goods                                       12,156              15,457
                                                 --------------------------------------
                                                   $        48,547      $       50,610
                                                 --------------------------------------
</TABLE>

Inventories contained components and assemblies in excess of the Company's
current estimated requirements and were, therefore, reserved at March 31, 2000
and 1999. The Company charged $3.3 million in Fiscal 2000 and $20.3 million in
Fiscal 1999 to cost of sales due to ongoing inventory valuation analysis for
excess and obsolete inventories as a result of product transitions.

PROPERTY AND EQUIPMENT. Property and equipment is stated at cost. Depreciation
and amortization are calculated using the straight-line method over the shorter
of the estimated useful lives of the assets (ranging from three to five years
for equipment and furniture, and forty years for buildings) or the lease term.
Included in property and equipment are assets held under capital leases with a
cost of $721,000 as of March 31, 2000, and $2,517,000 as of March 31, 1999.
Accumulated amortization on leased assets was $320,000 as of March 31, 2000, and
$974,000 as of March 31, 1999.

OTHER ASSETS. Other assets include goodwill and other intangible assets that are
being amortized on a straight line basis over their estimated useful lives,
ranging from five to ten years, as well as minority investments accounted for
using the cost method of accounting. Goodwill is the excess of the purchase
price over the fair value of net assets acquired. Goodwill, gross of accumulated
amortization, amounted to $2,778,000 as of March 31, 2000 and March 31, 1999.
Accumulated amortization of goodwill amounted to $1,721,000 at March 31, 2000
and $959,000 at March 31, 1999. The Company continually reviews goodwill and
other intangible assets to evaluate whether events or changes have occurred that
would suggest an impairment of carrying value. An impairment would be recognized
when expected future operating cash flows are lower than the carrying value. In
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived


                                 Page 19 of 35
<PAGE>

Assets to be Disposed of," goodwill of $9.7 million, net of accumulated
amortization related to the purchase of Granger, Inc., was written off in the
third quarter of Fiscal 1999. This write-off is included in Merger and
Restructuring expenses in the Consolidated Statements of Operations. In March
1999, the assets of Granger, Inc. were sold at net book value of $3.2 million
with extended payment terms to Granger's former managers.

ACCRUED LIABILITIES. Accrued liabilities included the following:

<TABLE>
<CAPTION>
                                                                March 31,
                                                 --------------------------------------
                                                       2000                1999
                                                 --------------------------------------
                                                             (in thousands)
<S>                                                <C>                  <C>
       Customer deposits                           $           770      $        3,170
       Accrued payroll and benefits                          4,703               2,628
       Accrued commissions                                   1,929               4,986
       Accrued warranty                                      5,533               3,033
       Accrued restructuring                                   892               3,998
       Accrued purchase order
           Cancellation and other
           Costs                                             5,296              15,482
       Other                                                11,847               7,316
                                                 --------------------------------------
                                                   $        30,970      $       40,613
                                                 --------------------------------------
</TABLE>

ACCUMULATED OTHER COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive
Income," establishes standards for reporting and display of comprehensive income
(loss) and its components. SFAS No. 130 requires companies to report a
"comprehensive income (loss)" that includes unrealized holding gains and losses
and other items that have previously been excluded from net income (loss) and
reflected instead in stockholders' equity. Comprehensive income (loss) for the
Company consists of net income (loss) plus the effect of unrealized holding
gains or losses on investments classified as available-for-sale and foreign
currency translation adjustments.

The accumulated balances for each component of accumulated other comprehensive
income (loss) are as follows:

<TABLE>
<CAPTION>
                                                        MARCH 31,
                                                        ---------
                                                 2000              1999
                                                 ----              ----
                                                     (in thousands)
<S>                                          <C>               <C>
Unrealized holding gain (loss) on
     Available-for-sale securities           $        176      $     (1,665)
Foreign exchange translation adjustments           (5,973)           (2,833)
                                             ------------      ------------
                                             $     (5,797)     $     (4,498)
                                             ============      ============
</TABLE>

FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's
subsidiaries located in the United Kingdom and Latin America is the U.S. dollar.
Accordingly, all of the monetary assets and liabilities of these subsidiaries
are remeasured into U.S. dollars at the current exchange rate as of the
applicable balance sheet date, and all non-monetary assets and liabilities are
remeasured at historical rates. Sales and expenses are remeasured at the average
exchange rate prevailing during the period. Gains and losses resulting from the
remeasurement of the subsidiaries' financial statements are included in the
Consolidated Statements of Operations. The Company's other international
subsidiaries use their local currency as their functional currency. Assets and
liabilities of these subsidiaries are translated at the exchange rates in effect
at the balance sheet date, and income and expense accounts are translated at the
average exchange rates during the year. The resulting translation adjustments
are recorded directly to a separate component of stockholders' equity.


