<PAGE>

FINANCIAL HIGHLIGHTS AND STOCK INFORMATION
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------

                                                                                years ended march 31,
                                                      -----------------------------------------------------------------------
                                                           1999           1998           1997           1996           1995
                                                      -----------------------------------------------------------------------
                                                            (in thousands, except per share data and number of employees)

<S>                                                   <C>            <C>            <C>            <C>             <C>
Net sales                                              $  236,499     $  345,116     $  213,441     $  174,380     $  167,506
Net income (loss)                                      $  (96,729)    $   18,818     $    6,461     $  (13,533)    $   (3,751)
Diluted net income (loss) per share                    $    (1.57)    $     0.35     $     0.13     $    (0.35)    $    (0.10)
Total assets                                           $  202,164     $  297,196     $  200,504     $  113,597     $  114,593
Working capital                                        $   85,247     $  167,623     $  105,233     $   43,684     $   31,082
Stockholders' equity                                   $  131,213     $  226,600     $   87,947     $   24,802     $   16,964
Total employees at year end                                   873          1,324            939            670            686
Diluted weighted average shares outstanding                61,601         54,459         50,464         38,604         36,335
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Note: Prior years have been restated to include Innova Corporation, which merged
with the Company in October 1998 in a pooling-of-interests transaction, and MAS
Technology Limited, which merged with the Company in March 1998 in a pooling-of-
interests transaction. See Note 8 of the Notes to Consolidated Financial
Statements.



TEN
<PAGE>

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.

All data from prior years has been restated to reflect the Company's merger
in October 1998 with Innova Corporation ("Innova"), a Washington corporation
which designs, manufactures, markets, and supports digital microwave radio
links for the worldwide telecommunications market. See Note 8 of the Notes to
Consolidated Financial Statements.

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 130,000
microwave radios worldwide.

The Company has equipment installed in over 70 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 87% in Fiscal 1999, 93% in Fiscal 1998, and 90% in
Fiscal 1997.

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,
                                            ------------------------------
                                             1999        1998        1997
                                            ------------------------------
<S>                                        <C>         <C>         <C>
Net sales                                   100.0%      100.0%      100.0%
Cost of sales                                 78.4        64.0        66.1
Inventory valuation charges                   16.0         1.7         -
                                            ------------------------------
Gross profit                                   5.6        34.3        33.9
Research and development                      10.2         7.1         7.6
Selling, general and administrative           23.4        18.9        21.6
Merger and restructuring                      12.7         2.5         -
                                            ------------------------------
Operating income (loss)                      (40.7)        5.8         4.7
Other income (expense), net                    0.1         0.8        (0.5)
                                            ------------------------------
Income (loss) before provision
  for income taxes                           (40.6)        6.6         4.2
Provision for income taxes                     0.3         1.1         1.2
                                            ------------------------------
Net income (loss)                            (40.9)%      5.5%        3.0%
                                            ------------------------------
                                            ------------------------------
</TABLE>

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 has been 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 Europe, $50.3 million in the Asia/Pacific region, $52.2 million in South
America, $31.8 million in North America, and $19.0 million in Africa. In
Fiscal 1998, net sales were $146.8 million in Europe, $96.1 million in the
Asia/Pacific region, $54.7 million in South America, $31.2 million in North
America, and $16.3 million in Africa. See Note 7 of the Notes to Consolidated
Financial Statements.

Net sales for Fiscal 1999 of SPECTRUM II-TM- 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-TM- product line decreased to $32.2 million in Fiscal
1999 from $36.1 million in Fiscal 1998. Net sales of the new Altium-TM-
product line 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
underutilization of manufacturing capacity and lower average selling prices
of the SPECTRUM II product line.

                                                                         ELEVEN
<PAGE>

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. The Company believes that its sales volume
has stabilized during the past nine months; however, management cannot
provide assurance that the continuing economic and political instability in
Asia and recent economic instability in Latin America will not have further
material adverse effect on the Company's business, financial condition, and
results of operations. See "Factors That May Affect Future Financial Results."

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 of its XP4, DART, and
DXR-TM- 700 product offerings and its new Altium high-capacity wireless
product platform. The Company will continue to invest in the development of
new products and features in order to maintain and enhance its competitive
position, and, as a result, expects research and development spending to
increase in Fiscal 2000.

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 is 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. 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 termination 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. Approximately
$12.2 million of the $29.9 million in merger and restructuring charges will
be a cash outflow, of which $8.2 million has been paid as of March 31, 1999.
The remaining amounts are expected to be paid during Fiscal 2000, and consist
of $0.9 million for severance, $2.3 million for facility termination costs,
and $0.8 million for other costs.

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.

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. Due to net operating loss carry-forwards,
the Company expects that the Fiscal 2000 effective tax rate will be
significantly less than the statutory rate.

YEAR ENDED MARCH 31, 1998 COMPARED TO THE YEAR ENDED MARCH 31, 1997

NET SALES. Net sales for Fiscal 1998 were $345.1 million, a 62% increase
compared to net sales of $213.4 million in Fiscal 1997. The increase in net
sales was due to higher sales in all the Company's major geographic areas.
For Fiscal 1998, net sales were $146.8 million in Europe, $96.1 million in
the Asia/Pacific region, $54.7 million in South America, $31.2 million in
North America, and $16.3 million in Africa. In Fiscal 1997, net sales were
$81.0 million in Europe, $66.6 million in the Asia/Pacific region, $26.6
million in South America, $26.9 million in North America and $12.3 million in
Africa. See Note 7 of the Notes to Consolidated Financial Statements.

TWELVE
<PAGE>

Net sales for Fiscal 1998 of SPECTRUM II increased to $175.3 million from
$73.5 million in Fiscal 1997. Net sales of the DXR product line increased to
$30.6 million in Fiscal 1998 from $25.0 million in Fiscal 1997. Net sales of
the XP4 product line increased to $36.1 million from $2.1 million in Fiscal
1997. Net sales of the QUANTUM-TM- product line decreased to $23.9 million in
Fiscal 1998 from $29.5 million in Fiscal 1997, primarily due to decreased
customer demand for this product. Net sales in Fiscal 1998 of the M Series
product line, which has been largely replaced by the SPECTRUM II product
line, decreased to $13.6 million from $31.5 million in Fiscal 1997. Net sales
for other products and services amounted to $65.6 million in Fiscal 1998
compared to $51.8 million in Fiscal 1997.

The increase in net sales in Fiscal 1998 compared to Fiscal 1997 was
primarily due to the increased market acceptance of the SPECTRUM II product
line as well as a general growing worldwide market. SPECTRUM II sales
increased by 138% in Fiscal 1998 from Fiscal 1997 and accounted for 51% of
total net sales in Fiscal 1998 compared to 34% in Fiscal 1997. In addition,
DXR product sales increased by 22% in Fiscal 1998 from Fiscal 1997 due to the
increased market acceptance of this product line.

