<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, 1998
 
                         Commission file number 1-12657
 
                               ----------------
 
                              DYNATECH CORPORATION
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<CAPTION>
                MASSACHUSETTS                                    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, 1999 there were 120,659,076 shares of common stock of the
registrant outstanding.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
 
                         PART I. Financial Information
 
Item 1. Financial Statements
 
                              DYNATECH CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands except per share data)
                                  (Unaudited)
 
<TABLE>
<CAPTION>
                                         Three Months      Nine Months Ended
                                       Ended December 31      December 31
                                       ------------------  ------------------
                                         1998      1997      1998      1997
                                       --------  --------  --------  --------
<S>                                    <C>       <C>       <C>       <C>
Sales................................. $136,781  $133,138  $369,525  $353,314
Cost of sales.........................   60,050    58,265   158,868   151,714
                                       --------  --------  --------  --------
Gross profit..........................   76,731    74,873   210,657   201,600
Selling, general & administrative
 expense..............................   36,331    38,512   107,517   103,549
Product development expense...........   13,239    14,484    40,306    41,563
Recapitalization-related costs........      --        --     43,386       --
Amortization of intangibles...........    1,625     1,445     4,697     4,327
Amortization of unearned
 compensation.........................      574       --        977       --
                                       --------  --------  --------  --------
    Total operating expenses..........   51,769    54,441   196,883   149,439
                                       --------  --------  --------  --------
Operating income......................   24,962    20,432    13,774    52,161
Interest expense......................  (13,125)     (164)  (33,106)     (945)
Interest income.......................      782       886     2,870     2,250
Gain on sale of subsidiary............      --        --     15,900       --
Other income (expense)................     (208)      244      (275)      694
                                       --------  --------  --------  --------
Income (loss) before income taxes.....   12,411    21,398      (837)   54,160
Income tax provision..................    5,462     8,663       486    21,933
                                       --------  --------  --------  --------
Net income (loss)..................... $  6,949  $ 12,735  $ (1,323) $ 32,227
                                       ========  ========  ========  ========
Income (loss) per common share:
  Basic............................... $   0.06  $   0.76  $  (0.01) $   1.92
  Diluted............................. $   0.05  $   0.73  $  (0.01) $   1.85
                                       ========  ========  ========  ========
Weighted average number of common
 shares:
  Basic...............................  120,313    16,817   101,480    16,826
  Diluted.............................  127,657    17,395   101,480    17,413
                                       ========  ========  ========  ========
</TABLE>
 
           See notes to condensed consolidated financial statements.
 
                                       2
<PAGE>
 
                              DYNATECH CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                          December 31  March 31
                                                             1998        1998
                                                          -----------  --------
                                                          (Unaudited)
<S>                                                       <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents..............................  $  36,499   $ 64,904
  Accounts receivable, net...............................     89,762     69,988
  Inventories:
   Raw materials.........................................     19,497     24,263
   Work in process.......................................     13,961     11,769
   Finished goods........................................      9,107     12,850
                                                           ---------   --------
    Total inventory......................................     42,565     48,882
  Other current assets...................................     14,634     16,823
                                                           ---------   --------
    Total current assets.................................    183,460    200,597
Property and equipment, net..............................     24,615     26,365
Intangible assets, net...................................     53,392     39,595
Other assets.............................................     53,909     21,573
                                                           ---------   --------
                                                           $ 315,376   $288,130
                                                           =========   ========
LIABILITIES & EQUITY (DEFICIT)
Current Liabilities:
  Current portion of long-term debt......................  $   8,235   $    150
  Accounts payable.......................................     22,185     22,933
  Accrued expenses:
   Compensation and benefits.............................     21,330     21,750
   Deferred revenue......................................     22,953     13,868
   Other accrued expenses................................     33,369     24,105
                                                           ---------   --------
    Total current liabilities............................    108,072     82,806
Long-term debt...........................................    528,169         83
Deferred compensation....................................      4,376      3,122
Shareholders' Equity (Deficit):
  Common stock...........................................        --       3,721
  Additional paid-in capital.............................    322,582      7,647
  Retained earnings (deficit)............................   (637,709)   237,282
  Unearned compensation..................................     (8,582)       --
  Cumulative other comprehensive loss....................     (1,532)    (1,600)
  Treasury stock.........................................        --     (44,931)
                                                           ---------   --------
    Total shareholders' equity (deficit).................   (325,241)   202,119
                                                           ---------   --------
                                                           $ 315,376   $288,130
                                                           =========   ========
</TABLE>
 
           See notes to condensed consolidated financial statements.
 
                                       3
<PAGE>
 
                              DYNATECH CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                            Nine Months Ended
                                                              December 31,
                                                            ------------------
                                                              1998      1997
                                                            --------  --------
<S>                                                         <C>       <C>
Operating activities:
  Net income (loss)........................................ $ (1,323) $ 32,227
  Adjustments to net income (loss):
   Depreciation............................................    8,874     8,926
   Amortization of intangibles.............................    4,697     4,327
   Gain on sale of subsidiary..............................  (15,900)      --
   Recapitalization-related costs..........................   14,640       --
   Amortization of unearned compensation...................      977       --
   Amortization of deferred debt issuance costs............    1,716       --
   Other...................................................       75       192
  Change in deferred income tax asset......................   (5,757)      (36)
  Change in operating assets and liabilities...............    8,591    (8,155)
                                                            --------  --------
  Net cash flows provided by continuing operations.........   16,590    37,481
  Net cash flows used in discontinued operations...........     (200)  (12,680)
                                                            --------  --------
Net cash flows provided by operating activities............   16,390    24,801
Investing activities:
  Purchases of property and equipment......................   (7,425)  (11,026)
  Proceeds from disposals of property and equipment........      246
  Proceeds from sale of business...........................   21,000       --
  Business acquired in purchase transaction, net of cash
   acquired................................................ (19,615)       --
  Other....................................................   (5,043)       85
                                                            --------  --------
  Net cash flows used in continuing operations.............  (10,837)  (10,941)
  Net cash flows provided by discontinued operations.......      --        507
                                                            --------  --------
Net cash flows used in investing activities................  (10,837)  (10,434)
Financing activities:
  Net borrowings (repayments) of debt......................  536,000    (5,000)
  Repayment of notes payable...............................   (2,156)      --
  Repayment of capital lease obligations...................     (132)      --
  Financing fees...........................................  (39,608)      --
  Proceeds from issuance of stock..........................  277,000       --
  Proceeds from exercise of stock options..................    1,800     4,332
  Purchases of treasury stock and stock outstanding........ (806,508)   (5,330)
                                                            --------  --------
Net cash flows used in financing activities................  (33,604)   (5,998)
Effect of exchange rate on cash............................     (354)     (582)
                                                            --------  --------
Increase (decrease) in cash and cash equivalents...........  (28,405)    7,787
Cash and cash equivalents at beginning of year.............   64,904    39,782
                                                            --------  --------
Cash and cash equivalents at end of period................. $ 36,499  $ 47,569
                                                            ========  ========
</TABLE>
 
           See notes to condensed consolidated financial statements.
 