                                 Page 20 of 35
<PAGE>

Gains and losses resulting from foreign exchange transactions are included in
other income (expense) in the accompanying Consolidated Statements of
Operations. The net foreign exchange loss was $930,000 in Fiscal 2000, a gain of
$799,000 in Fiscal 1999, and a loss of $1,070,000 in Fiscal 1998.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The Company hedges certain portions of
its exposure to foreign currency fluctuations through the use of forward foreign
exchange contracts. The Company enters into forward foreign exchange contracts
for purposes other than trading, but the Company does not engage in foreign
currency speculation. Forward foreign exchange contracts represent agreements to
buy or sell a specified amount of foreign currency at a specified price in the
future. These contracts generally have maturities that do not exceed one month.
At March 31, 2000, the Company had forward foreign exchange contracts to
exchange various foreign currencies for U.S. dollars in the aggregate amount of
$45.8 million, primarily in New Zealand dollars, British pounds, and European
Currency Units. Gains and losses associated with currency rate changes on
forward foreign exchange contracts are recorded in income if they offset
corresponding gains and losses on the foreign currency-denominated assets,
liabilities, and shipment of product hedged, or deferred if the foreign currency
order has not shipped. Therefore, the carrying value of forward foreign exchange
contracts approximates their fair value. The Company believes that the credit
risk with respect to its forward foreign exchange contracts is minimal because
the Company enters into contracts with major financial institutions. Market risk
with respect to forward foreign exchange contracts is offset by the
corresponding exposure related to the underlying assets, liabilities, and
shipments of product.

CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of temporary cash
investments and trade receivables. The Company has cash investment policies that
limit the amount of credit exposure to any one financial institution and
restrict placement of investments to financial institutions evaluated as highly
creditworthy. Trade receivables concentrated with certain customers primarily in
the telecommunications industry and in certain geographic locations potentially
subject the Company to concentration of credit risk. The Company actively
markets and sells products in North America, Europe, China, the Asia/Pacific
region, Africa, and Latin America. The Company performs ongoing credit
evaluations of its customers' financial conditions and generally requires no
collateral, although certain sales to China, the Asia/Pacific region, Europe,
Latin America, and Africa are paid through letters of credit.

REVENUE RECOGNITION. Revenue from product sales is recognized upon shipment,
except when product sales are combined with significant post-shipment
installation services provided over an extended period of time. Under this
exception, revenue is deferred until such services have been performed. Revenue
from product sales is net of third-party commissions, freight, and duty charges.
Service revenue, which is less than 10% of net sales for each of the three
fiscal years presented, is recognized when the related services are performed.

PRODUCT WARRANTY. The Company provides, at the time of sale, for the estimated
cost to repair or replace products under warranty, which is generally for a
two-year period.

RESEARCH AND DEVELOPMENT. All research and development costs are expensed as
incurred.

EARNINGS (LOSS) PER SHARE. Basic earnings per share are computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings per share are computed by dividing net income by the
weighted average number of common shares and potentially dilutive securities
outstanding during the period. Net loss per share is computed using only the
weighted average number of common shares outstanding during the period, as the
inclusion of potentially dilutive securities would be anti-dilutive.


                                 Page 21 of 35
<PAGE>

As of March 31, 2000, there were 192,000 weighted-average options outstanding to
purchase shares of Common Stock that were not included in the computation of
diluted earnings per share, as the options exercise prices were greater than the
average market price of the shares of Common Stock. As of March 31, 1999, there
were 4,344,000 weighted-average options outstanding and 1,983,000 warrants to
purchase shares of Common Stock that were not included in the computation of
diluted earnings per share because they were anti-dilutive as a result of the
net loss incurred in Fiscal 1999. Additionally, there were 1,998,000
weighted-average options outstanding as of March 31, 1998, to purchase shares of
Common Stock that were not included in the computation of diluted earnings per
share, as the options' exercise prices were greater than the average market
price of the shares of Common Stock. Also excluded from the computation of
diluted earnings per share were warrants to acquire 2,259,000 shares of Common
Stock in Fiscal 1998 as the warrants' exercise prices were greater than the
average market price of the shares of Common Stock.

STOCK COMPENSATION. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." In accordance with the
provisions of SFAS No. 123, the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plans. Note 5 of the Notes to
Consolidated Financial Statements contains a summary of the pro forma effects on
reported net income (loss) and earnings per share information for Fiscal 2000,
1999, and 1998, based on the fair market value of the options granted at the
grant date as prescribed by SFAS No. 123.

RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for companies with fiscal years beginning after June 15, 2000, and
requires the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The Company believes that the adoption of this
new pronouncement will not have a material effect on the Company's financial
statements.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition in financial statements. The Company will adopt SAB 101 as
required in the first quarter of Fiscal 2001 and is evaluating the effect that
such adoption may have on its consolidated results of operations and financial
position.

NOTE 3. Commitments and Contingencies

The Company leases certain property and equipment, as well as its headquarters
and manufacturing facilities, under noncancelable operating and capital leases
that expire at various periods through 2018. At March 31, 2000, future minimum
payment obligations under these leases were as follows:


                                 Page 22 of 35
<PAGE>

<TABLE>
<CAPTION>
                                                          Years ending March 31,
                                                 --------------------------------------
                                                      Capital           Operating
                                                 ------------------ -------------------
                                                            (in thousands)
<S>                                                <C>                  <C>
       2001                                        $           180      $        3,731
       2002                                                      -               4,640
       2003                                                      -               4,267
       2004                                                      -               4,231
       2005                                                      -               4,281
                                                 ------------------
       2006 and beyond                                           -              29,258
                                                 --------------------------------------
       Future minimum lease payments                           180      $       50,408
                                                                    -------------------
       Less amount representing interest

       (averaging 15%)                                         (13)
                                                 ------------------
       Present value of future minimum lease                   167
       payments

       Less current maturities                                (167)

                                                 ------------------
       Long-term lease obligations                 $             -
                                                 ------------------
</TABLE>

Rent expense under operating leases was approximately $3,897,000 for the year
ended March 31, 2000, $5,255,000 for the year ended March 31, 1999, and
$6,083,000 for the year ended March 31, 1998.

