<PAGE>

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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   Form 10-Q

              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

                      THE SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended December 31, 2000

                       Commission file number 000-07438

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

                              ACTERNA CORPORATION
            (Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
                   DELAWARE                                      04-2258582
<S>                                            <C>
       (State or other jurisdiction of                        (I.R.S. Employer
       incorporation or organization)                      Identification Number)
</TABLE>

                         3 New England Executive Park
                     Burlington, Massachusetts 01803-5087
              (Address of principal executive offices) (Zip code)

      Registrant's telephone number, including area code: (781) 272-6100

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

   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  [_]

   At January 15, 2000 there were 190,711,416 shares of common stock of the
registrant outstanding.

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<PAGE>

                              ACTERNA CORPORATION

                                   FORM 10-Q

                    FOR THE QUARTER ENDED DECEMBER 31, 2000

                               TABLE OF CONTENTS

<TABLE>
<S>                                                                         <C>
PART I --FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

    Consolidated Statements of Operations for the Three and Nine Months
    Ended December 31, 2000 and December 31, 1999.........................    3

    Condensed Consolidated Balance Sheets as of December 31, 2000 and
    March 31, 2000........................................................    4

    Condensed Consolidated Statements of Cash Flows for the Nine Months
    Ended December 31, 2000 and December 31, 1999.........................    5

    Notes to Condensed Consolidated Statements............................    6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS.............................................   24

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........   41

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.................................................   43

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.........................   43

ITEM 4. SUBMISSION OF MATTERS TO A VOTE...................................   43

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................   43
</TABLE>

                                       2
<PAGE>

                         PART I. Financial Information

Item 1. Financial Statements

                              ACTERNA CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                         Three Months
                                        Ended December     Nine Months Ended
                                              31,             December 31,
                                       ------------------  -------------------
                                         2000      1999      2000       1999
                                       --------  --------  ---------  --------
                                         (In thousands, except per share
                                                      data)
<S>                                    <C>       <C>       <C>        <C>
Net sales............................  $324,104  $122,225  $ 837,485  $316,808
Cost of sales........................   118,925    40,892    349,583   105,764
                                       --------  --------  ---------  --------
Gross profit.........................   205,179    81,333    487,902   211,044
Selling, general & administrative ex-
 pense...............................   125,561    41,378    317,105   107,014
Product development expense..........    40,279    16,349    105,162    41,687
Recapitalization and other related
 costs...............................       --        --       9,194    13,259
Purchased incomplete technology......       --        --      56,000       --
Amortization of intangibles..........    32,444     3,059     76,086     4,538
                                       --------  --------  ---------  --------
Total operating expenses.............   198,284    60,786    563,547   166,498
                                       --------  --------  ---------  --------
Operating income (loss)..............     6,895    20,547    (75,645)   44,546

Interest expense.....................   (27,941)  (12,989)   (73,734)  (38,429)
Interest income......................       765       572      2,473     1,872
Other income (expense), net..........    (1,755)      (16)    (2,825)      (40)
                                       --------  --------  ---------  --------
Income (loss) from continuing opera-
 tions before income taxes and ex-
 traordinary item....................   (22,036)    8,114   (149,731)    7,949
Provision (benefit) for income tax-
 es..................................    (3,730)    4,180     (9,301)    4,440
                                       --------  --------  ---------  --------
Net income (loss) from continuing op-
 erations before extraordinary item..  $(18,306) $  3,934  $(140,430) $  3,509
Discontinued operations:
Operating income, net of income tax
 provision of $591 and $8,373, re-
 spectively..........................       --        819        --     13,361
                                       --------  --------  ---------  --------
Net income (loss) before extraordi-
 nary item...........................   (18,306)    4,753   (140,430)   16,870
Extraordinary item, net of income tax
 benefit of $6,603...................       --        --     (10,659)      --
                                       --------  --------  ---------  --------
Net income (loss)....................  $(18,306) $  4,753  $(151,089) $ 16,870
                                       ========  ========  =========  ========
Income (loss) per common share--basic
Continuing operations................  $  (0.10) $   0.02  $   (0.77) $   0.02
Discontinued operations..............       --       0.01        --       0.09
Extraordinary loss...................       --        --       (0.06)      --
                                       --------  --------  ---------  --------
Net income (loss) per common share --
 basic...............................  $  (0.10) $   0.03  $   (0.83) $   0.11
                                       ========  ========  =========  ========
Income (loss) per common share dilut-
 ed:
  Continuing operations..............  $  (0.10) $   0.02  $   (0.77) $   0.02
  Discontinued operations............       --       0.01        --       0.08
  Extraordinary loss.................       --        --       (0.06)      --
                                       --------  --------  ---------  --------
  Net income (loss) per common share
   -- diluted........................  $  (0.10) $   0.03  $   (0.83) $   0.10
                                       ========  ========  =========  ========
Weighted average number of common
 shares:
  Basic..............................   190,300   148,914    181,634   147,998
  Diluted............................   190,300   164,150    181,634   160,267
</TABLE>

           See notes to condensed consolidated financial statements.


                                       3
<PAGE>

                              ACTERNA CORPORATION

                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                          December 31,
                                                              2000      March
                                                          (Unaudited)  31, 2000
                                                          ------------ --------
                                                             (In thousands)
<S>                                                       <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents..............................  $   71,790  $ 33,839
  Accounts receivable, net...............................     211,055    78,236
Inventories:
   Raw materials.........................................      49,413    11,085
   Work in process.......................................      39,001    12,859
   Finished goods........................................      56,941     6,308
                                                           ----------  --------
      Total inventory....................................     145,355    30,252
  Deferred income taxes..................................      29,005    21,548
  Other current assets...................................      50,864    16,332
                                                           ----------  --------
   Total current assets..................................     508,069   180,207
Property, plant and equipment, net.......................      87,795    27,316
Other assets:
  Net assets held for sale...............................      93,425    72,601
  Intangible assets, net.................................     652,971    58,508
  Deferred income taxes..................................         446    42,689
  Deferred debt issuance costs, net......................      26,939    21,382
  Other..................................................      20,039    12,135
                                                           ----------  --------
                                                           $1,389,684  $414,838
                                                           ==========  ========
LIABILITIES & STOCKHOLDERS' DEFICIT
Current Liabilities:
  Notes payable..........................................  $   15,207  $     --
  Current portion of long-term debt......................      17,742     7,646
  Accounts payable.......................................      85,623    38,374
   Accrued expenses:
   Compensation and benefits.............................      67,698    35,036
   Deferred revenue......................................      24,138    13,564
   Warranty..............................................      14,447     8,297
   Interest..............................................       5,213    10,055
   Taxes other than income taxes.........................      12,579     1,844
   Other.................................................      31,648     7,426
  Accrued income taxes...................................         --      5,703
                                                           ----------  --------
      Total current liabilities..........................     274,295   127,945
Long-term debt...........................................   1,086,666   572,288
Deferred income taxes....................................      49,143       --
Deferred compensation....................................      57,897    11,280
Stockholders' deficit:
  Common stock...........................................       1,907     1,225
  Additional paid-in capital.............................     805,641   344,873
  Accumulated deficit....................................    (775,018) (623,929)
  Unearned compensation..................................    (110,132)  (16,965)
  Other comprehensive loss...............................        (715)   (1,879)
                                                           ----------  --------
  Total stockholders' deficit............................     (78,317) (296,675)
                                                           ----------  --------
                                                           $1,389,684  $414,838
                                                           ==========  ========
</TABLE>

           See notes to condensed consolidated financial statements.

                                       4
<PAGE>

                              ACTERNA CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                            Nine Months Ended
                                                              December 31,
                                                            ------------------
                                                              2000      1999
                                                            ---------  -------
                                                             (In thousands)
<S>                                                         <C>        <C>
Operating activities:
  Net income (loss)........................................ $(151,089) $16,870
  Adjustments for non-cash items included in net income:
    Depreciation...........................................    14,700    9,103
    Amortization of intangibles............................    76,086    7,053
    Amortization of inventory step-up......................    35,750      --
    Amortization of unearned compensation..................    14,123    1,451
    Amortization of deferred debt issuance costs...........     2,943    2,424
    Writeoff of deferred debt issuance costs...............    10,019      --
    Purchased incomplete technology........................    56,000      --
    Recapitalization and other related costs...............     9,194      --
    Other..................................................       125       84
  Change in deferred income taxes..........................    (4,538)     --
  Change in operating assets and liabilities...............   (90,710) (21,283)
                                                            ---------  -------
  Net cash flows provided by (used in) operating activi-
   ties, net of assets acquired............................   (27,397)  15,702
                                                            ---------  -------
Investing activities:
  Purchases of property and equipment......................   (23,474) (12,960)
  Proceeds from sale of business...........................     3,500      --
  Businesses acquired in purchase transactions, net of cash
   acquired................................................  (407,034) (73,394)
  Other....................................................    (4,709)  (3,660)
                                                            ---------  -------
Net cash flows used in investing activities................  (431,717) (90,014)
                                                            ---------  -------
Financing activities:
  Net borrowings of debt...................................   323,015   39,595
  Repayment of capital lease obligations...................       (17)    (341)
  Capitalized debt issuance costs..........................   (18,519)     --
  Proceeds from issuance of common stock, net of expenses..   199,609    3,604
                                                            ---------  -------
Net cash flows provided by financing activities............   504,088   42,858
Effect of exchange rate on cash............................    (7,023)     108
                                                            ---------  -------
Increase (decrease) in cash and cash equivalents...........    37,951  (31,346)
Cash and cash equivalents at beginning of year.............    33,839   70,362
                                                            ---------  -------
Cash and cash equivalents at end of period................. $  71,790  $39,016
                                                            =========  =======
</TABLE>

           See notes to condensed consolidated financial statements.

                                       5
<PAGE>

                              ACTERNA CORPORATION

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. Basis of Presentation and Results of Operations

   Acterna Corporation (the "Company" or "Acterna") was organized in 1959 and
   its operations are conducted primarily by wholly-owned subsidiaries located
   principally in the United States and Europe, with distribution and sales
   offices in the Middle East, Africa, Latin America and Asia.

   The Company is managed in two continuing business segments: communications
   test and inflight information systems. The communications test business
   develops, manufactures and markets instruments, systems, software and
   services to test, deploy, manage and optimize communications networks,
   equipment and services. The inflight information systems segment, through
   the Company's AIRSHOW, Inc. subsidiary, provides systems that deliver real-
   time news, information and flight data to aircraft passengers. The Company
   also has other subsidiaries that, in the aggregate, are not reportable as a
   segment ("Other Subsidiaries"). These Other Subsidiaries include da Vinci
   Systems, Inc., which manufactures systems that correct or enhance the
   accuracy of color during the process of transferring film-based images to
   videotape, and DataViews Corporation, which was sold in June 2000.

   The Company operates on a fiscal year ending on March 31 in the calendar
   year indicated (e.g., references to fiscal 2001 refers to the Company's
   fiscal year which began April 1, 2000 and will end March 31, 2001).

B. Condensed Consolidated Financial Statements

   In the opinion of management, the unaudited condensed consolidated balance
   sheet at December 31, 2000 and March 31, 2000, and the unaudited
   consolidated statements of operations and unaudited condensed consolidated
   statements of cash flows for the interim periods ended December 31, 2000
   and 1999 include all adjustments (consisting only of normal recurring
   adjustments) necessary to present fairly these financial statements.

   Certain information and footnote disclosures normally included in financial
   statements prepared in accordance with generally accepted accounting
   principles have been condensed or omitted. The year-end balance sheet data
   was derived from audited financial statements, but does not include
   disclosures required by generally accepted accounting principles. These
   condensed statements should be read in conjunction with the Company's most
   recent Form 10-K as of March 31, 2000 and the Company's Current Report on
   Form 8-K dated May 31, 2000; its Current Report on Form 8-K/A dated July
   18, 2000 disclosing pro forma information relating to the WWG Merger; its
   Current Report on Form 8-K dated August 30, 2000 relating to the Company
   changing its name from Dynatech Corporation to Acterna Corporation; its
   Current Report on Form 8-K dated September 22, 2000 relating to the Company
   changing its CUSIP number and its NASDAQ OTC symbol; and its Current Report
   on Form 8-K dated November 14, 2000 relating to the Company's press release
   on its second quarter earnings.

   The preparation of financial statements in conformity with generally
   accepted accounting principles requires management to make certain
   estimates and assumptions that affect the reported amount 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 reported period. Significant estimates in these
   financial statements include allowances for accounts receivable, net
   realizable value of inventories, purchased incomplete technology, warranty
   accruals and tax valuation reserves. Actual results could differ from those
   estimates.

                                       6
<PAGE>

C. Acquisitions During Fiscal 2001

   Wavetek Wandel Goltermann, Inc.

   On May 23, 2000, the Company and its wholly-owned subsidiary DWW
   Acquisition Corporation, a Delaware corporation, completed their merger
   (the "WWG Merger") with Wavetek Wandel Goltermann, Inc., a Delaware
   corporation ("WWG"), pursuant to which WWG became an indirect, wholly-owned
   subsidiary of Acterna, for a purchase price of $371.2 million.

   The acquisition was accounted for using the purchase method of accounting.
   As part of the purchase price allocation, the Company increased the
   carrying value of the acquired inventory by $35 million in order to record
   this inventory at its fair value, and also recorded a charge of $51 million
   for acquired incomplete technology. This purchased incomplete technology
   had not reached technological feasibility and had no alternative future
   use. The Company generated approximately $521.4 million of excess purchase
   price that has been allocated on a preliminary basis between specific
   intangible assets and goodwill. This excess purchase price has been
   amortized using a weighted average six-year life. The final allocation of
   the purchase price has not yet been completed, however, and completion of
   the allocation of the excess purchase price and other purchase accounting
   adjustments depend upon certain valuations and other studies that are still
   in progress.

   In connection with the WWG Merger and the concurrent establishment of our
   new Senior Secured Credit Facility (see Note N. Long-Term Debt), the
   Company paid Clayton, Dubilier & Rice, Inc., an investment firm that
   manages Clayton, Dubilier & Rice Fund V Limited Partnership and Clayton,
   Dubilier & Rice Fund VI Limited Partnership, the Company's controlling
   stockholders, $6.0 million for services provided in connection with the WWG
   Merger and the related financing, of which $3.0 million has been allocated
   to deferred debt issuance costs and $3.0 million allocated to additional
   paid-in capital in connection with the Rights Offering. (See Note K. Income
   (Loss) Per Share).