                                       4
<PAGE>
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS)
 
A. Condensed Consolidated Financial Statements
 
   In the opinion of management, the unaudited condensed consolidated balance
sheet at December 31, 1998, and the unaudited consolidated statements of
operations and unaudited consolidated condensed statements of cash flows for
the interim periods ended December 31, 1998 and 1997 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. It is suggested that these condensed
statements be read in conjunction with the Company's most recent Form 10-K as
of March 31, 1998.
 
   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, and
tax valuation reserves. Actual results could differ from those estimates.
 
B. Merger/Recapitalization
 
   On May 21, 1998 the Company completed its management-led merger with a
Company formed at the direction of Clayton, Dubilier & Rice, Inc. ("CDR") (the
"Merger"). The Merger and related transactions were treated as a
recapitalization (the "Recapitalization") for financial reporting purposes.
Accordingly, the historical basis of the Company's assets and liabilities was
not affected by these transactions.
 
C. Related Party
 
   The Company will pay an annual management fee of $0.5 million to CDR. In
return for the annual management fee, CDR will provide management and financial
consulting services to the Company and its subsidiaries.
 
D. Financial Position of Dynatech Corporation and Dynatech LLC
 
   In connection with the Merger and related transactions, Dynatech LLC
(formerly known as Telecommunications Techniques Co., LLC), Dynatech
Corporation's wholly owned subsidiary ("Dynatech LLC"), became the primary
obligor (and Dynatech Corporation, a guarantor) with respect to indebtedness of
Dynatech Corporation, including the 9 3/4% Senior Subordinated Notes due 2008
(the "Senior Subordinated Notes") and the Senior Secured Credit Facilities
referred to elsewhere in this report.
 
   Dynatech Corporation has fully and unconditionally guaranteed the Senior
Subordinated Notes. Dynatech Corporation, however, is a holding company with no
independent operations and no significant assets other than its membership
interest in Dynatech LLC. See Note M. Debt. Accordingly, the condensed
consolidated financial statements of Dynatech Corporation, presented in this
report, are not materially different from those of Dynatech LLC. Management has
not included separate financial statements of Dynatech LLC because management
has determined that they would not be material to holders of the Senior
Subordinated Notes or to the holders of Dynatech Corporation's common stock.
Dynatech LLC is subject, under agreements governing its indebtedness, to
prohibitions on its ability to make distributions to Dynatech Corporation (with
limited exceptions) and other significant restrictions on its operations. See
Note M. Debt.
 
                                       5
<PAGE>
 
E. Acquisition
 
   On June 19, 1998, the Company, through one of its indirect, wholly owned
subsidiaries, acquired all of the outstanding capital stock of Pacific Systems
Corporation of Kirkland, Washington ("Pacific") for a total purchase price of
$20 million, including an incentive earnout. The acquisition was accounted for
using the purchase method of accounting, and resulted in approximately $18
million of goodwill. The pro forma effects related to the acquisition are not
material to the consolidated financial statements of the Company and are,
therefore, not presented.
 
F. Divestiture
 
   On June 30, 1998 the Company sold the assets of ComCoTec, Inc. ("ComCoTec")
located in Lombard, Illinois to The Potomac Group, Inc. for $21 million.
ComCoTec is a supplier of pharmacy management software and services and was a
subsidiary within the Company's visual communications products group.
 
G. Litigation
 
   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 of Massachusetts ("Whistler"), alleging
willful infringement of CMI's patent for a mute function in radar detectors. In
1994, the Company sold its radar detector business to Whistler. The Company and
Whistler have asserted in response that they have not infringed, and that the
patent is invalid and unenforceable. The Company obtained an opinion of counsel
from Bromberg & Sunstein LLP in connection with the manufacture and sale of the
Company's Whistler series radar detectors and will be offering the opinion,
among other things, as evidence that any alleged infringement was not willful.
Litigation is on-going. The Company intends to defend the lawsuit vigorously
and does not believe that the outcome of the litigation is likely to have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
 
H. New Pronouncements
 
   In the quarter ended June 30,1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive
Income." SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. SFAS 130 requires, among other things,
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity to be included in other comprehensive
income.
 
   In the quarter ended June 30,1998, the Company adopted Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions.
 
   In June, 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the reporting of operating
segments in the financial statements. The Company is required to adopt SFAS 131
in the fourth quarter of fiscal 1999 and its adoption may result in the
provision of additional details in the Company's disclosures.
 
   On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133
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. Due to its limited use of derivative instruments,
the Company is assessing the impact of the adoption of SFAS 133 on its results
of operations and its financial position.
 
                                       6
<PAGE>
 
I. Comprehensive Income (Loss)
 
   The following table shows adjustments to net income (loss) for other
comprehensive income (loss) (consisting primarily of foreign currency
translation adjustments).
 
<TABLE>
<CAPTION>
                                            Three Months    Nine Months Ended
                                         Ended December 31     December 31
                                         ------------------ ------------------
                                           1998     1997      1998      1997
                                         -------- --------- --------  --------
<S>                                      <C>      <C>       <C>       <C>
Net income (loss)....................... $  6,949 $  12,735 $ (1,323) $ 32,227
Other comprehensive income (loss).......      257       169       68      (691)
                                         -------- --------- --------  --------
Comprehensive income (loss)............. $  7,206 $  12,904 $ (1,255) $ 31,536
                                         ======== ========= ========  ========
</TABLE>
 
J. Income (loss) per share
 
   Effective as of December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which modifies
the calculation of earnings per share ("EPS"). The Standard replaces the
previous presentation of primary and fully diluted EPS to basic and diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS includes the dilution of common stock
equivalents, and is computed similarly to fully diluted EPS pursuant to APB
Opinion 15.
 
<TABLE>
<CAPTION>
                                      Three Months Ended  Nine Months Ended
                                          December 31        December 31
                                      ------------------- -------------------
                                        1998      1997      1998       1997
                                      --------- --------- ---------  --------
                                       (In thousands except per share data)
<S>                                   <C>       <C>       <C>        <C>
Net income (loss).................... $   6,949 $  12,735 $  (1,323) $ 32,227
                                      ========= ========= =========  ========
BASIC:
Common stock outstanding, net of
 treasury stock, beginning of
 period..............................   120,251    16,757    16,864    16,803
Weighted average common stock and
 treasury stock issued during the
 period..............................        62        60    98,788       103
Weighted average common stock and
 treasury stock repurchased..........       --        --    (14,172)      (80)
                                      --------- --------- ---------  --------
Weighted average common stock
 outstanding, net of treasury stock,
 end of period.......................   120,313    16,817   101,480    16,826
                                      ========= ========= =========  ========
Income (loss) per common share....... $    0.06 $    0.76 $   (0.01) $   1.92
                                      ========= ========= =========  ========
DILUTED:
Common stock outstanding, net of
 treasury stock, beginning of
 period..............................   120,251    16,757    16,864    16,803
Weighted average common stock and
 treasury stock issued during the
 period..............................        62        60    98,788       103
Weighted average common stock
 equivalents (a).....................     7,344       578       --        587
Weighted average common stock and
 treasury stock repurchased..........       --        --    (14,172)      (80)
                                      --------- --------- ---------  --------
Weighted average common stock
 outstanding, net of treasury stock,
 end of period.......................   127,657    17,395   101,480    17,413
                                      ========= ========= =========  ========
Income (loss) per common share.......  $ 0.05      $ 0.73  $ (0.01)    $ 1.85
                                      ========= ========= =========  ========
</TABLE>
--------
(a) As of December 31, 1998, the Company had options outstanding to purchase
    33.3 million shares of common stock that were excluded from the diluted
    earnings per share computation for the nine months ended December 31, 1998
    as the effect of their inclusion would have been antidilutive with respect
    to losses per share.
 