GROSS PROFIT. Gross profit in Fiscal 1998 was higher than in Fiscal 1997
primarily due to a greater mix of SPECTRUM II product line shipments versus
older products, and improved utilization of manufacturing capacity. Inventory
valuation charges, included in cost of sales, totaled $5.9 million in Fiscal
1998. These charges relate to the phase-out of older products during the
fiscal year.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
Fiscal 1998 of $24.5 million were $8.3 million higher than the $16.2 million
incurred in Fiscal 1997. This increase was primarily attributable to the
Company's development of its new Altium high-capacity wireless platform and
XP4 frequency rollout plan.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses for Fiscal 1998 increased by $19.2 million to $65.3
million from $46.1 million in Fiscal 1997. This increase was mostly
attributable to an increase in personnel, sales office, and related travel
expenses as the Company continued to increase its worldwide sales and
customer service and support organization, and to higher sales commissions
resulting from the Company's increased sales. In addition, goodwill
amortization of $1.2 million, which was related to the Company's acquisition
of Granger, Inc. in May 1997, as well as the selling, general, and
administrative expenses of Granger Inc., partially contributed to this
increase.

MERGER AND RESTRUCTURING EXPENSES. Merger and restructuring expenses totaled
$8.8 million for Fiscal 1998. These expenses included payments to the
Company's investment bankers, legal and accounting fees of $4.3 million
related to the Company's March 1998 merger with MAS Technology Limited, a New
Zealand company, MAS Technology asset valuation reserves for inventory,
receivables, and warranty totaling $1.3 million, as well as various other
costs of $3.2 million relating to office closures and contract terminations.
There are no remaining amounts to be paid during Fiscal 2000.

INTEREST AND OTHER INCOME, NET. Interest income for Fiscal 1998 was $3.1
million compared to $0.5 million in Fiscal 1997. This increase resulted
primarily from higher average cash balances. Other income, net for Fiscal
1998 was $0.7 million compared to $0.1 million in Fiscal 1997. This increase
resulted primarily from foreign exchange gains.

INTEREST EXPENSE.  Interest expense for Fiscal 1998 was $0.9 million compared
to $1.6 million in Fiscal 1997.  The decrease in interest expense was
primarily attributable to lower average principal balances outstanding on the
Company's line of credit and note payable in Fiscal 1998.

PROVISION FOR INCOME TAXES. The Company recorded an income tax provision in
Fiscal 1998 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

In Fiscal 1999, the Company's cash and short-term investments decreased by
$34.9 million. This decrease was primarily the result of the $96.7 million
net loss, partially offset by non-cash expenses such as depreciation and
amortization, and provisions for inventory reserves, warranty, and
uncollectable accounts.

Accounts receivable decreased by 30% during Fiscal 1999 compared to Fiscal
1998 primarily resulting from a 31% decrease in net sales. Net inventories
decreased by 31% in Fiscal 1999 compared to the prior year due to decreased
purchases by the Company in connection with its declining sales and increased
provisions for excess and obsolete inventories. Inventory reserves increased
in Fiscal 1999 compared to Fiscal 1998 as the merger with Innova and the
planned introduction of new product lines accelerated the obsolescence of the
SPECTRUM II product line.

                                                                       THIRTEEN
<PAGE>

Accounts payable decreased by 37% in Fiscal 1999 compared to Fiscal 1998 due
to the decrease in inventory purchases and selling, general, and
administrative expenses. The increase in accrued liabilities was due
primarily to inventory purchase commitments, and merger- and
restructuring-related expenses discussed above.

At March 31, 1999, the Company had an asset-based borrowing facility
agreement with a U.S. lender for $40.0 million. The working capital line of
credit, which includes a $5.0 million term loan, is secured by certain
receivables, inventory, and fixed assets of the Company. This credit facility
provides borrowings at prime plus 1.5% per annum. There is a minimum monthly
interest requirement of $20,000. As of March 31, 1999, approximately $21.0
million was available for borrowing under this agreement, of which $2.6
million was outstanding. This credit facility does not require the
maintenance of financial covenants.

In the future, the Company may require additional financing from other
sources; 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. Management has implemented plans to reduce the
Company's cash requirements through a combination of reductions in working
capital, equipment purchases, and operating expenditures. Management believes
that such plans, combined with existing cash balances and other sources of
liquidity, will enable the Company to meet its cash requirements through
Fiscal 2000. However, there can be no assurance that the Company will be able
to implement these plans or that it will be able to do so without a material
adverse effect on the Company's business, financial results, or results of
operations.

YEAR 2000 COMPLIANCE ISSUES.  The Company is aware of the issues associated
with the programming code in existing computer systems as the year 2000
approaches. The "Year 2000" problem is concerned with whether computer
systems will properly recognize date sensitive information when the year
changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Year 2000
problem is pervasive and complex, as virtually every company's computer
operation will be affected in some way. The Company's computer programs,
which process its operational and financial transactions, were designed and
developed without considering the impact of the upcoming change in century.
If not corrected, the Company's computer programs and products could fail or
create erroneous results by or at the year 2000.

The Company is taking steps to ensure that its products and computer programs
will continue to operate on and after January 1, 2000. The Company formed a
project team consisting of staff from Manufacturing, Customer Service,
Finance, Human Resources, Sales, Marketing, Legal, Engineering, and
Information Technology (IT) departments, led by a project manager. A
five-phase solution process has been established consisting of (1) awareness,
(2) assessment, (3) renovation, (4) validation, and (5) implementation. The
Company has substantially completed this five-phase process with respect to
most of its Year 2000 issues.  The remaining open issues consist of
completing major vendor site reviews and contingency plans for each major
location. The Company's Year 2000 project team identified its manufacturing
IT system as its highest priority and has implemented Year 2000 upgrades to
its manufacturing systems. The Company's network operating systems also are
Year 2000-ready. The Company's personal computers have been evaluated and
upgrades were installed to correct noncompliance. Some older personal
computers were replaced or taken out of service.

The Company has completed an assessment of most of its products. Most of its
hardware products are not affected by the Year 2000 issue because no internal
clock exists in these products.  Year 2000 readiness testing has been
completed for newer products, including the Altium product line and network
software products. Some older network software products are not Year
2000-ready, and the Company has developed an upgrade plan for customers who
are using this software.

The Company mailed letters to its primary suppliers and subcontractors to
determine whether they are developing plans to address processing
transactions in the Year 2000 and to monitor their progress toward Year 2000
capability. Approximately 50% of the vendors contacted have responded, and
the Year 2000 team is currently arranging site visits with critical vendors
to ensure that processes are actually in place as represented.

The Company believes that it will expend approximately $0.5 million
investigating and remedying issues related to Year 2000 readiness involving
internal operations. Approximately $0.2 million has been expensed to date for
purchases of software test tools, software upgrades, and upgrading a security
system related to Year 2000 readiness. In addition, the Company estimates
that

FOURTEEN
<PAGE>


$0.2 million of internal personnel costs have been incurred to date
supporting the Company's Year 2000 readiness plan.

