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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K/A

(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934) FOR THE FISCAL YEAR ENDED JULY 31, 1998.

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER 1-8342
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PICO PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

NEW YORK 15-0624701
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
No.)

12500 FOOTHILL BLVD., 91342
LAKEVIEW TERRACE, CA (Zip Code)
(Address of principal executive
offices)

(818) 897-0028

Registrant's telephone number including area code

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

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )

The aggregate market value of the Registrant's Voting Stock held by
non-affiliates of the Registrant computed by reference to the closing price of
such stock on the American Stock Exchange at November 12, 1998, was $1,015,728.
Excluded from this value were shares held by officers and directors of the
Registrant.

The number of the Registrant's common shares outstanding at November 10,
1998, was 4,215,913.

DOCUMENTS INCORPORATED BY REFERENCE:

Definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with the 1998 annual meeting of shareholders of the Registrant.

Index to Exhibits is at page 49.

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PART I

ITEM 1. BUSINESS

GENERAL

Pico Products, Inc. (the "Company") was formed as a corporation in the State
of New York on July 31, 1962. The Company and its subsidiaries design,
manufacture and distribute products and systems for the pay TV and cable TV
(CATV) industry, broadband communications and other signal distribution markets.
These other signal distribution markets include "private" cable TV systems such
as those found in hotels, schools, hospitals and large apartment complexes.
Private cable systems are cable systems that do not require a government
franchise to legally operate. Private cable systems are referred to in the
industry as master antenna (MATV) or satellite master antenna (SMATV) systems.
These systems receive satellite and "off-air," or broadcast, signals at a single
source known as the "headend." The signals are processed and then distributed by
coaxial or fiber optic cable to the consumer. Also included in other signal
distribution markets are wireless cable or MMDS (multichannel multipoint
distribution systems) and business-to-business or direct-to-home (DTH)
communications by satellite. The Company also sells pay TV security products and
home satellite market products. In general, the Company is a solutions provider
to TV system operators and suppliers engaged in the convergence of voice, video,
text and data transmission.

FORWARD-LOOKING STATEMENTS

Statements which are not historical facts, including statements about our
confidence, strategies and expectations, technologies and opportunities,
industry and market segment growth, demand and acceptance of new and existing
products, and return on investments in products and markets, are forward looking
statements that involve risks and uncertainties, including without limitation,
the effect of general economic and market conditions, industry market conditions
caused by changes in the supply and demand for our products, the continuing
strength of the markets we serve, competitor pricing, maintenance of our current
momentum and other factors.

SALE OF TRAP AND FILTER MANUFACTURING OPERATION

On September 3, 1998, the Company sold its trap and filter manufacturing
operations to Thomas & Betts Corporation for $5.2 million in cash. The trap and
filter manufacturing operations consist of machinery and equipment, inventory,
manufacturing processes, and product design. The Company will continue to market
and sell traps and filters through a five-year distribution arrangement with
Thomas & Betts. Pursuant to the arrangement, the Company has agreed for the
five-year period to represent Thomas & Betts on an exclusive basis, in the sales
and marketing of traps and filters. Thomas & Betts retains the right to sell to
other distributors.

BROADBAND COMMUNICATIONS INDUSTRY BACKGROUND

CABLE AND SATELLITE TECHNOLOGY

There are currently five primary methods for the transmission, reception and
distribution of TV signals. These include direct "off-air" transmission, CATV,
SMATV, MMDS and direct broadcast satellite transmission ("DBS").

The evolution of CATV and SMATV has been made possible by the development of
satellite communications. With a satellite, TV signals are transmitted up to a
satellite located in geosynchronous orbit 22,500 miles above the equator. From
the satellite TV, signals are retransmitted to a wide geographic reception area
known as a signal "footprint." Many of these signals, including all of the
premium programs such as HBO or CNN, are now encoded or scrambled. A special
decoding device or descrambler is required to receive these signals. In a cable
TV system, the satellite signals are received, processed and

amplified by a cable "headend" located at the cable satellite reception site,
before being sent along copper coaxial cable or fiber optic cable through a
distribution system to individual subscribers. A small cable system may have
several hundred subscribers with several miles of cable, while a large system
may have hundreds of thousands of subscribers and thousands of miles of cable.

A SMATV system is essentially a small cable system which has been configured
for a single building or building complex such as an apartment building, hotel,
hospital or school. Because it is designed to serve a single building complex
and fewer subscribers, a SMATV system is significantly less expensive than a
cable system. A SMATV system consists of a headend and a distribution system to
carry the TV signal through the building.

A home satellite system, known as direct-to-home or DTH, consists of a
dedicated dish antenna and a satellite receiver installed at every subscriber's
house. In the past, DTH received a signal directly from a satellite normally
using a large 12 foot dish antenna mounted near the house. However, a new
version of DTH was introduced by Hughes in 1994, called DirecTV, which involves
a dedicated Hughes Electronics satellite and direct microwave retransmission
from the satellite to a small, 18-inch dish at the home. Two other DTH
competitors, Primestar and Echostar, are now transmitting DTH signals and this
market has become competitive.

Terrestial MMDS systems, also known as "wireless cable", use a headend to
receive and process both satellite and local off-air signals. The signals are
then modulated and retransmitted at microwave frequencies to a microwave antenna
and down converter at the subscriber's home. Wireless cable can also be used to
transmit television signals to high-rise apartment buildings where the signals
can then be received, processed through a SMATV headend and distributed through
the building. The broadcast range of an MMDS system is strictly line-of-sight
and reception depends on the terrain and the height of the microwave
transmitting antenna.

THE CABLE INDUSTRY

Due to technological and regulatory changes, the traditional CATV industry
is undergoing a major transition. Competition (primarily in the form of DTH, and
SMATV) has enjoyed rapid growth partially at the expense of the CATV industry.
DTH is continuing to grow (although not as rapidly as in the past several years)
and each new DTH customer represents the potential loss of a cable customer.

CATV operators, while facing competition are beginning to expand their
operations by offering telephone services. Additionally, due to the inherent
large amount of bandwidth that CATV systems provide, CATV companies are also
expanding existing services including the delivery of large amounts of high
speed data to the home. Most of the large CATV operators, known as Multiple
Systems Operators (MSOs), are currently expanding their systems and offering
more channels.

Technological advances in the broadband communications industry now allow
for the delivery of a tremendous amount of information to a consumer's home. In
the traditional analog environment, one (1) TV channel requires 6 Mhz of
bandwidth. Due to digital compression, it is now possible to transmit 6-10 TV
channels in the same 6 Mhz bandwidth, albeit with some degradation of picture
quality. Improvements in compression technology continue to reduce the
observable degradation. Furthermore, when digital technology is used, data
services (especially access to the Internet) can be transmitted via the CATV
network at speeds of 6 to 10 megabits per second, far faster than the current
maximum of 56 Kilobit per second speed available over existing twisted pair
wiring used for telephone service. Data transmission over the broadband
infrastructure is also faster than the ISDN service offered by some telephone
operators.

This combination of technological advances and the removal of regulatory
barriers has created substantial opportunities to provide both CATV and other
telecommunications companies with products and services in support of delivering
large amounts of digital data to the home. With more bandwidth

available, more broadband services can be offered. With increased bandwidth,
highly specialized programming can be targeted and offered to specific
categories of customers. Additionally, telephone services can be provided by
CATV operators and partnerships are being formed among cable companies,
long-distance carriers, and local telephone operating companies with alliances
to offer telephone services where they have traditionally been prohibited.
Finally, creating more bandwidth to the home for Internet connections will allow
the Internet to sustain higher growth.

TRENDS IN THE TELECOMMUNICATIONS INDUSTRY

The passage of the Telecommunications Act of 1996 to deregulate the
telecommunications industry is having a major impact on both the
telecommunication and cable industries. The immediate result has been the
creation of numerous new partnerships and alliances among companies in the
telecommunications, CATV, cable electronics, computer and programming
industries. While the "convergence" of those industries is in an early stage of
evolution, a number of major investment commitments and consolidations have
occurred such as, the 1997 $1 Billion dollar investments of Microsoft in Comcast
and 1998 U.S. West's investment in Media One.

Deregulation has important implications for the CATV industry. This in turn
presents a number of new opportunities for the Company in the U.S. The rapid
evolution of the "information super-highway" is transforming broadband
communications in the U.S. The information super-highway is an open network
which permits interactive access to data and information. This super-highway
provides a vast capability to connect users through the Internet, using fiber
optic and copper cable links. In the future, this interconnection will also
incorporate new wireless and microwave links for both video and data
communications. The major technological change that will result is the wide
availability of broadband communications involving high-speed digital data
transmissions. This will permit the transmission of very large amounts of data
at very high speeds over all segments of the network and is making possible, not
only video and data links between government agencies, schools, libraries, and
research facilities, but also links between businesses and individuals.

It is becoming clear that new technology developments are concentrated on
the development of an interactive link with the consumer's home. Within five to
ten years, the television set and CATV converter box may be replaced by smart
telecommunications computer systems which have the ability to provide
interactive access to movies, data, home shopping, video games, video telephone,
and teleconferencing, as well as hundreds of channels of television programming.
Prototype interactive systems are now operational in many metropolitan areas.
Additionally, links to personal computers in consumers' homes will allow direct
transmission of high volumes of information to consumers.

The cost to provide connections and hardware to all U.S. households is
estimated to be at least $3,000 per household. Assuming a total of 90 million
U.S. households, the total cost to implement the new technology could approach
$300 billion. The requirement for vast capital expenditures means that only the
best capitalized companies, such as the RBOC's, the largest cable providers and
information technology companies can afford to make this investment. However,
the pace of investment in new technology will be determined largely by the
willingness of consumers to pay for new information or interactive services.

MARKETING AND SALES

The Company sells broadband systems and hardware components, CATV
accessories and passive radio frequency products primarily to the CATV, SMATV,
MMDS and DTH industries and related markets. Broadband systems include active
headend electronics, such as satellite receivers, signal processors, modulators
and amplifiers. The Company's headend products are manufactured under contract
on an exclusive or OEM basis by one principal subcontractor with facilities in
Taiwan and China.

Passive products include splitters, connectors, switches and couplers for
coaxial cable installation. Passive products are produced to the Company's
specifications by a number of subcontract manufacturers

in Taiwan. The Company maintains tight quality control supervision of these
manufacturers through on-site inspections.

Products for the U.S. market are shipped to the Company's warehouse in
California. In some cases, there is additional assembly and tuning or testing of
products before shipment.

The primary business focus for the Company has been on the development and
positioning of its line of headend equipment, 1 GHz product lines and 2 GHz
satellite products. Engineering and production efforts have upgraded various
products to ensure that they meet all U.S. regulatory requirements. As the
technical needs of the CATV, SMATV and MMDS industries have grown, the Company's
product line has been improved through the use of surface mount technology (SMT)
and computer aided design. Engineering design and product development are done
in the U.S. Independent testing and evaluation is completed prior to the
introduction of new products. These engineering efforts have resulted in
improved quality and features to the point where the Company has been able to
introduce low-cost, high-performance products for use by CATV, SMATV and MMDS
operators.

The second segment of Pico's domestic market is signal distribution systems
which use passive components such as splitters, taps and connectors. Both
franchised and private cable TV operators purchase passive components which are
used to wire both single and multiple dwelling units.

The Company sells over 500 different products at prices ranging from under
$1 for most passive components to over $20,000 for a complete multiple channel
SMATV headend. Products are sold to over 800 distributors, dealers and OEM
manufacturers located primarily in the United States. Sales are also made to
customers in Canada, Mexico, Central and South America, Europe, the Middle East
and Asia. Sales are primarily made through telemarketing efforts conducted from
the Company's Lakeview Terrace, California, facility with some direct sales to
major distributors, OEM accounts and to systems operators. The Company currently
uses industry trade shows and targeted advertising to market its products.

The Company also markets and sells Pay TV security products for the CATV
industry. These devices include both negative filters, as well as positive
encoders and filters. In the industry, these are known as "traps." Single
channel negative traps block out an entire channel of a pay service, such as
HBO, so that it cannot be viewed by a non-subscriber. Single channel positive
trapping systems use an encoder to "scramble" a video signal on a pay channel.
Installation of a positive trap by the cable operator allows the subscriber to
view the premium channel, while non-subscribers see a scrambled picture.

The Company has been making Pay TV security products since HBO introduced
its premium service in 1975. Following a product quality problem in 1988, Pico
developed and introduced its PT (Perfect Trap) line of products. This
hermetically sealed product line has two distinct advantages over previous
technologies. The first advantage is highly accurate temperature compensation
which allows the device to operate over a temperature range of -40 degrees to
+60 degrees Celsius in the harshest of environments. The second advantage is the
sealing method used in the device which eliminates water or water vapor
migration into the trap.

The Company also markets a variety of tier traps that block out an entire
tier or group of channels. These devices can be used to defeat signal theft by
blocking access to groups of premium channels when theft of service is
suspected.

The primary market for Pay TV security products is the cable CATV industry
in the U.S. The major customers are the U.S. multiple system operators (MSO's)
such as Adelphia, Comcast, Cox, Media One, Time Warner and TCI. The top 25 MSO's
constitute about 80% of the potential market.

The Company has developed specialized noise blocking filters that the CATV
Industry is using for telephone, Internet and data delivery to customer homes.
These filters incorporate SMT technologies. One version, the HPF-02 mini, has
been very successful in terms of sales volume and technical performance. Since
September 3, 1998, the Company has been purchasing and selling these noise
blocking filters, Pay

TV Security product, and tier traps under a non-exclusive distribution
arrangement. As is customary in the industries served, the Company's sales are
normally made pursuant to individual purchase orders. Orders are subject to
cancellation by the buyer under certain conditions without penalty. The backlog
of purchase orders as of July 31, 1998 and July 31, 1997 was approximately
$1,655 and $3,316, respectively. These purchase orders were believed to be firm,
and the Company expects to fill the July 31, 1998 backlog within fiscal year
1999.

The largest dollar volume sales are of the Company's active electronic
equipment items used in headend installations for which unit prices range from
approximately $100 to $500. However, a large volume of the Company's sales
include low cost components sold at unit prices under $5.00. Since 1982, a large
portion of Pico Macom's passive products have been sold under the trademark,
"Tru-Spec."

FOREIGN OPERATIONS

As of July 31, 1998, the Company owned and operated a manufacturing facility
on the island of St. Kitts (St. Christopher and Nevis) located in the Caribbean.
Pico (St. Kitts) Limited assembled the circuit boards for the Company's
positive, negative and tier traps, and is a manufacturing source for the HPF-O2
mini filter used in two-way cable TV systems. On October 8, 1998, the Company
discontinued manufacturing operations in Pico (St. Kitts) in connection with its
sale of its trap and filter operations. The Company intends to sell the building
and related improvements and expects such sale to be completed in fiscal 1999.

The Company maintains an office in Brazil to provide sales technical support
for the South American market. All sales activity for Asia and Europe is handled
through distributors.

At July 31, 1998 the assets located outside the United States constituted
less than 10% of the Company's total assets and the revenues and operating
expenses attributable to the Company's foreign operations were also less than
10% of the Company's revenues and expenses.

MANUFACTURERS AND SUPPLIERS

Approximately 60% of the Company's sales are from products manufactured by
subcontractors according to the Company's design and quality specifications.
These subcontractors are located primarily in Taiwan and China. For more than
ten years, the SMATV electronic components sold by the Company have been
manufactured under contract on an exclusive basis by one subcontractor in Taiwan
(and China.) Management believes that the Company's relationship with this
subcontractor is excellent and that the financial strength of the subcontractor
is strong. However, the loss of this subcontractor could have a material adverse
impact on the Company's operations until the Company could obtain an alternative
source of supply. This contract was renewed in June 1998 for a term of 1 year
and is subject to renewal annually. Most of the other products obtained from
foreign-based vendors are available from a number of different subcontractors.

For the fiscal year ended July 31, 1998, approximately 26% of the Company's
sales are from products manufactured by the Company. These items consisted of
passive traps and high-pass filters. The trap manufacturing process involves raw
materials procured from domestic and foreign-based sources, which are assembled
at the Company's manufacturing facility in St. Kitts. Final assembly and quality
control is accomplished at the manufacturing facility in Lakeview Terrace,
California. Effective September 3, 1998, the Company sold the manufacturing
assets of the trap and filter business and entered into a 5-year non-exclusive
distribution arrangement for passive traps, tier traps and high-pass filters.
The Company has entered into a non-compete agreement and has agreed not to
manufacture or source this product from other suppliers.

The remaining 14% of the Company's sales are derived from items purchased
from domestic subcontractors for resale.

Pico Macom has an agreement with a Taiwanese company to act as its agent to
facilitate procurement of products from vendors who are too small to export
directly. This agent serves as a liaison between Pico Macom and all of its Far
East vendors by monitoring quality control of the products and assisting in new
product development.