                                       7
<PAGE>
 
   The income (loss) per share and weighted average common shares outstanding
for the periods ending December 31, 1998 are based on the Company's
recapitalized structure. The income per share for the periods ending December
31, 1997 is based on the Company's capital structure at that time (prior to the
Merger).
 
K. Intangible Assets
 
   Intangible assets acquired primarily from business acquisitions are
summarized as follows:
 
<TABLE>
<CAPTION>
                                                          December 31, March 31,
                                                              1998       1998
                                                          ------------ ---------
      <S>                                                 <C>          <C>
      Product technology.................................   $17,042     $17,042
      Excess of cost over net assets acquired............    50,972      32,478
      Other intangible assets............................    13,307      13,307
                                                            -------     -------
                                                             81,321      62,827
      Less accumulated amortization......................    27,929      23,232
                                                            -------     -------
        Total............................................   $53,392     $39,595
                                                            =======     =======
</TABLE>
 
L. Other Assets
 
   In connection with the Merger, the Company incurred financing fees which
will be amortized over the life of the Senior Secured Credit Facilities and
Senior Subordinated Notes. See Note M. Debt. In addition, the deferred tax
asset increased primarily as a result of certain compensation charges relating
to stock option cancellation payments in connection with the Merger.
 
   The detail of Other Assets is as follows:
<TABLE>
<CAPTION>
                                                         December 31, March 31,
                                                             1998       1998
                                                         ------------ ---------
      <S>                                                <C>          <C>
      Deferred financing fees...........................   $25,591     $   --
      Deferred tax asset................................    22,809      17,084
      Other assets......................................     5,509       4,489
                                                           -------     -------
        Total other assets..............................   $53,909     $21,573
                                                           =======     =======
</TABLE>
 
M. Debt
 
   Long-term debt is summarized below:
 
<TABLE>
<CAPTION>
                                                          December 31, March 31,
                                                              1998       1998
                                                          ------------ ---------
      <S>                                                 <C>          <C>
      Senior secured credit facilities...................   $261,000     $--
      Senior subordinated notes..........................    275,000      --
      Capitalized leases.................................        404      233
                                                            --------     ----
        Total debt.......................................    536,404      233
          Less current portion...........................      8,235      150
                                                            --------     ----
      Long-term debt.....................................   $528,169     $ 83
                                                            ========     ====
</TABLE>
 
   In connection with the Merger, the Company entered into a senior secured
credit agreement (the "Senior Secured Credit Agreement") consisting of a $260
million term loan facility (the "Term Loan Facility") and a $110 million
revolving credit facility (the "Revolving Credit Facility") (collectively, the
"Senior Secured Credit Facilities"). In addition, the Company incurred $275
million of debt through the sale of its 9 3/4% Senior Subordinated Notes (the
"Senior Subordinated Notes").
 
                                       8
<PAGE>
 
   In connection with the Merger and related transactions, Dynatech LLC became
the primary obligor with respect to the Senior Secured Credit Facility and the
Senior Subordinated Notes. See Note D. Financial Position of Dynatech
Corporation and Dynatech LLC. Dynatech Corporation has guaranteed the Senior
Secured Credit Facilities and the Senior Subordinated Notes.
 
   Principal and interest payments under the new Senior Secured Credit
Agreement and interest payments on the Senior Subordinated Notes represent
significant liquidity requirements for the Company. During fiscal 1999 the
Company is required to make mandatory principal payments of $8 million of which
$6 million was repaid during the first nine months of fiscal 1999. With respect
to the $260 million initially borrowed under the Term Loan Facility (which is
divided into four tranches, each of which has a different term and repayment
schedule), the Company is required to make scheduled principal payments of the
$50 million of tranche A term loan thereunder during its six-year term, with
substantial amortization of the $70 million tranche B term loan, $70 million
tranche C term loan and $70 million tranche D term loan thereunder occurring
after six, seven and eight years, respectively. The $275 million of Senior
Subordinated Notes will mature in 2008, and bear interest at 9 3/4% per annum.
Total interest expense including the amortization of deferred debt issuance
costs is expected to be approximately $47 million in fiscal 1999.
 
   The Senior Secured Credit Facilities are also subject to mandatory
prepayment and reduction in an amount equal to, subject to certain exceptions,
(a) 100% of the net proceeds of (i) certain debt offerings by the Company and
any of its subsidiaries, (ii) certain asset sales by the Company or any of its
subsidiaries, and (iii) casualty insurance, condemnation awards or other
recoveries received by the Company or any of its subsidiaries, and (b) 50% of
the Company's excess cash flow (as defined in the Senior Secured Credit
Agreement) for each fiscal year in which the Company exceeds a certain leverage
ratio. The Senior Subordinated Notes are subject to certain mandatory
prepayments under certain circumstances.
 
   The Revolving Credit Facility matures in 2004, with all amounts then
outstanding becoming due. The Company expects that its working capital needs
will require it to obtain new revolving credit facilities at the time that the
Revolving Credit Facility matures, by extending, renewing, replacing or
otherwise refinancing the Revolving Credit Facility. No assurance can be given
that any such extension, renewal, replacement or refinancing can be
successfully accomplished or accomplished on acceptable terms.
 
   The loans under the Senior Secured Credit Agreement bear interest at
floating rates based upon the interest rate option elected by the Company. The
Company's weighted-average interest rate on the loans under the Senior Credit
Agreement was 8.5% per annum for the period commencing May 21, 1998 and ending
December 31, 1998, and is expected to be approximately 8.3% per annum for the
period commencing January 1, 1999 and ending March 31, 1999. However, the
Company has entered into interest rate swaps which will be effective for
periods ranging from two to three years beginning September 30, 1998 to fix the
interest charged on a portion of the total debt outstanding under the Term Loan
Facility. After giving effects to these arrangements, approximately $220
million of the debt outstanding will be subject to an effective average annual
fixed rate of 5.71% plus an applicable margin. See Note N. Interest Rate Swaps.
As a result of the substantial indebtedness incurred in connection with the
Merger, it is expected that the Company's interest expense will be higher and
will have a greater proportionate impact on net income in comparison to
preceding periods.
 