   Superior Electronics Group, Inc., dba Cheetah Technologies

   On August 23, 2000, the Company acquired substantially all of the assets
   and assumed specified liabilities of Superior Electronics Group, Inc., a
   Florida corporation doing business as Cheetah Technologies ("Cheetah") for
   a purchase price of approximately $166 million. The acquisition was
   accounted for using the purchase method of accounting. As part of the
   purchase price allocation, the Company increased the carrying value of the
   acquired inventory by $750 thousand in order to record this inventory at
   its fair value, and also recorded a charge of $5.0 million for acquired
   incomplete technology. This purchased incomplete technology had not reached
   technological feasibility and had no alternative future use. The Company
   generated a preliminary estimate of $132.7 million of excess purchase price
   that has been allocated on a preliminary basis between specific intangible
   assets and goodwill that is being amortized over a weighted average six-
   year life. The final allocation of the purchase price has not yet been
   completed, however, and completion of the allocation of the excess purchase
   price and other purchase accounting adjustments depend upon certain
   valuations and other studies that are still in progress.

   The Company funded the purchase price with borrowings of $100.0 million
   under its Senior Secured Credit Facility (see Note N. Long-Term Debt) and
   approximately $66.0 million from its existing cash balance.

   In connection with the Cheetah acquisition, options to purchase shares of
   Cheetah were converted into options to purchase shares of Acterna common
   stock based upon a conversion ratio designed to preserve the economic value
   of each converted option. The preliminary fair value as of the announcement
   date of the acquisition of all options converted has been estimated at $900
   thousand using an option-pricing model. A preliminary total of $6.7 million
   relates to the unearned intrinsic value of unvested options as of the
   closing date of the acquisition, and has been recorded as deferred
   compensation to be amortized over the remaining vesting period of the
   options (the weighted average vesting period is approximately two years).

D. Acquistitions During Fiscal 2000

   Sierra Design Labs

   On September 10, 1999, the Company purchased the outstanding stock of
   Sierra Design Labs ("Sierra") for a total purchase price of $6.3 million in
   cash. The acquisition was accounted for using the purchase

                                       7
<PAGE>

   method of accounting and resulted in $4.9 million of goodwill, which is
   being amortized over ten years. The operating results of Sierra have been
   included in the consolidated financial statements since September 10, 1999
   and is included within the Company's Other Subsidiaries.

   Applied Digital Access, Inc.

   On November 1, 1999, the Company acquired all the outstanding stock of
   Applied Digital Access, Inc.("ADA") for a total purchase price of
   approximately $81.0 million in cash. The acquisition was accounted for
   using the purchase method of accounting and resulted in $46.0 million of
   goodwill which is being amortized over three years. The operating results
   of ADA have been included in the consolidated financial statements since
   November 1, 1999 and is included within the Company's Communications Test
   segment.

E. Divestiture

   In June 2000, the Company sold the assets and liabilities of DataViews
   Corporation ("DataViews"), a subsidiary that manufactures software for
   graphical-user-interface applications, to GE Fanuc for $3.5 million. The
   sale generated a loss of approximately $0.1 million. Prior to the sale, the
   results of DataViews were included in the Company's financial statements
   within "Other Subsidiaries".

F. Discontinued Operations

   In May 2000, the Board of Directors approved a plan to divest the
   industrial computing and communications segment, which consists of the
   Company's ICS Advent and Itronix Corporation subsidiaries. In connection
   with its decision, the Board authorized management to retain one or more
   investment banks to assist the Company with respect to the divestiture. The
   segment's results of operations (including net sales, operating costs and
   expenses and income taxes) for the nine month period ended December 31,
   2000 was a loss of $14.2 million, and has been deferred and included in the
   balance sheet as net assets held for sale within non-current assets. The
   Company's balance sheets as of December 31, 2000 and March 31, 2000 reflect
   the net assets of the industrial computing and communications segment as
   net assets held for sale within non-current assets. The Statement of Cash
   Flows for the nine-month period ended December 31, 1999 has not been
   reclassified for the discontinued businesses.

   Management anticipates net operating losses from the discontinued segment
   through the first quarter of fiscal 2002, at which time the Company
   anticipates having sold these businesses. Management believes that the net
   proceeds from the disposition of these companies will exceed the carrying
   amount of the net assets and the operating losses through the date of
   disposition. Accordingly, the anticipated net gain from the disposal of the
   segment will not be reflected in the statements of operations until they
   are realized.

G. Extraordinary Item

   In connection with the refinancing of the debt related to the WWG Merger in
   the first quarter of fiscal 2001, the Company recorded an extraordinary
   charge of $10.7 million (net of an income tax benefit of $6.6 million), of
   which $7.3 million (pretax) related to a premium paid by the Company to
   WWG's former bondholders to repurchase WWG's senior subordinated debt
   outstanding prior to the WWG Merger. In addition the Company booked a
   charge of $10.0 million (pretax) for the writeoff of the unamortized
   deferred debt issuance costs that originated at the time of the
   recapitalization of the Company in May of 1998.

H. Recapitalizaton

   On May 21, 1998, CDRD Merger Corporation, a nonsubstantive transitory
   merger vehicle, which was organized at the direction of Clayton, Dubilier &
   Rice, Inc., a private investment firm, was merged with and into the Company
   (the "Recapitalization") with the Company continuing as the surviving
   corporation. In the Recapitalization, (1) each then outstanding share of
   common stock, par value $0.20 per share, of the Company was converted into
   the right to receive $47.75 in cash and 0.5 shares of common stock, no par
   value, of the Company and (2) each then outstanding share of common stock
   of CDRD Merger Corporation was converted into one share of common stock.

                                       8
<PAGE>

I. Recapitalization and Other Related Costs

   Recapitalization and other related costs from continuing operations during
   the first nine months of fiscal 2001 of $9.2 million related to an
   executive who left the Company during fiscal 2000. Recapitalization and
   other related costs during the first nine months of fiscal 2000 of $13.3
   million related to termination expenses of certain executives including
   those arising from the retirement of John F. Reno, former Chairman,
   President and Chief Executive Officer of the Company, as well as other
   employees.

J. Taxes

   The effective tax rate for the three months ended December 31, 2000 was
   16.9% as compared to 40% for the same period last year. The principal
   reasons for the decrease in the effective tax rate were: (1) additional
   non-deductible goodwill amortization expected in the current fiscal year as
   a result of the WWG Merger; and (2) expected changes in the amount of
   income earned in various countries with tax rates higher than the U.S.
   federal rate.

   The effective tax rate for the nine months ended December 31, 2000 was 6.2%
   as compared to 40% for the same period last year. The principal reasons for
   the decrease in the effective tax rate were: (1) the $56 million non-
   deductible charge for purchased incomplete technology in connection with
   the WWG Merger and Cheetah acquisition; (2) additional non-deductible
   goodwill amortization expected in the current fiscal year as a result of
   the WWG Merger; and (3) expected changes in the amount of income earned in
   various countries with tax rates higher than the U.S. federal rate.

                                       9
<PAGE>

                              ACTERNA CORPORATION

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


K. Income (Loss) Per Share

   Income (loss) per share is calculated as follows (In thousands, except per
share data):

<TABLE>
<CAPTION>
                                             Three Months
                                                Ended,       Nine Months Ended
                                             December 31,      December 31,
                                           ----------------- ------------------
                                             2000     1999     2000      1999
                                           --------  ------- ---------  -------
   <S>                                     <C>       <C>     <C>        <C>
   Net income (loss):
   Continuing operations.................  $(18,306) $ 3,934 $(140,430) $ 3,509
   Discontinued operations...............       --       819       --    13,361
   Extraordinary item....................       --       --    (10,659)     --
                                           --------  ------- ---------  -------
   Net income (loss).....................  $(18,306) $ 4,753 $(151,089) $16,870
                                           ========  ======= =========  =======
   BASIC:
   Common stock outstanding, beginning of
    period...............................   190,070  121,429   122,527  120,665
   Weighted average common stock issued
    during the period....................       230      632    53,578      645
                                           --------  ------- ---------  -------
                                            190,300  122,061   176,105  121,310
   Bonus element adjustment related to
    rights offering......................       --    26,853     5,529   26,688
                                           --------  ------- ---------  -------
   Weighted average common stock out-
    standing, end of period..............   190,300  148,914   181,634  147,998
                                           ========  ======= =========  =======
   Income (loss) per common share:
   Continuing operations.................  $  (0.10) $  0.02 $   (0.77) $  0.02
   Discontinued operations...............       --      0.01       --      0.09
   Extraordinary item....................       --       --      (0.06)     --
                                           --------  ------- ---------  -------
   Net income (loss) per common share....  $  (0.10) $  0.03 $   (0.83) $  0.11
                                           ========  ======= =========  =======
   DILUTED:
   Common stock outstanding, beginning of
    period...............................   190,070  121,429   122,527  120,665
   Weighted average common stock issued
    during the period....................       230      632    53,578      645
   Weighted average of dilutive potential
    common stock.........................       --    12,488       --    10,056
                                           --------  ------- ---------  -------
                                            190,300  134,549   176,105  131,366
   Bonus element adjustment related to
    rights offering......................       --    29,601     5,529   28,901
                                           --------  ------- ---------  -------
   Weighted average common stock out-
    standing, end of period..............   190,300  164,150   181,634  160,267
                                           ========  ======= =========  =======
   Income (loss) per common share:
   Continuing operations.................  $  (0.10) $  0.02 $   (0.77) $  0.02
   Discontinued operations...............       --      0.01       --      0.08
   Extraordinary loss....................       --       --      (0.06)     --
                                           --------  ------- ---------  -------
   Net income (loss) per common share....  $  (0.10) $  0.03 $   (0.83) $  0.10
                                           ========  ======= =========  =======
</TABLE>
--------
   As of December 31, 2000 and 1999, the Company had options outstanding to
   purchase 39.7 million and 32.0 million shares of common stock, respectively.

                                       10
<PAGE>

                              ACTERNA CORPORATION

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   On May 23, 2000, in order to finance the WWG Merger, the Company sold 12.5
   million and 30.625 million shares of common stock to Clayton, Dubilier &
   Rice Fund V Limited Partnership ("CDR Fund V") and Clayton, Dubilier & Rice
   Fund VI Limited Partnership ("CDR Fund VI"; together with CDR Fund V, the
   "CDR Funds"), respectively, at a price of $4.00 per share. In order to
   reverse the diminution of percentage ownership of all other common
   stockholders as a result of shares issued in connection with the WWG
   Merger, the Company made a rights offering to all its common stock
   stockholders (including CDR Fund V) of record on April 20, 2000 (the
   "Rights Offering"). CDR Fund V elected to waive its right to participate in
   this Rights Offering. As a result, on June 30, 2000, the Company sold
   4,983,000 shares of common stock to stockholders of record on April 20,
   2000 (other than CDR Fund V), that subscribed for shares in the Rights
   Offering, at a price of $4.00 per share. The closing trading price of the
   common stock on May 22, 2000, immediately prior to the sale of the common
   stock to the CDR Funds, was $11.25.

   For purposes of calculating weighted average shares and earnings per share,
   the Company has treated both the sale of common stock to the CDR Funds and
   the sale of common stock in the Rights Offering as a rights offer. Since
   the common stock has been offered to all stockholders at a price that is
   less than that of the market trading price (the "bonus element"), a
   retroactive adjustment has been made to weighted average shares to take
   this bonus element into account.

   For the three and nine month periods ended December 31, 2000, the Company
   excluded from its diluted weighted average shares outstanding the effect of
   the weighted average common stock equivalents which totaled 12.7 million
   shares and 14.5 million shares, respectively, as the Company incurred a net
   loss from continuing operations. The common stock equivalents have been
   excluded from the calculation of diluted weighted average shares
   outstanding because their inclusion would have an antidilutive effect by
   reducing the loss from continuing operations on a per share basis.

L. SEGMENT INFORMATION

   Net sales and earnings before interest, taxes and amortization ("EBITA")
   for the three and nine months ended December 31, 2000 and 1999 and total
   assets as of December 31, 2000 and 1999 are shown below (in thousands):

<TABLE>
<CAPTION>
                                             Three Months
                                                 Ended       Nine Months Ended
                                             December 31,       December 31,
                                           ----------------- ------------------
                   SEGMENT                   2000     1999     2000      1999
                   -------                 --------- ------- --------- --------
   <S>                                     <C>       <C>     <C>       <C>
   Communications test segment:
     Net sales............................ $ 296,244 $96,923 $ 754,100 $241,442
     EBITA................................    41,139  20,745   100,429   45,852
     Total assets......................... 1,147,015 180,275 1,147,015  180,275
   Inflight information systems segment:
     Net sales............................    19,079  17,257    57,408   53,055
     EBITA................................     3,870   4,030    12,085   16,471
     Total assets.........................    45,099  40,074    45,099   40,074
   Other subsidiaries:
     Net sales............................     8,781   8,045    25,977   22,311
     EBITA................................     2,834   1,687     7,113    5,398
     Total assets.........................    12,282  11,965    12,282   11,965
   Discontinued operations:
     Net assets held for sale.............    93,425     N/A    93,425      N/A
     Total assets.........................    93,425  75,631    93,425   75,631
</TABLE>

                                      11
<PAGE>

                              ACTERNA CORPORATION

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
<CAPTION>
                                      Three Months Ended   Nine Months Ended
                                         December 31,         December 31,
                                      -------------------  -------------------
                SEGMENT                 2000       1999      2000       1999
                -------               ---------  --------  ---------  --------
   <S>                                <C>        <C>       <C>        <C>
   Corporate:
     Income (loss) before interest
      and taxes.....................     (1,504)     (469)    (4,563)     (133)
     Total assets...................     91,863    99,052     91,863    99,052
   Total company:
     Net sales......................  $ 324,104  $122,225  $ 837,485  $316,808
     EBITA..........................     46,339    25,993    115,064    67,588
     Total assets...................  1,389,684   406,997  1,389,684   406,997

   The following are excluded from the calculation of EBITA:
   Recapitalization and other
    costs...........................        --        --       9,194    13,259
   Purchased incomplete technology..        --        --      56,000       --
   Amortization of unearned compen-
    sation..........................      6,157       485     14,123     1,103
   Amortization of inventory step-
    up..............................        562       --      35,750       --
   Other (a) .......................      2,036       --       2,380       --
</TABLE>

(a)  During the third quarter of fiscal 2001, the Company recorded a charge of
     $2,036 within selling, general and administrative expense that was
     related to the writeoff of all expenses capitalized in connection with
     the Company's registration statement on Form S-1, which the Company filed
     for a potential common stock offering in July 2000. The Company is
     amending this registration statement by converting it to a universal
     shelf registration statement on Form S-3 under which, upon effectiveness,
     the Company may offer from time to time up to $1 billion of equity or
     debt securities.