PRODUCT DEVELOPMENT

Product development costs are expensed as incurred. Expenses allocated to
product development for the years ended July 31, 1998, 1997 and 1996 totaled
approximately $830, $1,340 and $1,368, respectively.

COMPETITION AND PATENTS

Equipment reliability, diversity of product lines, delivery requirements,
price, customer service and technological competence are the major basis of
competition in the broadband communications equipment industries. The broadband
communications equipment industries are characterized by intense competition and
technological changes. Many companies which provide equipment and services to
these industries are substantially larger in size and in resources than the
Company. No royalties were received on Company-owned patents during the three
years ended July 31, 1998.

Management believes that its business is dependent upon marketing and
product availability rather than patent protection.

WARRANTIES

The Company warrants its products against faulty material and workmanship
for two years for electronic equipment and one year for other products. The
Company's warranties are limited to repair or replacement of the defective
product. During the three years ended July 31, 1998, direct costs associated
with the warranties have been nominal.

EMPLOYEES

At July 31, 1998, the Company employed 233 persons, of whom 17 were engaged
in administration and accounting, 7 in engineering and quality control, 25 in
sales and marketing, and the 184 in production, purchasing and shipping. None of
the Company's employees are represented by labor unions.

Subsequent to July 31, 1998 and in connection with the sale of the Company's
trap and filter manufacturing operation, the Company has significantly reduced
its headcount. At October 31, 1998, the Company employed a total of 90 persons,
of which 20 were engaged in sales and marketing, 15 in administrative functions,
5 in engineering and quality control and 25 in production, purchasing and
shipping.

GOVERNMENTAL REGULATION

The Company's products are subject to Federal Communications Commission
("FCC") regulation. Certain of the Company's customers also are subject to
regulation by the FCC and by state and local governmental authorities. The
rules, regulations, policies and procedures of the FCC affecting the broadband
communications industry are constantly under review. The likelihood of changes
in such regulation and its effect on the business of the Company cannot be
ascertained.

In early 1996, the U.S. Congress enacted sweeping legislation to deregulate
the U.S. telecommunications industry. This legislation is having a major impact
on both the telecommunication and cable industries. The immediate result has
been the creation of numerous new partnerships and alliances among companies in
the telecommunications, CATV, cable electronics, computer and programming
industries. While the "convergence" of those industries is in an early stage of
evolution, a number of major investment commitments have been made, such as the
purchase of Continental Cablevision by a division of

US West (a RBOC). Deregulation has important implications for the CATV industry.
This in turn presents a number of new opportunities for the Company in the U.S.

The Company's products are used by broadband communications systems in
foreign countries, especially in South America and Mexico. Sales to South
America and Mexico are made directly by the Company or through U.S. based
distributors. Regulation of construction, technical character and operation of
the broadband communications system is controlled by each country's government.
The Company cannot predict the impact on its sales due to changes in regulation
or legislation by foreign governments, or due to political or fiscal upheaval in
these countries.

TABLE OF COMPANY'S SUBSIDIARIES

ACTIVE (A)
INACTIVE
NAME JURISDICTION OF INCORPORATION YEAR INCORPORATED (I)

Pico Macom, Inc. Delaware 1983 A (1)
Pico Macom Taiwan Co. Ltd. Taiwan 1987 A (2)
Pico (St. Kitts) Ltd. St. Christopher and Nevis 1983 A (1)
Pico (Bermuda) Ltd. Bermuda 1994 A (1)
Pico Products Asia Ltd. Hong Kong 1994 A (3)
Pico Siam Company Limited Thailand 1996 A (2)
PicoMacom Productos de Brazil 1996 A (2)
Telecommunicacao, Ltda
Pico (St. Vincent) Ltd. St. Vincent and the Grenadines 1981 I (1)
Pico Satellite, Inc. Delaware 1983 I (1)
Pico Cargo, Inc. Delaware 1983 I (1)
Pico Korea, Ltd. Korea 1985 I (2)

Notes: (1) Subsidiary of Pico Products, Inc.
(2) Subsidiary of Pico Macom, Inc.
(3) Subsidiary of Pico (Bermuda) Limited.
Ownership percentage in all cases exceeds 90%.

At July 31, 1998, no operational activities were performed by the following
subsidiaries: Pico (St. Vincent) Ltd., Pico Satellite, Inc., Pico Cargo, Inc.
and Pico Korea, Ltd.

ITEM 2. PROPERTIES

The Company presently owns or leases an aggregate of approximately 76,000
square feet of office, production and warehouse space.

Pico Macom leases 60,000 square feet of space in Lakeview Terrace,
California which is used for corporate headquarters for Pico Products, Inc. and
Pico Macom, Inc., final assembly of Pay TV Security division products and Pico
Macom's administration, sales, engineering and distribution functions. The five-
year facility lease expires in March. The net annual rental for the current
facility is approximately $360,000.

Pico (St. Kitts) Limited, which manufactures components for the Company's
CATV Security products, owns a 16,000 square foot building and the underlying
ground lease located in Saint Christopher and Nevis, a country in the Caribbean.
On September 3, 1998, the manufacturing operations related to the St. Kitts
facility were sold and on October 9, 1998, the Company discontinued operations
at St. Kitts

facility. The Company expects to sell the St. Kitts facility and assign the
related lease during fiscal 1999. The net annual rental of the underlying ground
lease is less than $1,000 per year through 2018.

Management believes that the above-described properties are sufficient for
the Company's present needs.

ITEM 3. LEGAL PROCEEDINGS

EAGLE LITIGATION--(all amounts in 000's)

On July 30, 1997, Eagle Comtronics, Inc. ("Eagle") filed a motion in the
United States District Court for the Northern District of New York to amend the
complaint for patent infringement it had filed in 1979 against the Company. This
1979 action had been settled by Consent Judgment in 1988, pursuant to which the
Company and Eagle entered into a License Agreement providing for specified
royalty payments from Eagle to the Company. Eagle's motion sought the District
Court's permission to proceed against the Company under various legal theories
for breach of the License Agreement, based on Eagle's allegation that the
Company, in violation of the License Agreement's "most favored nation" clause,
granted a license to a third party (Arrow Communication Laboratories, Inc.) on
more favorable terms than those provided to Eagle. Eagle sought damages of
approximately $1,600 plus interest and attorneys fees. The Company believed that
Eagle's motion was procedurally improper and that, even if the amended complaint
were allowed by the District Court, it had meritorious defenses to the claims
stated in the amended complaint.

The Company responded to Eagle's motion, and Eagle promptly withdrew the
motion to file an amended complaint. At the same time Eagle filed a complaint in
New York State Supreme Court similar to the proposed amended federal complaint.
The Company filed a motion to dismiss Eagle's complaint, which has been denied.
The Company has appealed such denial. The discovery phase of the case is
proceeding. Management believes that the Company has meritorious defenses to
Eagle's action and that such suit will not have any material adverse effect on
the Company.

ARCOM LITIGATION--(all amounts in 000's)

In November 1991, Arrow Communication Laboratories, Inc. (Arcom) of
Syracuse, New York, initiated a lawsuit in the New York Supreme Court, which, as
amended, alleged that Arcom had a paid-up license with respect to the Company's
patent for positive trapping systems and that Arcom was entitled to unspecified
damages based on overpayment of royalty amounts. Arcom also claimed that it was
entitled to compensatory damages in excess of $250, plus punitive damages of
$3,000, as a result of a Company press release announcing termination of the
license agreement.

The Company initiated a patent infringement suit against Arcom in the United
States District Court for the Northern District of New York, which sought treble
damages for willful infringement plus attorneys fees. The Company requested that
the Court grant a preliminary injunction to prevent Arcom from infringing its
patent. At a Court hearing in February 1994, the parties agreed, and it was
ordered by the Court, that Arcom would post as security amounts equal to the
royalties due to the Company for the manufacture and sale of product covered by
the license agreement from December 15, 1991, the date that the license would
have terminated, until the expiration of the patent in February 1995. Through
July 31, 1995 Arcom had made cash payments of $462 covering royalties through
February 14, 1995. The Company did not include these amounts in income in any
fiscal period but recorded a current liability for $462 at July 31, 1995. In
addition, Arcom agreed to post an irrevocable letter of credit in an amount
deemed sufficient to permit recovery of a significant portion of the Company's
damages if it were to prevail on its willful infringement claim. In exchange,
the Company withdrew its request for a preliminary injunction.

other collateral provided to the Company by Arcom during the litigation, and the
Company reimbursed Arcom approximately $70 for certain fees and expenses.

EPA INFORMATION REQUEST

In March 1995, a subsidiary of the Company received a Joint Request for
Information (the "Information Request") from the United States Environmental
Protection Agency, Region II (the "EPA"), under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), with
respect to the release and/or threatened release of hazardous substances,
hazardous wastes, pollutants or contaminants into the environment at the
Onondaga Lake Site, Syracuse, Onondaga County, New York. The Company learned
that the EPA added the Onondaga Lake Site to the Superfund National Priorities
List in December 1994, and has completed an onsite assessment of the degree of
hazard. The EPA has indicated that the Company is one of 26 companies located in
the vicinity of Onondaga Lake or its tributaries that have received a similar
Information Request.

The Information Request related to the activities of the Company's Printed
Circuit Board Division, which was sold to a third party in 1992, and which
conducted operations within the specified area. Under the Agreement of Sale with
the buyer, the Company retained liability for environmental obligations which
occurred prior to the sale.

The Company has provided all information requested by the EPA. The
Information Request does not designate the Company as a potentially responsible
party, nor has the EPA indicated the basis upon which it would designate the
Company as a potentially responsible party. The Company is therefore unable to
state whether there is any material likelihood for liability on its part, and,
if there were to be any such liability, the basis of any sharing of such
liability with others.

In March 1997, the Company received a follow-on request for additional
information in this matter and has provided all information requested.

OTHER

The Company is involved, from time to time, in certain other legal actions
arising in the normal course of business. Management believes that the outcome
of other litigation will not have a material adverse effect on the Company's
consolidated financial statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

PART II

ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common shares are traded on the American Stock Exchange under
the symbol "PPI". The following table sets forth, for the fiscal periods
indicated, closing prices for the common shares on the American Stock Exchange
as reported by the American Stock Exchange, Inc.

HIGH LOW
--------- ---------

Fiscal Year Ended July 31, 1998:
First Quarter............................................................. 2 1/8 1
Second Quarter............................................................ 1 5/8 1
Third Quarter............................................................. 13/16 1/2
Fourth Quarter............................................................ 3/4 1/4

Fiscal Year Ended July 31, 1997:
First Quarter............................................................. 2 5/16 1 3/4
Second Quarter............................................................ 2 3/8 1 3/8
Third Quarter............................................................. 2 1/16 1 1/16
Fourth Quarter............................................................ 1 1/2 7/8

August 1, 1998 to November 9, 1998.......................................... 1/2 1/4

As of September 30, 1998, there were approximately 2,000 holders of record
of the Company's common shares.

The Company is currently not in compliance with certain of the listing
requirements of the American Stock Exchange. The American Stock Exchange has
continued to list the Company's shares, however, there can be no assurance that
they will continue to do in the future.

The Company has never paid a cash dividend on its common shares. The
Company's Board of Directors currently intends to retain any future earnings for
use in the Company's business. Payment of cash dividends in the future will be
dependent upon the Company's earnings, financial condition, capital requirements
and other factors deemed relevant by the Company's Board of Directors. In
addition, the Company's working capital line of credit and subordinated debt
agreements restrict the payment of dividends. See Notes C and D to the
Consolidated Financial Statements included in Item 8 of this Form 10-K for a
discussion of outstanding debt and related warrants to purchase common shares.

ITEM 6. SELECTED FINANCIAL DATA

The following is selected consolidated financial data of the Company for the
five fiscal years ended July 31, 1998. The selected consolidated financial data
should be read in connection with the consolidated financial statements included
as Item 8 of this Annual Report on Form 10-K.

FISCAL YEAR ENDED JULY 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

1) STATEMENT OF OPERATIONS DATA:
Sales...................................................... $ 27,743 $ 35,448 $ 36,051 $ 33,367 $ 29,886
Income (loss) from operations.............................. $ (832) $ (4,502) $ 534 $ 997 $ 799
Net income (loss).......................................... $ (2,736) $ (5,887) $ (400) $ 526 $ 905
Net income (loss) attributable to common stock............. $ (2,871) $ (5,972) $ (400) $ 526 $ 905
Net income (loss) attributable to common stock:
Basic.................................................... $ (.69) $ (1.45) $ ( .11) $ .15 $ .25
Diluted.................................................. $ (.69) $ (1.45) $ ( .11) $ .12 $ .21
Weighted average common and equivalent shares outstanding:
Basic.................................................... 4,186 4,113 3,798 3,636 3,605
Diluted.................................................. 4,186 4,113 3,798 4,240 4,295
2) BALANCE SHEET DATA:
Working capital............................................ $ (4,060) $ 3,363 $ 3,124 $ 3,497 $ 3,151
Total assets............................................... $ 17,956 $ 19,896 $ 17,945 $ 17,633 $ 13,853
Long-term debt............................................. $ 115 $ 4,915 $ 39 $ 279 $ 632
Redeemable preferred stock................................. $ 1,070 $ 917 $ - $ - $ -
Shareholders' equity (deficiency).......................... $ (3,411) $ (817) $ 4,456 $ 4,513 $ 3,961

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN 000'S, EXCEPT SHARE AMOUNTS)

RESULTS OF OPERATIONS

SALES 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------

Sales............................................................................ $ 27,743 $ 35,448 $ 36,051
Change versus Prior Year......................................................... (21.7%) (1.7%) 8.0%

1998 VERSUS 1997:

The Company has recorded declining sales for the past two fiscal years.
Factors contributing to these decreases were: (1) a decrease in the average
price paid for the Company's product, (2) shutdown of the Company's Far East
sales offices, and (3) product availability and competition.

Reduced prices for the Company products were a result of lower prices from
its suppliers and severe competition from U.S. based distributors of Satellite
Master Antenna Television (SMATV) products. Lower prices from the Company's
suppliers is a result of exchange rate fluctuations and a general decrease in
costs of electrical components.

The shutdown of the Company's Asian Sales office and decreased sales of
products in the international market (excluding Latin America) resulted in
decreased sales of $4,176, or (81.7%), in 1998 versus 1997.

Inaccurate forecasting of customer demand and lower prices offset by higher
sales of certain products, resulted in a shortfall of $3,037, or (12.5%) in 1998
versus 1997. Sales for fiscal year 1998 were substantially

below the Company's targeted sales levels. This shortfall has resulted in
continued pressure on profitability and cashflow, which has put a strain on the
Company's financial position and liquidity.

1997 VERSUS 1996:

The decrease of sales was primarily due to severe competition from U.S.
based distributors of Satellite Master Antenna Television (SMATV) products in
South America. Management is working diligently to recapture lost market share
through competitive pricing and the customer support of the Company's Brazilian
sales and marketing office which was opened in November 1996. The decrease in
Pico Macom's sales into South America during fiscal year 1997 was partly offset
by an increase in sales into the Middle East of over $1,400 compared to the
prior fiscal year. This included a contract worth over $1,000 to supply
components for a CATV system on the Seychelles Islands. A majority of the
contract was supplied as of July 31, 1997.

The Company's CATV division recorded a sales decrease of approximately $110,
or 2%, in fiscal year 1997 compared to the prior year. This decrease was mainly
due to an industry-wide downturn in demand for single channel pay TV decoders.
However, most of this decline was offset by sales of the Company's new high pass
filter used in two-way interactive communications systems. This product was
introduced early in fiscal year 1997, and sales of this product have remained
strong into the first quarter of fiscal year 1998. The Company's Hong Kong
subsidiary recorded a slight sales decrease in fiscal year 1997 compared to the
prior year. Based on the disappointing sales performance of the Hong Kong
subsidiary, management decided to close down its Hong Kong office effective July
31, 1997 and transition to in-country distribution of its products into the Far
East.

COST OF SALES

1998 1997 1996
--------- --------- ---------

Cost of Sales.................................................................... $ 21,213 $ 30,471 $ 27,377
Change versus Prior Year......................................................... (30.4%) 11.3% 8.5%
As a Percentage of Sales......................................................... 76.5% 86.0% 75.9%

1998 VERSUS 1997

The decrease in cost of sales from 1997 to 1998 is due to a reduction in
sales volume and a reduction in inventory reserves. As a percentage of sales,
cost of goods improved in 1998 versus 1997 due to certain reserves and
write-downs recorded during 1997 (described below).