   Future Financing Sources and Cash Flows. The amount under the Revolving
Credit Facility that remained undrawn following the May, 1998 closing of the
Recapitalization was $70 million. The undrawn portion of this facility will be
available to meet future working capital and other business needs of the
Company. At December 31, 1998, the undrawn portion of this facility was $103
million. The Company believes that cash generated from operations, together
with amounts available under the Revolving Credit Facility and any other
available sources of liquidity, will be adequate to permit the Company to meet
its debt service obligations, capital expenditure program requirements, ongoing
operating costs and working capital needs, although no assurance can be given
in this regard. The Company's future operating performance and ability to
service or refinance the Senior Subordinated Notes and to repay, extend or
refinance the Senior
 
                                       9
<PAGE>
 
Secured Credit Facilities (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.
 
   Covenant Restrictions. The Senior Secured Credit Agreement imposes
restrictions on the ability of the Company to make capital expenditures, and
both the Senior Secured Credit Facilities and the indenture governing the
Senior Subordinated Notes limit the Company's ability to incur additional
indebtedness. Such restrictions, together with the highly leveraged nature of
the Company, 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. The covenants
contained in the Senior Secured Credit Agreement also, among other things,
restrict the ability of the Company and its subsidiaries to dispose of assets,
incur guarantee obligations, prepay other indebtedness, make restricted
payments, create liens, make equity or debt investments, make acquisitions,
modify terms of the indenture governing the Senior Subordinated Notes, engage
in mergers or consolidations, change the business conducted by the Company and
its subsidiaries taken as a whole or engage in certain transactions with
affiliates. These restrictions, among other things, preclude Dynatech LLC from
distributing assets to Dynatech Corporation (which has no independent
operations and no significant assets other than its membership interest in
Dynatech LLC), except in limited circumstances. In addition, under the Senior
Secured Credit Agreement, the Company is required to comply with a minimum
interest expense coverage ratio and a maximum leverage ratio. These financial
tests become more restrictive in future years. The term loans under the Senior
Secured Credit Facilities (other than the $50 million tranche A term loan) are
governed by negative covenants that are substantially similar to the negative
covenants contained in the indenture governing the Senior Subordinated Notes,
which also impose restrictions on the operation of the Company's business.
 
N. Interest Rate Swaps
 
   The Company uses interest rate swap agreements to effectively fix a portion
of its variable rate Term Loan Facility to a fixed rate in order to reduce the
impact of interest rate changes on future income. The differential to be paid
or received under these agreements will be recognized as an adjustment to
interest expense related to the debt. At December 31, 1998 the Company had four
interest rate swap agreements (three of which commenced September 30, 1998 and
will end September 30, 2001) (with notional amounts totaling $195 million)
under which the Company will pay fixed rates of 5.85%, 5.845% and 5.8375%,
respectively, and will receive three-month LIBOR. The fourth interest rate swap
agreement commenced on October 16, 1998 and will end October 16, 2000 for a
notional amount of $25 million. The Company will pay a fixed rate of 4.715% and
will receive three-month LIBOR.
 
O. Unearned Compensation
 
   On July 15, 1998, the Company granted non-qualified options to certain key
employees to purchase 14.3 million shares of common stock at an exercise price
lower than fair market value. The Company has historically granted options at a
price equal to the closing market price on the date of the grant.
 
   Unearned compensation related to these options of $9.7 million was recorded
within shareholders' equity (deficit) and will be charged to expense over a
five-year vesting period. As of December 31, 1998, the unamortized portion of
the total compensation expense was $8.6 million.
 
                                       10
<PAGE>
 
P. Shareholders' Equity (Deficit)
 
  The following is a summary of changes in shareholders' equity (deficit) for
the period ended December 31, 1998.
 
<TABLE>
<CAPTION>
                      Number of Shares                                              Cumulative                 Total
                      -----------------         Additional Retained                    Other               Shareholders'
                      Common   Treasury Common   Paid-In    Earnings    Unearned   Comprehensive Treasury      Equity
                       Stock    Stock   Stock    Capital   (Deficit)  Compensation     Loss       Stock      (Deficit)
                      -------  -------- ------  ---------- ---------  ------------ ------------- --------  -------------
<S>                   <C>      <C>      <C>     <C>        <C>        <C>          <C>           <C>       <C>
Balance at 3/31/98..   18,605   (1,741) $3,721   $  7,647  $ 237,282                  $(1,600)   $(44,931)   $ 202,119
 Net loss...........                                          (1,323)                                           (1,323)
 Translation
  adjustments.......                                                                       68                       68
 Exercise of stock
  options and other
  issuances.........      408       59               (143)                                          1,946        1,803
Recapitalization-
related costs:
 Common stock
  repurchased.......  (18,605)   1,682  (3,721)    (7,269)  (873,668)                              42,985     (841,673)
 Issuance of new
  stock, net of
  fees..............  120,251                     298,148                                                      298,148
 Stock option
  expense...........                               14,640                                                       14,640
 Unearned
  compensation......                                9,559               $(9,559)                                   --
 Amortization of
  unearned
  compensation......                                                        977                                    977
                      -------   ------  ------   --------  ---------    -------       -------    --------    ---------
Balance at
 12/31/98...........  120,659        0  $    0   $322,582  $(637,709)   $(8,582)      $(1,532)   $      0    $(325,241)
                      =======   ======  ======   ========  =========    =======       =======    ========    =========
</TABLE>
 
                                       11
<PAGE>
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
 
   This Form 10-Q contains forward-looking statements which 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, 1998.
 
Overview
 
   The Merger. On May 21, 1998 the Company was merged with CDRD Merger
Corporation ("MergerCo"), a nonsubstantive transitory merger vehicle organized
at the direction of Clayton, Dubilier & Rice, Inc. ("CDR"), a private
investment firm, with the Company continuing as the surviving corporation (the
"Merger"). The Merger and related transactions were treated as a
recapitalization (the "Recapitalization") for financial reporting purposes.
Accordingly, the historical basis of the Company's assets and liabilities was
not affected by these transactions.
 
   In the Merger, (i) each then outstanding share of common stock, par value
$0.20 per share, of the Company (the "Common Stock") was converted into the
right to receive $47.75 in cash and 0.5 shares of common stock, no par value,
of the Company (the "Recapitalized Common Stock") and (ii) each then
outstanding share of common stock of MergerCo was converted into one share of
Recapitalized Common Stock.
 
   As a result of the Merger, Clayton, Dubilier & Rice Fund V Limited
Partnership, an investment partnership managed by CDR ("CDR Fund V"), holds
approximately 92.3% of the Recapitalized Common Stock. John F. Reno, the
Chairman, President and Chief Executive Officer of the Company, together with
two family trusts, holds approximately 0.7% of the Recapitalized Common Stock
and other stockholders hold approximately 7.0% of the Recapitalized Common
Stock.
 
   In connection with the Merger and related transactions, Dynatech LLC
(formerly known as Telecommunications Techniques Co., LLC), Dynatech
Corporation's wholly owned subsidiary ("Dynatech LLC"), became the primary
obligor (and Dynatech Corporation, a guarantor) with respect to indebtedness of
Dynatech Corporation, including the 9 3/4% Senior Subordinated Notes due 2008
(the "Senior Subordinated Notes") and the Senior Secured Credit Facilities
referred to elsewhere in this report.
 