LEGAL CONTINGENCIES. The Company is a party to various legal proceedings that
arise in the normal course of business. In the opinion of management, the
ultimate disposition of these proceedings will not have a material adverse
effect on the consolidated financial position, liquidity, or results of
operations of the Company.

CONTINGENCIES IN MANUFACTURING AND SUPPLIERS. The Company's manufacturing
operations are highly dependent upon the timely delivery of materials and
components by outside suppliers. In addition, the Company depends in part upon
subcontractors to assemble major components and subsystems used in its products
in a timely and satisfactory manner. The Company does not generally enter into
long-term or volume-purchase agreements with any of its suppliers, and no
assurance can be given that such materials, components, and subsystems will be
available in the quantities required by the Company, if at all. The inability of
the Company to develop alternative sources of supply quickly and on a
cost-effective basis could materially impair the Company's ability to
manufacture and deliver its products in a timely manner. There can be no
assurance that the Company will not experience component delays or other supply
problems in the future.

NOTE 4. Income Taxes

The Company provides for income taxes using as asset and liability approach,
under which deferred income taxes are provided based upon enacted tax laws and
rates applicable to periods in which the taxes become payable.

The domestic and foreign components of income (loss) before provision for income
taxes were as follows:

<TABLE>
<CAPTION>
                                                                  Years ended March 31,
                                                 --------------------------------------------------------
                                                       2000                1999               1998
                                                 --------------------------------------------------------
                                                                     (in thousands)
<S>                                                <C>                  <C>                 <C>
       Domestic                                    $        14,006      $     (91,230)      $     19,861
       Foreign                                               1,164             (4,892)             2,814
                                                 --------------------------------------------------------
                                                   $        15,170      $     (96,122)      $     22,675
                                                 --------------------------------------------------------
</TABLE>


                                 Page 23 of 35
<PAGE>

The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>
                                                                  Years ended March 31,
                                                 --------------------------------------------------------
                                                       2000                1999               1998
                                                 --------------------------------------------------------
                                                                     (in thousands)
<S>                                                <C>                  <C>                 <C>
       Current:
           Federal                                 $            38      $            -      $      6,770
           State                                                37                   -               365
           Foreign                                           2,434                 321             3,047
                                                 --------------------------------------------------------
                Total current                                2,509                 321            10,182
       Deferred                                                525                 286            (6,325)
                                                 --------------------------------------------------------
                                                   $         3,034      $          607      $      3,857
                                                 --------------------------------------------------------
</TABLE>

The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate as follows:

<TABLE>
<CAPTION>
                                                                  Years ended March 31,
                                                 --------------------------------------------------------
                                                       2000                1999               1998
                                                 --------------------------------------------------------
                                                                     (in thousands)
<S>                                                <C>                  <C>                 <C>
       Expected tax provision (benefit)            $         5,310      $      (32,681)     $      7,709
       State taxes net of Federal benefit                      348              (2,403)              565
       Change in valuation allowance                        (2,873)             32,385            (4,474)
       Non-deductible acquisition costs                          -                 443             2,333
       Non-deductible goodwill                                   -               3,863               371
       FSC commission                                            -                   -            (1,657)
       Other                                                   249              (1,000)             (990)
                                                 --------------------------------------------------------
                                                   $         3,034      $          607      $      3,857
                                                 --------------------------------------------------------
</TABLE>

The major components of the net deferred tax asset consisted of the following:


                                 Page 24 of 35
<PAGE>

<TABLE>
<CAPTION>
                                                         Years ending March 31,
                                                 --------------------------------------
                                                       2000                1999
                                                 --------------------------------------
                                                            (in thousands)
<S>                                                <C>                  <C>
       Inventory reserves                          $        10,058      $       11,652
       Restructuring reserves                                2,472               7,591
       Warranty reserves                                     1,980               1,055
       Bad debt reserves                                     1,376               1,067
       Accrued commissions                                     598                 747
       Net operating loss carry forwards                    20,667              21,841
       Tax credits                                           9,476               9,328
       Other                                                 5,261               3,204
                                                 --------------------------------------
                                                            51,888              56,485
       Less: Valuation allowance                           (50,603)            (53,476)
                                                 --------------------------------------
       Net deferred tax asset                      $         1,285      $        3,009
                                                 --------------------------------------
</TABLE>

The valuation allowance provides a reserve against deferred tax assets that may
expire or go unutilized by the Company. In accordance with SFAS No. 109,
"Accounting for Income Taxes," the Company believes it is more likely than not
that the Company will not fully realize these benefits and, accordingly, has
continued to provide a valuation allowance for them.

At March 31, 2000, the Company had U.S. federal and state net operating loss
carryforwards available to offset future taxable income, if any, of
approximately $58,000,000 and $966,000, respectively. The net operating losses
expire in various years through 2019. In addition, foreign net operating loss
carryforwards at March 31, 2000 total $3,200,000. Tax credits include
approximately $4,800,000 of federal minimum tax and state research credits that
carryforward indefinitely. The remaining tax credits of $4,600,000 are federal
and state credits that expire in various years through 2019. The Internal
Revenue Code contains provisions which may limit the net operating loss
carryforwards to be used in any given year upon the occurrence of certain
events, including a significant change in ownership interest.