M. INTANGIBLE ASSETS

   Intangible assets acquired primarily from business acquisitions are
summarized as follows:

<TABLE>
<CAPTION>
                                                          December 31, March 31,
                                                              2000       2000
                                                          ------------ ---------
   <S>                                                    <C>          <C>
   Product technology....................................  $  221,441  $  9,236
   Excess of cost over net assets acquired...............     411,939    67,328
   Other intangible assets...............................     118,517     4,177
                                                           ----------  --------
    .....................................................     751,897    80,741
   Less accumulated amortization.........................      98,926    22,233
                                                           ----------  --------
   Total.................................................  $  652,971  $ 58,508
                                                           ==========  ========

N. LONG-TERM DEBT

   Long-term debt is summarized below:
<CAPTION>
                                                          December 31, March 31,
                                                              2000       2000
                                                          ------------ ---------
   <S>                                                    <C>          <C>
   Senior Secured Credit Facility........................  $  802,501  $304,861
   Senior Subordinated Notes.............................     275,000   275,000
   Capitalized leases and other debt.....................      26,907        73
                                                           ----------  --------
   Total debt............................................   1,104,408   579,934
   Less current portion..................................      17,742     7,646
                                                           ----------  --------
   Long-term debt........................................  $1,086,666  $572,288
                                                           ==========  ========
</TABLE>

                                      12
<PAGE>

                              ACTERNA CORPORATION

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Principal and interest payments under the Senior Secured Credit Facility
   and interest payments on the Senior Subordinated Notes represent
   significant liquidity requirements for the Company. As a result of the
   substantial indebtedness incurred in connection with the WWG Merger and the
   Cheetah acquisition, the Company expects that its interest expense will be
   higher and will have a greater proportionate impact on net income in
   comparison to prior periods.

   Upon consummation of the WWG Merger, the Company restructured its existing
   bank debt as well as the senior subordinated debt, bank debt and other debt
   of WWG. As a result, on May 23, 2000, the Company entered into a new credit
   facility with a syndicate of lenders (the "Senior Secured Credit
   Facility"), that provides for loans in an aggregate principal amount of up
   to $860 million, consisting of (1) a revolving credit facility available to
   Acterna LLC in U.S. dollars or euros, in an aggregate principal amount of
   up to $175 million, which can also be used to issue letters of credit (the
   "Revolving Credit Facility"), (2) a Tranche A term loan of $75 million to
   Acterna LLC with a six year amortization (the "Tranche A Term Loan"), (3) a
   Tranche B term loan of $510 million to Acterna LLC with a seven and one-
   half year amortization (the "Tranche B Term Loan"), and (4) German term
   loans from certain German banks in an aggregate amount equal to Euro
   108.375 million to the Company's German subsidiaries with six year
   amortization periods (the "German Term Loans") (all term loans
   collectively, the "Term Loans"). The Company used the Term Loans to
   refinance certain existing indebtedness of the Company and as part of the
   financing for the WWG merger.

   On August 23, 2000, the Company borrowed $100 million under the Revolving
   Credit Facility to finance the Cheetah acquisition. The balance of the
   Revolving Credit Facility as of December 31, 2000 was $38 million and is
   available to the Company from time to time for potential acquisitions and
   other general corporate purposes.

   The loans under the Senior Secured Credit Facility bear interest at
   floating rates based upon the interest rate option elected by the Company.
   To fix the interest charged on a portion of its debt, the Company entered
   into interest rate hedge agreements. After giving effect to these
   agreements, $220 million of the Company's debt outstanding is subject to an
   effective average annual fixed rate of 5.66% (plus an applicable margin)
   per annum until September 2001. At December 31, 2000, the Company had $195
   million notional amount of debt subject to interest rate hedge agreements
   at an average annual fixed rate of 5.785%. In addition, through the
   acquisition of WWG, the Company obtained three additional interest rate
   hedge contracts for a total of DM 20 million (approximately $9.0 million).
   At December 31, 2000, all of the interest rate hedge agreements had an
   interest rate lower than the three-month LIBOR quoted by the respective
   financial institution counterparties, as variable rate three-month LIBOR
   interest rates increased after the swap interest rate hedge agreements
   became effective.

   In connection with the May 1998 Recapitalization, Acterna LLC issued its 9
   3/4% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes")
   in an aggregate principal amount of $275 million that will mature on May
   15, 2008. The Senior Subordinated Notes are guaranteed on a senior
   subordinated basis by Acterna Corporation. Interest on the Senior
   Subordinated Notes accrues at the rate of 9 3/4% per annum and is payable
   semi-annually in arrears on each May 15 and November 15.

   As of December 31, 2000, the Company was in compliance with all the
   covenants as defined in the credit agreement for the Senior Secured Credit
   Facility.

                                      13
<PAGE>

                              ACTERNA CORPORATION

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


O. STOCKHOLDERS' DEFICIT

   The following is a summary of the change in stockholders' deficit for the
period ended December 31, 2000:

<TABLE>
<CAPTION>
                          Number
                            Of
                          Shares         Additional                              Other         Total
                          Common  Common  Paid-In   Accumulated   Unearned   Comprehensive Stockholders'
                           Stock  Stock   Capital     Deficit   Compensation     Loss         Deficit
                          ------- ------ ---------- ----------- ------------ ------------- -------------
<S>                       <C>     <C>    <C>        <C>         <C>          <C>           <C>
Balance, March 31,
 2000...................  122,527 $1,225  $344,873   $(623,929)  $ (16,965)     $(1,879)     $(296,675)
Net loss current year...                              (151,089)                               (151,089)
Translation adjustment..                                                          1,164          1,164
                                                                                             ---------
Total comprehensive
 loss...................                                                                      (149,925)
                                                                                             ---------
Adjustment to unearned
 compensation...........                    (1,774)                  1,763                         (11)
Issuance of common stock
 to CDR Funds...........   43,125    431   172,069                                             172,500
Issuance of common stock
 rights offering, net of
 fees...................    4,983     50    16,882                                              16,932
Issuance of common stock
 to WWG stockholders....   14,987    150   129,850                                             130,000
Stock option expense....                    12,254                                              12,254
Conversion of Cheetah
 stock options..........                       900                                                 900
Amortization of unearned
 compensation-continuing
 operations.............                                            14,123                      14,123
Amortization of unearned
 compensation-discontin-
 ued operations.........                                             1,072                       1,072
Exercise of stock option
 and other issuances....    5,077     51    10,126                                              10,177
Unearned compensation
 from stock option
 grants.................                   103,404                (110,125)                     (6,721)
Tax benefit from exer-
 cise of stock options..                    17,057                                              17,057
                          ------- ------  --------   ---------   ---------      -------      ---------
Balance, December 31,
 2000...................  190,699 $1,907  $805,641   $(775,018)  $(110,132)     $  (715)     $ (78,317)
                          ======= ======  ========   =========   =========      =======      =========
</TABLE>

                                      14
<PAGE>

                              ACTERNA CORPORATION

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


P. UNEARNED COMPENSATION

   Since the time of the Recapitalization, the Company has issued non-
   qualified stock options to primarily all employees and non-employee
   directors at an exercise price equal to the fair market value as determined
   by the Company's board of directors. The exercise price may or may not be
   equal to the trading price on the public market on the dates of the grants.
   During the first nine months of fiscal 2001, the Company issued
   approximately 12.4 million non-qualified stock options to former WWG and
   Cheetah employees who became active employees of the Company at exercise
   prices lower than the closing price in the public market on the dates of
   grants. The Company, therefore, incurred a charge of approximately $110.1
   million for the difference between the closing price in the public market
   and the exercise price of the options and recorded the charge as unearned
   compensation within stockholders' equity. This unearned compensation charge
   will be amortized to expense over the options' vesting periods, of up to
   five years.

   The Board of Directors voted on October 23, 2000 to issue non-qualified
   stock options based on the price in the public market as of the day prior
   to the date of the grant for all stock options issued after that date.

Q. LEGAL PROCEEDINGS

   The Company is party to various legal actions that arose in the ordinary
   course of our business. The Company does not expect that resolution of
   these legal actions will have, individually or in the aggregate, a material
   adverse effect on its financial condition or results of operations.

  Whistler Litigation

   In 1994, the Company sold its radar detector business to Whistler
   Communications of Massachusetts. On June 27, 1996, Cincinnati Microwave,
   Inc. ("CMI"), filed an action in the United States District Court for the
   Southern District of Ohio against the Company and Whistler Corporation,
   alleging willful infringement of CMI's patent for a mute function in radar
   detectors. On September 26, 2000, the Federal District Court Judge granted
   the Company's motion for partial summary judgment on the affirmative
   defense of laches, and the case was administratively terminated. The
   decision was appealed by CMI on October 24, 2000. The Company does not
   expect that the outcome of this action will have a material impact on the
   results of operations or financial position of the Company.

R. NEW PRONOUNCEMENTS

   In December 1999, the Securities and Exchange Commission issued Staff
   Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
   ("SAB 101"). This bulletin provides guidance from the staff on applying
   generally accepted accounting principles to revenue recognition in
   financial statements. In June 2000, the SEC issued SAB 101B that defers the
   effective date for the Company to the fourth quarter of fiscal 2001. The
   Company is currently in the process of assessing the impact, if any, that
   the current guidance and interpretations of SAB 101 may have on its
   financial statements.

   In March 2000, the Financial Accounting Standards Board issued Financial
   Accounting Standards Board Interpretation No. 44, "Accounting for Certain
   Transactions Involving Stock Compensation--An Interpretation of APB Opinion
   No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25
   and among other issues clarifies the following: the definition of an
   employee for purposes of applying APB Opinion No. 25; the criteria for
   determining whether a plan qualifies as a noncompensatory plan; the
   accounting consequence of various modifications to the terms of previously
   fixed stock options or awards; and the accounting for an exchange of stock
   compensation awards in a business combination. FIN 44 is effective July 1,
   2000, but certain conclusions in FIN 44 cover specific events that occurred
   after either

                                      15
<PAGE>

                              ACTERNA CORPORATION

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   December 15, 1998 or January 12, 2000. The Company has adopted Fin 44 and
   the application of FIN 44 did not have a material impact on its results of
   operations or financial position.

   On June 15, 1998, the Financial Accounting Standards Board issued Statement
   of Financial Accounting Standards No. 133, "Accounting for Derivative
   Instruments and Hedging Activities"("FAS 133"). FAS 133 was amended by
   Statement of Financial Accounting Standards No. 137, which modified the
   effective date of FAS 133 to all fiscal quarters of all fiscal years
   beginning after June 15, 2000. FAS 133, as amended, requires that all
   derivative instruments be recorded on the balance sheet at their fair
   value. Changes in the fair value of derivatives are recorded each period in
   current earnings or other comprehensive income, depending on whether a
   derivative is designated as part of a hedge transaction and, if it is, the
   type of hedge transaction. The Company is assessing the impact of the
   adoption of FAS 133 on its results of operations and its financial
   position.

S. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   The column captioned "Pro Forma" set forth in these Unaudited Pro Forma
   Condensed Consolidated Financial Statements gives effect to the following:

  . the merger with WWG (after giving effect to certain divestitures by WWG
    that occurred prior to our merger with WWG);

  . the sales, in connection with the WWG merger, of 43,125,000 newly-issued
    but unregistered shares of our common stock to CDR Fund V and CDR Fund
    VI, and the concurrent establishment of our new Senior Secured Credit
    Facility;

  . the sale of 4,983,048 newly-issued registered shares of common stock to
    stockholders of record on April 20, 2000 (other than CDR Fund V) in the
    Rights Offering completed on June 30, 2000;

  . the acquisition of substantially all of the assets and specified
    liabilities of Cheetah Technologies (after giving effect to the sale of a
    building and the exclusion of specified assets and liabilities that were
    not acquired);

  . the acquisitions of Sierra and ADA; and

  . the divestiture of DataViews.

   The pro forma adjustments are based on currently available information and
   certain adjustments that management believes are reasonable. This pro forma
   financial information is presented for informational purposes only and does
   not necessarily represent what our financial position or results of
   operations would have been if these transactions had in fact occurred at
   the beginning of the periods presented and is not necessarily indicative of
   our financial position or results of operations for any future period.