   Dynatech Corporation has fully and unconditionally guaranteed the Senior
Subordinated Notes. Dynatech Corporation, however, is a holding company with no
independent operations and no significant assets other than its membership
interest in Dynatech LLC. See "Capital Resources and Liquidity." Accordingly,
the condensed consolidated financial statements of Dynatech Corporation,
presented in this report, are not materially different from those of Dynatech
LLC. Management has not included separate financial statements of Dynatech LLC
because management has determined that they would not be material to holders of
the Senior Subordinated Notes or to the holders of Dynatech Corporation's
common stock. Dynatech LLC is subject, under the agreements governing its
indebtedness, to prohibitions on its ability to make distributions to Dynatech
Corporation (with limited exceptions) and other significant restrictions on its
operations. See "Capital Resources and Liquidity."
 
   Acquisition. On June 19, 1998 the Company, through one of its indirect
wholly owned subsidiaries, acquired all of the outstanding capital stock of
Pacific Systems Corporation of Kirkland, Washington ("Pacific") for a total
purchase price of $20 million, including an incentive earnout, which resulted
in approximately $18 million of goodwill. The acquisition was accounted for
using the purchase method of accounting. Pacific designs and manufactures
customer-specified avionics and integrated cabin management equipment for the
corporate and general aviation market.
 
                                       12
<PAGE>
 
   Divestiture. On June 30, 1998 the Company sold the assets of ComCoTec, Inc.
("ComCoTec") located in Lombard, Illinois to The Potomac Group, Inc. for $21
million. ComCoTec is a supplier of pharmacy management software and services
and was a subsidiary within the Company's visual communications products group.
 
Current Trends
 
   Growth rates of enterprises engaged in the manufacture and provision of
telecommunications equipment and services will likely be affected by the
current trend of consolidation among such enterprises. In addition,
particularly in the near term, recent capital market volatility and reduced
financing availability may affect growth rates for certain customers,
particularly those that may be highly leveraged with significant capital
requirements and those that are located in emerging markets, as well as growth
of the economy in general. Any resulting slowdown in such growth could result
in delays or reductions of orders for the Company's products, and accordingly
affect the Company's own growth.
 
   In the shorter term, the Company believes that such consolidation is being
reflected in delays in orders for certain of the Company's test products as
consolidating companies integrate or coordinate their purchasing practices.
Conversely, the Company has experienced a recent influx of large orders from
certain of the Regional Bell Operating Companies ("RBOCs") for the Company's
ruggedized laptop computers.
 
   In the Company's largest business, communications test, sales have been
relatively flat for the nine month period ended December 31, 1998 (a decrease
of 1.4%), compared to the same period a year ago. The Company cannot predict
whether growth will continue at historical rates in either its own business or
in the markets in which it participates, due in part to recent global economic
events.
 
   Itronix, as a manufacturer of ruggedized portable computing and
communications hardware, generally has lower margins than the Company's other
businesses. As a result, profitability of the Company's industrial computing
and communications business is lower than the average profitability of the
Company's other businesses.
 
   Itronix had been facing significant manufacturing and marketing challenges
earlier in this fiscal year, as well as in fiscal 1998. The Company has taken
several steps designed to improve the operating performance of Itronix,
including programs designed to reduce costs and streamline manufacturing, as
well as a change in Itronix senior management. During the third quarter Itronix
received orders totaling more than $72 million, primarily from two RBOCs. As a
result, Itronix's performance during the third quarter has significantly
improved. However, results of operations for Itronix are expected to continue
to vary widely because of the relatively small number of potential customers
with large field-service work forces and the irregularity of the timing and
size of such customers' orders.
 
   Growth at ICS in the near term is expected to lag behind historical growth
rates. The Company is assessing the current market trend for these products.
 
Results of Operations
 
 Three Months Ended December 31, 1998 as compared to Three Months Ended
 December 31, 1997.
 
   Sales. Consolidated sales increased $3.7 million or 2.7% to $136.8 million
for the three months ended December 31, 1998 as compared to $133.1 million for
the same period last year.
 
   Sales of communications test products decreased $3.9 million to $66.3
million or 5.5% for the three months ended December 31, 1998 as compared to
$70.2 million for the same period last year. The Company has been experiencing
a decrease in demand for its core instruments which has been partially offset
by an increase in demand for its systems and services.
 
                                       13
<PAGE>
 
   Sales for industrial computing and communications products increased $3.1
million to $46.6 million or 7.1% for the three months ended December 31, 1998
as compared to $43.5 million from the same period last year. During the quarter
the Company shipped a higher number of ruggedized laptop computers as a result
of the strong order rate and backlog position at Itronix. This higher shipping
volume was offset by fewer shipments of its rack-mounted computers.
 
   Sales of visual communications products increased $4.4 million to $23.9
million or 22.9% for the three months ended December 31, 1998 as compared to
$19.4 million from the same period last year. The increase was primarily
attributable to the continued demand for the Company's real-time flight
information passenger video displays. In addition, the Company also incurred
additional sales from Pacific which were slightly offset by the reduction in
sales from the divestiture of ComCoTec.
 
   Gross Profit. Consolidated gross profit increased $1.9 million to $76.7
million or 56.1% of consolidated sales for the three months ended December 31,
1998 as compared to $74.9 million or 56.2% of consolidated sales for the same
period a year ago. The percentage decrease was attributable to a change in the
product mix as the Company shipped more industrial computing and communications
products during the quarter which are sold at lower gross margins. However,
selling prices and costs of sales across the Company's product lines remained
at levels similar to those during the same period last year.
 
   Operating Expenses. Operating expenses consist of selling, marketing and
distribution expense; general and administrative expense; product development
expense; amortization of intangibles; and amortization of unearned
compensation. Total operating expenses were $51.8 million or 37.8% of
consolidated sales as compared to $54.4 million or 40.9% of consolidated sales
for the same period last year. The decrease in operating expenses during the
quarter was primarily attributable to greater expense control throughout the
corporation.
 
   Selling, general and administrative expense was $36.3 million or 26.6% of
consolidated sales for the three months ended December 31, 1998, compared to
$38.5 million or 28.9% of consolidated sales for the same period a year ago.
The decrease was primarily attributable to cost containment programs as the
Company continues to respond to the leveling of incoming orders for some of the
Company's products.
 
   Product development expense was $13.2 million or 9.7% of consolidated sales
for the three months ended December 31, 1998 as compared to $14.5 million or
10.9% of consolidated sales for the same period last year. The decrease was due
primarily to the timing of expenses for ongoing research and development
programs.
 
   Amortization of intangibles was $1.6 million or 1.2% of consolidated sales
for the three months ended December 31, 1998 as compared to $1.4 million or
1.1% of consolidated sales for the same period last year. The increase was
primarily attributable to increased goodwill amortization related to the
acquisition of Pacific in June, 1998.
 
   Amortization of unearned compensation of $0.6 million relates to the
amortization of the $9.7 million recorded within shareholders' equity related
to the 14.3 million options that were issued in July, 1998 at a grant price
lower than fair market value.
 