If systems critical to the Company's operations have not been made Year
2000-ready by the completion of the project, the Year 2000 issue could have a
material adverse effect on the Company's financial statements. The Company is
currently developing a contingency plan to operate in the event that any
noncompliant critical systems are not remedied by January 1, 2000. The
Company expects to finalize its contingency plan by September 30, 1999.

Based on the steps being taken to address this issue and the progress to
date, the Company's management believes that the Year 2000 readiness expenses
will not have a material adverse effect on the Company's earnings. However,
there can be no assurance that Year 2000 problems will not occur with respect
to the Company's computer systems. Furthermore, the Year 2000 problem may
impact other entities with which the Company transacts business, and the
Company cannot predict the effect of the Year 2000 problem on such entities
or the resulting effect on the Company. As a result, if preventative and/or
corrective actions by the Company or those the Company does business with are
not made in a timely manner, the Year 2000 issue could have a material
adverse effect on the Company's business, financial condition, and results of
operations.

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, 1999, the Company had forward foreign exchange contracts
to exchange various foreign currencies for U.S. dollars in the aggregate
amount of $25.1 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 nearly 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 2000. Digital Microwave did
engage in foreign currency hedging activities during Fiscal 1999, as
explained above, and intends to continue doing so as needed.

                                                                        FIFTEEN
<PAGE>

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 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 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, Microwave Communications Division of Harris
Corporation, P-COM, 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

SIXTEEN
<PAGE>

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 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. 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.

------------------------------------------------------------------------------

SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                            years ended march 31,
                                                 ------------------------------------------------------------------------
                                                     1999           1998           1997          1996            1995
                                                 ------------------------------------------------------------------------
                                                                 (in thousands, except per share amounts)
<S>                                              <C>            <C>            <C>            <C>            <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales                                         $  236,499     $  345,116     $  213,441     $  174,380     $  167,506
Net income (loss)                                    (96,729)        18,818          6,461        (13,533)        (3,751)
Diluted net income (loss) per share                    (1.57)          0.35           0.13          (0.35)         (0.10)

CONSOLIDATED BALANCE SHEETS DATA:
Total assets                                      $  202,164     $  297,196     $  200,504     $  113,597     $  114,593
Long-term liabilities                                  2,236          1,174            700         10,097          6,805

</TABLE>
                                                                      SEVENTEEN
<PAGE>

CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                         march 31,
                                                                                            -------------------------------
                                                                                                   1999           1998
                                                                                            -------------------------------
                                                                                            (in thousands, except share and
                                                                                                   per share amounts)
<S>                                                                                           <C>            <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                                                                      $   21,518    $    27,585
Short-term investments                                                                              5,745         34,540
Accounts receivable, net of allowance of $3,261 in 1999 and $3,999 in 1998                         60,253         86,061
Inventories                                                                                        50,610         73,029
Deferred tax asset                                                                                  3,009          6,685
Other current assets                                                                               12,827          9,145
                                                                                            -------------------------------
   Total current assets                                                                           153,962        237,045
                                                                                            -------------------------------

PROPERTY AND EQUIPMENT:
Machinery and equipment                                                                            77,236         71,413
Land and buildings                                                                                  6,090          4,125
Furniture and fixtures                                                                             10,327          8,755
Leasehold improvements                                                                              4,597          3,332
                                                                                            -------------------------------
                                                                                                   98,250         87,625
Accumulated depreciation and amortization                                                         (55,225)       (43,963)
                                                                                            -------------------------------
Net property and equipment                                                                         43,025         43,662
                                                                                            -------------------------------

Other assets                                                                                        5,177         16,489
                                                                                            -------------------------------
                                                                                               $  202,164    $   297,196
                                                                                            -------------------------------
                                                                                            -------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt                                                              $      725    $         -
Current maturities of capital lease obligations                                                       862          1,342
Accounts payable                                                                                   25,116         39,572
Income taxes payable                                                                                1,399          1,298
Accrued liabilities                                                                                40,613         27,210
                                                                                            -------------------------------
   Total current liabilities                                                                       68,715         69,422
LONG-TERM LIABILITIES:
Long-term debt                                                                                      1,896              -
Capital lease obligations, net of current maturities                                                  340          1,174
                                                                                            -------------------------------
   Total liabilities                                                                               70,951         70,596
                                                                                            -------------------------------
                                                                                            -------------------------------

COMMITMENTS AND CONTINGENCIES (NOTE 4)

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none outstanding                          -              -
Common Stock, $.01 par value; 95,000,000 shares authorized; 62,144,171
   shares in 1999 and 61,027,154 shares in 1998 issued and outstanding                                621            610
Additional paid-in capital                                                                        250,602        248,447
Deferred stock compensation expense                                                                   (88)          (397)
Accumulated deficit                                                                              (115,424)       (20,499)
Accumulated other comprehensive loss                                                               (4,498)        (1,561)
                                                                                            -------------------------------
   Total stockholders' equity                                                                     131,213        226,600
                                                                                            -------------------------------
                                                                                               $  202,164    $   297,196
                                                                                            -------------------------------
                                                                                            -------------------------------
</TABLE>

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

EIGHTEEN
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  years ended march 31,
                                                      ---------------------------------------------------
                                                           1999                1998                1997
                                                      ---------------------------------------------------
                                                            (in thousands, except per share amounts)
<S>                                                   <C>                 <C>                 <C>
NET SALES                                              $  236,499          $  345,116          $  213,441
Cost of sales                                             185,493             221,021             141,000
Inventory valuation charges                                37,739               5,850                   -
                                                      ---------------------------------------------------
    Gross profit                                           13,267             118,245              72,441
                                                      ---------------------------------------------------
OPERATING EXPENSES:
Research and development                                   24,131              24,482              16,192
Selling, general, and administrative                       55,342              65,280              46,097
Merger and restructuring                                   29,941               8,752                   -
                                                      ---------------------------------------------------
    Total operating expenses                              109,414              98,514              62,289
                                                      ---------------------------------------------------
    Income (loss) from operations                         (96,147)             19,731              10,152

OTHER INCOME (EXPENSE):
Interest income                                             1,474               3,080                 473
Interest expense                                             (479)               (856)             (1,582)
Other income, net                                            (970)                720                  53
                                                      ---------------------------------------------------
    Total other income (expense), net                          25              2,944               (1,056)
                                                      ---------------------------------------------------
    Income (loss) before provision for income taxes       (96,122)             22,675               9,096
Provision for income taxes                                    607               3,857               2,635
                                                      ---------------------------------------------------
NET INCOME (LOSS)                                      $  (96,729)         $   18,818          $    6,461
                                                      ---------------------------------------------------
                                                      ---------------------------------------------------

Basic earnings (loss) per share                        $    (1.57)         $     0.37          $     0.16
Diluted earnings (loss) per share                      $    (1.57)         $     0.35          $     0.13

Basic weighted average shares outstanding                  61,601              51,285              39,541
Impact of dilutive stock options and warrants                 N/A               3,174              10,923
                                                      ---------------------------------------------------
Diluted weighted average shares outstanding                61,601              54,459              50,464