   The condensed, unaudited pro forma statement of operations data listed
   below is for the nine months ended December 31, 1999 (in thousands except
   per share data):

<TABLE>
<CAPTION>
                                                                     Nine Months
                                                                        Ended
                                                                     December 31,
                                                                         1999
                                                                     ------------
   <S>                                                               <C>
   Net sales........................................................   $728,619
   Net operating loss before extraordinary item.....................    (78,502)
   Loss per share--basic and diluted:
     Net operating loss before extraordinary item...................   $  (0.43)
</TABLE>

                                      16
<PAGE>

   The unaudited, pro forma condensed consolidating statements of operations
listed below are for the nine months ended December 31, 2000 and for the
twelve months ended March 31, 2000:

                              ACTERNA CORPORATION
      Unaudited Pro Forma Condensed Consolidated Statement of Operations
                  For the Nine Months Ended December 31, 2000
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                            Pro   Amortization    Other
                                                   Pro     Forma       of       Pro Forma
                                      DataViews   Forma   Cheetah Intangibles  Adjustments
                           Acterna   Divestiture   WWG      (3)       (4)          (5)     Pro Forma
                          ---------  ----------- -------  ------- ------------ ----------- ---------
<S>                       <C>        <C>         <C>      <C>     <C>          <C>         <C>
Net sales...............  $ 837,485     $(853)   $76,918  $22,518        --          --    $ 936,068
Cost of sales...........    349,583      (272)    28,272   11,001        --          --      388,584
                          ---------     -----    -------  -------   --------     -------   ---------
Gross profit............    487,902      (581)    48,646   11,517        --          --      547,484
Selling, general & ad-
 ministrative expense...    317,105      (587)    30,919    7,337        --          --      354,774
Product development ex-
 pense..................    105,162      (245)    11,245    2,884        --          --      119,046
Recapitalization and
 other related costs....      9,194       --         --       --         --          --        9,194
Purchased incomplete
 technology.............     56,000       --       1,603      --         --          --       57,603
Amortization of intangi-
 bles...................     76,086       --       2,352      --      18,621         --       97,059
                          ---------     -----    -------  -------   --------     -------   ---------
Total operating ex-
 penses.................    563,547      (832)    46,119   10,221     18,621         --      637,676
                          ---------     -----    -------  -------   --------     -------   ---------
Operating income
 (loss).................    (75,645)      251      2,527    1,296    (18,621)        --      (90,192)
Interest expense........    (73,734)      --      (3,710)     --         --      (11,080)    (88,524)
Interest income.........      2,473       --          63      --         --          --        2,536
Other income (expense)..     (2,825)       55     (2,483)     --         --          --       (5,253)
                          ---------     -----    -------  -------   --------     -------   ---------
Income (loss) from con-
 tinuing operations be-
 fore income taxes......   (149,731)      306     (3,603)   1,296    (18,621)    (11,080)   (181,433)
Provision (benefit) for
 income taxes...........     (9,301)      (26)     7,475      518     (4,877)     (4,432)    (10,643)
                          ---------     -----    -------  -------   --------     -------   ---------
Net income (loss) from
 continuing operations..  $(140,430)    $ 332    (11,078) $   778   $(13,744)    $(6,648)  $(170,790)
                          =========     =====    =======  =======   ========     =======   =========
Income (loss) per share
 from continuing opera-
 tions:
- Basic.................  $   (0.77)                                                       $   (0.90)
- Diluted...............  $   (0.77)                                                       $   (0.90)
Weighted average number
 of shares (6):
- Basic.................    181,634                                                          188,724
- Diluted...............    181,634                                                          188,724

</TABLE>


                                      17
<PAGE>

                              ACTERNA CORPORATION
       Unaudited Pro Forma Condensed Consolidated Statement of Operations
                   For the Twelve Months Ended March 31, 2000
                      (In thousands except per share data)

<TABLE>
<CAPTION>
                                        Other                 Pro   Amortization  Other Pro
                                    Acquisitions/   Pro      Forma       of         Forma
                                    Divestitures   Forma    Cheetah Intangibles  Adjustments
                          Acterna        (1)      WWG (2)     (3)       (4)          (5)     Pro Forma
                          --------  ------------- --------  ------- ------------ ----------- ---------
<S>                       <C>       <C>           <C>       <C>     <C>          <C>         <C>
Net sales...............  $453,239     $20,474    $475,680  $46,396   $    --     $    --    $ 995,789
Cost of sales...........   157,090       9,557     179,262   22,569                    --      368,478
                          --------     -------    --------  -------   --------    --------   ---------
Gross profit............   296,149      10,917     296,418   23,827                    --      627,311
                          --------     -------    --------  -------   --------    --------   ---------
Selling, general & ad-
 ministrative expense...   156,499       8,804     175,446   16,398                    --      357,147
Product development ex-
 pense..................    61,172       4,855      69,126    6,049                    --      141,202
Recapitalization and
 other related costs....    27,942         --          --       --                     --       27,942
Restructuring and other
 non-recurring charges..       --          --        4,400      --                     --        4,400
Amortization of intangi-
 bles...................     8,789         --       18,765      --      99,413         --      126,967
                          --------     -------    --------  -------   --------    --------   ---------
Total operating ex-
 penses.................   254,402      13,659     267,737   22,447     99,413         --      657,658
                          --------     -------    --------  -------   --------    --------   ---------
Operating income
 (loss).................    41,747      (2,742)     28,681    1,380    (99,413)        --      (30,347)
Interest expense........   (51,916)        --      (20,497)     --                 (35,817)   (108,230)
Interest income.........     2,354         --          769      --                     --        3,123
Other income (expense),
 net....................       (68)         57       1,665      --                     --        1,654
                          --------     -------    --------  -------   --------    --------   ---------
Income (loss) from con-
 tinuing operations be-
 fore income taxes and
 extraordinary item.....    (7,883)     (2,685)     10,618    1,380    (99,413)    (35,817)   (133,800)
Provision (benefit) for
 income taxes...........    (1,169)        121       9,093      552    (16,961)    (14,327)    (22,691)
                          --------     -------    --------  -------   --------    --------   ---------
Net income (loss) from
 continuing operations..  $ (6,714)    $(2,806)   $  1,525  $   828   $(82,452)   $(21,490)  $(111,109)
                          ========     =======    ========  =======   ========    ========   =========
Income (loss) per share
 from continuing opera-
 tions:
- Basic.................  $  (0.05)                                                            $(0.60)
- Diluted...............  $  (0.05)                                                            $(0.60)
Weighted average number
 of shares (6):
- Basic.................   148,312                                                             184,646
- Diluted...............   148,312                                                             184,646
</TABLE>

                                       18
<PAGE>

1. Other Acquisitions/Divestitures as of March 31, 2000 (in thousands):

<TABLE>
<CAPTION>
                                                                    Pro Forma
                                                                      Other
                                                                  Acquisitions/
                                      Sierra     ADA    DataViews Divestitures
                                      -------  -------  --------- -------------
<S>                                   <C>      <C>      <C>       <C>
Net sales............................ $ 1,702  $24,594   $(5.822)    $20,474
Cost of sales........................   1,242    9,341    (1,026)      9,557
                                      -------  -------   -------     -------
Gross profit.........................     460   15,253    (4,796)     10,917
                                      -------  -------   -------     -------
Selling, general & administrative
 expense.............................   1,337   10,920    (3,453)      8,804
Product development expense..........     377    6,068    (1,590)      4,855
                                      -------  -------   -------     -------
    Total operating expenses.........   1,714   16,988    (5,043)     13,659
                                      -------  -------   -------     -------
Operating income (loss)..............  (1,254)  (1,735)      247      (2,742)
Other income (expense), net..........       2      --         55          57
                                      -------  -------   -------     -------
Income (loss) from continuing
 operations before income taxes and
 extraordinary item..................  (1,252)  (1,735)      302      (2,685)
Provision (benefit) for income
 taxes...............................     --       --        121         121
                                      -------  -------   -------     -------
Net income (loss) from continuing
 operations.......................... $(1,252)  (1,735)      181     $(2,806)
                                      =======  =======   =======     =======
</TABLE>

                                       19
<PAGE>

2. Pro Forma WWG

   Set forth below are the unaudited pro forma results of operations for WWG
for the twelve months ended March 31, 2000. The WWG results of operations have
been adjusted to exclude the historical results of operations for certain
divestitures by WWG that occurred prior to the merger with Acterna.

   WWG's fiscal year ended on September 30. The WWG historical information for
the twelve months ended March 31, 2000 has been derived from the Statement of
Operations for the year ended September 30, 1999 included in WWG's Form 10-K
for the year ended September 30, 1999, then adding the Statement of Operations
for the six months ended March 31, 2000, included in WWG's Form 10-Q for the
period ended March 31, 2000, and then subtracting the Statement of Operations
for the six months ended March 31, 1999, included in WWG's Form 10-Q for the
period ended March 31, 1999. (in thousands).

<TABLE>
<CAPTION>
                                                   Twelve Months Ended
                                                      March 31, 2000
                                             --------------------------------
                                                                      Total
                                                                       Pro
                                                WWG         WWG       Forma
                                             Historical Divestitures   WWG
                                             ---------- ------------ --------
<S>                                          <C>        <C>          <C>
Sales.......................................  $519,059    $(43,379)  $475,680
Cost of Sales...............................   205,598     (26,336)   179,262
                                              --------    --------   --------
Gross Profit................................   313,461     (17,043)   296,418
Selling, general and administrative
 expense....................................   188,711     (13,265)   175,446
Product development expense.................    71,055      (1,929)    69,126
Restructuring and other non-recurring
 charges....................................     4,400         --       4,400
Amortization of intangibles.................    18,765         --      18,765
                                              --------    --------   --------
Total operating expenses....................   282,931     (15,194)   267,737
                                              --------    --------   --------
    Operating Income........................    30,530      (1,849)    28,681
Interest expense............................   (20,497)        --     (20,497)
Interest income.............................       769         --         769
Other income, net...........................     1,584          81      1,665
                                              --------    --------   --------
Income (loss) from continuing operations
 before income taxes........................    12,386      (1,768)    10,618
Provision (benefit) for income taxes........     9,773        (680)     9,093
                                              --------    --------   --------
Net (loss) income from continuing
 operations.................................  $  2,613    $ (1,088)  $  1,525
                                              ========    ========   ========
</TABLE>

                                      20
<PAGE>

3. Pro Forma Cheetah and Purchase Accounting Relating to the Cheetah
Acquisition

   Set forth below are the unaudited pro forma results of operations for
Cheetah for the period from April 1, 2000 through August 23, 2000 and for the
twelve months ended March 31, 2000. The Cheetah results have been adjusted to
reflect the elimination of interest expense on the debt that was not assumed
in the Cheetah acquisition and the recording of an income tax provision at
Acterna's effective statutory rate of 40% as Cheetah was not a tax paying
entity prior to the acquisition (in thousands).

<TABLE>
<CAPTION>
                                  For the period                      For the
                                 April 1, 2000 -                Twelve Months Ended
                                 August 23, 2000                   March 31, 2000
                         -------------------------------- --------------------------------
                          Cheetah                Cheetah   Cheetah                Cheetah
                         Historical Adjustments Pro Forma Historical Adjustments Pro Forma
                         ---------- ----------- --------- ---------- ----------- ---------
<S>                      <C>        <C>         <C>       <C>        <C>         <C>
Net sales...............  $22,518     $   --     $22,518   $46,396     $   --     $46,396
Cost of sales...........   11,001         --      11,001    22,569         --      22,569
                          -------     -------    -------   -------     -------    -------
Gross profit............   11,517         --      11,517    23,827         --      23,827
Selling, general and
 administrative
 expense................    6,976     (111)(a)     7,337    15,487     (279)(a)    16,398
                                       472 (b)                         1,190(b)
Product development
 expense................    2,884         --       2,884     6,049         --       6,049
                          -------     -------    -------   -------     -------    -------
Total operating
 expense................    9,860         361     10,221    21,536         911     22,447
                          -------     -------    -------   -------     -------    -------
  Operating income
   (loss)...............    1,657        (361)     1,296     2,291        (911)     1,380
Interest expense........     (601)      601(c)       --     (1,908)    1,908(c)       --
Other...................      --          --         --        --          --         --
                          -------     -------    -------   -------     -------    -------
Income (loss) before
 income taxes...........    1,056         240      1,296       383         997      1,380
                          -------     -------    -------   -------     -------    -------
Provision (benefit) for
 income taxes...........      --        518(d)       518       --        552(d)       552
                          -------     -------    -------   -------     -------    -------
Net income (loss).......  $ 1,056     $  (278)   $   778   $   383     $   445    $   828
                          =======     =======    =======   =======     =======    =======
</TABLE>
--------
(a) Reflects the reduction in annual depreciation expense associated with the
    building that was sold prior to the Cheetah acquisition
(b) Reflects the anticipated rental expense associated with the building that
    was sold prior to the Cheetah acquisition and then leased back to Acterna
    under an operating lease arrangement upon the consummation of the Cheetah
    acquisition
(c) Reflects the elimination of interest expense on the debt that was not
  assumed in the Cheetah acquisition
(d) Reflects the application of an effective statutory income tax rate of 40%
    to Cheetah's historical income from continuing operations before income
    taxes of $1,056 and $383, the net increase in facilities cost of $361 and
    $911, and the elimination in interest expense of $601 and $1,908, for the
    periods presented

4. Purchase Accounting Relating to the WWG Merger and the Cheetah Acquisition

   The estimated incremental increase related to the amortization of the
estimated intangible assets is as follows (in thousands):

<TABLE>
<CAPTION>
                                              For the            For the
                                         Nine Months Ended Twelve Months Ended
                                         December 31, 2000   March 31, 2000
                                         ----------------- -------------------
<S>                                      <C>               <C>
Pro forma amortization expense related
 to WWG.................................      $65,181           $ 86,908
Pro forma amortization expense related
 to Cheetah.............................       16,585             22,089
Pro forma amortization of other
 acquisitions' intangible assets........          --               9,181
Less WWG historical amortization of
 intangible assets......................       (2,352)          (18,765)
Less Acterna historical amortization
 expense related to WWG.................      (52,869)               --
Less Acterna historical amortization
 expense related to Cheetah.............       (7,924)               --
                                              -------           --------
                                              $18,621           $ 99,413
                                              =======           ========
</TABLE>

                                      21
<PAGE>

5. Restructuring of Bank Debt

   Upon consummation of the WWG merger, the Company restructured its existing
   bank debt, as well as the senior subordinated debt, bank debt and other
   debt of WWG. (See Note N. Long-Term Debt) In conjunction with the
   acquisition of Cheetah the Company borrowed approximately $100.0 million
   under the Revolving Credit Facility.