   Operating income. Operating income increased 22.2% to $25.0 million or 18.2%
of consolidated sales for the three months ended December 31, 1998 as compared
to $20.4 million or 15.3% of consolidated sales for the same period a year ago.
The increase is primarily attributable to the increase in sales and the
reduction in operating expenses.
 
   Interest. Interest expense, net of interest income, was $12.3 million for
the third quarter of fiscal 1999 as compared to net interest income of $0.7
million for the same period last year. The increase in net interest expense was
attributable to the debt incurred in connection with the Merger. Also included
in interest expense is $0.8 million of amortization expense related to deferred
debt issuance costs.
 
                                       14
<PAGE>
 
   Income before income taxes. Income before income taxes for the three months
of fiscal 1999 decreased 42% to $12.4 million, or 9% of consolidated sales as
compared to $21.4 million or 16% of consolidated sales for the same period last
year. The decrease was primarily attributable to an increase in interest
expense incurred in connection with the Merger, offset by higher gross profit
and lower operating expenses.
 
   Taxes. The effective tax rate for the third quarter of fiscal 1999 was
44.0%, compared to 40.5% for the same period a year ago. The increase is due to
permanent differences arising as a result of the accounting for the Merger.
 
   Net income. Net income decreased $5.8 million to $6.9 million or $0.05 per
share on a diluted basis for the three months ended December 31, 1998 as
compared to $12.7 million or $0.73 per share on a diluted basis for the same
period a year ago. The decrease was primarily attributable to the additional
interest expense incurred in connection with the Merger which was offset by
higher sales and lower operating expenses during the third quarter of fiscal
1999. The reduction in earnings per share is also attributable to a higher
number of common shares outstanding in connection with the Merger.
 
 Nine Months Ended December 31, 1998 as compared to Nine Months Ended December
 31, 1997
 
   Sales. Consolidated sales increased $16.2 million or 4.6% to $369.5 million
for the nine months ended December 31, 1998 as compared to $353.3 million for
the same period last year.
 
   Sales of communications test products decreased $2.7 million to $182.2
million or 1.4% for the nine months ended December 31, 1998 as compared to
$184.9 million from the same period last year. The decrease was primarily a
result of the slowdown of orders from the RBOCs.
 
   Sales for industrial computing and communications products increased $8.7
million to $119.7 million or 7.8% for the nine months ended December 31, 1998
as compared to $111.0 million from the same period last year. The increase was
attributable to increased sales for the Company's ruggedized laptops which was
partially offset by a decrease in shipments of the Company's rack-mounted
computers.
 
   Sales of visual communications products increased $10.2 million to $67.6
million or 17.7% for the nine months ended December 31, 1998 as compared to
$57.5 million from the same period last year. The increase was primarily
attributable to sales for the Company's real-time flight information passenger
video displays, which continued to be strong, as well as increased sales from
Pacific. Offsetting this increase were lower sales for graphical user-interface
(GUI) products as well as a reduction in sales from the sale of ComCoTec.
 
   Gross Profit. Consolidated gross profit increased $9.1 million to $210.7
million or 57.0% of consolidated sales for the nine months ended December 31,
1998 as compared to $201.6 million or 57.1% of consolidated sales for the same
period a year ago, due primarily to an increased volume of shipments of
products.
 
   Operating Expenses. Operating expenses consist of selling, marketing and
distribution expense; general and administrative expense; product development
expense; recapitalization-related costs; amortization of intangibles; and
amortization of unearned compensation. Total operating expenses were $196.9
million or 53.3% of consolidated sales for the nine months ended December 31,
1998 as compared to $149.4 million or 42.3% of consolidated sales for the same
period last year. Included in the operating expenses for the nine months ended
December 31, 1998 were $43.4 million of expenses related to the
Recapitalization, primarily for the option cancellation payments. Excluding
these Recapitalization-related expenses, operating expenses for the nine months
ended December 31, 1998 were $153.5 million or 41.5% of consolidated sales.
 
   Selling, general and administrative expense was $107.5 million or 29.1% of
consolidated sales for the nine months ended December 31, 1998, compared to
$103.5 million or 29.3% of consolidated sales for the same period a year ago.
The Company continued to manage its selling, general and administrative
expenses to ensure that these expenses increase at a slower rate than sales
growth.
 
 
                                       15
<PAGE>
 
   Product development expense was $40.3 million or 10.9% of consolidated sales
for the nine months ended December 31, 1998 as compared to $41.6 million or
11.8% of consolidated sales for the same period last year.
 
   Recapitalization-related costs. In connection with the Merger, the Company
incurred $43.4 million, consisting of $39.9 million (including a $14.6 million
non-cash charge) for the cancellation payments of employee stock options and
compensation expense due to the acceleration of unvested stock options, and
$3.5 million for certain other expenses resulting from the Merger, including
employee termination expense. The Company incurred an additional $41.3 million
in expenses, of which $27.3 million was capitalized and will be amortized over
the life of the Senior Secured Credit Facilities and Senior Subordinated Notes,
and $14.0 million was charged directly to shareholders' equity.
 
   Amortization of intangibles was $4.7 million or 1.3% of consolidated sales
for the nine months ended December 31, 1998 as compared to $4.3 million or 1.2%
of consolidated sales for the same period last year. The dollar increase was
primarily attributable to increased goodwill amortization related to the
acquisition of Pacific.
 
   Amortization of unearned compensation of $1.0 million relates to the
amortization of the $9.7 million recorded within shareholders' equity related
to the 14.3 million options that were issued in July, 1998 at a grant price
lower than fair market value.
 
   Operating income (loss). Operating income decreased 73.6% to $13.8 million
or 3.7% of consolidated sales for the nine months ended December 31, 1998 as
compared to $52.2 million or 14.8% of consolidated sales for the same period a
year ago. The loss is primarily attributable to the Recapitalization-related
costs in connection with the Merger. Excluding these expenses, the Company
generated operating income of $57.2 million or 15.5% of consolidated sales. The
percentage increase was primarily attributable to lower operating expenses
described above.
 
   Interest. Interest expense, net of interest income, was $30.2 million for
the first nine months of fiscal 1999 as compared to net interest income of $1.3
million for the same period last year. The increase in net interest expense was
attributable to the debt incurred in connection with the Merger on May 21,
1998. Also included in interest expense is $1.8 million of amortization expense
related to deferred debt issuance costs.
 
   Gain on sale of subsidiary. On June 30, 1998 the Company sold the assets of
ComCoTec for $21 million which resulted in a gain of $15.9 million.
 
   Income (loss) before income taxes. The Company incurred a loss before income
taxes of $0.8 million for the nine months ended December 31, 1998 as compared
to income before income taxes of $54.2 million for the same period last year.
The loss is primarily due to an increase in interest expense and to the one-
time Recapitalization-related costs which were in part offset by the gain on
the sale of ComCoTec. Excluding the one-time charge and gain, income before
income taxes for the nine months ended December 31, 1998 was $26.6 million or
7.2% of consolidated sales. The decrease is primarily due to additional
interest expense offset in part by higher sales.
 