1997 VERSUS 1996

The dollar increase in cost of sales and the increase in cost of sales as a
percentage of sales was primarily due to over $2,000 of reserves for slow moving
and obsolete inventory. Additionally, the Company faced severe price competition
both domestically and in South America, which resulted in price reductions for
many of the Company's products. Startup costs related to initial manufacturing
of some of the Company's new products also impacted costs. Finally, cost of
sales was impacted unfavorably by the lower margins generated by the sales of
third-party products by the Company's Hong Kong subsidiary.

SELLING AND ADMINISTRATIVE EXPENSES

1998 1997 1996
--------- --------- ---------

Selling and Administrative Expenses................................................. $ 7,362 $ 9,479 $ 8,140
Change versus Prior Year............................................................ (22.3%) 16.5% 13.9%
As a Percentage of Sales............................................................ 26.5% 26.7% 22.6%

1998 VERSUS 1997

The reduction of selling and administrative expenses is a result of cost
containment efforts implemented during fiscal 1997 and 1998 to match the
Company's cost structure with its revenue. As noted below, the Company closed
several overseas sales offices and reduced administrative and engineering
personnel during fiscal 1997. In 1998, the Company has continued its cost
control efforts, further reducing headcount in all areas of the Company and
closing its Syracuse, New York, Taiwan and Philadelphia, Pennsylvania
administrative offices. These cost savings were offset by certain one-time costs
incurred in implementing inventory control measures and costs related to closing
down these facilities. Excluding these one-time costs, total selling and
administrative expenses were $6,598, or 23.8% of fiscal 1998 sales.

1997 VERSUS 1996

The primary reasons for the increase were an expansion of the Company's
sales and marketing activities worldwide and approximately $900 of restructuring
costs recorded at July 31, 1997. The restructuring costs include the closing of
the Company's Hong Kong office and transition to in-country distribution to sell
the Company's products in the Far East, as well as a contract settlement with
the Company's former chairman and chief executive officer.

PRODUCT DEVELOPMENT

Product development expenditures for fiscal years 1998, 1997 and 1996 were
approximately $830, $1,340, $1,368, respectively. These amounts are included in
the selling and administrative expenses totals mentioned previously. The product
development efforts during fiscal years 1996 through 1998 were concentrated on
upgrading and expanding Pico Macom's product line to address CATV industry new
products, new features and higher performance specifications. Additionally, new
products were developed for the CATV Division that incorporate 1 GHz capability
in specialized RF filter products for the cable industry. Also, broadband
amplifiers that support 1 GHz with two-way capabilities were designed and
brought into production. Agile headend products, including modulator and
demodulator products, were brought into full manufacturing.

Management believes that in order to remain competitive in a constantly
changing technological market place, the Company will need to increase levels of
product development expenses, or enter into alternative arrangements to maintain
a competitive offering of product.

INTEREST EXPENSE

Interest expense increased 37% in fiscal 1998 as compared to fiscal 1997 and
46% in fiscal 1997 as compared to fiscal 1996. The increase in interest expense
is due to the increase in long-term debt related to the November 1996 and
October 1997 subordinated financings. The long-term debt was used to fund
increases in inventory and pay for operating costs related to its expansion
efforts in Asia. Subsequent to July 31, 1998, the Company repaid $1,390 of
subordinated debt and reduced the amount outstanding under its working capital
line of credit by approximately $2,000. As a result of these payments the
Company expects a reduction in interest expense during fiscal 1999.

INCOME TAX PROVISION

No provision for U.S. Federal and state regular income taxes or foreign
income taxes have been recorded for fiscal year 1998, 1997 and 1996 due to no
taxable income and the Company's U.S. Federal, state and foreign net operating
loss carryforward positions and a tax holiday granted to one of the Company's
foreign subsidiaries.

NET LOSS ATTRIBUTABLE TO COMMON STOCK

The Company has recorded a net loss attributable to common stock for each of
the last three fiscal years. Several factors have contributed to these losses.
The most significant factor contributing to these losses was the failure of its
expansion efforts in Asia which resulted in both operating losses (during

fiscal 1996 and 1997) and a significant increase in interest expense during
fiscal 1998 (due to funding of losses and investment in inventory). In addition,
price competition, an inability to meet customer demand due to inventory
availability of certain products, and a shortfall in achieving targeted sales
levels contributed to these net losses.

Return to profitability in fiscal year 1999 is contingent upon a resurgence
in demand for the Company's products on a worldwide basis as compared to fiscal
1998, tight control of operating expenses, and effective inventory management to
meet customer requirements. Reductions in outstanding indebtedness, subsequent
to July 31, 1998, will reduce interest expense and also contribute to a return
to profitability.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

The Company has generated negative operating cash flows of $199, $6,500, and
$513 for fiscal years 1998, 1997 and 1996, respectively. These negative
operating cash flows have been funded by increased borrowings, both long- and
short-term, and the issuance of preferred stock.

The Company was in technical violation of several of the financial covenants
related to both its subordinated debt and working capital line of credit. These
covenants provided for achieving certain quarterly sales, earnings, and related
ratio tests. Both the senior lender and subordinated lender have agreed to waive
these violations as of July 31, 1998. In addition, the senior lender has revised
certain ratios and tests, with which the Company believes that it will comply in
the future. Due to the uncertainty in meeting these revised and continuing
covenants under the Company's various borrowing agreements the Company has
reclassified $5,478, representing the subordinated debentures, as a current
liability. However, the holders of the subordinated debt have not requested
payment or any acceleration of payment of the subordinated debentures.

In order to achieve compliance with the covenants in subsequent quarters it
will be critical to maintain control over expenses. In the event that the
Company fails to meet certain covenants under its senior and subordinated
borrowing agreements the Company will seek to obtain a waiver. However, there
can be no assurances that the Company's senior or subordinated lenders would
grant a waiver of any future covenant violations.

To maintain adequate liquidity to fund product purchases and reduce
outstanding indebtedness it is critical that the Company achieve a return to
profitability during fiscal 1999. Management believes that it has taken several
actions that will contribute to a return to profitability. During fiscal 1998,
the Company has reduced its annualized Selling and Administrative expenses by
over $3,000. In addition, during the first quarter of fiscal 1999, the Company
sold its trap and filter manufacturing operation, the proceeds of which will be
used to reduce both long- and short-term debt and to provide additional working
capital. To return to profitability it will be critical to maintain a tight
control over expenses and reverse recent trends.

In the event that management is unable to control expenses and maintain
sales, the Company will need to raise additional capital through issuance of
additional stock or long-term debt on terms favorable to the Company. If the
Company is unable to raise additional capital the Company may be forced to seek
other alternatives, including obtaining concessions from its current lenders and
product suppliers or to sell its business, in whole or part.

Management believes that its relationships with its lenders and product
suppliers are sound and that it will be able to continue to meet its obligations
and obtain adequate product inventory during fiscal 1999.

At July 31, 1998 the Company had $14,898 of secured debt including a working
capital line of credit of $9,139 and subordinated debt of $5,759 plus unsecured
redeemable preferred stock of $1,070.

Subsequent to July 31, 1998, and in connection with the sale of its trap and
filter manufacturing operation the Company and its working capital lender
revised the terms of Company's working capital line of credit. The revolving
line of credit is used to fund operating expenses and product purchases. The new
terms provide for an $8,000 total commitment with a $1,000 sublimit for
outstanding letters of credit. The

amount available to borrow at any one time is subject to various percentages of
eligible accounts receivable and eligible inventory as defined in the agreement.
The credit facility is subject to certain financial tests and covenants
continuing through the term of the agreement. The line of credit is subject to
review and renewal on December 31, 1998 and shall be automatically renewed for
successive monthly terms; provided, however, that either party may terminate the
loan agreement upon written notice. Management believes that this commitment is
adequate to support the Company's needs during fiscal 1999. It will be
necessary, however, to obtain a renewal of this commitment or to obtain
alternative financing in the event the Company's current lender does not renew
its commitment.

In addition to its working capital indebtedness, major sources of financing
outstanding at July 31, 1998 are $5,000 12% subordinated debentures issued in
November 1996 and due in installments beginning fiscal 2001, $985 of 10%
subordinated debentures issued in October 1997 due in 2000, (see above
discussion regarding classification of these liabilities as current) and the
issuance of $1,000 in November 1996 of seven year 12% and $165 in October 1997
of three year 10% redeemable preferred stock. Under these various private
placements of preferred stock and subordinated debentures, the Company has
issued warrants to purchase 955,176 shares of common stock at $1.81 and
1,004,641 shares of common stock at $1.17.

The private placement financing agreements require the Company to meet
certain financial covenants which are similar to the Company's working capital
revolving line of credit. Additionally, these agreements prohibit the
distribution of cash, stock or other property to shareholders (whether
characterized as dividends or otherwise) or the redemption or repurchase of the
Company's capital stock or similar securities, subject to limited exceptions.

Subsequent to July 31, 1998 the Company repaid $1,390 of the $5,000 12%
subordinated debentures. In connection with the debt repayment, 265,539 warrants
to purchase common stock issued to holders of the subordinated debt were
canceled.

As noted previously, management must continue to control expenses and
achieve consistent sales performance in order to achieve a return to
profitability. A return to profitability and positive cash flow from operations
will be required in order to remain in compliance with these revised covenants
and to begin mandatory principal reductions beginning in fiscal 2001. Achieving
profitability is subject to various uncertainties including general economic
conditions and the actions of actual or potential competitors and customers. The
Company's future prospects depend on the growth of the CATV market in the United
States and internationally. In the United States, a number of factors could
affect the future profitability of the Company, including changes in the
regulatory climate for CATV, changes in the competitive structure of the cable
and telecommunications industry or changes in the technology base of the
industry.

FISCAL 1998 FINANCING ACTIVITIES

At July 31, 1998, the Company had approximately $9,139 in revolving loans
and approximately $60 in letters of credit outstanding, and the unused portion
of the borrowing base was $316.

On September 12, 1997, the Company completed a private placement with two
institutional investors raising gross proceeds of $1,135 consisting of $985 of
10% subordinated debentures due in three years and $150 of preferred stock. The
proceeds, net of various transaction costs of $117, were used to repay $150 of
previously issued subordinated notes payable and provide additional working
capital of $868. In connection with the financing and issuance of preferred
stock, the Company has issued warrants for 860,441 and 144,200 shares of its
common stock to the holders of the subordinated debt and preferred stock,
respectively. 209,000 of the warrants are subject to call up to 90 days after
all the obligations under the debentures are fully paid, at $3.00 per share, or
if the warrants have not been exercised, to repurchase the such unexercised
warrants subject to call at $3.00 per share less $1.81 per share exercise price.
The warrants are exercisable at any time to the later of the date which is (i)
three years after the obligations have been repaid in full, or (ii) six years
from the date of issuance, at a price of $1.17 per share.

As a condition to the financing, one of the investors requested that the
Company's directors participate in the financing. During fiscal 1998, Officers
and Directors of the Company executed a

participation agreement with such investors for $535. See Note P to Notes to
Consolidated Financial Statements.

FISCAL 1997 FINANCING ACTIVITIES

In February 1997, the Company was notified by the holders of two outstanding
notes payable that they intended to exercise 100,000 warrants to purchase common
stock of the Company, totaling $100 against the second installment payment due
on the debt. This transaction was completed in February 1997.

During the second half of fiscal year 1996, management determined that the
Company's credit arrangements, along with an inventory reduction program
implemented by the Company, would not provide sufficient cash to fund growth in
the Company's sales and planned operations for fiscal year 1997 and beyond.
Consequently, on November 21, 1996 the Company completed a private placement
financing totaling $6,000 with two U.S. based institutional investors to provide
funds for general working capital requirements and investment in new product
development, market development, and upgrade of facilities. The private
placement consisted of $5,000 of seven-year 12 percent subordinated debentures
sold to Allied Capital Corporation of Washington, D.C. and certain of its
affiliates, and $1,000 of seven-year 12 percent redeemable preferred stock sold
to the Sinkler Corporation of Wilmington, Delaware.

In connection with the financing, Allied Capital Corporation and affiliates
received warrants to purchase 779,313 shares of the Company's common stock. The
Sinkler Corporation received warrants to purchase 155,863 of the Company's
common stock, and Shipley Raidy Capital Partners, LP, the Company's investment
banker, received warrants to purchase 20,000 shares of the Company's common
stock. Additionally, Allied Capital Corporation and affiliates and The Sinkler
Corporation received warrants to purchase, in the aggregate, up to 18% of the
number of shares of the Company's common stock resulting from the exercise, from
time to time, by holders of options and warrants previously granted by the
Company. The warrants are exercisable at a price of $1.81 per share, the average
closing price of the Company's common stock for the 30 trading days prior to
November 21, 1996.

Various transaction costs totaling $459 were incurred in conjunction with
the private placement financing. These costs are being amortized over the
seven-year term of the debt and preferred stock.

On September 12, 1997 the Company completed a private placement financing
totaling $1,650 with two U.S. based institutional investors to provide funds for
general working capital requirements. The private placement provides for an
investment of up to $1,485 of three-year 10 percent junior subordinated
debentures by Allied Capital Corporation and affiliates, and an investment of
$165 of three-year 10 percent redeemable preferred stock by The Sinkler
Corporation. In connection with the financing, the Company has agreed to issue
to the investors warrants for up to 1,442,000 shares of its common stock.

In February 1996, the Company was notified by the holders of the two
outstanding notes payable that they intended to exercise 250,000 warrants to
purchase common stock of the Company as an offset against the first $250
installment payment due on the debt. This transaction was completed by the end
of March 1996.

CAPITAL EXPENDITURES

During the years ended July 31, 1998, 1997 and 1996, cash used for capital
expenditures was approximately $ 283, $283 and $229, respectively. Capital
expenditures for fiscal year 1999 are expected to be under $250.

OTHER

YEAR 2000

The Company has developed a plan to address the possible exposure related to
the impact on its computer systems of the Year 2000. Key financial information
and operational and product systems have

been assessed and plans have been developed to address systems modifications
required by December 31, 1999. The financial impact of making the required
systems changes is not expected to be material to the Company's consolidated
financial position, results of operations, or cash flow. In addition, the
Company will be communicating with others with whom it does significant
business, including but not limited to its suppliers, key customers and lenders,
to determine their Year 2000 compliance readiness and the extent to which the
Company is vulnerable to any third party Year 2000 issues. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company. The risk of Year 2000 issues is
mitigated by the fact that the Company does not significantly rely upon any one
major supplier or customer and that its products do not contain date-sensitive
computer software or hardware.

IMPACT OF TECHNOLOGICAL OBSOLESCENCE

The Company's products are subject to technological obsolescence as
government regulations, competition or the nature of the broadband
communications industry could require changes in the current product lines. The
rapid changes in all sectors of the communications industry and the entry of new
technology could significantly impact the sale of the Company's products. While
management is not aware of any specific products, regulations or requirements
that would create significant obsolescence in the next fiscal year,
technological obsolescence could materially affect the operating results of the
Company in any fiscal period.

IMPACT OF INFLATION AND CHANGING PRICES

Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced some increased costs of materials,
supplies, salaries and benefits due to inflation. The Company attempts to pass
on increased costs and expenses by increasing selling prices, when possible, and
by developing more useful and economical products that can be sold at favorable
profit margins.

FOREIGN OPERATIONS

A substantial portion of the Company's products are purchased from vendors
in Taiwan, the Company is subject to price increases and decreases imposed by
those vendors to compensate for currency fluctuations. During fiscal years 1996
through 1998 the U.S. dollar generally maintained its purchasing power against
the currencies of the countries from which the Company purchases most of its
products. If the U.S. dollar were to weaken, the Company would consider setting
price increases for its products. Continued weakening of the U.S. dollar could
cause the Company to lose its competitive costing edge to U.S.-based
manufacturers, which could adversely affect operating results. Restrictive
foreign government regulations or political instability could also materially
affect the operating results of the Company. As discussed above, foreign
economic and financial uncertainties could also materially affect sales levels
to foreign customers which could materially affect the operating results of the
Company.

FORWARD LOOKING STATEMENTS

Statements which are not historical facts, including statements about the
Company's confidence, strategies and expectations, technologies and
opportunities, industry and market segment growth, demand and acceptance of new
and existing products, and return on investments in products and markets, are
forward looking statements that involve risks and uncertainties, including
without limitation, the effect of general economic and market conditions,
industry market conditions caused by changes in the supply and demand for the
Company's products, the continuing strength of the markets the Company serves,
competitor pricing, maintenance of the Company's current momentum and other
factors.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders of Pico Products, Inc.:

We have audited the accompanying consolidated balance sheets of Pico
Products, Inc. and its subsidiaries as of July 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity
(deficiency), and cash flows for each of the three years in the period ended
July 31, 1998. Our audits also included the financial statement schedule listed
at Item 14a(2). These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pico Products, Inc. and its
subsidiaries at July 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended July 31, 1998
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
A to the financial statements, the Company has continuing losses from operations
and negative cash flows. At July 31, 1998 the Company was not in compliance with
certain covenants of its loan agreements which the lenders have temporarily
waived. The Company's continuing losses from operations and negative cash flows
as well as difficulties in meeting its loan agreement covenants and financing
needs raise substantial doubt about its ability to continue as a going concern.
Due to the uncertainty in meeting these revised and continuing covenants under
the Company's various borrowing agreement the Company has reclassified all of
the debt under its subordinated debentures as a current liability. Management's
plans concerning these matters are also described in Note A. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

DELOITTE & TOUCHE LLP

Los Angeles, California
November 13, 1998

PICO PRODUCTS, INC.