NOTE 5. Common Stock

STOCK OPTION PLANS. The Company's 1984 Stock Option Plan (the "1984 Plan")
provides for the grant of both incentive and nonqualified stock options to key
employees and certain independent contractors of the Company. At March 31, 2000
options to purchase 91,376 shares of Common Stock were outstanding under the
1984 Plan, of which 91,376 shares were exercisable at an average exercise price
of $8.43 per share. Upon the adoption of the Company's 1994 Stock Incentive Plan
("the 1994 Plan"), the Company terminated future grants under the 1984 Plan.

In July 1994, the stockholders approved 2,366,660 shares of Common Stock to be
reserved for issuance under the 1994 Plan over a ten-year term. In August 1996,
the stockholders approved the reservation for issuance of 2,000,000 additional
shares of Common Stock under the 1994 Plan. In March 1998, the stockholders
approved the reservation for issuance of 2,500,000 additional shares of Common
Stock under the 1994 Plan. The terms of the 1994 Plan also provide for an
automatic increase on the first trading day of each calendar year for five years
after the adoption of the 1994 Plan, beginning January 1995, of an amount equal
to one percent (1%) of the number of shares of Common Stock outstanding, but in
no event is such annual increase to exceed 300,000 shares. The total number of
shares of Common Stock reserved for issuance under the 1994 Plan is 7,766,660.
At March 31, 2000, options to purchase 4,596,471 shares were outstanding, of
which 1,315,900 were exercisable at an average exercise price of $9.64 per
share. At March 31, 2000, the number of shares available for future grant was
328,778.


                                 Page 25 of 35
<PAGE>

The 1994 Plan contains: (i) a discretionary grant program for key employees and
consultants whereby options generally vest over five years and expire after 10
years, (ii) an automatic grant program for non-employee Board members, whereby
options vest over three years and expire after 10 years, (iii) a salary
reduction grant program under which key employees may elect to have a portion of
their base salary reduced each year in return for stock options, (iv) a stock
fee program under which the non-employee Board members may elect to apply all or
a portion of their annual retainer fee to the acquisition of shares of Common
Stock, and (v) a stock issuance program under which eligible individuals may be
issued shares of Common Stock as a bonus tied to their performance of services
or the Company's attainment of financial milestones, or pursuant to their
individual elections to receive such shares in lieu of base salary. The
implementation and use of any of these equity incentive programs (other than the
automatic grant program and the stock fee program) is within the sole discretion
of the Compensation Committee of the Board of Directors of the Company.

In April 1996, the Company adopted the 1996 Non-Officer Employee Stock Option
Plan (the "1996 Plan"). The 1996 Plan authorizes 1,000,000 shares of Common
Stock to be reserved for issuance to non-officer key employees as an incentive
to continue in the service of the Company. The 1996 Plan will terminate on the
date on which all shares available have been issued. At March 31, 2000, 598,182
shares were outstanding, of which 129,528 were exercisable, at an average
exercise price of $6.36 per share, and 48,730 shares were available for future
grants.

In November 1997, the Company adopted the 1998 Non-Officer Employee Stock Option
Plan (the "1998 Plan"), which became effective on January 2, 1998. The 1998 Plan
authorizes 500,000 shares of Common Stock to be reserved for issuance to
non-officer key employees as an incentive to continue in the service of the
Company. The 1998 Plan will terminate on the date on which all shares available
have been issued. At March 31, 2000, there were 371,836 options outstanding, of
which 42,716 were exercisable at an average price of $3.13, and 84,160 were
available for future grants.

The 1999 Stock Incentive Plan (the "1999 Incentive Plan"), approved by the
Company's stockholders in August 1999, provides for the issuance of stock
options covering up to 2,500,000 shares of Common Stock of the Company. The 1999
Incentive Plan enables the Company to grant options as needed to retain and
attract talented employees. At March 31, 2000, there were 379,525 options
outstanding, of which no options were exercisable and 2,120,475 were available
for future grant.

In connection with the Company's merger with MAS Technology (see Note 7), the
Company assumed the MAS Technology 1997 Stock Option Plan (the "1997 MAS Plan")
under the same terms and conditions as were applicable under the 1997 MAS Plan
prior to the merger. Each outstanding option to purchase MAS ordinary shares,
whether vested or unvested, was assumed and converted into an option to receive
1.20 shares of the Company's Common Stock. The 1997 MAS Plan provided for the
grant of stock options to employees and certain independent contractors of MAS.
Options granted under the 1997 MAS Plan vest from one to three years from the
date of grant. Additionally, options granted under the 1997 MAS Plan
automatically vest upon the involuntary termination of the employment of an
option holder within 18 months of the change in ownership of the Company. At
March 31, 2000, options to purchase 227,088 shares of Common Stock were
outstanding under the 1997 MAS Plan, of which 4,000 were exercisable at an
average exercise price of $12.91 per share. The 1997 MAS Plan has been
terminated as to future grants.

In connection with the Company's merger with Innova Corporation (see Note 7),
the Company assumed the 1990 Innova Stock Option Plan and the 1997 Director
Stock Option Plan (the "Innova Plans") under the same terms and conditions as
were applicable under the Innova Plans prior to the merger. Each outstanding
option to purchase Innova common shares was assumed and converted into an option
to receive 1.05 shares of the


                                 Page 26 of 35
<PAGE>

Company's Common Stock. The Innova Plans provided for the grant of stock options
to employees, directors, and certain vendors of Innova. At March 31, 2000,
options to purchase 104,731 shares of Common Stock were outstanding under the
1990 Innova Stock Option Plan and 42,000 shares of Common Stock were outstanding
under the 1997 Innova Director Stock Option Plan, of which all stock options
under both plans were exercisable at an average exercise price of $5.66 per
share. The Innova Plans have been terminated as to future grants.