   The estimated incremental increase to interest expense due to the
   restructuring of the debt and the incremental borrowing is as follows:

<TABLE>
<CAPTION>
                                                For the            For the
                                           Nine Months Ended Twelve Months Ended
                                           December 31, 2000   March 31, 2000
                                           ----------------- -------------------
                                                      (in thousands)
   <S>                                     <C>               <C>
   Pro Forma Interest Expense from the
    Senior Secured Credit Facility:
   Revolving Credit Facility, $100
    million at an interest rate of 2.75%
    plus LIBOR (9.5%)....................       $ 7,125            $ 9,500
   Tranche A term loan, $75 million at an
    interest rate of 2.75% plus LIBOR
    (9.5%)...............................         5,344              7,125
   Tranche B term loan, $510 million at
    an interest rate of 3.25% plus LIBOR
    (10%)................................        38,250             51,000
   German term loans, approximately $100
    million at an interest rate of 2.75%
    plus LIBOR (9.5%)....................         7,125              9,500
                                                -------            -------
                                                $57,844            $77,125
                                                -------            -------
   Pro Forma Interest Expense from
    amortization of debt issuance costs
    relating to the Senior Secured Credit
    Facility:
     Debt issuance costs related to the
      Revolving Credit Facility (6 year
      amortization)......................           283                377
     Debt issuance costs related to the
      Tranche A term loan (6 year
      amortization)......................           213                284
     Debt issuance costs related to the
      Tranche B term loan (7.5 year
      amortization)......................         1,156              1,541
                                                -------            -------
                                                  1,652              2,202
                                                -------            -------
   Historical Interest Expense:
   Historical interest expense related to
    the WWG retired debt.................        (2,910)           (20,497)
   Historical interest expense related to
    the Senior Secured Credit Facility...       (43,790)           (21,121)
   Historical interest expense for the
    amortization of the debt issuance
    costs related to the retired debt....          (400)            (1,892)
   Historical interest expense for the
    amortization of the debt issuance
    costs related to the Senior Secured
    Credit Facility for the period from
    May 23, 2000 to December 31, 2000....        (1,316)               --
                                                -------            -------
                                                (48,416)           (43,510)
                                                -------            -------
   Incremental Pro Forma Interest
    Expense..............................       $11,080            $35,817
                                                =======            =======
</TABLE>

                                      22
<PAGE>

                              ACTERNA CORPORATION

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


6. Weighted Average Number of Common Shares
<TABLE>
<CAPTION>
                                                For the            For the
                                           Nine Months Ended Twelve Months Ended
                                           December 31, 2000   March 31, 2000
                                           ----------------- -------------------
                                                      ( in thousands)
   <S>                                     <C>               <C>
   Common shares outstanding beginning of
    period...............................       122,527            120,665
   Weighted average common shares issued
    during the period....................         3,102                886
   Issuance of our common shares in the
    WWG acquisition......................        14,987             14,987
   Sale of our common shares to CDR Fund
    V and CDR Fund VI in connection with
    the WWG acquisition..................        43,125             43,125
   Sale of our common shares in the
    Rights Offering......................         4,983              4,983
                                                -------            -------
   Pro forma weighted average number of
    shares...............................       188,724            184,646
                                                =======            =======
</TABLE>

                                       23
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

   This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, product demand and market
acceptance risks, the effect of economic conditions, the impact of competitive
products and pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, availability of
capital resources, general business and economic conditions, the effect of the
Company's accounting policies, and other risks detailed in the Company's most
recent Form 10-K as of March 31, 2000 and below.

OVERVIEW

   The Company reports its results of continuing operations in two business
segments: communications test and inflight information systems. The Company's
communications test business develops, manufactures and markets instruments,
systems, software and services to test, deploy, manage and optimize
communications networks, equipment and services. The Company's inflight
information systems segment, through its AIRSHOW, Inc. subsidiary, is the
leading provider of systems that deliver real-time news, information and
flight data to aircraft passengers. The Company also has other subsidiaries
that, in the aggregate, are not reportable as a segment ("Other
Subsidiaries"). These Other Subsidiaries include da Vinci Systems, Inc., which
manufactures systems that correct or enhance the accuracy of color during the
process of transferring film-based images to videotape; and DataViews
Corporation, which was sold in June 2000.

   In July 2000, the Company filed a registration statement on Form S-1 for a
potential common stock offering. The Company is amending this registration
statement by converting it to a universal shelf registration statement on Form
S-3 under which, upon effectiveness, the Company may offer from time to time
up to $1 billion of equity or debt securities.

   On August 23, 2000, the Company acquired substantially all the assets and
specified liabilities of Superior Electronics Group, Inc., a Florida
corporation doing business as Cheetah Technologies ("Cheetah"), for a purchase
price of approximately $166 million. The acquisition was accounted for using
the purchase method of accounting and resulted in a preliminary estimate of
$132.7 million of excess purchase price that will be amortized over a weighted
average 6 years. Cheetah is a leading global supplier of automated test,
monitoring, and management systems for cable television and telecommunications
networks.

   On May 23, 2000, the Company completed the merger of one of its
subsidiaries with Wavetek Wandel Goltermann, Inc. ("WWG"), a developer,
manufacturer and marketer of communications test instruments, systems,
software and services in Europe for a purchase price of $371.2 million. To
finance the WWG Merger, the Company sold 12.5 million and 30.625 million
newly-issued, but unregistered shares of its common stock to CDR Fund V and
CDR Fund VI, respectively, for an aggregate purchase price of $172.5 million.
In addition, on June 30, 2000, the Company sold in the Rights Offering 4.983
million newly-issued, registered shares of common stock to stockholders of
record on April 20, 2000 (other than CDR Fund V) at the same price per share
that was paid by CDR Fund V and CDR Fund VI. The Rights Offering provided such
stockholders with the opportunity to reverse the diminution of their
percentage equity ownership interest in the Company that resulted from the
sale of common stock to CDR Fund V and CDR Fund VI. As of December 31, 2000,
CDR Fund V and CDR Fund VI, the Company's controlling stockholders,
collectively hold approximately 81% of the outstanding shares of common stock
of the Company.

   In connection with the WWG Merger, the Company entered into a new credit
facility for $860 million with a syndicate of lenders. The proceeds were used
to finance the WWG Merger, refinance WWG and Acterna debt and provide for
additional working capital and borrowing capacity.

                                      24
<PAGE>

   In May 2000, the Board of Directors approved a plan to divest the
industrial computing and communications segment, which consists of the
Company's ICS Advent and Itronix Corporation subsidiaries. In connection with
its decision, the Board authorized management to retain one or more investment
banks to assist the Company with respect to the divestiture. The segment's
results of operations including net sales, operating costs and expenses and
income taxes for the three and nine month periods ended December 31, 2000 have
been deferred and included in the balance sheet as net assets held for sale
within non-current assets. The segment's results of operations including net
sales, operating costs and expenses and income taxes for the three and nine
month periods ended December 31, 1999 have been reclassified in the
accompanying statements of operations as discontinued operations. The
Company's balance sheets as of December 31, 2000 and March 31, 2000 reflect
the net assets of the industrial computing and communications segment as net
assets held for sale within non-current assets. The Statement of Cash Flows
for the nine-month period ended December 31, 1999 has not been reclassified
for the discontinued businesses.

   Management anticipates net operating losses from the discontinued segment
through the first quarter of fiscal 2002, at which time the Company
anticipates having sold these businesses. The pretax operating loss for the
segment for the nine-month period ended December 31, 2000 was $14.2 million.
Management believes that the net proceeds from the disposition of these
companies will exceed the carrying amount of the net assets and the operating
losses through the date of disposition. Accordingly, the anticipated net gain
from the disposal of the segment will not be reflected in the statements of
operations until they are realized.

RESULTS OF OPERATIONS

For the Three Months Ended December 31, 2000 as Compared to Three Months Ended
December 31, 1999 on a Consolidated Basis

   Net sales. For the three months ended December 31, 2000 consolidated net
sales increased $201.9 million to $324.1 million as compared to $122.2 million
for the three months ended December 31, 1999. The increase occurred within all
business units, though primarily in the communications test segment. Of the
$201.9 million increase, $199.3 million was attributable to businesses within
the communications test segment, of which 13.0% of the increase was related to
historical communications test business; 6.6% was attributable to the
additional sales from Applied Digital Access, Inc. ("ADA"), which was acquired
in November 1999; 73.7% was attributable to the acquisition of WWG; and 6.7%
was attributable to the acquisition of Cheetah.

   Gross profit. Consolidated gross profit increased $123.8 million to $205.2
million or 63.3% of consolidated net sales for the three months ended December
31, 2000, as compared to $81.3 million or 66.5% of consolidated net sales for
the three months ended December 31, 1999. The decrease in gross margin as a
percent of sales is, in part, a result of products sold by WWG, Cheetah, and
ADA which have a lower gross margin than the Company's primary products. The
Company's Airshow subsidiary also experienced increased net sales to the
general aviation customer group which carries a lower gross margin than the
consolidated group as well as increased product costs in its commercial
aviation products.

   Operating expenses. Operating expenses from continuing operations consist
of selling, general and administrative expense; product development expense;
and amortization of intangibles. Total operating expenses were $198.3 million
or 61.2% of consolidated net sales for the three months ended December 31,
2000, as compared to $60.8 million or 49.7% of consolidated net sales for the
three months ended December 31, 1999. The increase is primarily a result of
the acquisition of WWG, which has a higher cost structure than the Company has
had historically, increased amortization expense, and expenses relating to
rebranding, severance, and additional consultants hired for the integration of
WWG with the Company's communications test segment.

   Amortization of unearned compensation which relates to the issuance of non-
qualified stock options to employees and non-employee directors at a grant
price lower than the closing price in the public market on the date of
issuance, is included in both cost of sales ($2.1 million and $0.1 million)
and operating expenses ($4.1 million and $0.4 million) from continuing
operations (for the three months ending December 31, 2000 and

                                      25
<PAGE>

1999, respectively). The amortization of unearned compensation during the
third quarter of fiscal 2001 and fiscal 2000 was $6.2 million and $0.5
million, respectively, and has been allocated to cost of sales; selling,
general and administrative expense; and product development expense. The
increase in the amortization expense is primarily a result of the non-
qualified stock options that were granted to former WWG and Cheetah employees
who became active employees of the Company. (See Note P. Unearned
Compensation).

   Selling, general and administrative expense was $125.6 million or 38.7% of
consolidated sales for the three months ended December 31, 2000, as compared
to $41.4 million or 33.9% of consolidated net sales for the three months ended
December 31, 1999. The percentage increase is in part a result of expenses
relating to rebranding, severance, and additional consultants hired for the
integration of WWG with the Company's communications test segment. In
addition, the Company recorded a charge of $2.0 million related to the
writeoff of all charges capitalized in connection with the Company's
registration statement on Form S-1, which the Company filed in July 2000 for a
potential common stock offering. The Company is amending this registration
statement by converting it to a universal shelf registration statement on Form
S-3 under which, upon effectiveness, the Company may offer from time to time
up to $1 billion of equity or debt securities.

   Product development expense was $40.3 million or 12.4% of consolidated net
sales for the three months ended December 31, 2000 as compared to $16.3
million or 13.4% of consolidated sales for the same period a year ago. The
dollar increase is a direct result of the WWG Merger and the acquisition of
Cheetah.

   Amortization of intangibles was $32.4 million for the three months ended
December 31, 2000, as compared to $3.1 million for the same period a year ago.
The increase was primarily attributable to increased goodwill amortization
related to the acquisitions of Cheetah, WWG and ADA.

   Operating income (loss). Operating income was $6.9 million for the three
months ended December 31, 2000 as compared to income of $20.5 million or 16.8%
of consolidated net sales for the same period a year ago. The change was a
result of the additional amortization expense, as well as expenses relating to
the integration of WWG with the Company's communications test segment.

   Interest. Interest expense, net of interest income, was $27.2 million for
the three months ended December 31, 2000 as compared to $12.4 million for the
same period a year ago. The increase in interest expense was attributable to
the additional debt incurred in connection with the WWG Merger and the
acquisition of Cheetah.

   Taxes. The effective tax rate for the three months ended December 31, 2000
was 16.9% as compared to 40% for the same period last year. The principal
reasons for the decrease in the effective tax rate were: (1) additional non-
deductible goodwill amortization expected in the current fiscal year as a
result of the WWG Merger; and (2) expected changes in the amount of income
earned in various countries with tax rates higher than the U.S. federal rate.

   Net income (loss). Net loss was $18.3 million or a $0.10 loss per share on
a diluted basis for the three months ended December 31, 2000 as compared to
net income of $4.8 million or $0.03 per share on a diluted basis for the same
period a year ago. The loss was attributable to the additional intangible
amortization expense, expenses relating to rebranding, severance, and
additional consultants hired for the integration of WWG with the Company's
communications test segment and additional interest expense.

   The backlog at December 31, 2000, was $375.5 million as compared to $180.4
million at March 31, 2000, primarily the result of the acquisitions of WWG and
Cheetah.

Nine Months Ended December 31, 2000 as Compared to Nine Months Ended December
31, 1999 on a Consolidated Basis

   Net sales. For the nine months ended December 31, 2000, consolidated net
sales increased $520.7 million or 164.4% to $837.5 million as compared to
$316.8 million for the nine months ended December 31, 1999. Of

                                      26
<PAGE>

the $520.7 million increase, $512.7 million was attributable to businesses
within the communications test segment, of which 18.6% of the increase was
related to historical communications test business; 7.3% was attributable to
the additional sales from ADA, ; 70.0% was attributable to the acquisition of
WWG; and 4.1% was attributable to the acquisition of Cheetah.

   Gross profit. Consolidated gross profit increased $276.9 million to $487.9
million or 58.3% of consolidated net sales for the nine months ended December
31, 2000 as compared to $211.0 million or 66.6% of consolidated net sales for
the nine months ended December 31, 1999. Excluding the $35.8 million included
in cost of sales for the amortization of the inventory step-up from the
acquisitions of WWG and Cheetah, consolidated gross profit was 62.5% of
consolidated net sales for the nine months ended December 31, 2000. The
decrease in gross margin as a percentage of sales is, in part, a result of
products sold by WWG, Cheetah and ADA that have a lower gross margin than the
Company's primary products.

   Operating expenses. Operating expenses from continuing operations consist
of selling, general and administrative expense; product development expense;
recapitalization and other related costs; purchased incomplete technology; and
amortization of intangibles. Total operating expenses were $563.5 million or
67.3% of consolidated net sales for the nine months ended December 31, 2000,
as compared to $166.5 million or 52.6% of consolidated net sales for the nine
months ended December 31, 1999. Excluding the impact of the writeoff of the
purchased incomplete technology as well as the recapitalization and other
related costs, total operating expenses were $496.3 million or 59.3% of
consolidated net sales and $152.2 million or 48.0% of consolidated net sales
for the nine months ended December 31, 2000 and 1999, respectively. The
increase is primarily a result of the higher cost structure at WWG, costs
associated with the integration of WWG with the communications test segment,
as well as additional intangible amortization expense.

   Amortization of unearned compensation, which relates to the issuance of
non-qualified stock options to employees and non-employee directors at an
exercise price lower than fair market value (defined as the closing price in
the public market on the date of issuance), is included in both cost of sales
($4.7 million and $0.3 million) and operating expenses ($9.4 million and $0.8
million) from continuing operations (for the nine months ending December 31,
2000 and 1999, respectively). The amortization of unearned compensation during
the first nine months of fiscal 2001 and fiscal 2000 was $14.1 million and
$1.1 million, respectively, and has been allocated to cost of sales; selling,
general and administrative expense; and product development expense. The
increase in the amortization expense during fiscal 2001 is primarily a result
of the non-qualified stock options that were granted to former WWG and Cheetah
employees who became active employees of the Company. (See Note P. Unearned
Compensation).