</TABLE>

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

                                                                       NINETEEN
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                       years ended march 31, 1999, 1998, and 1997
                                              -------------------------------------------------------------------------------------
                                                                  Additional  Deferred                 Accumulated       Total
                                              Common Stock         Paid-In     Stock      Accumulated   Other Com-    Stockholders'
                                                 Shares   Amount   Capital   Compensation   Deficit   prehensive Loss    Equity
                                              -------------------------------------------------------------------------------------
                                                                        (in thousands)
<S>                                           <C>        <C>      <C>        <C>         <C>          <C>             <C>
BALANCE, MARCH 31, 1996                          32,569   $ 325    $ 70,229  $      -     $  (45,778)  $    26         $ 24,802
Components of comprehensive income:
  Net income                                          -       -           -              -     6,461         -            6,461
  Unrealized holding loss on
   available-for-sale securities                      -       -           -              -         -         (63)           (63)
  Translation adjustment                              -       -           -              -         -         50              50
                                                                                                                       --------
      Total comprehensive income                                                                                          6,448
                                                                                                                       --------
Sale of stock                                     4,461      45      51,592              -         -         -           51,637
Stock options exercised                             980      10       4,765              -         -         -            4,775
Tax benefit related to employee
  stock transactions                                  -       -         285              -         -         -              285
                                              ---------------------------------------------------------------------------------
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 stock                     9,116      91      47,678              -         -         -           47,769
Stock issued for options & warrants               2,252      22       9,652         (1,590)        -         -            8,084
Amortization of deferred stock compensation           -       -           -          1,193         -         -            1,193
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 & warrants                 745       7       1,187              -         -         -            1,194
Amortization of deferred stock compensation           -       -           -            309         -         -              309
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
                                              ---------------------------------------------------------------------------------
                                              ---------------------------------------------------------------------------------
</TABLE>

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

TWENTY
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                        years ended march 31,
                                                            ----------------------------------------
                                                                 1999           1998           1997
                                                            ----------------------------------------
                                                                        (in thousands)
<S>                                                        <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                           $  (96,729)     $  18,818       $  6,461
Adjustments to reconcile net income
     (loss) to net cash used for operating activities:
   Adjustment to conform year-end of pooled company              1,804              -              -
   Depreciation and amortization                                25,912         13,411          7,351
   Provision for uncollectable accounts                          4,608            356          1,400
   Provision for inventory reserves                             20,305         12,862          4,271
   Provision for warranty reserves                               7,023          5,310          2,385
   Tax benefit of disqualifying dispositions                        64          2,192            285
   Changes in assets and liabilities:
     Decrease (increase) in accounts receivable                 20,620        (27,744)       (21,480)
     Decrease (increase) in inventories                          1,503        (33,024)       (19,073)
     Decrease (increase) in deferred taxes                       3,639         (6,496)          (193)
     Increase in tax refund receivable                          (4,553)             -              -
     Decrease (increase) in other current assets                   786         (3,864)          (565)
     Decrease in other assets                                   11,624              6             24
     Increase (decrease) in accounts payable                   (14,283)         9,890          8,972
     Increase (decrease) in income tax payable                     102         (1,065)         1,072
     Increase (decrease) in other accrued liabilities            6,841         (5,810)         4,594
                                                             ----------------------------------------
   Net cash used for operating activities                      (10,734)       (15,158)        (4,496)
                                                             ----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities                      (16,621)       (27,990)       (17,947)
Maturity/sale of available-for-sale securities                  45,374         11,327              -
Purchase of property and equipment                             (24,711)       (30,471)        (9,580)
Acquisition of business, net of cash received                   (2,286)       (11,491)          (374)
Investment in Granger Associates, Ltd.                               -         (4,000)             -
Proceeds from the sale of other assets                             610              -              -
Proceeds from disposal of fixed assets                           1,194              -             61
                                                             ----------------------------------------
   Net cash provided by (used for) investing activities          3,560        (62,625)       (27,840)
                                                             ----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from banks                                            2,600              -         20,681
Repayments to banks                                                  -         (6,665)       (21,561)
Payment of assumed Granger, Inc. debt                                -         (3,286)             -
Payments of capital lease obligations                           (1,314)        (1,951)        (1,429)
Proceeds from sale of Common Stock                               2,166         77,143         65,076
                                                             ----------------------------------------
   Net cash provided by financing activities                     3,452         65,241         62,767
                                                             ----------------------------------------
Effect of exchange rate changes on cash                         (2,345)          (420)           (74)
                                                             ----------------------------------------
Net increase (decrease) in cash and cash equivalents            (6,067)       (12,962)        30,357
Cash and cash equivalents at beginning of year                  27,585         40,547         10,190
                                                             ----------------------------------------
Cash and cash equivalents at end of year                     $  21,518      $  27,585      $  40,547
                                                             ----------------------------------------
                                                             ----------------------------------------
</TABLE>

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

                                                                     TWENTY ONE
<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 telephone network
interconnection and access. Transmitting and receiving multiple digital
lines, the Company's high-performance digital microwave systems carry voice,
data, and digitized video signals across a full spectrum of frequencies and
capacities. The Company has sold over 130,000 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. Prior year information has been restated to reflect the October
1998 merger with Innova Corporation ("Innova"), a Washington corporation that
designs, manufactures, markets, and supports digital microwave radio links
for the worldwide telecommunications market.

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 statements, 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, 1999 and 1998.

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 No. 115. At
March 31, 1999, the Company's available-for-sale securities had contractual
maturities ranging from 1 month to 19 months, with a weighted average
maturity of 5 months.

All short-term and long-term investments are reported at fair market value
with the related unrealized holding gains and losses reported as a component
of stockholders' equity. Unrealized holding losses on the portfolio of
approximately $1,665,000 were recorded as of March 31, 1999 and $17,000 of
unrealized holding losses were recorded as of March 31, 1998. There were
realized gains of approximately $6,000 on the sale of securities during each
of Fiscal 1999 and Fiscal 1998, and no realized gains or losses on sales of
securities during Fiscal 1997. Long-term investments are included in Other
Assets in the Consolidated Balance Sheets.