   Taxes. The effective tax rate for the first nine months of fiscal 1999 was
58% compared to a tax rate of 40.5% for the same period a year ago due to the
permanent differences arising as a result of the accounting for the
recapitalization, and a smaller amount of income (loss) before income taxes,
which magnified the effect of such permanent differences.
 
   Net income (loss). Net income decreased $33.6 million to a net loss of $1.3
million or ($0.01) per share on a diluted basis for the nine months ended
December 31, 1998 as compared to net income of $32.2 million or $1.85 per share
on a diluted basis for the same period a year ago. The decrease was primarily
attributable to the additional interest expense and the Recapitalization-
related expenses incurred in connection with the Merger, offset by the gain on
the sale of ComCoTec.
 
 
                                       16
<PAGE>
 
   Backlog. Backlog at December 31, 1998 was $142.4 million, an increase of
$63.3 million over the backlog at March 31, 1998. The increase is due primarily
to the significant orders received at Itronix.
 
Capital Resources and Liquidity
 
   The Company broadly defines liquidity as its ability to generate sufficient
cash flow from operating activities to meet its obligations and commitments. In
addition, liquidity includes the ability to obtain appropriate debt and equity
financing and to convert into cash those assets that are no longer required to
meet existing strategic and financial objectives. Therefore, liquidity cannot
be considered separately from capital resources that consist of current or
potentially available funds for use in achieving long-range business objectives
and meeting debt service commitments.
 
   The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the Merger and from the
funding of working capital and capital expenditures. As of December 31, 1998,
the Company had $536.4 million of indebtedness, primarily consisting of $275.0
million principal amount of the Senior Subordinated Notes, $254.0 million in
borrowings under the Term Loan Facility and $7.0 million in borrowings under
the new Revolving Credit Facility.
 
   Cash flows. The Company's cash and cash equivalents decreased $28.4 million
during the first nine months of fiscal 1999 principally due to the
Recapitalization of the Company and repayment of debt.
 
   Working capital. During the first nine months of fiscal 1999, the Company's
working capital increased as its operating assets and liabilities provided an
$8.6 million source of cash, excluding the acquisition of Pacific. Inventory
levels decreased, creating a source of cash of $8.1 million, due primarily to
better inventory management at the Company's industrial computing and
communications operations. Accounts receivable increased, creating a use of
cash of approximately $19.8 million, due in part to the large increase in
shipments at the end of the quarter as well as an increase in deferred service
contract billings. Other current assets decreased, creating a source of cash of
$2.4 million mainly due to the recognition of expenses previously capitalized
in connection with the Merger. Accounts payable decreased, creating a use of
cash of $1.0 million as a result of the timing of the payment of bills. Other
current liabilities increased, creating a source of cash of $19.0 million. This
is due to the increase in deferred service contract revenue; the accrual of
interest on the debt incurred in connection with the recapitalization; and the
accrual of expenses related to the final phase of the Merger.
 
   Investing activities. The Company's investing activities used a total of
$10.8 million during the first nine months of fiscal 1999 primarily for the
purchase and replacement of property and equipment and the payment of an
earnout incentive related to the fiscal 1998 operating results of Advent
Design, Inc., a subsidiary purchased in March, 1997. Also included in this
total are the proceeds received from the sale of ComCoTec, offset by the cash
purchase price for Pacific. The Company's capital expenditures were $7.4
million compared with $11.0 million for the same period last year. The decrease
is primarily due to the timing of certain capital expenditure purchases. The
Company anticipates capital expenditures to be approximately 30% below fiscal
1998 levels, primarily as a result of the reduction of commitments at the
Company's test and industrial computing businesses.
 
   Debt and equity. The Company's financing activities used $33.6 million in
cash during the first nine months of fiscal 1999, due mainly to the Merger.
 
   Debt Service. In connection with the Merger, the Company entered into a
senior secured credit agreement (the "Senior Secured Credit Agreement")
consisting of a $260 million term loan facility (the "Term Loan Facility") and
a $110 million revolving credit facility (the "Revolving Credit Facility")
(collectively, the "Senior Secured Credit Facilities"). In addition, the
Company incurred $275 million of debt through the sale of its 9 3/4% Senior
Subordinated Notes (the "Senior Subordinated Notes").
 
                                       17
<PAGE>
 
   In connection with the Merger and related transactions, Dynatech LLC became
the primary obligor with respect to the Senior Secured Credit Facility and the
Senior Subordinated Notes. See Note D. Financial Position of Dynatech
Corporation and Dynatech LLC. Dynatech Corporation has guaranteed the Senior
Secured Credit Facilities and the Senior Subordinated Notes.
 
   Principal and interest payments under the new Senior Secured Credit
Agreement and interest payments on the Senior Subordinated Notes represent
significant liquidity requirements for the Company. During fiscal 1999 the
Company is required to make mandatory principal payments of $8 million of which
$6 million was repaid during the first nine months of fiscal 1999. With respect
to the $260 million initially borrowed under the Term Loan Facility (which is
divided into four tranches, each of which has a different term and repayment
schedule), the Company is required to make scheduled principal payments of the
$50 million of tranche A term loan thereunder during its six-year term, with
substantial amortization of the $70 million tranche B term loan, $70 million
tranche C term loan and $70 million tranche D term loan thereunder occurring
after six, seven and eight years, respectively. The $275 million of Senior
Subordinated Notes will mature in 2008, and bear interest at 9 3/4% per annum.
Total interest expense including the amortization of deferred debt issuance
costs is expected to be approximately $47 million in fiscal 1999.
 
   The Senior Secured Credit Facilities are also subject to mandatory
prepayment and reduction in an amount equal to, subject to certain exceptions,
(a) 100% of the net proceeds of (i) certain debt offerings by the Company and
any of its subsidiaries, (ii) certain asset sales by the Company or any of its
subsidiaries, and (iii) casualty insurance, condemnation awards or other
recoveries received by the Company or any of its subsidiaries, and (b) 50% of
the Company's excess cash flow (as defined in the Senior Secured Credit
Agreement) for each fiscal year in which the Company exceeds a certain leverage
ratio. The Senior Subordinated Notes are subject to certain mandatory
prepayments under certain circumstances.
 
   The Revolving Credit Facility matures in 2004, with all amounts then
outstanding becoming due. The Company expects that its working capital needs
will require it to obtain new revolving credit facilities at the time that the
Revolving Credit Facility matures, by extending, renewing, replacing or
otherwise refinancing the Revolving Credit Facility. No assurance can be given
that any such extension, renewal, replacement or refinancing can be
successfully accomplished or accomplished on acceptable terms.
 
   The loans under the Senior Secured Credit Agreement bear interest at
floating rates based upon the interest rate option elected by the Company. The
Company's weighted-average interest rate on the loans under the Senior Credit
Agreement was 8.5% per annum for the period commencing May 21, 1998 and ending
December 31, 1998, and is expected to be approximately 8.3% per annum for the
period commencing January 1, 1999 and ending March 31, 1999. However, the
Company has entered into interest rate swaps which will be effective for
periods ranging from two to three years beginning September 30, 1998 to fix the
interest charged on a portion of the total debt outstanding under the Term Loan
Facility. After giving effects to these arrangements, approximately $220
million of the debt outstanding will be subject to an effective average annual
fixed rate of 5.71% plus an applicable margin. See Note N. Interest Rate Swaps
to the notes to condensed consolidated financial statements provided elsewhere
in this report. As a result of the substantial indebtedness incurred in
connection with the Merger, it is expected that the Company's interest expense
will be higher and will have a greater proportionate impact on net income in
comparison to preceding periods.
 