CONSOLIDATED BALANCE SHEETS

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

JULY 31,
--------------------
1998 1997
--------- ---------

ASSETS (Note C):
CURRENT ASSETS:
Cash and cash equivalents.................................................................... $ 93 $ 22
Accounts receivable (less allowance for doubtful accounts: July 31, 1998, $139; July 31,
1997, $200)................................................................................ 3,871 5,622
Inventories (Note B)......................................................................... 11,997 11,961
Prepaid expenses and other current assets.................................................... 161 340
--------- ---------
TOTAL CURRENT ASSETS....................................................................... 16,122 17,945
--------- ---------
PROPERTY, PLANT AND EQUIPMENT (Note E):
Buildings.................................................................................... 217 217
Leasehold improvements....................................................................... 187 280
Machinery and equipment...................................................................... 2,420 2,900
--------- ---------
2,824 3,397
Less accumulated depreciation and amortization............................................... 1,914 2,431
--------- ---------
910 966
--------- ---------
OTHER ASSETS:
Patents and licenses (less accumulated amortization: July 31, 1998, $74; July 31, 1997,
$68)....................................................................................... 147 153
Excess of cost over net assets of businesses acquired (less accumulated amortization; July
31, 1998, $425; July 31, 1997, $396)....................................................... 152 181
Deposits and other non-current assets........................................................ 192 235
Debt Issuance Costs (less accumulated amortization; July 31, 1998, $146; July 31, 1997;
$44)....................................................................................... 433 416
--------- ---------
924 985
--------- ---------
$ 17,956 $ 19,896
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Notes payable (Note C)......................................................................... $ 9,139 $ 9,425
Current portion of long-term debt (Note D)..................................................... 5,644 133
Accounts payable............................................................................... 3,614 3,349
Accrued expenses:
Legal and accounting......................................................................... 364 213
Payroll and payroll taxes.................................................................... 491 486
Other accrued expenses....................................................................... 661 396
Restructuring costs (Note N)................................................................. 269 580
--------- ---------
TOTAL CURRENT LIABILITIES.................................................................... 20,182 14,582
--------- ---------
LONG-TERM DEBT (Note D)........................................................................ 115 4,915
RESTRUCTURING COSTS (Note N)................................................................... -- 299
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes E and M).................................................. -- --
REDEEMABLE PREFERRED STOCK, $.01 par value; authorized 500,000 shares; issued and outstanding
1,250 shares at July 31, 1998 and 1,000 shares at July 31, 1997 (Note D)..................... 1,070 917
--------- ---------
SHAREHOLDERS' DEFICIENCY (Notes K and L):
Common shares, $.01 par value; authorized 15,000,000 shares issued and outstanding 4,215,913
shares at July 31, 1998 and 4,185,913 shares at July 31, 1997.............................. 42 42
Additional paid-in capital................................................................... 22,992 22,715
Stock subscriptions receivable............................................................... (81) (105)
Accumulated deficit.......................................................................... (26,253) (23,382)
Cumulative translation adjustment............................................................ (111) (87)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIENCY................................................................. (3,411) (817)
--------- ---------
$ 17,956 $ 19,896
--------- ---------
--------- ---------

See notes to consolidated financial statements

PICO PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN 000'S EXCEPT SHARE AND PER SHARE AMOUNTS)

YEAR ENDED JULY 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------

SALES (Note I)............................................................. $ 27,743 $ 35,448 $ 36,051

COSTS AND EXPENSES

Cost of Sales............................................................ 21,213 30,471 27,377

Selling and administrative expenses (Notes H and N) 7,362 9,479 8,140
---------- ---------- ----------

TOTAL COSTS AND EXPENSES................................................... 28,575 39,950 35,517
---------- ---------- ----------

INCOME (LOSS) FROM OPERATIONS.............................................. (832) (4,502) 534

OTHER INCOME (Note F)...................................................... 13 14 22

INTEREST EXPENSE........................................................... (1,917) (1,399) (956)
---------- ---------- ----------

LOSS BEFORE INCOME TAXES................................................... (2,736) (5,887) (400)

INCOME TAX PROVISION (Note G).............................................. -- -- --
---------- ---------- ----------

NET LOSS................................................................... (2,736) (5,887) (400)

DIVIDENDS ON PREFERRED STOCK............................................... 135 85 --
---------- ---------- ----------

NET LOSS ATTRIBUTABLE TO COMMON STOCK...................................... $ (2,871) $ (5,972) $ (400)
---------- ---------- ----------
---------- ---------- ----------

Basic and Diluted Net Loss Per Common Share................................ $ (.69) $ (1.45) $ (.11)
---------- ---------- ----------
---------- ---------- ----------

Shares used in Basic and Diluted Per Share Calculations.................... 4,185,895 4,113,229 3,797,972
---------- ---------- ----------
---------- ---------- ----------

See notes to consolidated financial statements.

PICO PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)

(IN 000'S EXCEPT SHARE AND PER SHARE AMOUNTS)

COMMON ADDITIONAL STOCK CUMULATIVE
NUMBER OF SHARES -- PAID-IN SUBSCRIPTIONS ACCUMULATED TRANSLATION
COMMON SHARES PAR VALUE CAPITAL RECEIVABLE DEFICIT ADJUSTMENT TOTAL
--------------- ------------- ----------- --------------- ------------ ------------- ---------

BALANCE
July 31, 1995......... 3,637,046 36 21,565 0 (17,010) (78) 4,513
--------------- --- ----------- ----- ------------ ----- ---------
Cumulative Translation
Adjustment.......... -- -- -- -- -- (17) (17)
Shares issued under
stock incentive
plans............... 165,200 2 107 -- -- -- 109
Shares issued for
exercise of stock
warrants............ 250,000 3 248 -- -- -- 251
Stock subscriptions
receivable.......... -- -- 115 (115) -- --
Net loss.............. -- -- -- -- (400) -- (400)
--------------- --- ----------- ----- ------------ ----- ---------
BALANCE
July 31, 1996......... 4,052,246 41 22,035 (115) (17,410) (95) 4,456
--------------- --- ----------- ----- ------------ ----- ---------
Cumulative Translation
Adjustment.......... -- -- -- -- 8 8
Shares issued under
stock incentive
plans............... 33,667 -- 47 -- -- -- 47
Shares issued for
exercise of stock
warrants............ 100,000 1 99 -- -- -- 100
Stock subscriptions
receivable.......... (10) 10 -- -- --
Value of stock
Warrants issued
(Note D)............ 544 -- -- -- 544
Preferred Dividend.... -- -- -- -- (85) -- (85)
Net loss.............. -- -- (5,887) -- (5,887)
--------------- --- ----------- ----- ------------ ----- ---------
BALANCE
July 31, 1997......... 4,185,913 $ 42 $ 22,715 $ (105) $ (23,382) $ (87) $ (817)
--------------- --- ----------- ----- ------------ ----- ---------
Cumulative Translation
Adjustment.......... -- -- -- -- (24) (24)
Shares issued under
stock incentive
plans............... 30,000 -- 30 -- -- -- 30
Shares issued for
exercise of stock
warrants............ -- -- --
Stock subscriptions
receivable.......... (24) 24 -- -- --
Value of stock
Warrants issued
(Note D)............ -- -- 271 -- -- -- 271
Preferred Dividend.... -- -- -- (135) -- (135)
Net loss.............. (2,736) -- (2,736)
--------------- --- ----------- ----- ------------ ----- ---------
BALANCE
July 31, 1998......... 4,215,913 $ 42 $ 22,992 $ (81) $ (26,253) $ (111) $ (3,411)
--------------- --- ----------- ----- ------------ ----- ---------

See notes to consolidated financial statements.

PICO PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

YEAR ENDED JULY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $ (2,736) $ (5,887) $ (400)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 653 522 362
Provision for losses on accounts receivable................................... (21) 124 144
Provision for inventory obsolescence.......................................... (1,686) 2,200 175
Changes in operating assets and liabilities:
Accounts receivable........................................................... 1,772 (456) 459
Inventories................................................................... 1,650 (3,221) (1,365)
Prepaid expenses and other current assets..................................... 179 (149) (7)
Other assets.................................................................. 43 16 (115)
Accounts payable.............................................................. 265 (572) 595
Accrued expenses.............................................................. 427 44 101
Other liabilities............................................................. (135) -- (462)
Restructuring costs (Note N).................................................. (610) 879 --
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES............................................. (199) (6,500) (513)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (283) (283) (229)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreements.................................. $ (286) $ 1,197 $ 449
Issuance of long-term debt (Note D)............................................. 1,105 5,000 --
Issuance of preferred stock (Note D)............................................ 165 1,000 --
Private placement financing costs (Note D)...................................... (120) (459)
Principal payments on long-term debt............................................ (311) (116) (135)
Proceeds from exercise of stock options......................................... -- 38 86
Dividends paid on preferred stock............................................... -- (14) --
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES......................................... 553 6,646 400
--------- --------- ---------
NET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS............................... 71 (137) (342)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................... 22 159 502
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......................................... $ 93 $ 22 $ 160
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest........................................................................ $ 1,599 $ 1,325 $ 954
--------- --------- ---------
--------- --------- ---------
Income taxes.................................................................... $ -- $ 10 $ 29
--------- --------- ---------
--------- --------- ---------

See notes to consolidated financial statements.

PICO PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

In July 1998, per the terms of a severance agreement, a former employee of
the Company was issued 30,000 shares and the Company forgave a stock
subscription note receivable of $30.

During 1998 the reported dividends on preferred stock of $135. This amount
is included in Other Liabilities.

In fiscal 1998, the Company financed the purchase of lab, test and office
equipment totaling $120.

In February 1997 the holders of $100 of the Company's notes payable
exercised 100,000 warrants to purchase common stock of the Company at $1.00 per
share. The proceeds from the exercise of the warrants offset the payment due on
the debt.

In fiscal year 1997 the Company financed the purchase of computer, office
and test lab equipment totaling approximately $358.

In fiscal year 1996 the Company financed the purchase of office and test lab
equipment totaling approximately $94.

In March 1996 the holders of $250 of the Company's notes payable exercised
250,000 warrants to purchase common stock of the Company at $1.00 per share. The
proceeds from the exercise of the warrants offset the payment due on the debt.

In April 1996 an officer of the Company exercised options to acquire 125,000
shares of the Company's common stock in exchange for a stock subscription note
receivable.

In June 1996 several officers and employees of the Company exercised options
to acquire 50,000 shares of the Company's common stock in exchange for stock
subscription notes receivable.

See notes to consolidated financial statements.

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Pico Products,
Inc. and its wholly owned subsidiaries. All significant inter-company balances
and transactions have been eliminated in consolidation.

Profitability of operations is subject to various uncertainties including
general economic conditions and the actions of actual or potential competitors
and customers. The Company's future depends on the growth of the cable TV market
in the United States and internationally. In the United States, a number of
factors could affect the future profitability of the Company, including changes
in the regulatory climate for cable TV, changes in the competitive structure of
the cable and telecommunications industries or changes in the technology base of
the industry. Internationally, the Company's profitability depends on its
ability to penetrate new markets in the face of competition from other United
States and foreign companies.

The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred continuing
losses from operations and negative cash flows.

At July 31, 1998 the Company was in technical violation of several of the
financial covenants related to both its subordinated debt and working capital
line of credit. These covenants provided for achieving certain quarterly sales,
earnings, and related ratio tests. Both the senior lender and subordinated
lender have agreed to waive these violations as of July 31, 1998. In addition,
the senior lender has revised certain ratios and tests. These factors among
others may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time. See Note C below.

In order to achieve compliance with the covenants in subsequent quarters it
will be critical to reverse recent sales trends and to maintain control over
expenses. In the event that the Company fails to meet certain covenants under
its senior and subordinated borrowing agreements the Company will seek to obtain
a waiver. However, there can be no assurances that the Company's senior or
subordinated lenders will grant a waiver of any future covenant violations. Due
to the uncertainty in meeting these revised and continuing covenants under the
Company's various borrowing agreements the Company has reclassified $5,478,
representing the subordinated debentures, as a current liability. However, the
holders of the subordinated debt have not requested payment or any acceleration
of payment of the subordinated debentures.

To maintain adequate liquidity to fund product purchases and reduce
outstanding indebtedness it is critical that the Company achieve a return to
profitability during fiscal 1999. Management believes that it has taken several
actions that will contribute to a return to profitability. During fiscal 1998,
the Company has reduced its annualized Selling and Administrative expenses by
over $3,000. In addition, during the first quarter of fiscal 1999, the Company
sold it's trap and filter manufacturing operation, the proceeds of which will be
used to reduce both long- and short-term debt and to provide additional working
capital. To return to profitability it will be critical to maintain a tight
control over expenses and maintain sales at recent levels.

In the event that management is unable to control expenses and maintain
sales, the Company will need to raise additional capital through issuance of
additional stock or long-term debt on terms favorable to the Company. If the
Company is unable to raise additional capital the Company may be forced to seek
other alternatives, including obtaining concessions from it's current lenders
and product suppliers or to sell its business, in whole or part.

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DESCRIPTION OF BUSINESS

Pico Products, Inc. and its subsidiaries (the "Company") design, manufacture
and distribute products and systems for the pay TV and cable TV industry (CATV),
broadband communications and other signal distribution markets. These other
distribution markets include "private" cable TV systems such as those found in
hotels, schools, hospitals and large apartment complexes. Private cable systems
are referred to in the industry as master antenna (MATV) or satellite master
antenna (SMATV) systems. These systems receive satellite and "off-air" (or
broadcast) signals at a single source known as the "headend". The signals are
processed and then distributed by coaxial or fiber optic cable to the consumer.
Also included in other signal distribution markets are wireless cable or MMDS
(multichannel multipoint distribution systems) and business-to-business or
direct-to-home (DTH) communications by satellite. The Company also sells pay TV
security products and home satellite market products.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash equivalents,
accounts receivable, accounts payable, and debt instruments. The carrying value
of cash equivalents, accounts receivable and accounts payable, are
representative of their fair values due to their short maturities. The estimated
fair value of the revolving bank line of credit approximates fair value because
of its variable interest rate. It is not practical to estimate the fair value of
the Company's private placement financing due to the lack of quoted market price
and a valuation model necessary to make an estimate has not been obtained or
developed.

CONCENTRATION OF CREDIT RISK

Financial instruments which subject the Company to credit risk consist
primarily of accounts receivable. Concentration of credit risk with respect to
accounts receivable is generally diversified due to the large number of entities
comprising the Company's customer base and their geographic dispersion. The
Company performs ongoing credit evaluations of its customers and maintains an
allowance for potential credit losses.

During Fiscal 1998, the Company obtained foreign credit insurance for
certain receivables due from customers based in South America and Mexico.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventory costs consist of material, direct labor and overhead.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided for on the straight-line method over the estimated
useful lives of the assets as follows:

Buildings.................................................................... 20 years
Leasehold improvements....................................................... Term of lease
Machinery and equipment...................................................... 3 to 10 years

During the fiscal years ended July 31, 1998 and 1997, approximately $349 and
$342, respectively, of cost and the related accumulated depreciation were
removed from the accounting records for fully depreciated assets no longer in
use.

Repairs and maintenance costs not extending the useful life of the assets
are expensed in the year incurred. Betterments are capitalized.

PATENTS AND TRADEMARKS

Patents and trademarks are amortized on the straight-line method over the
shorter of their estimated useful lives or the remaining lives of the patents
and trademarks which at July 31, 1998 represented 14 to 25 years.

IMPAIRMENT OF LONG-LIVED ASSETS

The excess of the Company's purchase price of subsidiaries over the fair
market value of net assets acquired is being amortized on the straight-line
method over twenty years. The Company reviews the carrying value of all tangible
and intangible assets on a regular basis, and if the undiscounted future cash
flows are believed insufficient to recover the remaining carrying value of the
asset, the carrying value is written down to its estimated fair value in the
period the impairment is identified.

REVENUE RECOGNITION

Revenue from sale of products or services is recognized when goods are
delivered or services performed. Reserves for estimated product returns are
provided at the time of sale.

DEBT ISSUANCE COSTS

Debt issuance costs are included in other non-current assets and are
amortized over the term of the related debt.

INCOME TAXES

Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards.