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

<TABLE>
<CAPTION>
                                                                    1999
                                                 ------------------------------------------
                                                                   MARKET
                                                                  VALUE AT      UNREALIZED
                                                   COST AT     BALANCE SHEET      HOLDING
                                                  EACH ISSUE        DATE        GAIN (LOSS)
                                                 ------------------------------------------
                                                               (in thousands)
<S>                                               <C>             <C>            <C>
CORPORATE NOTES                                     $  5,753       $  5,745       $     (8)
INVESTMENT IN
   GRANGER ASSOCIATES, LTD.                         $  3,399       $  1,742       $ (1,657)
                                                 ------------------------------------------
TOTAL                                               $  9,152       $  7,487       $ (1,665)
                                                 ------------------------------------------
                                                 ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>

                                                                 1998
                                                 ------------------------------------------
                                                                  Market
                                                                 Value at       Unrealized
                                                   Cost at     Balance Sheet      Holding
                                                  Each Issue       Date         Gain (Loss)
                                                 ------------------------------------------
                                                              (in thousands)
<S>                                               <C>             <C>            <C>
Corporate notes                                    $  13,737      $  13,720      $     (17)
Municipal notes                                          500            500              0
U.S. government agency
   securities                                         19,320         19,320              0
Auction rate preferred notes                           1,000          1,000              0
                                                 ------------------------------------------
Total short-term investments                       $  34,557      $  34,540      $     (17)
                                                 ------------------------------------------
                                                 ------------------------------------------
Investment in Granger
   Associates, Ltd.                                    4,000          4,000              -
                                                 ------------------------------------------
                                                   $  34,557      $  34,540      $     (17)
                                                 ------------------------------------------
                                                 ------------------------------------------
</TABLE>

TWENTY TWO
<PAGE>

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,
                                                     -------------------------------------
                                                        1999           1998           1997
                                                     -------------------------------------
                                                                 (in thousands)
<S>                                                 <C>            <C>            <C>
Interest                                             $   762        $   856        $ 1,688
Income taxes                                         $ 2,003        $ 8,885        $ 1,754
</TABLE>

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

<TABLE>
<CAPTION>
                                                                  march 31,
                                                     -------------------------------------
                                                       1999           1998           1997
                                                     -------------------------------------
                                                                (in thousands)
<S>                                                  <C>         <C>             <C>
Notes payable to stockholders
   converted into redeemable
   preferred stock                                    $    -       $  1,500       $  6,984
Estimated fair value of
   warrant issued in
   connection with
   notes payable                                      $    -       $     67       $      -
Capital lease obligations
   incurred to acquire
   equipment                                          $    -       $  1,922       $    633
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,
                                                  --------------------------
                                                     1999            1998
                                                  --------------------------
                                                        (in thousands)
<S>                                               <C>              <C>
Raw materials                                      $  25,616        $ 25,183
Work-in-process                                        9,537          19,104
Finished goods                                        15,457          28,742
                                                  ---------------------------
                                                   $  50,610        $ 73,029
                                                  ---------------------------
                                                  ---------------------------
</TABLE>

Inventories contained components and assemblies in excess of the Company's
current estimated requirements and were, therefore, reserved at March 31,
1999 and 1998. The Company charged $20.3 million in Fiscal 1999 and $12.9
million in Fiscal 1998 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 $2,517,000 for Fiscal 1999 and
$5,913,000 for Fiscal 1998. Accumulated amortization on leased assets was
$974,000 as of March 31, 1999 and $2,463,000 as of March 31, 1998.

OTHER ASSETS. Other assets include goodwill and other intangible assets that
are being amortized on a straight line basis over their 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, 1999 and $12,574,000 as
of March 31, 1998. Accumulated amortization of goodwill amounted to $959,000
at March 31, 1999 and $1,215,000 at March 31, 1998. 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 Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived 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.

                                                                   TWENTY THREE
<PAGE>

ACCRUED LIABILITIES. Accrued liabilities included the following:

<TABLE>
<CAPTION>
                                                           march 31,
                                                   ------------------------
                                                      1999           1998
                                                   ------------------------
                                                        (in thousands)
<S>                                                <C>            <C>
Customer deposits                                   $  3,170       $  3,387
Accrued payroll and benefits                           2,628          5,361
Accrued commissions                                    4,986          6,162
Accrued warranty                                       3,033          3,247
Accrued restructuring                                  3,998          4,520
Accrued inventory purchase order
   cancellation and valuation costs                   15,482              -
Accrued professional fees                                829          1,309
Other                                                  6,486          3,224
                                                   ------------------------
                                                    $ 40,612       $ 27,210
                                                   ------------------------
                                                   ------------------------
</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.

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 $799,000 in Fiscal 1999, a
gain of $1,070,000 in Fiscal 1998, and a loss of $10,000 in Fiscal 1997.

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, 1999, the Company had forward foreign
exchange contracts to exchange various foreign currencies for U.S. dollars in
the aggregate amount of $25.1 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 South 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, South 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

TWENTY FOUR
<PAGE>

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.

NET INCOME (LOSS) PER SHARE. Stockholders approved a two-for-one stock split
paid in the form of a stock dividend in November 1997. Accordingly, all share
and earnings per share data for all periods presented have been adjusted to
reflect the stock split.

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.

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. At March 31, 1997, there were 1,504,000 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.
Also excluded from the computation of diluted earnings per share were
warrants to acquire 2,259,000 shares of Common Stock in Fiscal 1998 and
3,074,000 shares of Common Stock in Fiscal 1997 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
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation. In accordance with the provisions of SFAS 123, the
Company applies APB Opinion 25 and related interpretations in accounting for
its stock option plans. Note 6 of the Notes to Consolidated Financial
Statements contains a summary of the pro forma effects on reported net income
and earnings per share for Fiscal 1999, 1998, and 1997, based on the fair
market value of the options granted at the grant date as prescribed by
SFAS 123.

RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for the
reporting and display of comprehensive income and its components in general
purpose financial statements. SFAS No. 133 is effective for companies with
fiscal years beginning after June 15, 2000. SFAS 133 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.

NOTE 3. CREDIT ARRANGEMENTS

At March 31, 1999, the Company had an asset-based borrowing facility
agreement with a U.S. lender for borrowings up to $40.0 million. The working
capital line of credit, which includes a $5.0 million term loan, is secured
by certain receivables, inventory, and fixed assets of the Company. This
credit facility provides borrowings at prime plus 1.5% per annum. There is a
minimum monthly interest requirement of $20,000. As of March 31, 1999,
approximately $21.0 million was available for borrowing under this agreement,
of which $2.6 million was outstanding. Repayment of the $2.6 million
outstanding amount is payable monthly over four years. The credit facility
does not require the maintenance of financial covenants; however, there were
certain non-financial covenants with which the Company was in compliance as
of March 31, 1999.

                                                                   TWENTY FIVE
<PAGE>

NOTE 4. 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,
1999, future minimum payment obligations under these leases were as follows:

<TABLE>
<CAPTION>
                                                     years ending march 31,
                                                     ----------------------
                                                     Capital      Operating
                                                     ----------------------
                                                         (in thousands)
<S>                                                  <C>          <C>
2000                                                  $  947       $  4,224
2001                                                     356          3,906
2002                                                                  2,579
2003                                                       -            563
2004                                                       -            383
2005 and beyond                                            -          4,503
                                                     ----------------------
Future minimum lease
   payments                                            1,303       $ 16,158
                                                                   --------
                                                                   --------
Less amount representing
   interest (averaging 15%)                             (101)
                                                     --------
Present value of future
   minimum lease payments                              1,202
Less current maturities                                 (862)
                                                     --------
Long-term lease obligations                           $  340
                                                     --------
                                                     --------
</TABLE>

Rent expense under operating leases was approximately $5,255,000 for the year
ended March 31, 1999, $6,083,000 for the year ended March 31, 1998, and
$3,869,000 for the year ended March 31, 1997.