   Selling, general and administrative expense was $317.1 million or 37.9% of
consolidated net sales for the nine months ended December 31, 2000 as compared
to $107.0 million or 33.8% of consolidated net sales for the nine months ended
December 31, 1999. The percentage increase is related to rebranding,
severance, and additional consultants hired for the integration of WWG with
the Company's communications test segment. In addition, during the third
quarter of fiscal 2001, the Company recorded a charge of $2.0 million related
to the writeoff of all expenses capitalized in connection with the Company's
registration statement on Form S-1, which the Company filed for a potential
common stock offering in July 2000. The Company is amending this registration
statement by converting it to a universal shelf registration statement on Form
S-3 under which, upon effectiveness, the Company may offer from time to time
up to $1 billion of equity or debt securities.

   Product development expense was $105.2 million or 12.6% of consolidated net
sales for the nine months ended December 31, 2000 as compared to $41.7 million
or 13.2% of consolidated sales for the same period a year ago. The dollar
increase is a result of the WWG Merger and the acquisition of Cheetah.

   Recapitalization and other related costs from continuing operations were
$9.2 million and $13.3 million at December 31, 2000 and December 31, 1999,
respectively. The expense incurred during the first three months of fiscal
2001 of $9.2 million related to an executive who left the Company during
fiscal 2000. The expense incurred during the first three months of fiscal 2000
related to termination expenses of certain executives

                                      27
<PAGE>

including the retirement of John F. Reno, former Chairman, President and Chief
Executive Officer of the Company, as well as other employees.

   Amortization of intangibles was $76.1 million for the nine months ended
December 31, 2000, as compared to $4.5 million for the same period a year ago.
The increase was primarily attributable to increased goodwill amortization
related to the acquisitions of Cheetah, WWG and ADA.

   Operating income (loss). Operating loss was $75.6 million for the nine
months ended December 31, 2000 as compared to operating income of $44.5
million for the same period a year ago. The change was a result of the
amortization of the inventory step-up, additional amortization expense,
purchased incomplete technology, as well as expenses relating to rebranding,
severance, and additional consultants hired for the integration of WWG with
the Company's communications test segment.

   Interest. Interest expense, net of interest income, was $71.3 million for
the nine months ended December 31, 2000 as compared to $36.6 million for the
same period a year ago. The increase in interest expense was attributable to
the additional debt incurred in connection with the WWG Merger and the
acquisition of Cheetah.

   Taxes. The effective tax rate for the nine months ended December 31, 2000
was 6.2% as compared to 40% for the same period last year. The principal
reasons for the decrease in the effective tax rate were: (1) the $56 million
non-deductible charge for purchased incomplete technology in connection with
the WWG Merger and Cheetah acquisition; (2) additional non-deductible goodwill
amortization expected in the current fiscal year as a result of the WWG
Merger; and (3) expected changes in the amount of income earned in various
countries with tax rates higher than the U.S. federal rate.

   Extraordinary item. In connection with the WWG Merger, the Company recorded
an extraordinary charge of approximately $10.7 million (net of an income tax
benefit of $6.6 million), of which $7.3 million (pretax) related to a premium
paid by the Company to WWG's former bondholders for the repurchase of WWG's
senior subordinated debt outstanding prior to the WWG Merger. In addition, the
Company booked a charge of $10.0 million (pretax) for the unamortized deferred
debt issuance costs that originated at the time of the May 1998
Recapitalization.

   Net income (loss). Net loss was $151.1 million or a $0.83 loss per share on
a diluted basis for the nine months ended December 31, 2000 as compared to net
income of $16.9 million or $0.10 per share on a diluted basis for the same
period a year ago. The loss was primarily attributable to the amortization of
the inventory step-up, purchased incomplete technology, additional interest
expense, amortization of intangibles, and the extraordinary charge.

                                      28
<PAGE>

Segment Disclosure

   The Company measures the performance of its subsidiaries by their
respective new orders received ("bookings"), net sales and earnings before
interest, taxes and amortization ("EBITA") which excludes non-recurring and
one-time charges. (See Note L. Segment Information). Included in each
segment's EBITA is an allocation of corporate expenses. The information below
includes bookings, net sales and EBITA for the Company's two segments and its
Other Subsidiaries (in thousands):

<TABLE>
<CAPTION>
                                              Three Months
                                                  Ended       Nine Months Ended
                                              December 31,      December 31,
                                            ----------------- -----------------
                                              2000     1999     2000     1999
                                            -------- -------- -------- --------
   <S>                                      <C>      <C>      <C>      <C>
   SEGMENT
   Communications test segment:
     Bookings.............................. $309,154 $112,256 $781,766 $268,656
     Net sales.............................  296,244   96,923  754,100  241,442
     EBITA.................................   41,139   20,745  100,429   45,852
   Inflight information systems segment:
     Bookings..............................   20,572   18,177   59,425   53,938
     Net sales.............................   19,079   17,257   57,408   53,055
     EBITA.................................    3,870    4,030   12,085   16,471
   Other subsidiaries:
     Bookings..............................    8,810    7,957   24,421   23,786
     Net sales.............................    8,781    8,045   25,977   22,311
     EBITA.................................    2,834    1,687    7,113    5,398
</TABLE>

Three and Nine Months Ended December 31, 2000 Compared to Three and Nine
Months Ended December 31, 1999 -- Communications Test Products

   Bookings for communications test products increased to $309.2 million for
the three months ended December 31, 2000 as compared to $112.3 million for the
same period a year ago. For the nine months ended December 31, 2000, bookings
for communications test products increased to $781.8 million as compared to
$268.7 million for the same period a year ago. The increase was primarily due
to the WWG Merger and the acquisitions of Cheetah and ADA (for which no
comparisons existed during the first six months of fiscal 2000) as well as an
increase in bookings for instruments, systems and services at the Company's
existing communications test businesses.

   Net sales of communications test products were $296.2 million for the three
months ended December 31, 2000 as compared to $96.9 million for the same
period a year ago. For the nine months ended December 31, 2000, net sales of
communications test products were $754.1 million as compared to $241.4 million
for the nine months ended December 31, 1999. The increase was due to the
additional net sales from the WWG Merger and the acquisitions of Cheetah and
ADA. The increase is related to the following portions of the communications
test segment: 43.7% of the increase was related to the Company's historical
communications test business; 5.0% was attributable to the additional sales
from ADA; 48.2% was attributable to the acquisition of WWG; and 2.8% was
attributable to the acquisition of Cheetah.

   During the third quarter of fiscal 2001 and on a year-to-date basis, sales
of optical transport products were $104.6 million and $278.7 million,
respectively; sales of cable networks were $40.8 million and $88.7 million,
respectively; and sales of telecommunications systems and software products
were $23.0 million and $68.8 million, respectively; and $127.8 million and
$317.9 million, respectively, in other products, as compared to the same
period last year, primarily due to the acquisitions.

   EBITA for the communications test products increased to $41.1 million for
the three months ended December 31, 2000 as compared to $20.7 million for the
same period a year ago. For the nine months ended

                                      29
<PAGE>

December 31, 2000, EBITA increased to $100.4 million as compared to $45.9
million for the same period a year ago. The increase in EBITA is a result of
the additional sales of the Company's historical communications test products,
which carry a higher gross margin offset by sales of WWG products that carry a
lower gross margin. In addition, the increase was also offset by the
integration expense as a result of the WWG Merger.

Three and Nine Months Ended December 31, 2000 Compared to Three and Nine
Months Ended December 31, 1999 -- Inflight Information Systems

   Bookings for the inflight information systems products increased 13.2% to
$21.0 million for the three months ended December 31, 2000 as compared to
$18.2 million for the same period a year ago. For the nine months ended
December 31, 2000, bookings for this segment increased 10.2% to $59.4 million
as compared to $53.9 million for the same period a year ago. The increase in
bookings was a result of additional orders for the general aviation products.

   Net sales of inflight information systems products increased 10.6% to $19.1
million for the three months ended December 31, 2000 as compared to $17.3
million for the three months ended December 31, 1999. For the nine months
ended December 31, 2000, net sales for this segment increased 8.2% to $57.4
million as compared to $53.1 million for the same period a year ago. The
increase was principally due to revenue recognized from the increased sales of
general aviation products.

   EBITA for the inflight information systems products decreased 4.0% to $3.9
million for the three months ended December 31, 2000 as compared to $4.0
million for the same period a year ago. For the nine months ended December 31,
2000 EBITA for this segment decreased 26.6% to $12.1 million as compared to
$16.5 million for the same period a year ago. The EBITA decrease is due in
part due to lower earnings from the sale of general aviation products, which
carries a lower gross margin than commercial aviation products, as well as
increased product costs in its commercial aviation products.

LIQUIDITY AND CAPITAL RESOURCES

   The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the May 1998
Recapitalization, the WWG Merger, the acquisitions of Cheetah and ADA and from
the funding of working capital and capital expenditures.

   Cash flows. The Company's cash and cash equivalents increased $38.0 million
during the nine months ended December 31, 2000.

   Working capital. For the nine months ended December 31, 2000, the Company's
working capital increased as its operating assets and liabilities used $90.7
million of cash. Accounts receivable increased, creating a use of cash of
$33.1 million primarily due to the increased sales volume during the quarter.
Inventory levels increased, creating a use of cash of $36.0 million. The
increase is in part due the increase in raw material inventory to support the
large backlog position at the communications test subsidiaries. In addition
the Company has a large finished goods inventory of systems solutions also at
the communications test subsidiaries which have not yet been installed at the
customers' requested sites. Other current assets increased, creating a source
of cash of $5.7 million. Accounts payable increased, creating a source of cash
of $10.2 million. Other current liabilities decreased, creating a use of cash
of $33.8 million, primarily due to the decrease in taxes payable. The decrease
is in part related to the additional tax deductions from the exercise of stock
options. In addition during fiscal 2001 the Company has operated at a loss
from continuing operations before income taxes which creates a tax benefit,
therefore decreasing taxes payable.

   Investing activities. The Company's investing activities totaled $431.7
million for the nine months ended December 31, 2000 in part for the purchase
and replacement of property and equipment. The primary use of cash was for the
WWG Merger of approximately $241.2 million (approximately $387.8 million in
gross purchase price less $146.6 million in cash and non-cash items), and for
the acquisition of Cheetah for approximately

                                      30
<PAGE>

$164.6 million. The Company's capital expenditures during the first nine
months of fiscal 2001 were $23.5 million as compared to $13.0 million for the
same period last year. The increase was primarily due to the replacement of
certain of its Enterprise Resource Planning (ERP) systems within the Company.
The Company is, in accordance with the terms of the Senior Secured Credit
Agreement, subject to maximum capital expenditure levels.

   Financing activities. The Company's financing activities generated $504.1
million in cash during the first three quarters of fiscal 2001, due mainly to
the additional borrowings of debt and the cash generated from the sale of
stock in connection with the WWG Merger and the acquisition of Cheetah.

DEBT SERVICE

   As of March 31, 2000, the Company had $579.9 million of debt incurred in
connection with the May 1998 Recapitalization and the acquisition of ADA. Such
debt primarily consisted of $275.0 million principal amount of the Senior
Subordinated Notes, $234.9 million in term loans and $70.0 million in
borrowings under the old revolving credit facility.

   The weighted-average interest rate on the loans under the Company's old
senior secured credit facility was 7.85% per annum for fiscal 2000. Interest
on the Senior Subordinated Notes accrues at the rate of 9 3/4% per annum and
is payable semi-annually in arrears on each May 15 and November 15.

   In connection with the WWG Merger, the Company refinanced its debt and
entered into the new Senior Secured Credit Facility. As of December 31, 2000,
the Company had $1,104.4 million of long-term debt (including current portion
of long-term debt), primarily consisting of $275.0 million principal amount of
the Senior Subordinated Notes and $675.5 million in term loans and $127.0
million under the Revolving Credit Facility, both under the new Senior Credit
Secured Facility, and $26.9 million of other debt obligations.

   The loans under the new Senior Secured Credit Facility bear interest at
floating rates based upon the interest rate option elected by the Company. To
fix interest charged on a portion of its debt, the Company entered into
interest rate hedge agreements. After giving effect to these agreements, $220
million of the Company's debt is subject to an effective average annual fixed
rate of 5.66% (plus an applicable margin) (with differing expiry dates) per
annum until September 2001. At December 31, 2000, the Company had $195 million
notional amount of debt subject to interest rate hedge agreements at an
average annual fixed rate of 5.785%. The year-to-date weighted average
interest rate on the loans under the new Senior Secured Credit Facility was
7.97%.

   Principal and interest payments under both the old credit facility and the
new Senior Secured Credit Facility and interest payments on the Senior
Subordinated Notes have represented and will continue to represent significant
liquidity requirements for the Company.

   For a more detailed description of the Senior Subordinated Notes and the
new Senior Secured Credit Facility, including the applicable principal
amortization schedule and interest rates, see the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2000 and its other reports filed
with the SEC.

   Future financing sources and cash flows. The amount under the Revolving
Credit Facility that remained undrawn at December 31, 2000 was approximately
$38.0 million including outstanding letters of credit. While the Company
believes that cash generated from operations, together with amounts available
under the Revolving Credit Facility and other available sources of liquidity,
will be adequate to permit the Company to meet its debt service obligations,
investment and capital expenditure program requirements, ongoing operating
costs and working capital needs, the Company cannot assure its stockholders
that this will be the case. The Company's future operating performance and
ability to service or refinance the Senior Subordinated Notes and to repay,
extend or refinance the Senior Secured Credit Facility (including the
Revolving Credit Facility) will be, among other things, subject to future
economic conditions and to financial, business and other factors, many of
which are beyond the Company's control.

                                      31
<PAGE>

   In July 2000, the Company filed a registration statement on Form S-1 for a
potential common stock offering. The Company is amending this registration
statement by converting it to a universal shelf registration statement on Form
S-3 under which, upon effectiveness, the Company may offer from time to time
up to $1 billion of equity or debt securities. The Company's shelf
registration statement creates additional potential sources of liquidity in
the future. However, the Company has no current plans to offer securities
pursuant to this shelf registration statement.