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME (LOSS) PER SHARE

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, ("SFAS 128") "Earnings per Share."
SFAS 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share based upon the weighted average number
of common shares for the period. It also requires dual presentation of basic and
diluted earnings per share for companies with complex capital structures. SFAS
128 was adopted by the Company for the fiscal year ending July 31, 1998 and
earnings per share for all prior periods have been be restated.

Loss per common and common equivalent share is based upon the weighted
average number of common shares outstanding during each year, assuming exercise
of dilutive outstanding stock options and warrants. Due to a Net Loss
Attributable to Common Stock reported in each of the last three fiscal years,
shares issuable upon exercise of stock options and warrants have not been
included in the calculation of the Diluted loss per share. At July 31, 1998 the
Company had 2,495,467 shares issuable upon the exercise of outstanding stock
options and warrants at prices ranging from $1.10 to $3.19.

CERTAIN RECLASSIFICATIONS

The Company has made certain reclassifications to the 1997 and 1996
consolidated financial statements to conform to the classifications used in the
1998 consolidated financial statements.

B. INVENTORIES

The composition of inventories was as follows:

JULY 31,
--------------------
1998 1997
--------- ---------

Raw materials........................................................... $ 4,280 $ 4,635
Work in process......................................................... 761 606
Finished goods.......................................................... 6,956 6,720
--------- ---------
$ 11,997 $ 11,961
--------- ---------
--------- ---------

C. NOTES PAYABLE

At July 31, 1998, the Company's Pico Macom, Inc. subsidiary (Pico Macom) had
a $11,000 revolving bank line of credit with HSBC Business Loans, a member of
the Hongkong and Shanghai Banking Corporation Group, which provides for interest
at the prime rate (8.5% at July 31, 1998 and July 31, 1997) plus 1.25%. The bank
line of credit is used to fund operating expenses, product purchases and letters
of credit for import purchases. The line of credit is secured by substantially
all of Pico Macom's assets, including all trade accounts receivable and
inventories.

The line is structured as a $11,000 line of credit with a sublimit of $1,500
for outstanding letters of credit. The amount available to borrow at any one
time is based upon various percentages of eligible accounts receivable and
eligible inventories as defined in the agreement. At July 31, 1998, Pico Macom
had $9,139 in revolving loans and $60 in letters of credit outstanding, and the
unused portion of the borrowing base was $316.

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

C. NOTES PAYABLE (CONTINUED)

The line of credit arrangement is subject to various financial tests and
covenants, including but not limited to, tangible net worth, working capital and
current ratio requirements; and contains certain restrictions on acquisitions,
capital expenditures and payment of dividends or purchases of stock.

At July 31, 1998 the Company was in technical violation of certain terms and
conditions. The Company's lenders have agreed at July 31, 1998 to waive
compliance of these terms. Subsequent to July 31, 1998, the Company negotiated
new terms, including several revised financial tests and covenants. The line of
credit expires December 31, 1998 and shall be automatically renewed for
successive monthly terms; provided, however, that either party may terminate the
loan agreement upon written notice.

This new arrangement provides for a total commitment of a $8,000 line of
credit with a sublimit of $1,000 for outstanding letters of credit, as well as
revised formulas for calculating eligible account receivables and inventories.
See Note A for a discussion of continuing compliance with the terms and
conditions of the Company's revolving line of credit (senior debt) and
subordinated borrowings (see Note D).

D. LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK

JULY 31,
--------------------
1998 1997
--------- ---------

Long-term debt consisted of the following:
Subordinated debentures to domestic investment funds, payable in
installments beginning in fiscal 2001 through fiscal 2004, with interest
at 12.0% net of debt discount for valuation of warrants of $348 and $161,
respectively............................................................. $ 4,652 $ 4,575
Subordinated debentures to domestic investment funds, payable in 2000, net
of debt discount of $161 for valuation of warrants, with interest at
10%...................................................................... 826 --
Subordinated notes payable to domestic investment funds, with interest at
10.0%.................................................................... -- 150
Capital lease obligations (Note E)......................................... 281 319
Other loans payable........................................................ -- 4
--------- ---------
5,759 5,048
Less current portion....................................................... 5,644 133
--------- ---------
$ 115 $ 4,915
--------- ---------
--------- ---------

At July 31, 1998 the Company was in technical violation of certain terms and
conditions related to achieving certain quarterly sales, earnings, and related
ratio tests. The Company's subordinated lenders have agreed at July 31, 1998 to
waive compliance with these terms. See Note A for a discussion of continuing
compliance with the terms and conditions of the Company's revolving line of
credit (see Note C for a description) and the subordinated debentures described
below. Due to the uncertainty in meeting these revised and continuing covenants
under the Company's various borrowing agreements the Company has reclassified
$5,478, representing the subordinated debentures, as a current liability.
However, the

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

D. LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK (CONTINUED)
holders of the subordinated debt have not requested payment or any acceleration
of payment of the subordinated debentures.

On September 12, 1997 the Company completed a private placement financing
$1,650 with two U.S.-based institutional investors to provide funds for general
working capital requirements. The private placement provides for an investment
of up to $1,485 of three-year 10 percent junior subordinated debentures and $165
of three-year 10 percent redeemable preferred stock. In connection with the
financing, the Company has agreed to issue to the investor's warrants for up to
1,442,000 shares of its common stock, of which 300,000 shares are subject to
call provisions. These call provisions permit the Company at any time to 90 days
after all of its obligations under the debentures are fully paid to purchase
from the investors up to 300,000 shares of the warrant shares, at $3.00 per
share, or if the warrants have not been exercised, to repurchase such
unexercised warrants subject to call at $3.00 per warrant share less the per
share exercise price.

The Company received gross proceeds of $1,135 of the total financing
facility using $985 to fund the Company's operating needs and $150 to refinance
previously issued subordinated notes payable by the Company, which were
purchased by one of the institutional investors in June 1997. Additionally, the
Company issued to investors warrants for 1,004,641 shares of its common stock,
of which 209,000 shares are subject to the above call provisions. The Company
does not expect to receive the remaining balance of the commitment nor be
required to issue any additional warrants to purchase shares.

Various transaction costs totaling $119 were incurred in conjunction with
the private placement financing. These costs are being amortized over the
three-year term of the debt and preferred stock.

The warrants issued in conjunction with this financing are exercisable at
any time to the later of the date which is (i) three years after the obligations
under the debentures are satisfied in full, or (ii) 6 years from the date of
issuance, at a price of $1.17.

The Company has measured the fair value of the warrants issued in connection
with the private placement financing. This value has been allocated as a
discount applied against the related long-term debt and redeemable preferred
stock and is amortized over the three-year term of the subordinated debentures
and preferred stock. As a condition to the financing, one of the investors
requested that the Company's Directors participate in the financing. During
1998, Officers and Directors of the Company executed a participation agreement
with such investors for $535. See Note P.

In November 1996 the Company completed a private placement financing
totaling $6,000 with two U.S.-based institutional investors. The private
placement consisted of $5,000 of seven-year 12 percent subordinated debentures
and $1,000 of seven-year 12 percent redeemable preferred stock. In connection
with the financing, the Company issued warrants to the investors and to the
Company's investment banker for 955,176 shares of its common stock. These
warrants are exercisable no later than 10 years from the date of issuance, at a
price of $1.81 per share.

Additionally, the Company issued warrants to the investors providing for the
purchase, in the aggregate, of up to 18% of the number of shares of the
Company's common stock resulting from the exercise from time-to-time by holders
of options and warrants previously granted by the Company. These contingent
warrants are exercisable no later than 10 years from the date of issuance, at a
price of $1.81 per share.

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

D. LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK (CONTINUED)
Various transaction costs totaling $459 were incurred in conjunction with
the private placement financing. These costs are being amortized over the
seven-year term of the debt and preferred stock.

The private placement financing agreements require the Company to meet
certain financial covenants, which are very similar to the financial covenants
relating to Pico Macom's bank revolving line of credit. Additionally, these
agreements prohibit the distribution of cash, stock or other property to
shareholders (whether characterized as dividends or otherwise) or the redemption
or repurchase of the Company's capital stock or similar securities, subject to
limited exceptions.

In June 1997 the holders of $150 of the Company's subordinated notes
payable, with interest at 8%, sold the notes to one of the U.S.-based
institutional investors involved in the November 1996 private placement
financing. As of July 31, 1997, the debt has been converted to subordinated
notes payable due in fiscal year 2001, with interest at 10%.

In February 1996, the Company was notified by the holders of two outstanding
notes payable that they intended to exercise 250,000 warrants to purchase common
stock of the Company as an offset against the first $250 installment payment due
on the debt. This transaction was completed in March 1996.

In February 1997, the Company was notified by the holders of two outstanding
notes payable that they intended to exercise 100,000 warrants to purchase common
stock of the Company, totaling $100, against the second installment or payment
due on the debt. This transaction was completed in February 1997.

Long-term debt and redeemable preferred stock at July 31, 1998 are payable
according to the contractual maturities as follows:

REDEEMABLE
LONG-TERM DEBT PREFERRED STOCK
--------------- -----------------

Year ending July 31, 1999................................... $ 166 --
Year ending July 31, 2000................................... 103 --
Year ending July 31, 2001................................... 1,337 238
Year ending July 31, 2002................................... 500 100
Year ending July 31, 2003................................... 1,000 200
Thereafter.................................................. 2,653 532
------ -----
$ 5,759 1,070
------ -----
------ -----

See Note O, Subsequent Event for a discussion of the repayment of $1,390 of the
subordinated debentures issued in November 1996.

E. LEASE COMMITMENTS

The Company leases manufacturing, computer and office equipment under lease
agreements, some of which have been capitalized. These capitalized lease
obligations are payable in monthly and quarterly installments through fiscal
year 2000 and have interest rates varying from 4% to 12%. The Company has

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

E. LEASE COMMITMENTS (CONTINUED)
included the cost of equipment under capital leases of $522 and $402 in
property, plant and equipment at July 31, 1998 and 1997, respectively.
Accumulated amortization on such assets was $144 and $47 at July 31, 1998 and
1997, respectively.

The Company also leases certain of its manufacturing and office facilities
and equipment under operating lease agreements. Minimum rental commitments at
July 31, 1998 for these leases are as follows:

CAPITAL OPERATING
----------- -----------

Year ending July 31, 1999................................................ $ 186 $ 421
Year ending July 31, 2000................................................ 110 423
Year ending July 31, 2001................................................ 14 403
Year ending July 31, 2002................................................ -- 392
Year ending July 31, 2003................................................ -- 252
Thereafter............................................................... -- 9
----- -----------
310
Less imputed interest.................................................... 29
-----
$ 281 $ 1,900
----- -----------
----- -----------

Renewal options exist on certain of the operating leases for additional
periods at increased rental rates. Total rental expense for the years ended July
31, 1998, 1997 and 1996 was $558, $678 and $651, respectively. The Company is
also required to pay real estate taxes and other occupancy costs of the
facilities in addition to the above rentals.

F. OTHER INCOME

Other income consist of interest income for the fiscal years ended 1998,
1997 and 1996.

G. INCOME TAXES

A reconciliation of the Company's income tax provision to that computed
using the Federal statutory rate is as follows:

YEAR ENDED JULY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------

Federal tax (benefit) based on statutory tax rate............... $ (1,005) $ (2,061) $ (140)
Other........................................................... 199 101 318
Change in valuation allowance................................... 806 1,960 (178)
--------- --------- ---------
Income Tax Provision............................................ $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------

At July 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $19,300, which expire in varying
amounts from the year 2000 through the year 2013. Additionally, the Company has
federal tax credit carryforwards of approximately $182 which expire in varying
amounts from the year 1999 through the year 2001.

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

G. INCOME TAXES (CONTINUED)

Neither U.S. nor foreign taxes or tax benefit have been provided on the
cumulative undistributed foreign earnings (losses), as of July 31, 1998, due to
an exemption from foreign taxes, which expires in 1998.

The following represents the tax effects of significant items comprising the
Company's deferred income taxes as of July 31, 1998 and 1997. The Company
recognized a valuation allowance to offset the net deferred tax asset since the
future benefit of these assets is not assured.

JULY 31,
--------------------
1998 1997
--------- ---------

Deferred income tax assets:
Differences between book and tax basis of property..................... $ 180 $ 136
Reserves not currently deductible...................................... 769 1,353
Other.................................................................. 67 64
Operating loss carryforwards........................................... 8,293 6,765
Tax credit carryforwards............................................... 182 367
--------- ---------
9,491 8,685
Valuation allowance...................................................... (9,491) (8,685)
--------- ---------
Net deferred income taxes................................................ $ 0 $ 0
--------- ---------
--------- ---------

H. PRODUCT DEVELOPMENT COSTS

Product development costs are expensed as incurred and are included as part
of selling and administrative expenses. Expenses related to product development
for the years ended July 31, 1998, 1997 and 1996 amounted to approximately $830,
$1,340, and $1,368, respectively.

I. SIGNIFICANT CUSTOMERS

In fiscal 1998, 1997 and 1996 the Company's sales to one customer were
approximately 5%, 9% and 16%, respectively, of the Company's consolidated sales.

J. RETIREMENT BENEFITS

The Company maintains a defined contribution pension plan (under Internal
Revenue Code Section 401(k)) covering substantially all of its U.S.-based
employees with more than three months of service. Company contributions are
determined at 50% of each employee's voluntary contribution (up to 6% of
compensation) to the plan. The Company's contribution expense totaled $80, $64
and $79 for the years ended July 31, 1998, 1997 and 1996, respectively.

K. OTHER STOCK OPTIONS

During fiscal year 1994, the Board of Directors issued nonqualified,
non-plan options to two individuals. These options were issued in November 1993
and became exercisable in November 1994. A total of 30,000 options were issued
at an average exercise price of $1.29 per share. The Company recognized
compensation expense of $12,292 and $33,958 during fiscal year 1995 and fiscal
year 1994,

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

K. OTHER STOCK OPTIONS (CONTINUED)
respectively, for the difference between the fair value of the stock options at
the date of the grant and the exercise price of the options. At July 31, 1998
5,000 options remain outstanding.

L. STOCK INCENTIVE PLANS

The Company has four stock incentive plans; the 1981 Non-Qualified Stock
Option Plan (1981 Plan) amended in December, 1991 and in December 1995; the 1982
Incentive Stock Option Plan (1982 Plan) adopted in April 1982; the 1992
Incentive Stock Plan (1992 Plan), adopted in January, 1993 and amended in July,
1994; and the 1996 Incentive Stock Plan (1996 Plan), adopted in December 1996.
The 1981 Plan reserved 450,000 common shares for issuance, the 1982 Plan
reserved 150,000 shares for issuance, the 1992 Plan reserves 175,000 common
shares for issuances and the 1996 Plan reserves 195,000 common shares for
issuance. Each plan is administered by the Board of Directors, or a special
committee thereof, which has the authority to determine the persons, the shares
and the related terms and provisions of the incentives which may be granted.

In addition to the four shareholder-approved plans, the Company has issued
152,000 Phantom Stock Options. These options were issued at 100% of fair market
value at the date of grant and may be, at the discretion of the Board or a
special committee thereof, converted to options under an approved Stock Option
Plan.

Under the 1981 Plan, the option exercise price could not be less than 80% of
the fair market value of the shares at the date of grant. Under the 1982 Plan,
the option exercise price could not be less than 100% (or 110% if the optionee
owned 10% or more of the Company's outstanding voting securities) of the fair
market value of the shares at the date of grant. Options under the 1981 Plan and
the 1982 Plan could not be exercised more than five years and ten years,
respectively, from the date of grant. The 1982 Plan provided limitations on the
number of option shares which could be granted to officers and directors. In
both plans, options became exercisable as specified in the option agreement,
subject to the limitation that no option could be exercised within twelve months
after the date it is granted. The 1982 Plan provided that no incentive stock
options could be granted after April 28, 1992, and the 1981 Plan provided that
no non-qualified stock options could be granted after May 31, 1996.

Under the 1992 Plan, incentive stock options ("ISO"), nonqualified stock
options ("NSO"), stock appreciation rights ("Rights") and stock awards
("Awards") may be granted to eligible persons. The Board of Directors, or a
committee thereof, determines the option prices and vesting periods for all
options granted; however, options may not be exercised less than one nor more
than ten years from the date of grant. The option exercise prices for ISO's must
be at 100% of the fair market value of the shares at the date of grant to comply
with tax regulations. The 1992 Plan specified that each director who is not also
an employee of the Company or any of its affiliates would be awarded an annual
grant of 5,000 NSO's at an option price equal to 80% of the fair market value on
the date of grant. During fiscal year 1994, the Board of Directors amended the
plan by reducing the annual grant to directors to 2,000 NSO's with option prices
and vesting provisions consistent with all other plan options. During fiscal
year 1994, the Board of Directors also determined that NSO's would be granted at
100% of the fair market value of the shares at the date of grant.