At March 31, 2000, the Company had reserved 8,993,352 shares for future issuance
under all stock options plans for which there were options outstanding or
available for grant as of March 31, 2000.

The following table summarizes the Company's stock option activity under all of
its stock option plans:

<TABLE>
<CAPTION>
                                                                      FISCAL YEARS ENDED MARCH 31,
                                                                      ----------------------------
                                                  2000                             1999                           1998
                                        SHARES      WEIGHTED AVG         Shares      Weighted Avg        Shares     Weighted Avg
                                                    EXERCISE PRICE                   Exercise Price                 Exercise Price
                                     -----------------------------------------------------------------------------------------------
<S>                                   <C>             <C>                  <C>          <C>             <C>         <C>
(shares in thousands)
Options outstanding at beginning
of year                                      8,871    $         7.51          7,055     $       8.86        5,633     $        6.12
   Granted                                   1,790             18.03          3,768             6.69        3,778             10.56
   Exercised                                (3,726)             5.52           (441)            2.99       (1,424)             5.63
   Expired or canceled                        (523)             9.45         (1,511)           12.64         (932)             4.77
                                     -----------------------------------------------------------------------------------------------
Options outstanding at end of year

                                             6,412    $        10.72          8,871     $       7.51        7,055     $        8.86
                                     -----------------------------------------------------------------------------------------------
Exercisable at end of year                   1,730                            3,928                         1,882
   Weighted average fair
   value of options granted           $      11.05                     $       2.86                    $     5.62
                                     -----------------------------------------------------------------------------------------------
</TABLE>

The following summarizes the stock options outstanding at March 31, 2000:

<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                           ----------------------------------------------------------------------------------------------
   ACTUAL RANGE OF             NUMBER           WEIGHTED AVG         WEIGHTED AVG         NUMBER         WEIGHTED AVG
   EXERCISE PRICES           OUTSTANDING         REMAINING          EXERCISE PRICE     EXERCISABLE      EXERCISE PRICE
                               3/31/00        CONTRACTUAL LIFE                           3/31/00
(shares in thousands)
<S>                          <C>              <C>                   <C>                <C>              <C>
        $ 0.23 - 4.69                1,385                  7.90      $         3.45             302      $         3.14
        $ 4.69 - 9.00                1,597                  7.84                7.25             656                6.78
       $ 9.06 - 12.13                1,397                  7.79               11.30             321               10.30
      $ 12.19 - 14.75                1,324                  7.83               13.43             350               13.20
      $ 15.00 - 41.81                  709                  8.84               26.53             101               19.62
-------------------------------------------------------------------------------------------------------------------------
        $0.23 - 41.81                6,412                  7.95      $        10.72           1,730      $         8.84
</TABLE>


                                 Page 27 of 35
<PAGE>

In accordance with the disclosure requirements of SFAS No.123, if the Company
had elected to recognize compensation cost based on the fair market value of the
options granted at grant date as prescribed, income and earnings per share would
have been reduced to the pro forma amounts indicated in the table below. The pro
forma effect on net income for Fiscal 2000, 1999, and 1998 is not representative
of the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to Fiscal 1996.

<TABLE>
<CAPTION>
                                                                      2000               1999               1998
                                                              --------------------------------------------------------
                                                                      (in thousands, except per share amounts)
<S>                                                               <C>                  <C>                 <C>
    Net income (loss) - as reported                               $         12,136     $     (96,729)      $     18,818
    Net income (loss) - pro forma                                 $          4,120     $    (107,515)      $      9,746
    Basic earnings per share - as reported                        $           0.18     $       (1.57)      $       0.37
    Basic earnings per share - pro forma                          $           0.06     $       (1.75)      $       0.19
    Diluted earnings per share - as reported                      $           0.17     $       (1.57)      $       0.35
    Diluted earnings per share - pro forma                        $           0.06     $       (1.75)      $       0.18
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                                      2000               1999               1998
                                                              --------------------------------------------------------
<S>                                                               <C>                  <C>                 <C>
    Expected dividend yield                                                   0.0%               0.0%              0.0%
    Expected stock volatility                                                79.7%              78.6%             74.7%
    Risk-free interest rate                                             4.8 - 7.5%         4.8 - 5.6%       5.5% - 6.4%
    Expected life of options from vest date                              1.4 YEARS          0.9 years         0.8 years
    Forfeiture rate                                                         ACTUAL             actual            actual
</TABLE>

WARRANTS. In connection with the Innova merger, the Company assumed the
outstanding warrants of Innova to purchase common stock of Innova. The Innova
warrants were issued in conjunction with various financing rounds. No separate
values were assigned to the warrants as the values were not significant at the
date of issuance, other than warrants for 21,500 shares of Innova common stock
with an exercise price of $6.96 per share issued in connection with debt
financing in April 1997. There were 21,500 warrants outstanding at March 31,
2000, 1,889,000 outstanding at March 31, 1999, and 2,152,000 outstanding at
March 31, 1998. The warrants expire May 31, 1999, through April 30, 2002. Upon
exercise of these warrants, each warrant is converted to 1.05 shares of the
Company's Common Stock.