   Covenant restrictions. The Company's Senior Secured Credit Facility
contains covenants that, among other things, restrict its ability to obtain
additional sources of financing and cash flows, including by disposing of
assets, incurring additional debt, guaranteeing obligations or incurring
contingent liabilities, repaying the Senior Subordinated Notes, paying
dividends, creating liens on assets, making investments, loans or investments,
engaging in mergers or consolidations, making capital expenditures or engaging
in certain transactions with affiliates. Under the Senior Secured Credit
Facility, the Company is required to comply with a minimum interest expense
coverage ratio and a maximum leverage ratio, and these financial tests will
become more restrictive in future years. The indenture governing the Senior
Subordinated Notes limits the Company's ability to incur additional
indebtedness.

   The restrictions in the Senior Secured Credit Facility and the Senior
Subordinated Notes could limit the Company's ability to respond to market
conditions, to meet its capital-spending program, to provide for unanticipated
capital investments or to take advantage of business opportunities.

   As of December 31, 2000, the Company was in compliance with all the
covenants as defined in the credit agreement for the Senior Secured Credit
Facility.

NEW PRONOUNCEMENTS

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This bulletin provides guidance from the staff on applying
generally accepted accounting principles to revenue recognition in financial
statements. In June 2000, the SEC issued SAB 101B that defers the effective
date for the Company to the fourth quarter of fiscal 2001. The Company is
currently in the process of assessing the impact, if any, that the current
guidance and interpretations of SAB 101 may have on its financial statements.

   In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation--An Interpretation of APB Opinion
No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and
among other issues clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether
a plan qualifies as a noncompensatory plan; the accounting consequence of
various modifications to the terms of previously fixed stock options or
awards; and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The Company has adopted FIN 44 and the
application of FIN 44 did not have a material impact on its results of
operations or financial position.

   On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133. "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 was amended by
Statement of Financial Accounting Standards No. 137, which modified the
effective date of FAS 133 to all fiscal quarters of all fiscal years beginning
after June 15, 2000. FAS 133, as amended, requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
Company is assessing the impact of the adoption of FAS 133 on its results of
operations and its financial position.

                                      32
<PAGE>

                                 RISK FACTORS

   Set forth below and elsewhere in this quarterly report and in the other
documents the Company files with the SEC are risks and uncertainties that
could cause actual results to differ materially from the results contemplated
by the forward- looking statements contained in this quarterly report.

                   Risks Related to the Company's Business.

Because the Company's quarterly operating results have fluctuated in the past
and are likely to fluctuate in the future, the Company's stock price may be
volatile and may decline.

   In the past, the Company has experienced fluctuations in its quarterly
results due to a number of factors beyond the Company's control. In the
future, the Company expects that its quarterly operating results may fluctuate
and will be difficult to predict given the nature of its business. Many
factors could cause the Company's operating results to fluctuate from quarter
to quarter in the future, including the following:

  . the size and timing of orders from the Company's customers, in each case
    exacerbated by the lengthy and unpredictable buying patterns of its
    customers, and the Company's ability to ship these orders on a timely
    basis;

  . the degree to which the Company's customers have allocated and spent
    their yearly budgets, which has, in some cases, resulted in higher net
    sales in the Company's third quarter;

  . the uneven pace of technology innovation, the development of products and
    services responding to these technology innovations by the Company and
    its competitors, and customers' acceptance of these products and
    innovations;

  . the varied degree of price, product and technology competition, which has
    been affected by the rapid changes in the telecommunications industry and
    the Company's customers' and competitors' responses to these changes;

  . economic downturns or other factors reducing demand for telecommunication
    equipment and services may cause the Company's customers to reduce their
    spending on testing products and services;

  . potential delay or deferral of customer deployment of the Company's
    products and services;

  . the relative percentages of the Company's products and services sold
    domestically and internationally; and

  . the mix of the products and services the Company sells and the varied
    margins associated with these products.

   A significant portion of the Company's operating expenses is fixed and if
the Company's net sales are below its expectations in any quarter, the Company
may not be able to reduce its spending in a timely manner. If the Company's
results of operations are below the expectations of investors or market
analysts, the Company's stock price is likely to decline.

The length and unpredictability of the order process for the Company's
products make it difficult to forecast quarterly revenues.

   Sales of the Company's products, particularly its systems, often entail an
extended decision-making process on the part of prospective customers. The
Company may experience delays in obtaining orders following initial contact
with a prospective customer and expend substantial funds and management effort
pursuing these sales.

                                      33
<PAGE>

The Company's ability to forecast the timing and amount of specific sales is
therefore limited. As a result, the uneven buying patterns of the Company's
customers may cause fluctuations in its quarterly operating results, which
could cause the Company's stock price to decline.

   There are other sources of delays that contribute to a long order process,
or even the loss of a potential order. These include potential customers'
internal approval and contracting procedures, procurement practices, and
testing and acceptance processes. As a result, the order process for larger
deployment of selected products typically ranges from six to 24 months for new
deployment of selected product sales, and up to six months for occasional
large selected product sales. The deferral or loss of one or more significant
orders could significantly affect operating results in a particular quarter,
especially if there are significant sales and marketing expenses associated
with the deferred or lost order.

As the Company acquires businesses, it will face the significant challenges of
integrating the operations of those businesses with its existing operations
and may encounter unanticipated difficulties or costs during the integration
process.

   The Company's acquisition strategy presents it with significant challenges.
It may be difficult for the Company to expand its financial and management
controls and reporting systems and procedures to integrate those businesses.
The successful integration of acquired businesses and implementation of the
Company's operating strategy could divert substantial resources and attention
from the Company's management team. If unanticipated costs or difficulties
arise, those acquisitions could have a material adverse effect on the
Company's results of operations or competitive position.

The markets in which the Company operates are highly competitive. The Company
may not adapt as quickly as its competitors to changes in these markets.

   The markets for the Company's products are highly competitive. The Company
competes directly or indirectly with Agilent Technologies, Inc., Tektronix,
Inc. and Anritsu Corporation. The Company also competes with a number of other
vendors who offer products that address discrete portions of the Company's
market, including Spirent plc, Digital Lightwave, Inc., EXFO Electro-Optical
Engineering, Inc. and Sunrise Telecom Incorporated. Due to the rapid evolution
of the markets in which the Company competes, additional competitors with
significant market presence and financial resources, including large
telecommunications equipment manufacturers, may enter the Company's markets
and further intensify competition. Increased competition could cause the
Company to reduce the price of its products or lose market share.

   In addition, some of the Company's current and potential competitors have
greater name recognition and greater financial, selling and marketing,
technical, manufacturing and other resources than the Company does. To
continue to compete effectively, the Company will be required to make
significant investments in research and product development, marketing and
customer service and support. The Company may not be able to compete
effectively with its existing competitors or with new competitors, and the
Company's competitors may succeed in adapting more rapidly and effectively to
changes in technology, in the market or in developing or marketing products
that will be more widely accepted.

The markets the Company serves are characterized by rapid change and
innovation. The Company may not be able to develop and successfully market
products that account for such changes and innovations.

   The market for the Company's products and services is characterized by
rapidly changing technologies, new and evolving industry standards and
protocols and product and service introductions and enhancements that may
render the Company's existing offerings obsolete or unmarketable. A shift in
customer emphasis from employee-operated communications test to automated,
remote test and monitoring systems could likewise render some of

                                      34
<PAGE>

the Company's existing product offerings obsolete or unmarketable, or reduce
the size of one or more of the Company's addressed markets. In particular,
incorporation of self-testing functions in the equipment currently addressed
by the Company's communications test instruments could render some of its
offerings redundant and unmarketable. Failure to anticipate or to respond
rapidly to advances in technology and to adapt its products appropriately
could have a material adverse effect on the Company's business, financial
condition and results of operations.

   The development of new, technologically advanced products is a complex and
uncertain process requiring the accurate anticipation of technological and
market trends and the incurrence of substantial research and development
costs. The Company may not successfully anticipate such trends or have
sufficient free cash flow to continue to incur such costs. In addition, the
Company must carefully manage production and inventory levels to meet product
demand, new product introductions and product transitions. Inaccuracies in the
Company's demand forecasts could quickly result in either insufficient or
excessive inventories and disproportionate expenses. The Company cannot assure
its stockholders that it will successfully identify new product opportunities,
develop and bring new products to market in a timely manner and achieve market
acceptance of its products or that products and technologies developed by
others will not render the Company's products or technologies obsolete or
noncompetitive.

The Company's manufacturing efforts could be interrupted due to component
shortages, which could reduce the Company's ability to build and sell its
products.

   The Company uses a number of components to build its products and systems
that are only available from a limited number of, or single-source, vendors.
Examples of these types of components include semiconductors that the Company
purchases exclusively from large manufacturers and custom application-specific
integrated circuits that are made for the Company by a single foundry. In
addition, to obtain the components the Company requires to build its products
and systems, the Company may be required to identify alternate sources of
supply, which can be time consuming and result in higher procurement costs.
The Company is currently receiving limited allocations of key components for
several of its products. To address this issue, the Company is attempting to
increase inventory levels of key components and seeking additional sources of
supply. The Company cannot assure its stockholders, however, that these
measures will be adequate to fulfill the Company's manufacturing requirements.
The Company also cannot assure its stockholders that it will be able to obtain
suitable substitutes for components that become unavailable, which could
potentially require the Company to perform costly and time consuming redesigns
of its products. If the Company is unable to obtain sufficient quantities of
these required components, or if suppliers choose to reduce the amount of
parts they make available to the Company, the Company may be unable to meet
customer demand for its products, which would negatively affect its business
and results of operations and could materially damage customer relationships.

Acquisitions by the Company of additional businesses, products or technologies
could negatively affect its business and its stock price.

   The Company has acquired businesses and technologies in the past and
expects to pursue acquisitions of other companies, technologies and new and
complementary product lines in the future. Any acquisition would involve risks
to the Company's business, including:

  . an inability to integrate the operations, products and personnel of the
    Company's acquired businesses;

  . an inability to retain key personnel of, or add key personnel to, the
    acquired businesses;

  . an inability to manufacture and sell the products of the acquired
    businesses;

  . a decline in demand by the Company's customers for products of the
    acquired businesses;

  . an inability to expand the Company's financial and management controls
    and reporting systems and procedures to incorporate the acquired
    businesses;

                                      35
<PAGE>

  . diversion of management's time and attention;

  . potential difficulties in completing projects associated with purchased
    in-process research and development;

  . customer dissatisfaction or performance problems with the products or
    services of an acquired firm;

  . risks of entering markets in which the Company has no or limited direct
    prior experience and where competitors in such markets have stronger
    market positions;

  . assumption of unknown liabilities, or other unanticipated events or
    circumstances;

  . the possibility that the Company may pay too much cash or issue too much
    of its stock as the purchase price for an acquired business relative to
    the economic benefits that the Company ultimately derives from operating
    the acquired business; and

  . the need to record significant one-time charges or amortize intangible
    assets, which could lower the Company's reported earnings.

   Mergers and acquisitions of high-technology companies are inherently risky.
The Company cannot assure its stockholders that any business that it may
acquire will achieve anticipated net sales and operating results, which could
decrease the value of the acquisition to the Company. Any of these risks could
materially harm the Company's business, financial condition and results of
operations. Payment paid for future acquisitions, if any, could be in the form
of cash, stock, rights to purchase stock or a combination of these. Dilution
to existing stockholders and to earnings per share may result in connection
with any future acquisitions.

The Company's substantial debt could adversely affect its financial condition.

   The Company has a significant amount of debt. As of December 31, 2000, the
Company's outstanding debt was approximately $1.1 billion primarily consisting
of $275 million of the Company's Senior Subordinated Notes, $675 million of
term loans outstanding and $127.0 million of revolving loans under the
Company's new Senior Secured Credit Facility, and $27 million of other debt.
The Company's Revolving Credit Facility, which permits borrowings of up to
$175 million, matures in 2006. Approximately $175 million of the Company's
indebtedness under its term loan facility matures in 2006. The remaining $510
million matures in 2007. The Company's Senior Subordinated Notes mature in
2008.

   The Company's substantial level of debt and the terms of its debt
instruments may have important consequences for the Company, including, but
not limited to, the following:

  . the Company's vulnerability to adverse general economic conditions is
    heightened;

  . the Company will be required to dedicate a substantial portion of its
    cash flow from operations to repayment of debt, limiting the availability
    of cash for other purposes;

  . the Company is and will continue to be limited by financial and other
    restrictive covenants in its ability to borrow additional funds,
    guarantee obligations, pay dividends, consummate asset sales, enter into
    transactions with affiliates or conduct mergers and acquisitions;

  . the Company's flexibility in planning for, or reacting to, changes in its
    business and industry will be limited;

  . the Company is sensitive to fluctuations in interest rates because some
    of its debt obligations are subject to variable interest rates; and

  . the Company's ability to obtain additional financing in the future for
    working capital, capital expenditures, acquisitions, general corporate
    purposes or other purposes may be impaired.

                                      36
<PAGE>

   The Company's leverage and restrictions in its debt instruments may
materially and adversely affect its ability to finance its future operations
or capital needs or to capitalize on business opportunities.

The Company's debt agreements impose significant operating and financial
restrictions, which may prevent it from capitalizing on business
opportunities.

   The Company's debt agreements impose significant restrictions on its
operations, thereby limiting the discretion of management with respect to
certain business matters. These agreements restrict, among other things, the
Company's ability to:

  . incur additional indebtedness, guarantee obligations and create liens;

  . pay dividends and make other distributions;

  . prepay or modify the terms of other indebtedness;

  . make certain capital expenditures, investments or acquisitions, or enter
    into mergers or consolidations or sales of assets; and

  . engage in certain transactions with affiliates.

   The Company's ability to comply with the restrictions contained in its debt
agreements may be affected by events beyond its control, including prevailing
economic, financial and industry conditions, and the Company may not be able
to comply with such restrictions in the future.

Economic, political and other risks associated with international sales and
operations could adversely affect the Company's net sales.

   Because the Company sells its products worldwide, the Company's business is
subject to risks associated with doing business internationally. The Company
expects its net sales originating outside the United States to be
approximately half of the Company's total net sales for its 2001 fiscal year.
In addition, many of the Company's manufacturing facilities and suppliers are
located outside the United States. Accordingly, the Company's future results
could be harmed by a variety of factors, including:

  . changes in foreign currency exchange rates;

  . changes in a specific country's or region's political or economic
    conditions, particularly in emerging markets;

  . trade protection measures and import or export licensing requirements;

  . potentially negative consequences from changes in tax laws;

  . challenges in staffing and managing international operations;

  . differing protection of intellectual property in disparate jurisdictions;
    and

  . unexpected changes in regulatory requirements.