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 5. INCOME TAXES

The Company provides for income taxes using an 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,
                                                   ---------------------------------------
                                                      1999           1998            1997
                                                   ---------------------------------------
                                                                (in thousands)
<S>                                                <C>             <C>             <C>
Domestic                                           $ (91,230)      $ 19,861        $ 4,633
Foreign                                               (4,892)         2,814          4,463
                                                   ---------------------------------------
                                                   $ (96,122)      $ 22,675        $ 9,096
                                                   ---------------------------------------
                                                   ---------------------------------------
</TABLE>

The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>
                                                            years ended march 31,
                                                   ---------------------------------------
                                                       1999           1998            1997
                                                   ---------------------------------------
                                                                (in thousands)
<S>                                                <C>             <C>             <C>
Current:
   Federal                                            $    -        $ 6,770        $ 1,118
   State                                                   -            365             44
   Foreign                                               321          3,047          1,473
                                                   ---------------------------------------
      Total current                                      321         10,182          2,635
   Deferred                                              286         (6,325)             -
                                                   ---------------------------------------
                                                      $  607        $ 3,857        $ 2,635
                                                   ---------------------------------------
                                                   ---------------------------------------
</TABLE>

TWENTY SIX
<PAGE>

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,
                                                   ---------------------------------------
                                                      1999           1998            1997
                                                   ---------------------------------------
                                                                (in thousands)
<S>                                                <C>             <C>             <C>
Expected tax provision                             $ (32,681)       $ 7,709        $ 3,093
State taxes net of
   Federal benefit                                    (2,403)           565            367
Change in valuation
   allowance                                          32,385         (4,474)          (423)
Non-deductible
   acquisition costs                                     443          2,333              -
Non-deductible goodwill                                3,863            371              -
FSC commission                                             -         (1,657)          (581)
Other                                                 (1,000)          (990)           179
                                                   ---------------------------------------
                                                   $     607        $ 3,857        $ 2,635
                                                   ---------------------------------------
                                                   ---------------------------------------
</TABLE>

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

<TABLE>
<CAPTION>
                                                            march 31,
                                                   -------------------------
                                                       1999          1998
                                                   -------------------------
                                                         (in thousands)
<S>                                                <C>            <C>
Inventory reserves                                  $ 17,454       $  9,646
Restructuring reserves                                 9,495              -
Warranty reserves                                      1,055          1,154
Bad debt reserves                                      1,067          1,408
Accrued commissions                                      806          1,163
Net operating loss carry-forwards                     13,051         13,713
Tax credits                                            7,887            901
Other                                                  9,074          3,195
                                                   -------------------------
                                                      59,889         31,180
Less: Valuation reserve --
   Operations                                        (56,880)       (24,495)
                                                   -------------------------
Net deferred tax asset                              $  3,009       $  6,685
                                                   -------------------------
                                                   -------------------------
</TABLE>

The realizability of the $3.0 million deferred tax asset at March 31, 1999 is
dependent on future profitability. If the Company does not generate net
income in future periods, the $3.0 million would be written off. The
valuation allowance provides a reserve against deferred tax assets that may
expire or go unutilized by the Company. In accordance with Statement of
Financial Accounting Standards 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, 1999, the Company had U.S. Federal net
operating loss carry-forwards of $36,341,000 and state net operating loss
carry-forwards of $5,800,000 available to offset future taxable income, if
any. The net operating loss carry-forwards expire in various years through
2012. In addition, foreign net operating loss carry-forwards at March 31,
1999, total $878,000. Tax credits include approximately $3,613,000 of Federal
minimum tax credits that carry forward indefinitely. The remaining tax
credits of $4,274,000 are Federal and state credits that expire in various
years through 2019. The Internal Revenue Code contains provisions that may
limit the net operating loss carry-forwards to be used in any given year upon
the occurrence of certain events, including a significant change in ownership
interest.

NOTE 6. COMMON STOCK

The Company's stockholders approved a two-for-one stock split paid in the
form of a stock dividend in November 1997. All share and per share data have
been adjusted to give effect to this stock split. In March 1998, the
stockholders approved an increase in the total number of authorized shares of
Common Stock from 60,000,000 shares to 95,000,000 shares.

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, 1999, options to purchase 264,040 shares of Common Stock were outstanding
under the 1984 Plan, of which 226,140 shares were exercisable at an average
exercise price of $6.88 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

                                                                   TWENTY SEVEN
<PAGE>

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, 1999, options to purchase 5,519,136 shares were
outstanding, of which 1,940,261 were exercisable at an average exercise price
of $8.62 per share. At March 31, 1999, the number of shares available for
future grant was 1,116,412.

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, 1999, 799,210 shares were outstanding, of which 217,898 were
exercisable, at an average exercise price of $7.05 per share, and 80,610
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, 1999, there were 492,450
options outstanding, none of which were exercisable, and 7,550 were available
for future grants.

In connection with the Company's merger with MAS Technology (see Note 8), 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, 1999, options to purchase 314,040
shares of Common Stock were outstanding under the 1997 MAS Plan, of which
60,992 were exercisable at an average exercise price of $15.31 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 8),
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, except for the
immediate vesting of all outstanding stock options under these plans upon
consummation of the merger. Each outstanding option to purchase Innova common
shares was assumed and converted into an option to receive 1.05 shares of the
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,
1999, options to purchase 1,429,810 shares of Common Stock were outstanding
under the 1990 Innova Stock Option Plan and 52,500 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 $2.71 per share. The Innova Plans have been terminated as to future
grants.

At March 31, 1999, the Company had reserved 10,075,758 shares for future
issuance under all stock options plans for which there were options
outstanding or available for grant as of March 31, 1999.

TWENTY EIGHT
<PAGE>

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


<TABLE>
<CAPTION>
                                                                          fiscal years ended march 31,
                                               ------------------------------------------------------------------------------------
                                                         1999                           1998                          1997
                                               -------------------------      -------------------------     -----------------------
                                                           WEIGHTED AVG                    Weighted Avg             Weighted Avg
                                                SHARES    EXERCISE PRICE       Shares     Exercise Price     Shares  Exercise Price
                                               ------------------------------------------------------------------------------------
<S>                                            <C>        <C>                 <C>         <C>              <C>       <C>
(shares in thousands)
Options outstanding at beginning of year         7,055         $ 8.86          5,633         $ 6.12          4,455      $ 4.94
   Granted                                       3,768           6.69          3,778          10.56          2,503        7.49
   Exercised                                      (441)          2.99         (1,424)          5.63           (931)       4.32
   Expired or canceled                          (1,511)         12.64           (932)          4.77           (394)       5.32
                                               ------------------------------------------------------------------------------------
Options outstanding at end of year               8,871         $ 7.51          7,055         $ 8.86          5,633      $ 6.12
                                               ------------------------------------------------------------------------------------
Exercisable at end of year                       3,928                         1,882                         1,383
   Weighted average fair value of
     options granted                            $ 2.86                        $ 5.62                        $ 4.51
                                               ------------------------------------------------------------------------------------
                                               ------------------------------------------------------------------------------------
</TABLE>