EMPLOYEE STOCK PURCHASE PLANS. In August 1996, the Company adopted an Employee
Stock Purchase Plan (the "1996 Purchase Plan") and reserved 600,000 shares of
Common Stock for issuance under the 1996 Purchase Plan. Employees, subject to
certain restrictions, were able to purchase Common Stock under the 1996 Purchase
Plan through payroll withholding at a price per share of 85% of the fair market
value at the beginning or end of the purchase period, as defined under the terms
of the 1996 Purchase Plan. The Company sold 372,345 shares in Fiscal 1999, and
166,597 shares in Fiscal 1998 under the Purchase Plan. At March 31, 1999, no
shares remained available for future issuance under the 1996 Purchase Plan.
Accordingly, in June 1999, the Company adopted the 1999 Employee Stock Purchase
Plan (the "1999 Purchase Plan") and reserved 900,000 shares of Common Stock for
issuance under the 1999 Purchase Plan. Employees, subject to certain
restrictions, may purchase Common Stock under the 1999 Purchase Plan through
payroll withholding at a price per share of 85% of the fair market value at the
beginning or end of the purchase period, as defined under the terms of the 1999
Purchase Plan. The Company sold 93,189 shares in Fiscal 2000 under the 1999
Purchase Plan.


                                 Page 28 of 35
<PAGE>

STOCKHOLDERS' RIGHTS AGREEMENT. In October 1991, the Company adopted a
Stockholders' Rights Agreement pursuant to which one Preferred Share Purchase
Right (a "Right") was distributed for each outstanding share of Common Stock.
Each Right, as adjusted to give effect to a stock dividend, which effected a
two-for-one stock split in November 1997, entitles stockholders to buy one
two-hundredth of a share of Series A Junior Participating Preferred Stock at an
exercise price of $50.00 upon certain events. The Rights expire on October 23,
2001, unless earlier redeemed by the Company.

The Rights become exercisable if a person acquires 15% or more of the Company's
Common Stock or announces a tender offer that would result in such person owning
15% or more of the Company's Common Stock, other than a person who has reported
or is required to report beneficial ownership of the Company's Common Stock on
Schedule 13G under the Securities Exchange Act of 1934, as amended, with respect
to whom the threshold is 20%. If the Rights become exercisable, the holder of
each Right (other than the person whose acquisition triggered the exercisability
of the Rights) will be entitled to purchase, at the Right's then-current
exercise price, a number of shares of the Company's Common Stock having a market
value of twice the exercise price. In addition, if the Company were to be
acquired in a merger or business combination after the Rights became
exercisable, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, stock of the acquiring company having a market
value of twice the exercise price. The Rights, as adjusted to give effect to a
stock dividend, which effected a two-for-one stock split in November 1997, are
redeemable by the Company at a price of $0.005 per Right at any time within ten
days after a person has acquired 15% (or 20% in the case of a Schedule G filer)
or more of the Company's Common Stock.

NOTE 6. Operating Segment and Geographic Information

The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," as of March 31, 1999. SFAS No. 131 establishes annual
and interim reporting standards for an enterprise's operating segments and
related disclosures about products, geographic information, and major customers.
Operating segment information for Fiscal 2000, Fiscal 1999, and 1998 is also
presented in accordance with SFAS No. 131. See Note 1 for a brief description of
the Company's business.

The Company is organized into two operating segments: Products and Services. The
Chief Executive Officer ("CEO") has been identified as the Chief Operating
Decision-Maker as defined by SFAS 131. Resources are allocated to each of these
groups using information on their revenues and operating profits before interest
and taxes.

The Products operating segment includes the SPECTRUM II, XP4, DART, Altium, and
DXR digital microwave systems for digital transmission markets, and designs,
develops, and manufactures these products in Seattle, Washington; San Jose,
California; and, Wellington, New Zealand. The Services operating segment
includes, but is not limited to, installation, repair, network design, path
surveys, integration, and other services. The Company maintains regional service
centers in San Jose, California; and Lanarkshire, Scotland; and Clark Field,
Pampanga, Philippines.

The Company does not identify or allocate assets or depreciation by operating
segment, nor does the CEO evaluate these groups on these criteria. Operating
segments generally do not sell products to each other, and accordingly, there
are no significant inter-segment revenues to be reported. The Company does not
allocate interest and taxes to operating segments. The accounting policies for
segment reporting are the same as for the Company as a whole.


                                 Page 29 of 35
<PAGE>

<TABLE>
<CAPTION>
                                                    2000                1999              1998
                                             ----------------------------------------------------
                                                             (in thousands)
<S>                                                <C>                 <C>              <C>
    PRODUCTS
    Revenues                                       $285,449            $215,545         $320,688
    Operating profit (loss)                          15,924             (94,186)          16,572

    SERVICES
    Revenues                                         15,054              20,954           24,428
    Operating profit (loss)                          (1,399)             (1,961)           3,159

    TOTAL
    Revenues                                       $300,503            $236,499         $345,116
    Operating profit (loss)                          14,525             (96,147)          19,731
</TABLE>

One customer accounted for 16% of net sales for Fiscal 2000. No other customers
accounted for more than 10% of net sales during Fiscal 2000, 1999, or 1998. At
March 31, 2000 three customers accounted for 59% of the backlog. There can be no
assurance that our current customers will continue to place orders with us, that
orders by existing customers will continue to be at levels of previous periods,
or that we will be able to obtain orders from new customers. Our customers
typically are not contractually obligated to purchase any quantity of products
in any particular period and product sales to major customers have varied widely
from period to period.