Under the 1992 plan, Rights may be granted to holders of stock options
outstanding under the 1981 Plan, the 1982 Plan, or the 1992 Plan, whereby the
holder of such options, in exchange for the

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

L. STOCK INCENTIVE PLANS (CONTINUED)
surrender of the options to the Company, will receive from the Company an amount
equal to the excess of the fair market value of the related shares over the
option price of the options surrendered. Awards may be granted to selected
recipients, without payment therefore, as additional compensation for their
services to the Company or its affiliates. Any Awards will be subject to various
terms and conditions as determined by the committee.

The 1996 Plan provisions are essentially the same as the 1992 Plan, allowing
for grants of ISO's, NSO's, Rights and Awards to eligible persons. Under the
1996 plan, Rights may be granted to holders of stock options outstanding under
the 1981 Plan, the 1992 Plan, or the 1996 Plan, whereby the holder of such
options, in exchange for the surrender of the options to the Company, will
receive from the Company an amount equal to the excess of the fair market value
of the related shares over the option price of the options surrendered. Awards
may be granted to selected recipients, without payment therefore, as additional
compensation for their services to the Company or its affiliates. Any Awards
will be subject to various terms and conditions as determined by a committee of
the Board of Directors.

In June 1996, the Board of Directors of the Company rescinded the amendment
to the 1981 Plan which provided for extending the expiration date from five
years to ten years for options granted under the Plan. This amendment had been
approved by the shareholders in December 1995.

In April 1996 an officer of the Company exercised options to acquire 125,000
shares of the Company's common stock in exchange for a stock subscription note
receivable. In June 1996 several officers and employees of the Company exercised
options to acquire 50,000 shares of the Company's common stock in exchange for
stock subscription notes receivable.

A SUMMARY OF CHANGES IN SHARES UNDER OPTION FOR THE COMPANY'S FOUR STOCK
INCENTIVE PLANS IS AS FOLLOWS:

YEAR ENDED JULY 31,
-----------------------------------
1998 1997 1996
---------- ---------- -----------

NON QUALIFIED PLAN (1981):
Outstanding at beginning of year............................................ 233,250 290,000 410,000
Options granted............................................................. -- -- 10,500
Options expired............................................................. (59,750) (33,750) (10,500)
Options exercised........................................................... (30,000) (23,000) (120,000)
---------- ---------- -----------
Outstanding at end of year*................................................. 143,500 233,250 290,000
---------- ---------- -----------
---------- ---------- -----------
Exercisable at end of year*................................................. 142,667 227,083 268,670
---------- ---------- -----------
---------- ---------- -----------
Weighted average exercise price of options--
Outstanding at beginning of year.......................................... $ 0.89 $ 0.95 $ 0.75
Options granted........................................................... $ -- $ -- $ 1.81
Options expired........................................................... $ 1.52 $ 1.26 $ 1.20
Options exercised......................................................... $ 0.80 $ 1.12 $ 0.60
Outstanding at end of year................................................ $ 0.99 $ 0.89 $ 0.95
Exercisable at end of year................................................ $ 0.99 $ 0.86 $ 0.87

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

L. STOCK INCENTIVE PLANS (CONTINUED)

YEAR ENDED JULY 31,
-----------------------------------
1998 1997 1996
---------- ---------- -----------

INCENTIVE PLAN (1982):
Outstanding at beginning of year.......................................... -- -- 45,200
Options exercised......................................................... -- -- (45,200)
---------- ---------- -----------
Outstanding at end of year................................................ -- -- --
---------- ---------- -----------
---------- ---------- -----------
Exercisable at end of year.................................................. -- -- --
---------- ---------- -----------
---------- ---------- -----------
Weighted average exercise price of options--
Outstanding at beginning of year.......................................... $ -- $ -- $ 0.31
Options expired........................................................... $ -- $ -- $ 0.31
Options exercised......................................................... $ -- $ -- $ --
Outstanding at end of year................................................ $ -- $ -- $ --

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

* Includes options to acquire 135,000, 165,000 and 175,000 shares the
Company's common stock at July 31, 1998, 1997 and 1996, which were exercised
in exchange for stock subscription notes receivable during fiscal year 1996.

YEAR ENDED JULY 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------

STOCK PLAN (1992)
(Nonqualified options)
Outstanding at beginning of year........................................... 116,500 135,000 114,000
Options granted............................................................ 58,500 10,000 23,500
Options expired............................................................ (26,500) (17,833) (2,500)
Options exercised.......................................................... -- (10,667) --
---------- ---------- ----------
Outstanding at end of year................................................. 148,500 116,500 135,000
---------- ---------- ----------
---------- ---------- ----------
Exercisable at end of year................................................... 81,976 76,673 58,832
---------- ---------- ----------
---------- ---------- ----------
Weighted average exercise price of options--
Outstanding at beginning of year........................................... $ 2.20 $ 2.19 $ 2.29
Options granted............................................................ $ 1.19 $ 1.62 $ 1.83
Options expired............................................................ $ 2.08 $ 2.43 $ 3.19
Options exercised.......................................................... $ -- $ 1.13 $ --
Outstanding at the end of year............................................. $ 2.00 $ 2.20 $ 2.19
Exercisable at end of year................................................... $ 2.40 $ 2.13 $ .85

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

L. STOCK INCENTIVE PLANS (CONTINUED)

YEAR ENDED JULY 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------

STOCK PLAN (1996)
(Nonqualified options)
Outstanding at beginning of year........................................... 52,500 120,000 --
Options granted............................................................ 121,650 7,500 120,000
Options expired............................................................ (87,500) (75,000) --
Options exercised.......................................................... -- -- --
---------- ---------- ----------
Outstanding at end of year................................................... 86,650 52,500 120,000
---------- ---------- ----------
---------- ---------- ----------
Exercisable at end of year................................................... -- 14,999 --
---------- ---------- ----------
---------- ---------- ----------
Weighted average exercise price of options--
Outstanding at beginning of year........................................... $ 2.25 $ 2.34 $ --
Options granted............................................................ $ 1.21 $ 2.09 $ 2.34
Options expired............................................................ $ 1.83 $ 2.34 $ --
Options exercised.......................................................... $ -- $ -- $ --
Outstanding at the end of year............................................. $ 1.05 $ 2.25 $ 2.34
Exercisable at end of year................................................. $ -- $ 2.28 $ --

Significant option groups outstanding at July 31, 1998 and related weighted
average price and life information follow:

WEIGHTED
AVERAGE NUMBER
RANGE OF NUMBER REMAINING EXERCISABLE AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL WEIGHTED AVERAGE AT EXERCISE
PRICES JULY 31, 1998 LIFE EXERCISE PRICE JULY 31,1998 PRICE
- -------------- -------------- --------------- ----------------- ------------- ---------------

$ .60 135,000 # $ .60 135,000 $ .60
.94-1.13 107,000 4.5 years 1.07 -- --
1.19-1.50 226,150 2.9 years 1.25 40,002 1.26
1.56-1.81 16,500 3.4 years 1.63 4,307 1.69
2.63-3.19 46,000 1.2 years 3.12 45,334 3.12
------- -------------
530,650 224,643
------- -------------
------- -------------

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

# Options were exercised for stock subscription notes receivables during fiscal
year 1996.

The weighted average fair value of the stock options granted from the 1981
Plan, the 1992 Plan, the 1996 Plan and non-plan options during fiscal years
1998, 1997 and 1996 was $.68, $1.53 and $1.53, respectively. The fair value of
each stock option grant is estimated on the date of grant using the Black-
Scholes option pricing model with the following weighted average assumptions
used:

YEAR ENDED JULY 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------

Expected life................................................................ 5.0 years 5.0 years 5.0 years
Risk-free interest rate...................................................... 5.63% 6.32% 6.23%
Volatility................................................................... 83% 83% 83%
Dividend yield............................................................... -- -- --

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

L. STOCK INCENTIVE PLANS (CONTINUED)

The Company has applied the provisions of APB Opinion 25 to account for
stock options, under which no compensation cost has been recognized for stock
option awards. Had compensation costs for the Company's stock incentive plans
been determined consistent with the provisions of Statement of Financial
Accounting Standards Number 123, the Company's pro-forma net income (loss)
attributable to common stock and earnings per share for fiscal years 1998, 1997
and 1996 would have been as follows:

YEAR ENDED JULY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------

Net loss attributable to common stock.............................................. $ (2,891) $ (5,989) $ (407)
--------- --------- ---------
--------- --------- ---------
Net income (loss) attributable to common stock per common share:
Basic and Diluted................................................................ $ (.69) $ (1.46) $ (0.11)
--------- --------- ---------
--------- --------- ---------

Because options vest over several years and additional options may be
granted each year, the effects on pro forma net loss and related per share
amounts presented above are not representative of the effects for future years.

M. COMMITMENTS AND CONTINGENCIES

PURCHASE COMMITMENTS

The majority of the SMATV electronic components sold by Pico Macom are
manufactured under contract on an exclusive basis by one subcontractor in
Taiwan. Management believes that the Company's relationship with this
subcontractor is excellent and that the financial strength of the subcontractor
is strong. However, the loss of this subcontractor could have a material adverse
impact on the Company's operations until the Company could obtain an alternative
source of supply. The contract does not require the subcontractor to maintain a
parts inventory, so that from time-to-time delays are possible in completing
customer orders. The current contract, renewed in May 1998 for a 1-year term and
is renewable annually. Effective September 3, 1998, the Company entered into a
five-year distribution arrangement to distribute traps and filters (previously
manufactured by the Company). Pursuant to the arrangement, the Company has
agreed for the five-year period to represent the supplier on an exclusive basis.
The supplier, however, retains the right to sell traps and filters to other
distributors. In addition, the Company has agreed to purchase $4,000 of product
over a two-year period.

Most of the other products obtained from foreign-based vendors are available
from a number of different subcontractors.

EAGLE LITIGATION

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

M. COMMITMENTS AND CONTINGENCIES (CONTINUED)
to a third party (Arrow Communication Laboratories, Inc.) on more favorable
terms than those provided to Eagle. Eagle sought damages of approximately $1,600
plus interest and attorneys fees. The Company believed that Eagle's motion was
procedurally improper and that, even if the amended complaint were allowed by
the District Court, it had meritorious defenses to the claims stated in the
amended complaint.

ARCOM LITIGATION

In November 1991, Arrow Communication Laboratories, Inc. (Arcom) of
Syracuse, New York initiated a lawsuit in the New York Supreme Court, which, as
amended, alleged that Arcom had a paid-up license with respect to the Company's
patent for positive trapping systems and that Arcom was entitled to unspecified
damages based on overpayment of royalty amounts. Arcom also claimed that it was
entitled to compensatory damages in excess of $250 plus punitive damages of
$3,000 as a result of a Company press release announcing termination of the
license agreement.

The Company initiated a patent infringement suit against Arcom in the United
States District Court for the Northern District of New York, which sought treble
damages for willful infringement plus attorneys fees. The Company requested that
the Court grant a preliminary injunction to prevent Arcom from infringing its
patent. At a Court hearing in February 1994, the parties agreed, and it was
ordered by the Court, that Arcom would post as security amounts equal to the
royalties due to the Company for the manufacture and sale of product covered by
the license agreement from December 15, 1991, the date that the license would
have terminated, until the expiration of the patent in February 1995. Through
July 31, 1995 Arcom had made cash payments of $462 covering royalties through
February 14, 1995. The Company did not include these amounts in income in any
fiscal period but recorded a current liability for $462 at July 31, 1995. In
addition, Arcom agreed to post an irrevocable letter of credit in an amount
deemed sufficient to permit recovery of a significant portion of the Company's
damages if it were to prevail on its willful In-fringement claim. In exchange,
the Company withdrew its request for a preliminary injunction.

In May, 1996, the Company and Arcom agreed to settle the foregoing lawsuits,
pursuant to which all suits were terminated and dismissed with prejudice. As
part of this agreement, the Company and Arcom, respectively, granted each other
full releases from liability, the Company released certain deposits and other
collateral provided to the Company by Arcom during the litigation, and the
Company reimbursed Arcom approximately $70 for certain fees and expenses.

EPA INFORMATION REQUEST

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

M. COMMITMENTS AND CONTINGENCIES (CONTINUED)
County, New York. The Company learned that the EPA added the Onondaga Lake Site
to the Superfund National Priorities List in December 1994 and has completed an
onsite assessment of the degree of hazard. The EPA has indicated that the
Company is one of 26 companies located in the vicinity of Onondaga Lake or its
tributaries that have received a similar Information Request.

In March 1997 the Company received a follow-on request for additional
information in this matter and has provided all information requested.

OTHER

N. RESTRUCTURING COSTS

The Company had recorded restructuring expenses of approximately $879 in
fiscal year 1997 related to the realignment of its operations and a contract
settlement with the Company's former chairman and chief executive officer.

O. SUBSEQUENT EVENT

On September 3, 1998, the Company sold its trap and filter manufacturing
operation and entered into an arrangement to purchase its trap and filter
requirements exclusively for a five-year term. The Company received gross
proceeds of $5,200 and transferred the inventory and certain manufacturing
assets, including equipment, technical designs and plans to the buyer. The
Company will continue to market and sell traps and filters, which in fiscal 1998
represented approximately 21% of total sales.

Management expects to continue this business at a comparable level of sales
and profitability. In connection with the five-year distribution arrangement the
Company issued a non-revocable purchase commitment to purchase $4,000 of
inventory over two years. The Company used $1,390 of the proceeds to repay its
12% subordinated debt. In connection with this repayment, the holders of the
subordinated debt returned 265,539 warrants to purchase common shares.

PICO PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)

O. SUBSEQUENT EVENT (CONTINUED)
PRO FORMA UNAUDITED FINANCIAL INFORMATION

The following pro forma unaudited condensed balance sheet information is
based upon the historical consolidated balance sheet, adjusted to give effect to
the sale of trap and filter manufacturing operations of the Company. Pro forma
condensed statement of operations information has not been provided as the
Company will continue to sell and market traps and filters under a five-year
distribution arrangement.

The pro forma adjustments give effect to available information and
assumptions that the Company believes are reasonable.

CONDENSED PRO FORMA BALANCE SHEET INFORMATION--UNAUDITED

JULY 31, PRO FORMA PRO FORMA
1998 ADJUSTMENTS CONDENSED
AS REPORTED DR (CR) BALANCE SHEET
------------ ----------- -------------

Current Assets............................................. $ 16,122 $ (4,000)(1) $ 12,122
Property, Plant & Equipment, net........................... 910 (200)(1) 710
Other Assets............................................... 924 924
------------ ----------- -------------
Total Assets............................................... $ 17,956 $ (4,200) $ 13,756
------------ ----------- -------------
------------ ----------- -------------
Current Liabilities........................................ $ 20,182 $ 4,000 )(4 $ 16,182
Long-term Debt............................................. 115 115
Preferred Stock............................................ 1,070 1,070
Shareholders' Deficiency................................... (3,411) 200(4) (3,611)
------------ ----------- -------------
Total Liabilities and Equity............................... $ 17,956 $ 4,200 $ 13,756
------------ ----------- -------------
------------ ----------- -------------

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

Adjustments:

1. Reduce inventory, $4,000, and property & equipment, net $200.

2. Net reduction of subordinated debt, $1,290.

3. Apply remaining proceeds to reduce amounts outstanding for trade payables
and amounts due under the Company's line of credit.

4. Extinguishment of Debt.

P. RELATED PARTY

During fiscal 1998, certain Directors and Officers entered into a
participation agreement with one of the Company's subordinated investors issued
in 1997 for $535. The participation was a condition of the subordinated lender
to provide the financing. The Company pays interest at 10% directly to the
individual participant. Under this agreement, the Directors and Officers
received 107,000 shares of common stock, 102,204 warrants to purchase common
shares at $1.17 and $504 principal amount of 10% debentures directly from the
subordinated lender.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COST AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTION* PERIOD
- -------------------------------------------------------------------- ----------- ------------- ------------- -----------

Fiscal Year Ended July 31, 1996:
Allowance for doubtful accounts................................... $ 290 $ 144 $ 234 $ 200

Fiscal Year Ended July 31, 1997:
Allowance for doubtful accounts................................... $ 200 $ 124 $ 124 $ 200

Fiscal Year Ended July 31, 1998:
Allowance for doubtful accounts................................... $ 200 $ -- $ 61 $ 139

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

* Write-off of uncollectible accounts receivable and other adjustments.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not Applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

NAME AGE DIRECTOR SINCE POSITION
- ------------------------------------------------------ --- --------------- ------------------------------------

Charles G. Emley, Jr.................................. 57 1993 Chairman of the Board and Chief
Executive Officer
E.B. Leisenring, Jr................................... 72 1994 Director
Pierson G. Mapes...................................... 61 1996 Director
William W. Mauritz.................................... 64 1992 Director
William S. Patton..................................... 63 1998 Director
E. James Selzer....................................... 34 -- Vice President, Finance and
Administration and Chief Financial
Officer
Michael T. Gavigan.................................... 40 -- Controller

CERTAIN BIOGRAPHICAL AND OTHER INFORMATION REGARDING THE COMPANY'S DIRECTORS AND
OFFICERS

Charles G. Emley, Jr. has been the Chief Executive Officer and Chairman of
the Board of the Company since July 1997. From March 1997 through July 1997, Mr.
Emley served as Chief Operating Officer of the Company. Mr. Emley has also been
a director of the Company since November 1993. In addition, since January 1996,
Mr. Emley has been President of Emley & Co., LLC. Prior to this, Mr. Emley had
been Managing Principal, World Wide Information Services, of Unisys Corporation
from November 1993 to December 1995. Before that, Mr. Emley was a Vice President
of IBM Consulting Group from November 1992 through October 1993 and a management
consulting partner with Deloitte & Touche LLP from 1977 until November 1992.