The planned divestiture of the Company's industrial computing and
communications segment may not be successful.

   The Company is in the process of transitioning from a portfolio of
businesses to a company that is focused primarily on the communications test
business. In May 2000, the Company's board of directors approved a plan

                                      37
<PAGE>

to divest its industrial computing and communications segment, which consists
of the ICS Advent and Itronix Corporation subsidiaries. The Company cannot
assure its stockholders that it will be able to find a buyer for these
subsidiaries or that the Company will be able to obtain an attractive price.

Several of the Company's products must comply with significant governmental
and industry-based regulations, certifications, standards and protocols. Such
compliance is costly and time consuming, and the Company cannot assure its
stockholders that its products will continue to meet these standards in the
future.

   Several of the Company's products must comply with significant governmental
and industry-based regulations, certifications, standards and protocols, some
of which evolve as new technologies are deployed. These regulations,
certifications, standards and protocols include those promulgated by the U.S.
Federal Communications Commission, the Underwriters Laboratories and various
foreign jurisdictions. Compliance with such regulations, certifications,
standards and protocols may prove costly and time-consuming for the Company.
In addition, regulatory compliance may present barriers to entry in particular
markets or reduce the profitability of the Company's product offerings. Such
regulations, certifications, standards and protocols may also adversely affect
the communications industry, limit the number of potential customers for the
Company's products and services or otherwise have a material adverse effect on
its business, financial condition and results of operations. Failure to
comply, or delays in compliance, with such regulations, standards and
protocols or delays in receipt of such certifications could delay the
introduction of new products or cause the Company's existing products to
become obsolete.

The Company may incur expenses to comply with environmental regulations.

   There are aspects of the Company's business that involve substances that
could pose a threat of contamination to the environment. The Company may in
the future incur expenses resulting from environmental remediation activities,
or in connection with complying with current or future environmental
regulations. Environmental remediation is costly, time consuming and could
result in lengthy proceedings that could distract the Company's management. If
the Company is required to remediate any environmental hazard, its business,
results of operations and financial condition could be harmed.

                   Risks Related to the Company's Industry.

Industry consolidation or changes in regulation could adversely affect the
Company's business.

   A substantial portion of the Company's customers are regional telephone
service operating companies, competitive access providers, wireless service
providers, competitive local exchange carriers and other communications
service providers and industrial engineers and other users of communications
test equipment. Their industries are characterized by intense competition and
consolidation. Consolidation could reduce the number of the Company's
customers, increase their buying power and create pressure on the Company to
lower its prices. In addition, governmental regulation of the communications
industry could materially adversely affect the Company's customers and, as a
result, materially limit or restrict its business. The current trend toward
deregulation of the telecommunications market, which has resulted in increased
competition among the Company's customers as well as escalating demand on the
part of such customers for the Company's technologies and services, may not
continue.

If service providers reduce their use of field technicians and successfully
implement a self-service installation model, demand for the Company's products
could decrease.

   To ensure quality service, the Company's major service provider customers
typically send into the field a technician who uses its products to verify
service for installations. However, some providers have recently

                                      38
<PAGE>

announced plans to encourage their customers to install their own service and,
by doing so, hope to reduce their expenses and expedite installation for their
customers. To encourage self-installation, these companies offer financial
incentives. If service providers successfully implement these plans or choose
to send technicians into the field only after a problem has been reported, or
if alternative methods of verification become available, such as remote
verification service, the need for field technicians and the need for some of
the Company's communications test instruments could decrease, which would
negatively affect the Company's business and results of operations.

The Company's operating results could be harmed if the markets into which the
Company sells its products experience a downturn as a result of a reduction in
previously planned capital expenditures for infrastructure expansion.

   Several significant markets into which the Company sells its products are
cyclical. For example, the telecommunications industry in general, and the
competitive local exchange carrier segment in particular, are now experiencing
a downturn that may result in a reduction in previously planned capital
expenditures for infrastructure expansion. These industry downturns have been
characterized by diminished product demand, excess manufacturing capacity and
the subsequent accelerated erosion of average selling prices. Any significant
downturn in the Company's customers' markets or in general economic conditions
would likely result in a reduction in demand for the Company's products and
services and could harm its business. The Company's customers may be unable to
pay for its products in a timely manner or they may decide to delay placing
orders with the Company.

The Company's success depends upon the quality of its key personnel. If the
Company is unable to retain some of its personnel, or if the Company is unable
to continue to hire highly-skilled personnel, its business may suffer.


   The Company's success depends in large part upon its senior management, as
well as its ability to attract and retain highly-skilled technical,
managerial, sales and marketing personnel, particularly engineers with
communications equipment experience. Competition for such personnel is
intense, and the Company may not be successful in retaining its existing key
personnel or attracting additional employees. Any failure of the Company to
retain its personnel, including senior management, could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, continued labor market shortages of technically-
skilled personnel may lead to significant wage increases, which could
adversely affect the Company's results of operations.

Third parties may claim the Company is infringing their intellectual property
and, as a result of such claims, the Company may face significant litigation
or incur licensing expenses or be prevented from selling its products.

   Third parties may claim that the Company is infringing their intellectual
property rights, and the Company may be found to infringe those intellectual
property rights. Although the Company does not believe that any of its
products infringe the valid intellectual property rights of third parties, the
Company may be unaware of the intellectual property rights of others that may
cover some of its technology, products and services.

   Any litigation regarding patents or other intellectual property rights
could be costly and time consuming, and divert the attentions of the Company's
management and key personnel from its business operations.
The complexity of the technology involved and the uncertainty of intellectual
property litigation increase these risks. Claims of intellectual property
infringement might also require the Company to enter into costly royalty or
license agreements. However, the Company may not be able to obtain royalty or
license agreements on terms acceptable to it, or at all. The Company also may
be subject to significant damages or injunctions against development and sale
of certain of its products.

                                      39
<PAGE>

Third parties may infringe on the Company's intellectual property and, as a
result, the Company may be required to expend significant resources enforcing
its rights or suffer competitively.

   The Company's success depends in large part on its intellectual property.
The Company relies on a combination of patents, copyrights, trademarks and
trade secrets, confidentiality provisions and licensing arrangements to
establish and protect its proprietary intellectual property. If the Company
fails to enforce successfully its intellectual property rights, the Company's
competitive position could suffer, which could have a material adverse effect
on its business, financial condition and results of operations.

   The Company's pending patent and trademark registration applications may
not be allowed or competitors may challenge the validity or scope of these
patent applications or trademarks registrations. In addition, competitors may
design alternatives to the Company's technology or develop competing
technologies. Intellectual property rights may also be unavailable or limited
in some foreign countries, which could make it easier for the Company's
competitors to capture market share.

The Company's products are complex, and its failure to detect errors and
defects may subject it to costly repairs, product returns under warranty and
product liability litigation.

   The Company's products are complex and may contain undetected defects or
errors when first introduced or as enhancements are released. These errors may
occur despite the Company's testing and may not be discovered until after a
product has been shipped and used by its customers. This risk is compounded by
the fact that the Company offers many products, with multiple hardware and
software configurations, which makes it more difficult to ensure high
standards of quality control in the manufacturing process. The existence of
these errors or defects could result in costly repairs and/or returns of
products under warranty, diversion of development resources and, more
generally, in delayed market acceptance of the product or damage to the
Company's reputation and business, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.

                 Risks Related to the Company's Common Stock.

The Company's current principal stockholders have effective control over the
Company's business and could delay, deter or prevent a change of control or
other business combination.

   As of December 31, 2000, the Clayton, Dubilier & Rice funds, the Company's
controlling stockholders, together held approximately 81% of the outstanding
shares of the Company's common stock. In addition, three of the ten directors
who serve on the Company's board are currently affiliated with the Clayton,
Dubilier & Rice funds. By virtue of such stock ownership and board
representation, the Clayton, Dubilier & Rice funds have effective control over
all matters submitted to the Company's stockholders, including the election of
the Company's directors, and exercise significant control over the Company's
policies and affairs. Such concentration of voting power could have the effect
of delaying, deterring or preventing a change in control or other business
combination that might otherwise be beneficial to the Company's stockholders.
Clayton, Dubilier & Rice Fund V Limited Partnership has agreed, pursuant to
certain employment agreements with Messrs. Allan M. Kline, the Company's
Corporate Vice President, Chief Financial Officer and Treasurer, and John R.
Peeler, the President and Chief Executive Officer of the Company's
Communications Test Business, to vote its shares to elect both men as
directors so long as they are employed by the Company.

Only approximately 11% of the Company's common stock trades publicly and the
market for technology stocks is extremely volatile.

   Only approximately 11% of the Company's common stock has been trading on
the over-the-counter-market since May 21, 1998 and on The Nasdaq Stock
Market's National Market since November 9, 2000, and the public market for the
Company's common stock has been and remains limited. The stock market in
general, and the

                                      40
<PAGE>

market for technology stocks in particular, have experienced extreme
volatility and this volatility has often been unrelated to the operating
performance of particular companies. The market price of the Company's common
stock could fluctuate significantly at any time in response to any of the
following:

  . changes in financial estimates or investment recommendations relating to
    the Company by securities analysts;

  . the Company's quarterly operating results falling below securities
    analysts' or investors' expectations in any given period;

  . changes in economic conditions for companies serving the Company's
    markets;

  . changes in market valuations of, or earnings and other announcements by,
    companies serving the Company's markets;

  . declines in the market prices of stocks generally, particularly those of
    technology companies;

  . announcements by the Company or its competitors of new products,
    acquisitions or strategic relationships;

  . changes in business or regulatory conditions; and

  . trading volume of the Company's common stock.

   In the past, following periods of market volatility, stockholders have
instituted securities class action litigation. If the Company were involved in
securities litigation, it could have a substantial cost and divert resources
and the attention of executive management from the Company's business.

                                      41
<PAGE>

Item 3. Quantitative and Qualitative Disclosures about Market Risk

   The Company operates manufacturing facilities and sales offices in over 80
countries. The Company is subject to business risks inherent in non-U.S.
activities, including political and economic uncertainty, import and export
limitations, and market risk related to changes in interest rates and foreign
currency exchange rates. The Company believes the political and economic risks
related to its foreign operations are mitigated due to the stability of the
countries in which its facilities are located. The Company's principal
currency exposures against the U.S. dollar are in the major European
currencies and in Canadian currency. The Company does use foreign currency
forward exchange contracts to mitigate fluctuations in currency. The Company's
market risk exposure to currency rate fluctuations is not material. The
Company does not hold derivatives for trading purposes.

   The Company uses derivative financial instruments consisting primarily of
interest rate hedge agreements. The Company's objective in managing its
exposure to changes in interest rates (on its variable rate debt) is to limit
the impact of such changes on earnings and cash flow and to lower its overall
borrowing costs.

   At December 31, 2000, the Company had $789.3 million of variable rate debt
outstanding. The Company currently has two interest rate hedge agreements with
notional amounts totaling $195 million that fix its variable rate debt to a
fixed interest rate through September 2001. Pursuant to these agreements, the
Company pays a fixed interest rate on a portion of its outstanding debt and
receives a three-month LIBOR rate. In addition, through the acquisition of
WWG, the Company obtained three additional interest rate hedge contracts for a
total of DM 20 million (approximately $9.0 million). At December 31, 2000, all
of the interest rate hedge agreements had an interest rate lower than the
three-month LIBOR quoted by the respective financial institution
counterparties, as variable rate three-month LIBOR interest rates increased
after the swap interest rate hedge agreements became effective. Therefore, the
Company recognized a reduction in interest expense (calculated as the
difference between the interest rate in the interest rate hedge agreements and
the quoted three-month LIBOR rate) during the three and nine months ended
December 31, 2000 of $559 thousand and $1,478 thousand, respectively. The
Company has performed a sensitivity analysis assuming a hypothetical 10%
adverse movement in the floating interest rate on the interest rate sensitive
instruments described above. The Company believes that such a movement is
reasonably possible in the near term. As of December 31, 2000, the analysis
demonstrated that such movement would cause the Company to recognize
additional interest expense of approximately $1.3 million on an annual basis,
and accordingly, would cause a hypothetical loss in cash flows of
approximately $1.3 million on an annual basis.

                                      42
<PAGE>

                          PART II. Other Information

Item 1. Legal Proceedings

  The Company is party to various legal actions that arose in the ordinary
  course of our business. The Company does not expect that resolution of
  these legal actions will have, individually or in the aggregate, a material
  adverse effect on its financial condition or results of operations.

  Whistler Litigation

  In 1994, the Company sold its radar detector business to Whistler
  Communications of Massachusetts. On June 27, 1996, Cincinnati Microwave,
  Inc. ("CMI"), filed an action in the United States District Court for the
  Southern District of Ohio against the Company and Whistler Corporation,
  alleging willful infringement of CMI's patent for a mute function in radar
  detectors. On September 26, 2000, the Federal District Court Judge granted
  the Company's motion for partial summary judgment on the affirmative
  defense of laches, and the case was administratively terminated. The
  decision was appealed by CMI on October 24, 2000.

Item 2. Changes in Securities and Use of Proceeds

   None

Item 4. Submission of Matters to a Vote

   None.

Item 6. Exhibits and Reports on Form 8-K

   (a) Exhibits

  The exhibit numbers in the following list correspond to the numbers
  assigned to such exhibits in the Exhibit Table of Item 601 of Regulation S-
  K:

<TABLE>
<CAPTION>
 Exhibit
 Number  Description
 ------- -----------
 <C>     <S>
 27      Financial Data Schedule
</TABLE>

      (b) Reports on Form 8-K

     1. The Company filed a Current Report on Form 8-K dated November 15,
     2000 relating to the    Company's press release on second quarter
     earnings.

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<PAGE>

                                   SIGNATURES

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

                                          ACTERNA CORPORATION

February 14, 2001                         /s/ ALLAN M. KLINE
_____________________________________     _____________________________________
Date                                      Allan M. Kline
                                          Vice President, Chief Financial
                                          Officer and Treasurer

February 14, 2001                         /s/ ROBERT W. WOODBURY, JR.
_____________________________________     _____________________________________
Date                                      Robert W. Woodbury, Jr.
                                          Vice President, Corporate
                                          Controller and Principal Accounting
                                          Officer


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