                                 Page 30 of 35
<PAGE>

Revenues by product from unaffiliated customers for Fiscal 2000, 1999, and 1998
are as follows:

<TABLE>
<CAPTION>
                                                     2000                1999               1998
                                                 --------------------------------------------------
                                                               (in thousands)
<S>                                                 <C>                 <C>               <C>
      SPECTRUM II                                   $122,349            $111,823          $175,326
      XP4                                             61,700              32,247            36,100
      DXR                                             40,302              32,513            30,589
      Altium                                          47,534               5,259                 -
      Quantum*                                             -               7,227            23,936
      M-Series*                                            -               3,581            13,596
      Other Products                                  13,564              22,895            41,141
                                                 --------------------------------------------------
      Total Products                                 285,449            $215,545          $320,688
      Total Services                                  15,054              20,954            24,428
                                                 --------------------------------------------------
      Total Revenue                                 $300,503            $236,499          $345,116
                                                 --------------------------------------------------
</TABLE>

         *Included in other product in Fiscal 2000.

Revenues by geographic region from unaffiliated customers for Fiscal 2000, 1999,
and 1998 are as follows:

<TABLE>
<CAPTION>
                                                      2000                1999               1998
                                                 --------------------------------------------------
                                                                     (in thousands)
<S>                                                 <C>                 <C>               <C>
          United States                             $ 62,990            $ 31,753          $ 25,800
          Mexico*                                     32,106              14,619                 -
          Other Americas                              24,201              37,592            60,146
          Europe/Middle East                          81,761              83,242           146,812
          Africa                                      19,087              19,036            16,283
          China**                                     48,325              18,100                 -
          Other Asia/Pacific                          32,033              32,157            96,075
                                                 --------------------------------------------------
          Total revenues                            $300,503            $236,499          $345,116
                                                 --------------------------------------------------
</TABLE>

                  * Included in other Americas in 1998.
                  ** Included in other Asia/Pacific in 1998.

Long-lived assets consisted primarily of property and equipment during Fiscal
2000 and 1999. Net property and equipment by country was as follows:

<TABLE>
<CAPTION>
                                                     2000                1999
                                                 -------------------------------
                                                          (in thousands)
<S>                                                 <C>                 <C>
          United States                             $29,423             $28,043
          United Kingdom                              9,719              11,621
          Other foreign countries                     4,659               3,361
                                                 -------------------------------
          Net property and
               Equipment                            $43,801             $43,025
                                                 -------------------------------
</TABLE>


                                 Page 31 of 35
<PAGE>


NOTE 7. Mergers and Acquisitions

In May 1997, the Company acquired all of the outstanding shares of Granger,
Inc., a U.S. manufacturer of wireless products and provider of installation
services. The purchase price of Granger, Inc., including the assumption of debt
and the purchase of certain product rights, totaled $14.7 million. A portion of
the purchase price was allocated to the net assets acquired based on their
estimated fair values. The fair value of the tangible assets acquired was $5.8
million and liabilities assumed was $1.9 million. The purchase price in excess
of the net assets acquired of $10.8 million was recorded as goodwill on the
balance sheet. (See Note 2 above). The acquisition was accounted for using the
purchase method of accounting. Accordingly, the accompanying financial
statements include the results of Granger, Inc., since the date of acquisition.
No pro forma financial statements for the periods presented have been provided
due to the amounts being immaterial.

In addition, concurrent with the acquisition of Granger, Inc., the Company made
a minority investment in Granger Associates, Ltd., a privately held company
based in the United Kingdom, for $4.0 million. This minority investment has been
accounted for using the cost method of accounting. In Fiscal 1999, the Company
sold approximately 10% of this investment for $470,000. Also in Fiscal 2000, the
Company sold approximately 40% of its remaining investment for proceeds of $2.1
million and realized a gain of $480,000 which is reflected in other income in
the accompanying consolidated statement of operation.

In March 1998, the stockholders approved the issuance of Common Stock of the
Company pursuant to an agreement to merge with MAS Technology Limited ("MAS
Technology"), a New Zealand company, which designs, manufactures, markets, and
supports digital microwave radio links for the worldwide telecommunications
market. Under the terms of the agreement, the Company exchanged 1.2 shares of
its Common Stock for each outstanding share of MAS Technology stock and stock
options. The Company issued approximately 8.2 million shares to MAS Technology
share and option holders. The combination was qualified as a tax-free
reorganization accounted for as a pooling-of-interests transaction. Accordingly,
the historical financial statements of the Company have been restated to reflect
the results of MAS Technology for all periods presented.

In October 1998, the stockholders approved the issuance of Common Stock of the
Company pursuant to an agreement to merge with Innova Corporation ("Innova"), a
Washington corporation, which designs, manufactures, markets, and supports
digital microwave radio links for the worldwide telecommunications market. Under
the terms of the agreement, the Company exchanged 1.05 shares of its Common
Stock for each outstanding share of Innova stock, stock options, and warrants.
The Company issued approximately 14.7 million shares to Innova shareholders upon
consummation of the merger. The combination qualified as a tax-free
reorganization accounted for as a pooling-of-interests transaction. Accordingly,
the historical financial statements of the Company have been restated to reflect
the results of Innova for all periods presented.