The following summarizes the stock options outstanding at March 31, 1999:

<TABLE>
<CAPTION>
                                                            OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                                               ------------------------------------------- ---------------------------
                                                 NUMBER      WEIGHTED AVG                     NUMBER
                                               OUTSTANDING    REMAINING     WEIGHTED AVG    EXERCISABLE   WEIGHTED AVG
ACTUAL RANGE OF EXERCISE PRICES                 3/31/99    CONTRACTUAL LIFE EXERCISE PRICE   3/31/99    EXERCISE PRICE
----------------------------------------------------------------------------------------------------------------------
(shares in thousands)
<S>                                            <C>         <C>              <C>             <C>         <C>
$  0.23 -  4.13                                  2,790           8.61         $ 2.60          1,534         $ 2.22
$  4.19 -  7.25                                  2,803           8.24           6.19          1,290           6.05
$  7.31 - 13.19                                  2,197           7.67          10.16            855          10.46
$ 13.25 - 23.31                                  1,081           8.61          15.82            249          17.31
----------------------------------------------------------------------------------------------------------------------
$  0.23 - 23.31                                  8,871           8.26         $ 7.22          3,928         $ 6.23

</TABLE>

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 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>
                                                      1999            1998           1997
                                                  ----------------------------------------
                                                  (in thousands, except per share amounts)
<S>                                               <C>              <C>            <C>
Net income (loss) -- as reported                  $  (96,729)      $ 18,818        $ 6,461
Net income (loss) -- pro forma                    $ (107,515)      $  9,746        $ 2,598
Basic net income (loss) per share -- as reported  $    (1.57)      $   0.37        $  0.16
Basic net income (loss) per share -- pro forma    $    (1.75)      $   0.19        $  0.07
Diluted net income (loss) per share
 -- as reported                                   $    (1.57)      $   0.35        $  0.13
Diluted net income (loss) per share -- pro forma  $    (1.75)      $   0.18        $  0.05

</TABLE>
                                                                    TWENTY NINE
<PAGE>

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>
                                                        1999           1998           1997
                                                ------------------------------------------
<S>                                             <C>            <C>            <C>
Expected dividend yield                                 0.0%           0.0%           0.0%
Expected stock volatility                              78.6%          74.7%          74.3%
Risk-free interest rate                          4.8% - 5.6%    5.5% - 6.4%    5.3% - 7.1%
Expected life of options from vest date            0.9 YEARS      0.8 years      0.7 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 1,889,000 warrants
outstanding at March 31, 1999, 2,152,000 outstanding at March 31, 1998, and
2,928,000 at March 31, 1997. 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
subject to shareholder approval. 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.

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

THIRTY
<PAGE>

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 7. 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
1998 and 1997 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 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.

<TABLE>
<CAPTION>
                                                        1999           1998           1997
                                                   ---------------------------------------
                                                                  (in thousands)
<S>                                               <C>            <C>            <C>
PRODUCTS
Revenues                                           $ 215,545      $ 320,688      $ 201,272
Operating profit (loss)                              (94,186)        16,572          8,390

SERVICES
Revenues                                              20,954         24,428         12,169
Operating profit (loss)                               (1,961)         3,159          1,762

TOTAL
Revenues                                           $ 236,499      $ 345,116      $ 213,441
Operating profit (loss)                              (96,147)        19,731         10,152
</TABLE>

One customer (Siemens AG) accounted for 12% of net sales for Fiscal 1997. No
other customers accounted for more than 10% of net sales during Fiscal 1999,
1998, or 1997.

Revenues from unaffiliated customers by product for Fiscal 1999, 1998, and
1997 are as follows:

<TABLE>
<CAPTION>

                                                      1999           1998            1997
                                                  ----------------------------------------
                                                                (in thousands)
<S>                                               <C>            <C>             <C>
SPECTRUM II                                        $ 111,823      $ 175,326       $ 73,528
XP4                                                   32,247         36,100          2,104
DXR                                                   32,513         30,589         24,971
Altium                                                 5,259              -              -
Quantum                                                7,227         23,936         29,467
M-Series                                               3,581         13,596         31,485
Other Products                                        22,895         41,141         39,717
                                                  ----------------------------------------
Total Products                                     $ 215,545      $ 320,688       $201,272
Total Services                                     $  20,954      $  24,428       $ 12,169
                                                  ----------------------------------------
Total Revenue                                      $ 236,499      $ 345,116       $213,441
                                                  ----------------------------------------
                                                  ----------------------------------------
</TABLE>

                                                                     THIRTY ONE
<PAGE>

Revenues from unaffiliated customers by geographic region for Fiscal 1999, 1998,
and 1997 are as follows:

<TABLE>
<CAPTION>
                                                      1999           1998           1997
                                                  ----------------------------------------
                                                                (in thousands)
<S>                                               <C>            <C>             <C>
Europe                                              $ 83,242      $ 146,812       $ 81,068
Africa                                                19,036         16,283         12,300
North America                                         31,757         31,239         26,922
South America                                         52,207         54,707         26,576
Asia/Pacific                                          50,257         96,075         66,575
                                                  ----------------------------------------
Total revenues                                      $236,499       $345,116       $213,441
                                                  ----------------------------------------
                                                  ----------------------------------------
</TABLE>

Long-lived assets consisted primarily of property, plant, and equipment during
Fiscal 1999 and 1998. Net property, plant, and equipment by country was as
follows:

<TABLE>
<CAPTION>

                                                       1999           1998
                                                    ------------------------
                                                         (in thousands)
<S>                                                <C>            <C>
United States                                       $ 28,043       $ 32,122
United Kingdom                                        11,621          8,946
Other foreign countries                                3,361          2,594
                                                    ------------------------
Total property, plant, and
   equipment, net                                   $ 43,025       $ 43,662
                                                    ------------------------
                                                    ------------------------
</TABLE>

NOTE 8. 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.

In March 1998, 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.

THIRTY TWO
<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 1997 and the nine months ended December 31, 1997.

<TABLE>
<CAPTION>

                                                     year ended       nine months ended
                                                    march 31, 1997    december 31, 1997
                                                    -----------------------------------
<S>                <C>                              <C>               <C>
REVENUE:            Digital Microwave                  $ 178,344          $ 195,790
                    MAS Technology                        35,300             38,846
                    Intercompany sales                    (2,307)            (6,020)
                                                    -----------------------------------
                    Total                              $ 211,337          $ 228,616
                                                    -----------------------------------
                                                    -----------------------------------
Net INCOME:         Digital Microwave                  $  11,707          $  22,067
                    MAS Technology                         2,165              3,770
                    Intercompany profit eliminations         (82)               (14)
                                                    -----------------------------------
                    Total                              $  13,790          $  25,823
                                                    -----------------------------------
                                                    -----------------------------------
</TABLE>

In October 1998, 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.