E.B. Leisenring, Jr. has been a director of the Company since November 1994.
Mr. Leisenring served as Chairman of the Executive Committee of Westmoreland
Coal Company from January 1992 to May 1995. Prior to that, Mr. Leisenring was
Chairman of the Board and Chief Executive Officer of both Westmoreland Coal
Company and Penn Virginia Corporation, serving as Chairman of the Board since
1978. Mr. Leisenring is also a director of Norfolk Southern Corporation and
Chairman of the Philadelphia Contributionship Insurance Company.

Pierson G. Mapes has been a director of the Company since June 1996. Mr.
Mapes was President of the NBC Television Network ("NBC-TV") from 1982 until his
retirement in 1994. In that role, he was responsible for NBC-TV's affiliate
relations, advertising and sales. Prior to that, he was Vice President, Network
Planning for NBC-TV. Mr. Mapes is a member of the International Radio and
Television Society. Mr. Mapes is a trustee of Norwich University and a director
of Electronic Warfare Associates, Wolf and Cohen Insurance Company and The
Ramapo Land Co. Inc.

William W. Mauritz has been a director of the Company since June 1992. Mr.
Mauritz has been Managing Director of William W. Mauritz & Associates, a
management consulting firm, since November 1996, and prior to that, from
September 1990 to June 1995. In the interim, Mr. Mauritz was a partner with
DeSilva & Partners, Inc., from June 1995 to November 1996. From 1989 to
September 1990, he served as Executive Vice President-Human Resources for the
Bank of New England. From 1984 to 1989, he was Senior Vice President, Human
Resources for McGraw-Hill, Inc.

William S. Patton has been a director of the Company since February 1998.
Mr. Patton is currently a limited partner with Arch Venture Partners and
principal of PFT Investments and serves as a Director of SITE-OF-CARE SYSTEMS,
Inc. From 1996 to 1997, he was the Chairman of Micro Optical Devices, Inc. From
1991 to December 1995, Mr. Patton held various senior management positions with
Unisys Corporation, the most recent of which was Senior Vice President of the
Corporation, President, U.S.

Division, Information Services and Systems Group. From 1984 to 1990, Mr. Patton
was President and Chief Executive Officer of MAI Basic Four.

E. James Selzer has been Vice President, Finance and Administration and
Chief Financial Officer of the Company since January 1998. From May 1994 to
January 1998, Mr. Selzer was employed by Jay Alix & Associates, a turnaround and
management consulting firm. Prior to that, Mr. Selzer attended the University of
Michigan from August 1992 to August 1994, where he obtained his MBA. In
addition, from 1986 to 1992, Mr. Selzer held various positions with Ernst &
Young, a public accounting firm.

Michael T. Gavigan has been the Controller of the Company since January
1998. From April 1997 to January 1998 Mr. Gavigan, practiced individually as a
Certified Public Accountant and management consultant. From December 1990 to
March 1997, Mr. Gavigan was Vice President Sales Planning for the Walt Disney
Company's Domestic Home Video Division.

There are no family relationships between any director or executive officer
of the Company.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of the ownership and changes in the ownership of
such securities with the Securities and Exchange Commission ("SEC") and the
American Stock Exchange. Officers, directors and beneficial owners of more than
ten percent of the Company's stock are required by SEC regulation to furnish the
Company with copies of all such forms which they file.

Based solely on the Company's review of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during the fiscal year
ended July 31, 1998, all filing requirements applicable to its officers,
directors and persons who own more than ten percent of the Common Stock were
complied with, except the following: (i) with respect to one transaction, a Form
5 for Mr. Charles G. Emley, Jr., for the fiscal year ended July 31, 1997, was
amended during the fiscal year ended July 31, 1998; (ii) with respect to one
transaction, a Form 5 for the fiscal year ended July 31, 1998 was filed late by
Mr. E.B. Leisenring, Jr.; (iii) with respect to one transaction, a Form 5 for
the fiscal year ended July 31, 1998 was filed late by Mr. Pierson G. Mapes; and
(iv) with respect to one transaction, a Form 5 for the fiscal year ended July
31, 1998 was filed late by Mr. William W. Mauritz.

ITEM 11. EXECUTIVE COMPENSATION.

SUMMARY OF COMPENSATION

The following table sets forth a summary of all compensation paid or accrued
by the Company for services rendered during the last three fiscal years, to the
Chief Executive Officer of the Company and to each of the Company's most highly
compensated individuals who were serving as executive officers on July 31, 1998,
or who had served as executive officers during the fiscal year ended July 31,
1998 (the "named executive officers"):

SUMMARY COMPENSATION TABLE

LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- -------------
OTHER ANNUAL STOCK OPTION/ ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION (1) SAR GRANTS COMPENSATION (2)
- -------------------------------- ------------- --------- --------- ---------------- ------------- -----------------

Charles G. Emley, Jr., (3)...... 1998 $ 102,308 $ -- $ 158,600(4) 200,000(5) $ 1,780
Chairman and Chief 1997 -- -- 93,500(4) 2,000(6) --
Executive Officer 1996 -- -- -- 2,000(6) --

Robert G. Cunningham (7)........ 1998 120,226 -- -- 10,000 2,993
Former Senior Vice 1997 120,769 20,000 -- 5,000 2,519
President, Sales and 1996 11,475 -- -- 20,000 --
Marketing

Norman F. Reinhardt (8)......... 1998 127,530 -- -- 10,000 3,270
Former Vice President, 1997 120,385 -- -- -- 3,368
Technology and Product 1996 105,769 -- -- 28,250 2,596
Development

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

(1) Does not include amounts for perquisites and other personal benefits,
securities or property paid to any of the named executive officers, which
arose primarily as a result of Company cars, car allowances and the use of
memberships in private clubs, the value of which does not exceed the lesser
of $50,000 or ten percent of the total of annual salary or other fixed
compensation and bonus reported for such person.

(2) The amounts listed in this column represent contributions by the Company to
the named executives' accounts established under the Company's 401(k) plan.

(3) Mr. Emley has been the Chief Executive Officer and Chairman of the Board of
the Company since July 1997. From March 1997 through July 1997, Mr. Emley
served as Chief Operating Officer of the Company.

(4) During the fiscal year ended July 31, 1997 and until December 31, 1997, Mr.
Emley was compensated as an independent contractor and thus, his
compensation is not considered salary. For the fiscal years ended July 31,
1997 and 1998, Mr. Emley was paid $93,500 and $158,600, respectively, for
his consultant services. As of January 8, 1998, the Company and Mr. Emley
are parties to an employment agreement. See "Executive Compensation--
Employment Agreements."

(5) These options were granted to Mr. Emley in connection with the execution of
a certain employment agreement entered into between the Company and Mr.
Emley dated as of January 8, 1998. Of these options, 118,000 are options to
purchase shares of the Company's common stock, and 82,000 are "phantom
stock" units. See "Executive Compensation--Employment Agreements."

(6) These options were granted to Mr. Emley in his capacity as a director of the
Company, prior to his appointment as an executive officer of the Company.

(7) As of June 12, 1998, Mr. Cunningham is no longer employed by the Company.

(8) As of June 19, 1998, Mr. Reinhardt is no longer employed by the Company.

STOCK OPTIONS

The following table sets forth grants of stock options made during the
Company's fiscal year ended July 31, 1998, to each of the named executive
officers of the Company:

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
------------------------------------------------------------------------------- STOCK PRICE
NUMBER OF % OF TOTAL OPTIONS/ APPRECIATION FOR
OPTIONS/ SARS GRANTED TO OPTION TERM
SARS EMPLOYEES IN FISCAL EXERCISE/ MARKET PRICE ON EXPIRATION --------------------
NAME GRANTED YEAR BASE PRICE DATE OF GRANT DATE 5% 10%
- --------------------------- ----------- --------------------- ----------- ----------------- ----------- --------- ---------

Charles G. Emley, Jr. (1).. 118,000 70%(5) $ 1.19 $ 1.19 8/19/2007 $ 116,935 $ 260,085
Charles G. Emley, Jr. (2).. 82,000 63%(6) 1.06 1.06 1/15/2007 83,289 174,800
Robert G. Cunningham (3)... 10,000 6%(5) 1.19 1.19 8/19/2007 21,159 44,959
Norman F. Reinhardt (4).... 10,000 6%(5) 1.19 1.19 8/19/2007 21,159 44,959

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

(1) This row discloses options to purchase shares of the Common Stock of the
Company, granted to Mr. Emley in connection with the execution of a certain
employment agreement entered into between the Company and Mr. Emley dated as
of January 8, 1998. See "Executive Compensation--Employment Agreements."

(2) This row discloses "phantom stock" units of the Company, granted to Mr.
Emley in connection with the execution of a certain employment agreement
entered into between the Company and Mr. Emley dated as of January 8, 1998.
See "Executive Compensation--Employment Agreements."

(3) As of June 12, 1998, Mr. Cunningham is no longer employed by the Company.

(4) As of June 19, 1998, Mr. Reinhardt is no longer employed by the Company.

(5) Percentage of total options granted to employees in fiscal year.

(6) Percentage of total SAR's granted to employees in fiscal year.

EXERCISE OF OPTIONS

The following table sets forth information regarding the exercise of stock
options and the value of any unexercised stock options of each of the named
executive officers of the Company during the fiscal year ended July 31, 1998:

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES

VALUE OF
NUMBER OF SECURITIES UNEXERCISED
IN-
UNDERLYING THE-MONEY
UNEXERCISED OPTIONS/SARS
OPTIONS/SARS AT AT FISCAL
FISCAL YEAR END YEAR END
SHARES ACQUIRED ON VALUE -------------------- -----------
NAME EXERCISE REALIZED VESTED UNVESTED VESTED
- ----------------------------------------------- ------------------- ------------- --------- --------- -----------

Charles G. Emley, Jr. (1)...................... -- -- 8,334 118,666 --
Charles G. Emley, Jr. (2)...................... -- -- -- 82,000 --
Robert G. Cunningham........................... -- -- -- -- --
Norman F. Reinhardt............................ -- -- -- -- --

NAME UNVESTED
- ----------------------------------------------- -------------

Charles G. Emley, Jr. (1)...................... --
Charles G. Emley, Jr. (2)...................... --
Robert G. Cunningham........................... --
Norman F. Reinhardt............................ --

COMPENSATION OF DIRECTORS

For the year ended July 31, 1998, outside directors received a fee of
$12,000 per year (payable monthly) and an annual grant of options for 2,000
shares of Common Stock for their services as directors. Additionally, the
chairmen of the Compensation and Audit Committees of the Board of Directors
receive an additional $6,000 and $3,000 per year, respectively, (payable
monthly) for their services in these positions.

EMPLOYMENT AGREEMENTS

During the fiscal year ended July 31, 1998, Charles G. Emley, Jr. and the
Company entered into a three-year employment agreement dated as of January 8,
1998. This employment agreement provides for a minimum base salary of $175,000,
participation in the Company's incentive compensation plans, options to purchase
118,000 shares of Common Stock (which options were granted in August, 1997),
82,000 "phantom stock" units (which units were granted in January, 1998), and
certain other benefits. In addition, the Company agreed to pay Mr. Emley $44,600
as reimbursement for the present value of certain pension benefits Mr. Emley
lost as a result of accepting employment with the Company. This employment
agreement provides that in the event of a change in control, Mr. Emley has the
option, for Good Cause (as defined in the agreement to include, among other
things, a reduction in status or compensation), to terminate the employment
agreement and receive twice his annual salary plus one year of benefits as well
as the automatic vesting of stock options and phantom stock units; provided that
the total benefits not exceed an amount which would trigger the "golden
parachute" excise tax (generally 2.99 times his base compensation). If the
Company terminates the employment agreement with Mr. Emley, other than for Cause
(as defined in the agreement), or due to Mr. Emley's death or disability, the
Company will be obligated to pay Mr. Emley a sum equal to his annual base
compensation and continuation of benefits for a period of one year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth, as of November 15, 1998, the number and
percentage of shares of the Company's Common Stock (the Company's only
outstanding class of voting securities) which, according to information supplied
to the Company, are beneficially owned by: (i) each person who is the beneficial
owner of more than 5% of the Common Stock; (ii) each of the directors of the
Company individually; (iii) the chief executive officer of the Company; (iv)
each of the named executive officers (as that phrase is defined in the section
entitled "Executive Compensation"); and (v) all current directors and executive

officers of the Company as a group. Unless otherwise indicated, the persons
named in the table below have sole voting and investment power with respect to
all Common Stock shown as beneficially owned by them.

SHARES OF
COMMON STOCK
BENEFICIALLY
OWNED PERCENT OF
AS OF CLASS
NAME AND ADDRESS NOVEMBER 15, 1998 (APPROX.)(1)
- --------------------------------------------------------------------------------- ----------------- -------------

Charles G. Emley, Jr. (2)........................................................ 143,196 3.3%
c/o Pico Products, Inc.
12500 Foothill Blvd.
Lake View Terrace, California 91342

E.B. Leisenring, Jr. (3)......................................................... 51,479 1.2%
One Tower Bridge, Suite 501
West Conshohocken, Pennsylvania 19428

Pierson G. Mapes (4)............................................................. 236,389 5.4%
9 Sterlington Road
Pierson Lakes
Sloatsburg, New York 10974

William W. Mauritz (5)........................................................... 21,440 *
c/o William W. Mauritz & Assoc.
386 Park Avenue South
New York, NY 10016

William S. Patton................................................................ 0 *
c/o Pico Products, Inc
12500 Foothill Boulevard
Lake View Terrace, California 91342

Robert G. Cunningham (6)......................................................... 0 *
c/o Pico Products, Inc.
12500 Foothill Boulevard
Lake View Terrace, California 91342

Norman F. Reinhardt (7).......................................................... 0 *
c/o Pico Products, Inc.
12500 Foothill Boulevard
Lake View Terrace, California 91342

Allied Capital Corporation (8)................................................... 1,102,714 20.7%
One Maritime Plaza, Suite 1750
San Francisco, CA 94111

The Sinkler Corporation (9)...................................................... 335,063 7.4%
c/o Montgomery, McCracken
Walker & Rhoads, LLP
Fidelity Building
123 South Broad Street
Philadelphia, PA 19109-1029

All directors and executive officers
as a group. (9 individuals)(10).................................................. 617,324 13.3%

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

* Denotes less than one percent of class.

(1) The percent of class for any person or group who, as of November 15, 1998,
beneficially owned any shares pursuant to options, warrants or other rights
to purchase shares of the Company's Common Stock ("Rights") which are
exercisable within 60 days of November 15, 1998, is calculated assuming all
such Rights have been exercised in full and adding the number of shares
subject to such Rights to the total number of shares issued and outstanding
on November 15, 1998.

(2) Includes options for 5,000 shares of Common Stock granted by the Board of
Directors; such options were not granted pursuant to or under any of the
Company's option plans and are, therefore, non-qualified. Also, includes
options for 24,645 and 19,635 shares of Common Stock granted under the 1992
and 1996 Incentive Stock Plans, respectively. Mr. Emley had the right to
acquire beneficial ownership of the shares underlying these options within
60 days of November 15, 1998. Also includes currently exercisable warrants
for 65,916 shares of Common Stock.

(3) Includes options for 5,340 and 660 shares of Common Stock granted under the
1992 and 1996 Incentive Stock Plans, respectively. Mr. Leisenring had the
right to acquire beneficial ownership of the shares underlying these options
within 60 days of November 15, 1998. Also includes 4,000 shares of Common
Stock and currently exercisable warrants for 16,479 shares of Common Stock
which Mr. Leisenring holds in a self directed profit sharing plan. Does not
include: (a) 11,000 shares of Common Stock owned by a trust of which Mr.
Leisenring's spouse is the sole beneficiary; and (b) the shares owned by The
Sinkler Corporation of which, Mr. Leisenring is a director. Mr. Leisenring
disclaims beneficial ownership of such 11,000 shares of Common Stock and the
shares owned by The Sinkler Corporation.