                                 Page 32 of 35
<PAGE>

The following table shows the reconciliation of the historical results of the
Company to the results presented in the accompanying Statements of Operations
for Fiscal 1998 for the Innova merger:

<TABLE>
<CAPTION>
                                                Year ended
                                                 March 31
                                                   1998
                                           -------------------
<S>                                         <C>
Revenue:     Digital Microwave              $          310,490
             Innova                                     36,100
             Intercompany sales                        (1,474)
                                           -------------------
             Total                          $          345,116
                                           -------------------

Net Income:  Digital Microwave              $           19,878
             Innova                                    (1,060)
             Intercompany profit
             eliminations                                    -
                                           -------------------
             Total                          $           18,818
                                           -------------------
</TABLE>

Merger and restructuring expenses of $8.8 million for Fiscal 1998 included
payments of $4.3 million for investment banker, legal, and accounting fees;
asset valuation reserves for inventory, receivables, and warranty totaling $1.3
million; as well as various other costs of $3.2 million, which included office
closures and contract terminations. As of March 31, 1999, there was no remaining
restructuring reserve related to the Fiscal 1998 merger and restructuring.

Merger and restructuring charges of $29.9 million were recorded in Fiscal 1999.
As a result of the slowdown in the demand for the Company's products, which
began with the downturn in various Asian economies in which the Company sells
its products, and additionally accelerated by the heightened pricing and
competitive pressures of the telecommunications market in Europe and other
regions of the world in Fiscal 1998 and Fiscal 1999, the Company undertook
strategic cost savings measures to reflect reduced sales levels and to make the
Company more competitive in the future. The Company consolidated its facilities
in San Jose, California and reduced its occupancy, primarily for manufacturing,
from approximately 230,000 square feet to 132,000 square feet. Also, the Company
discontinued its manufacturing operation in Scotland and now maintains a
regional service and repair center in Scotland. Additionally, the Company closed
various worldwide sales offices, some of which, as a result of the merger with
MAS Technology in March 1998, were duplications of regional coverage. The
closing of the facilities discussed above were completed in Fiscal 1999.
Facility consolidation costs totaled $4.1 million, of which $1.8 million was
paid in Fiscal 1999 and the remaining $2.3 million in Fiscal 2000.

Concurrent with the facilities closures, the Company reduced its workforce by
312 employees or 27% of its average Fiscal 1998 workforce of 1,147. Of the 312
employees affected, 71% were manufacturing related positions, 7% were research
and development positions and 22% were in sales, marketing and administration.
The workforce reductions were completed by March 31, 1999. Severance costs
totaled $4.2 million in Fiscal 1999 of which $3.3 million was paid in Fiscal
1999, $0.4 million was paid in Fiscal 2000 and $0.5 remains to be paid during
Fiscal 2001. Payments in Fiscal 2001 are for extended severance pay and benefits
elected by the employee in lieu of a lump sum distribution at date of
termination.

The Company also discontinued projects related to the implementation of
enterprise-wide software purchased for internal use totaling $5.8 million of
which $0.6 million was paid in Fiscal 1998, $4.4 million was paid in Fiscal
1999, $0.4 million was paid in Fiscal 2000, and the remaining $0.4 million will
be paid during Fiscal 2001, consisting of software commitments.


                                 Page 33 of 35
<PAGE>

Merger costs expensed in Fiscal 1999, related to the merger of Innova
consummated in October 1998, totaled $2.7 million and consisted of $1.6 million
to investment bankers, $0.7 million for legal and accounting services, and $0.4
million for other direct merger related expenses. All expenses were paid in
Fiscal 1999.

As part of the restructuring in the third quarter of Fiscal 1999, the Company
concluded that the carrying value of the Company's investment in Granger, Inc.,
a wholly owned subsidiary, was impaired due to changes in business conditions
including the slowdown in demand for its products in the U.S. PCS market.
Accordingly, the Company wrote-off $9.6 million of goodwill related to the
Granger acquisition. In addition, the Company wrote-off other assets, primarily
assets of Granger, Inc., totaling $3.5 million. No facilities were closed or
employees terminated as part of the write-down of assets. In March 1999, Granger
was subsequently sold at net book value for $3.2 million with extended payment
terms to Granger's former managers.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Digital Microwave Corporation:

We have audited the accompanying consolidated balance sheets of Digital
Microwave Corporation (a Delaware corporation) and subsidiaries as of March 31,
2000 and 1999, and the related Consolidated Statements of Operations,
Stockholders' Equity and Cash Flows for each of the three years in the period
ended March 31, 2000. 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 auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Digital Microwave Corporation
and subsidiaries as of March 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2000, in conformity with accounting principles generally accepted in
the United States.

                                                        /s/ ARTHUR ANDERSEN LLP

San Jose, California
April 21, 2000

STOCK INFORMATION

The Company's Common Stock is traded on the Nasdaq National Market under the
symbol DMIC. The following table sets forth the high and low closing sales
prices of the Company's Common Stock as reported by Nasdaq for the periods
indicated.


                                 Page 34 of 35
<PAGE>

<TABLE>
<CAPTION>
                                                   Fiscal year ended March 31,
                                  ---------------------------------------------------------------
                                                    2000                          1999
                                  ---------------------------------------------------------------
                                            HIGH            LOW            high            low
                                  ---------------------------------------------------------------
<S>                                   <C>             <C>            <C>             <C>
       1st Quarter                          15.13           7.56           $14.50          $7.00
       2nd Quarter                          16.06          10.84             7.63           2.88
       3rd Quarter                          25.00          12.81             6.84           2.38
       4th Quarter                          48.50          21.09            10.50           6.50
</TABLE>

The Company has not paid cash dividends on its Common Stock and does not intend
to pay cash dividends in the foreseeable future in order to retain earnings for
use in its business. At March 31, 2000, there were approximately 339
stockholders of record.


                                 Page 35 of 35