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 and Fiscal 1997 and the six months ended September 30, 1996.

<TABLE>
<CAPTION>

                                                     years ended march 31     six months ended
                                                     1998             1997   september 31, 1996
                                                   ------------------------  ------------------
<S>                <C>                             <C>            <C>         <C>
REVENUE:            Digital Microwave              $ 310,490      $ 211,337      $ 102,614
                    Innova                            36,100          2,104         15,881
                    Intercompany sales                (1,474)             -              -
                                                   ------------------------  ------------------
                    Total                          $ 345,116      $ 213,441      $ 118,495
                                                   ------------------------  ------------------
                                                   ------------------------  ------------------
NET INCOME:         Digital Microwave              $  19,878      $  13,790      $ (21,047)
                    Innova                            (1,060)        (7,329)        (5,548)
                    Intercompany profit eliminations       -              -              -
                                                   ------------------------  ------------------
                    Total                          $  18,818      $   6,461      $  26,595
                                                   ------------------------  ------------------
                                                   ------------------------  ------------------
</TABLE>

                                                                   THIRTY THREE
<PAGE>

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. 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 termination
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. Approximately $12.2 million of the $29.9
million in merger and restructuring charges will be a cash outflow, of which
$8.2 million has been paid as of March 31, 1999. The remaining amounts are
expected to be paid during Fiscal 2000, and consist of $0.9 million for
severance, $2.3 million for facility termination costs, and $0.8 million for
purchased commitments of software.

THIRTY FOUR
<PAGE>

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, 1999 and 1998, and the related Consolidated Statements of Operations,
Stockholders' Equity, and Cash Flows for each of the three years in the
period ended March 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Microwave
Corporation and subsidiaries as of March 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1999, in conformity with generally accepted accounting
principles.

/s/Arthur Andersen LLP
------------------------
Arthur Andersen LLP

San Jose, California

April 21, 1999

                                                                    THIRTY FIVE
<PAGE>

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. The prior-year per-share amounts have been restated to give effect
retroactively to a stock dividend, which effected a two-for-one stock split
in November 1997.

<TABLE>
<CAPTION>

                                  fiscal year ended march 31,
                    ------------------------------------------------------
                              1999                           1998
                    ------------------------------------------------------
                       HIGH             LOW           high           low
                    ------------------------------------------------------
<S>                 <C>               <C>           <C>            <C>
1st Quarter         $ 14.50           $ 7.00        $ 16.00         $ 9.63
2nd Quarter            7.63             2.88          22.63          13.63
3rd Quarter            6.84             2.38          25.50          12.63
4th Quarter           10.50             6.50          21.63          12.44
</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, 1999, there were approximately
356 stockholders of record.

CORPORATE DIRECTORY

OFFICERS

Charles D. Kissner
Chairman of the Board and
Chief Executive Officer

Jean-Francois Grenon
President
Narrowband Division

Sam Smookler
President
Broadband, Long Haul,
and Services Group

Frank Carretta, Jr.
Senior Vice President
Worldwide Sales

Carl A. Thomsen
Senior Vice President, Chief Financial
Officer, and Secretary

John C. Brandt
Vice President and Corporate Controller

Carol A. Goudey
Corporate Treasurer and
Assistant Secretary

Paul A. Kennard
Vice President, Corporate Marketing
and Chief Technical Officer

John P. O'Neil
Vice President, Personnel

DIRECTORS

Richard C. Alberding
Executive Vice President (Retired)
Hewlett-Packard Company

Paul S. Bachow
President of the Corporate General Partners
Bachow Investment Partners III, L.P.
Paul S. Bachow Co-Investment Fund, L.P.

John W. Combs
President, Southwest Area
Nextel Communications, Inc.

Clifford H. Higgerson
General Partner
Communications Ventures
and General Partner
Vanguard Venture Partners

Charles D. Kissner
Chairman of the Board and
Chief Executive Officer

Dr. James D. Meindl, Ph.D.
Director of Microelectronics
Research Center
Chaired Professor of Microelectronics
Georgia Institute of Technology

V. Frank Mendicino
General Partner
Woodside Fund

Billy B. Oliver
A Private Communications
Consultant

Howard Oringer
Managing Director
Communications Capital Group

THIRTY SIX
<PAGE>

INDEPENDENT PUBLIC ACCOUNTS

Arthur Andersen LLP
San Jose, California

GENERAL LEGAL COUNSEL

Morrison & Foerster LLP
San Francisco, California

REGISTRAR AND TRANSFER AGENT

ChaseMellon
Shareholder Services LLC
San Francisco, California

PRINCIPAL SUBSIDIARIES

DMC Telecom UK, Ltd.
Lanarkshire, Scotland

DMC Telecom Canada, Inc.
Etobicoke, Ontario, Canada

DMC do Brazil Ltda.
Campinas, Brazil

DMC de Mexico, S.A. de C.V.
Mexico D.F., Mexico

Digital Microwave India
Private Limited
New Delhi, India

DMC Telecom Philippines, Inc.
Metro Manila, Philippines

Digital Microwave Corporation
Limited
Wellington, New Zealand

Digital Microwave (Proprietary)
Limited
South Pretoria, Republic of South Africa

Digital Microwave Asia Pacific (S)
Pte. Ltd.
Singapore

Digital Microwave NW, Inc.
Seattle, Washington, USA

CORPORATE HEADQUARTERS

Digital Microwave Corporation
170 Rose Orchard Way
San Jose, CA 95134
United States of America

SALES AND SERVICE OFFICES

NORTH AMERICA:
San Jose, California
Lawrenceville, Georgia
Itasca, Illinois
Plantation, Florida
Seattle, Washington
Etobicoke, Ontario, Canada

EUROPE:
Coventry, England
Lanarkshire, Scotland
Freising, Germany
Athens, Greece
Copenhagen, Denmark
Stockholm, Sweden

THE MIDDLE EAST:
Dubai, United Arab Emirates

AFRICA:
South Pretoria, South Africa
Harare, Zimbabwe
Francistown, Botswana

CENTRAL AND SOUTH AMERICA:
Mexico City, Mexico
Santa Fe de Bogota, Colombia
Buenos Aires, Argentina
Campinas, Sao Paulo, Brazil
Curitiba, Parana, Brazil

ASIA/PACIFIC:
Singapore
Wellington, New Zealand
Beijing, China
Clark Special Economic Zone, Philippines
Manila (Makati City), Philippines
New Delhi, India
Colombo, Sri Lanka
Victoria, Australia
Bangkok, Thailand
Kuala Lumpur, Malaysia


SEC FORM 10-K

A copy of the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission is available without charge by writing to:

Digital Microwave Corporation
Attn: Investor Relations
170 Rose Orchard Way
San Jose, CA 95134



[inside back cover]