(4) Includes options for 1,340 and 660 shares of Common Stock granted under the
1992 and 1996 Incentive Stock Plans, respectively. Mr. Mapes had the right
to acquire beneficial ownership of the shares underlying these options
within 60 days of November 15, 1998. Also includes 45,000 shares of Common
Stock and currently exercisable warrants for 185,389 shares of Common Stock
which Mr. Mapes holds in an Individual Retirement Account.

(5) Includes options for 5,340 and 660 shares of Common Stock granted under the
1992 and 1996 Incentive Stock Plans, respectively. Mr. Mauritz had the right
to acquire beneficial ownership of the shares underlying these options
within 60 days of November 15, 1998. Also includes currently exercisable
warrants for 8,240 shares of Common Stock.

(6) As of June 12, 1998, Mr. Cunningham is no longer employed by the Company.

(7) As of June 19, 1998, Mr. Reinhardt is no longer employed by the Company.

(8) Includes currently exercisable warrants for 507,888 and 594,826 shares of
Common Stock held by Allied Capital Corporation and Allied Investment
Corporation, respectively.

(9) Includes currently exercisable warrants for 300,063 shares of Common Stock
issued to The Sinkler Corporation.

(10) Such group includes E. James Selzer and Michael T. Gavigan, both of whom
are executive officers of the Company, but neither of which are "named
executive officers" for whom specific disclosure is required.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee of the Board of Directors consisted of
William W. Mauritz (Chairman), David A. Heenan, and E.B. Leisenring, Jr. through
January 16, 1998. Mr. Heenan's term as a director ended on such date.
Subsequently, on March 17, 1998, Pierson G. Mapes was elected a member of the
Compensation Committee to replace Mr. Heenan.

On September 12, 1997, Allied Capital Corporation and certain affiliates
("Allied") purchased and committed to purchase a total of $1,485,000 principal
amount of subordinated debt of the Company. As a condition to such financing,
Allied requested that directors and officers of the Company participate with
Allied in the financing and in Allied's purchase of the Company's Common Stock
from an unrelated institution. Accordingly, at the closing of such financing,
Charles G. Emley, Jr., Mr. Leisenring, Mr. Mapes, and Mr. Mauritz, and,
subsequent to the closing of the financing, E. James Selzer, purchased from
Allied: (i) Junior Subordinated Secured Debentures in the principal amount of
$75,424, $18,856, $212,130, $9,428 and $188,560, respectively; (ii) 16,000,
4,000, 45,000, 2,000 and 40,000 shares of Common Stock of the Company,
respectively, at Allied's purchase price of $0.286 per share; and (iii) 13,713,
16,479, 185,389, 8,240 and 164,820 warrants to purchase shares of Common Stock
of the Company, respectively, at an exercise price of $1.17 per share. During
fiscal year ended July 31, 1998 the Company paid interest of $4,442, $1,110,
$12,492, $555 and $6,392 to Messrs. Emley, Leisenring, Mapes, Mauritz and
Selzer, respectively.

The Sinkler Corporation also owns all outstanding shares of the Company's
Series A Preferred Stock and Series B Preferred Stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

See Item 12--Compensation Committee Interlocks and Insider Participation.

PART IV

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

(a) 1. The following consolidated financial statements are included in Part II Item 8:

Independent Auditors' Report

Consolidated Balance Sheets as of July 31, 1998 and 1997

Consolidated Statements of Operations for the Years Ended July 31, 1998, 1997 and 1996

Consolidated Statements of Shareholders' Equity for the Years Ended July 31, 1998, 1997 and 1996

Consolidated Statements of Cash Flows for the Years Ended July 31, 1998, 1997 and 1996

Notes to Consolidated Financial Statements

2. The following consolidated financial statement schedule should be read in conjunction with the
consolidated financial statements set forth in Part II Item 8:

Valuation and Qualifying Accounts

All other schedules called for under Regulation S-X are not submitted because they are not applicable or
not required or because the required information is not material or is included in the consolidated
financial statements or notes thereto.

3. See Index to Exhibits for a list of exhibits to this Annual Report.

(b) Reports on Form 8-K.
Item 2. Disposition of Assets--filed on September 18, 1998 and incorporated by reference.

2(a)w Asset Purchase Agreement, dated as of September 3, 1998 between Pico Products, Inc., a
New York Corporation, and Thomas & Betts Corporation.

3(a)v Complete copy of the Certificate of Incorporation of the Company, as amended on
November 19, 1996.

3(b)e By-Laws of the Company, as amended on December 17, 1987.

4(a)b 1981 Non-Qualified Stock Option Plan.

4(b)a 1982 Incentive Stock Option Plan.

4(c)i 1992 Incentive Stock Plan.

4(d)j Warrant Certificates issued to Scimitar Development Capital Fund and Scimitar
Development Capital "B" Fund, dated February 10, 1993.

4(e)k Warrant Certificate issued to City National Bank, dated February 10, 1993.

4(f)m Amendment to 1992 Incentive Stock Plan.

4(g)r Amendment to 1981 Non-Qualified Stock Option Plan.

See page 53 for Key to Index of Exhibits Incorporated by Reference

4(h)s Investment Agreement between the Company and certain of its subsidiaries, and Allied Capital Corporation
and certain of its affiliated companies, dated November 21, 1996.

4(i)s Subordinated Secured Debenture issued by the Company and certain of its subsidiaries, payable to Allied
Capital Corporation, dated November 21, 1996. The Company has issued subordinated secured debentures in
substantially the same form as this debenture to the following parties for the following amounts:

HOLDER AMOUNT
------------------------------------------------------ ------------
2 Allied Investment Corporation $2,300,000
Allied Investment Corporation II $1,450,000
Allied Capital Corporation II $ 550,000

4(j)s Letter Agreement covering the issuance and sale by the Company of Preferred Stock to The Sinkler
Corporation, dated November 21, 1996.

24(k)s Stock Purchase Warrant issued by the Company to Allied Capital Corporation, dated November 21, 1996. The
Company has issued warrants in substantially the same form as this warrant to the following parties for
the following number of shares:

HOLDER SHARES
------------------------------------------------------ ------------

Allied Investment Corporation 358,484
Allied Investment Corporation II 226,001
Allied Capital Corporation II 85,724
The Sinkler Corporation 155,863
Shipley Raidy Capital Partners, LP 20,000

4(l)s Stock Purchase Warrant issued by the Company to Allied Capital Corporation, dated November 21, 1996. The
Company has issued warrants in substantially the same form as this warrant to the following parties for
the following percentage of shares:

PERCENTAGE
OF
HOLDER SHARES
------------------------------------------------------ ------------

Allied Investment Corporation 6.9%
Allied Investment Corporation II 4.35%
Allied Capital Corporation II 1.65%
The Sinkler Corporation 3.0%

4(m)s Registration Rights Agreement between the Company, Allied Capital Corporation and certain of its
affiliated companies, Scimitar Development Capital Fund and Scimitar Development Capital "B" Fund,
Shipley Raidy Capital Partners, LP, and The Sinkler Corporation, dated November 21, 1996.

4(n)t Amended and Restated 1996 Incentive Stock Plan.

4(o)v Investment Agreement between the Company and certain of its subsidiaries, and Allied Capital Corporation
and certain of its affiliated companies, dated September 12, 1997.

See page 53 for Key to Index of Exhibits Incorporated by Reference

4(p)v Junior Subordinated Secured Debenture issued by the Company and certain of its subsidiaries, payable to
Allied Capital Corporation, dated September 12, 1997. The Company has issued subordinated secured
debentures in substantially the same form as this debenture to the following parties for the following
amounts:

HOLDER AMOUNT
------------------------------------------------------ ------------

Allied Investment Corporation $ 374,300
Allied Capital Corporation II $ 394,000

4(q)v Letter Agreement covering the issuance and sale by the Company of Preferred Stock to The Sinkler
Corporation, dated September 12, 1997.

4(r)v Stock Purchase Warrant issued by the Company to Allied Capital Corporation, dated September 12, 1997.
The Company has issued warrants in substantially the same form as this warrant to the following parties
for the following number of shares:

HOLDER SHARES
------------------------------------------------------ ------------

Allied Investment Corporation 258,944
Allied Capital Corporation II 272,572
The Sinkler Corporation 114,200

4(s)v Stock Purchase Warrant Subject to Call issued by the Company to Allied Capital Corporation, dated
September 12, 1997. The Company has issued warrants in substantially the same form as this warrant to
the following parties for the following number of shares:

HOLDER SHARES
------------------------------------------------------ ------------

Allied Investment Corporation 68,024
Allied Capital Corporation II 71,604
The Sinkler Corporation 30,000

4(t)v First amendment to Investment Agreement between the Company and certain of its subsidiaries, and Allied
Capital Corporation and certain of its affiliated Companies, dated September 12, 1997.

10(a)f The Company product warranties

10(b)c Pico (St. Kitts) Limited lease on Pond Pasture Industrial Estate, Basseterre, St. Christopher and Nevis.

10(c)d Pico Macom, Inc. lease on approximately 60,000 square feet of building at 12500 Foothill Blvd., Lakeview
Terraace, California.

10(d)g Amendment to Pico Macom, Inc. lease of building at 12500 Foothill Blvd., Lakeview Terrace, California.

10(e)e Lease on office of Pico Macom Taiwan Co., Ltd.

10(f)g Exclusive Manufacturing Agreement between Pico Macom, Inc. and Goodmind Industries, dated April 26,
1989.

10(g)k Amendment to Exclusive Manufacturing Agreement between Pico Macom, Inc. and Good Mind Industries (dated
April 26, 1989)--amendment dated April 27, 1993

See page 53 for Key to Index of Exhibits Incorporated by Reference

10(h)l Loan and Security Agreement between Pico Macom, Inc. and Marine Midland Business Loans, Inc. dated May
25, 1994

10(i)o Employment Agreement between Pico Macom, Inc. and Norman Reinhardt, dated March 22, 1995.

10(j)o Amendment to Exclusive Manufacturing/Marketing Agreement between Pico Macom, Inc. and Goodmind
Industries (dated April 26, 1989)--amendment dated April 10, 1995.

10(k)p Amendments to the Loan and Security Agreement between Pico Macom, Inc. and Marine Midland Business
Loans, Inc. dated May 25, 1994--amendments dated April 27, 1995 and May 18, 1995.

10(l)p Employment Agreement between Pico Products, Inc. and Everett T. Keech, dated September 22, 1995.

10(m)q Amendment to Pico Macom, Inc. lease of building at 12500 Foothill Boulevard, Lakeview Terrace,
California--amendment dated November 9, 1995.

10(n)r Amendment No. 3 to the Loan and Security Agreement between Pico Macom, Inc. and Marine Midland Business
Loans, Inc. dated May 25, 1994--amendment dated December 20, 1995.

10(o)s Amendment No. 4 to the Loan and Security Agreement between Pico Macom, Inc. and HSBC Business Loans,
Inc., as successor to Marine Midland Business Loans, Inc. (original agreement dated May 25,
1994)--amendment dated November 25, 1996.

10(p)u Employment Agreement between Pico Products, Inc. and Robert G. Cunningham, dated December 12, 1996.

10(q)x Amendment No. 5 to the Loan and Security Agreement between Pico Macom, Inc. and HSBC Business Loans,
Inc., as successor to Marine Midland Business Loans, Inc. dated May 25, 1994--Amendment dated October
31, 1997.

10(r)y Employment agreement dated January 8, 1998 between the Company and Charles G. Emley, Jr.

10(s) Amendments No. 6, 7, 8, and 9 to the Loan and Security Agreement between Pico Macom, Inc. and HSBC
Business Loans, Inc., dated December 12, 1998, June 1, 1998, October 11, 1998 and November 13, 1998,
respectively.

11.1 Computation of Per Share Earnings. Incorporated by reference to Financial Statement footnote A under
Item 8 of Form 10-K.

22(a) Subsidiaries of the Company are listed in the Table at the end of Item 1

24(a) Independent Auditors' Consent

27 Financial Data Schedule (included only in the EDGAR filing).

See page 53 for Key to Index of Exhibits Incorporated by Reference

KEY TO INDEX OF EXHIBITS INCORPORATED BY REFERENCE

a Previously filed by the Company as an exhibit to the Company's Registration Statement on Form S-1, File No.
2-77439 and incorporated by reference.

b Previously filed by the Company as an exhibit to the Company's Registration Statement on Form S-18, File No.
2-72318 and incorporated by reference.

c Previously filed by the Company as an exhibit to the Company's Form 10-K for the fiscal year ended July 31,
1983 and incorporated by reference.

d Previously filed by the Company as an exhibit to the Company's Form 10-K for the fiscal year ended July 31,
1985 and incorporated by reference.

e Previously filed by the Company as an exhibit to the Company's Form 10-K for the fiscal year ended July 31,
1988 and incorporated by reference.

f Previously filed by the Company as an exhibit to the Company's Form 10-K for the fiscal year ended July 31,
1990 and incorporated by reference.

g Previously filed by the Company as an exhibit to the Company's Form 10-K for the fiscal year ended July 31,
1991 and incorporated by reference.

h Previously filed by the Company as an exhibit to the Company's Form 10-K for the fiscal year ended July 31,
1992 and incorporated by reference.

i Previously filed by the Company as an exhibit to the Company's Form 10-Q for the fiscal quarter ended
January 31, 1993 and incorporated by reference.

j Previously filed as exhibits to Schedule 13D, dated February 16, 1993, filed by Standard Chartered Equitor
Trustee CI Limited, Scimitar Development Capital Fund and Scimitar Development Capital "B" Fund, and
incorporated by reference.

k Previously filed by the Company as an exhibit to the Company's Form 10-K for the fiscal year ended July 31,
1993 and incorporated by reference.

l Previously filed by the Company as an exhibit to the Company's Form 10-Q for the fiscal quarter ended April
30, 1994 and incorporated by reference.

m Previously filed by the Company as an exhibit to the Company's Form 10-K for the fiscal year ended July 31,
1994 and incorporated by reference.

n Previously filed by the Company as an exhibit to the Company's Form 10-Q for the fiscal quarter ended
January 31, 1995 and incorporated by reference.

o Previously filed by the Company as an exhibit to the Company's Form 10-Q for the fiscal quarter ended April
30, 1995 and incorporated by reference.

p Previously filed by the Company as an exhibit to the Company's Form 10-K for the fiscal year ended July 31,
1995 and incorporated by reference.

q Previously filed by the Company as an exhibit to the Company's Form 10-Q for the fiscal quarter ended
October 31, 1995 and incorporated by reference.

r Previously filed by the Company as an exhibit to the Company's Form 10-Q for the fiscal quarter ended
January 31, 1996 and incorporated by reference.

s Previously filed by the Company as an exhibit to the Company's Form 10-Q for the fiscal quarter ended
October 31, 1996 and incorporated by reference.

t Previously filed by the Company as an amendment to the Company's definitive proxy statement dated December
4, 1996 and incorporated by reference.

u Previously filed by the Company as an exhibit to the Company's Form 10-Q for the fiscal quarter ended
January 31, 1997 and incorporated by reference.

v Previously filed by the Company as an exhibit to the Company's Form 10-K for the fiscal year-ended July 31,
1997 and incorporated by reference.

w Previously filed by the Company as an exhibit to the Company's Form 8-K filed on September 18, 1998 and
incorporated by reference.

x Previously filed by the Company as an exhibit to the Company's Form 10-Q for the fiscal quarterly ended
October 31, 1997 and incorporated by reference.

y Previously filed by the Company as an exhibit to the Company's Form 10-Q for the fiscal quarter ended
January 31, 1998 and incorporated by reference.

Copies of all exhibits incorporated by reference are availableSchedule at no charge by written request to
Assistant Corporate Secretary, Pico Products, Inc., 1250 Foothill Blvd., Lakeview Terrace, California 91342.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.

PICO PRODUCTS, INC.

(Registrant)

By: /s/ E. JAMES SELZER
-----------------------------------------
E. James Selzer
VICE PRESIDENT, FINANCE AND ADMINISTRATION
AND CHIEF FINANCIAL OFFICER

Dated: December 9, 1998

FORM 10-K
YEAR ENDED JULY 31, 1998
NEW EXHIBITS

EXHIBITS
- -----------

10(s) Amendments No. 6, 7, 8, and 9 to the Loan and Security Agreement between Pico Macom, Inc. and
HSBC Business Loans, Inc., dated December 12, 1998, June 1, 1998, October 11, 1998 and November
13, 1998, respectively.

11.1 Computation of Per Share Earnings. Incorporated by reference to financial statement footnote A
under Item 8 of Form 10-K.

24(a) Independent Auditors' Consent.

27 Financial Data Schedule (included only in the EDGAR filing).