   Future Financing Sources and Cash Flows. The amount under the Revolving
Credit Facility that remained undrawn following the May, 1998 closing of the
Recapitalization was $70 million. The undrawn portion of this facility will be
available to meet future working capital and other business needs of the
Company. At December 31, 1998, the undrawn portion of this facility was $103
million. The Company believes that cash generated from operations, together
with amounts available under the Revolving Credit Facility and any other
available sources of liquidity, will be adequate to permit the Company to meet
its debt service obligations, capital expenditure program requirements, ongoing
operating costs and working capital needs, although no assurance can be given
in this regard. The Company's future operating performance and ability to
service or refinance the Senior Subordinated Notes and to repay, extend or
refinance the Senior
 
                                       18
<PAGE>
 
Secured Credit Facilities (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.
 
   Covenant Restrictions. The Senior Secured Credit Agreement imposes
restrictions on the ability of the Company to make capital expenditures and
both the Senior Secured Credit Facilities and the indenture governing the
Senior Subordinated Notes limit the Company's ability to incur additional
indebtedness. Such restrictions, together with the highly leveraged nature of
the Company, 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. The covenants
contained in the Senior Secured Credit Agreement also, among other things,
restrict the ability of the Company and its subsidiaries to dispose of assets,
incur guarantee obligations, prepay other indebtedness, make restricted
payments, create liens, make equity or debt investments, make acquisitions,
modify terms of the indenture governing the Senior Subordinated Notes, engage
in mergers or consolidations, change the business conducted by the Company and
its subsidiaries taken as a whole or engage in certain transactions with
affiliates. These restrictions, among other things, preclude Dynatech LLC from
distributing assets to Dynatech Corporation (which has no independent
operations and no significant assets other than its membership interest in
Dynatech LLC), except in limited circumstances. In addition, under the Senior
Secured Credit Agreement, the Company is required to comply with a minimum
interest expense coverage ratio and a maximum leverage ratio. These financial
tests become more restrictive in future years. The term loans under the Senior
Secured Credit Facilities (other than the $50 million tranche A term loan) are
governed by negative covenants that are substantially similar to the negative
covenants contained in the indenture governing the Senior Subordinated Notes,
which also impose restrictions on the operation of the Company's business.
 
Year 2000
 
   Broadly speaking, Year 2000 issues may arise when certain computer programs
use only two digits to refer to a year or to recognize a year. As a result,
computers that are not Year 2000 compliant may read the date 2000 as 1900. The
Company is aware that Year 2000 issues could adversely impact its operations,
and as detailed below, has commenced a process intended to address Year 2000
issues that the Company has been able to identify. The Company's program for
addressing Year 2000 issues at each of its businesses generally comprises the
following phases: inventory, assessment, testing and remediation. The scope of
this program includes the review of the Company's products, information
technology ("IT") systems, non-IT and embedded systems, and vendors/supply
chain.
 
   State of Readiness. Management at each of the Company's businesses has
commenced a review of its computer systems and products to assess exposure to
Year 2000 issues. The review process is being conducted by employees with
expertise in information technology as well as engineers familiar with non-IT
systems, and focuses on both the Company's internal systems and its existing
and installed base of products. Although the Company has used the services of
consultants to a limited extent in connection with its assessment of some Year
2000 issues, it has not used independent verification and validation processes
in the testing of its systems and products. As of December 31, 1998, the
Company had conducted an inventory and test of its existing significant
internal systems with regard to Year 2000 issues. The Company anticipates that
additional testing and remediation of these systems will continue through June,
1999.
 
   As of December 31, 1998, the Company had conducted an inventory of its
existing products. The Company anticipates that it will complete its inventory
of its installed base of products by March 31, 1999. In particular, it is
anticipated that significant focus and resources will be required for the
assessment, testing and remediation process for the Industrial Computer Source
existing product line and installed base of products. In determining state of
readiness the Company has adopted the following definition:
 
   Year 2000 readiness means the intended functionality of a product, when used
in accordance with its associated documentation, will correctly process,
provide and/or receive date-data in and between the years
 
                                       19
<PAGE>
 
1999 and 2000, including leap year calculations, provided that all other
products and systems (for example, hardware, software and firmware) used with
the product properly exchange accurate date-data with it.
 
   As part of its assessment phase, the Company is in the process of
communicating with its significant suppliers and customers to determine the
extent to which the Company is vulnerable to any failure by those third parties
to remediate their own Year 2000 issues. In addition, the Company is evaluating
the extent to which Year 2000 issues may arise as a result of some combinations
of certain of its products with other companies' products. If any such
suppliers to customers or product combinations do not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
materially adversely affected.
 
   The targeted completion date for the review and remediation process for the
communications test business, the Company's largest, is June, 1999. As of
December 31, 1998, the communications test business had completed the
inventory, assessment and testing of its existing products. Management does not
consider data time fields to be critical to the functionality of the Company's
communications test products. For the Company's other product categories, which
may employ data time fields in areas that are critical to product
functionality, completion dates are targeted on or prior to June, 1999 for
testing and remediation.
 
   Costs. The Company's historical and estimated costs of remediation have not
been and are not anticipated to be material to the Company's financial position
or results of operations, and will be funded through operating cash flows.
Total costs associated with remediation of Year 2000 (including systems,
software, and non-IT systems replaced as a result of Year 2000 issues) are
currently estimated at approximately $3 million to $4 million, of which at
least $2 million to $3 million remains to be spent. The largest cost factor to
date has consisted of expenditure of management and employee time in attention
to Year 2000 and related issues. Estimated remediation costs are based on
management's best estimates. There can be no guarantee that these estimates
will be achieved, and actual results could differ materially from those
anticipated, particularly if unanticipated Year 2000 issues arise.
 
   Year 2000 Risks and Related Plans. While the Company expects to make the
necessary modifications of changes to both its internal IT and non-IT systems
and existing product base in a timely fashion, there can be no assurance that
the Company's internal systems and existing or installed base of products will
not be materially adversely affected by the advent of Year 2000. Certain of the
Company's products are used, in conjunction with products of other companies,
in applications that may be critical to the operations of its customers. Any
product non-readiness, whether standing alone or used in conjunction with the
products of other companies, may expose the Company to claims from its
customers or others, and could impair market acceptance of the Company's
products and services, increase service and warranty costs, or result in
payment of damages, which in turn could materially adversely affect the
Company.
 
   In the event of a failure as a result of Year 2000 issues, the Company could
lose or have trouble accessing accurate internal data, resulting in incomplete
or inaccurate accounting of Company financial results, the Company's
manufacturing operating systems could be impaired, and the Company could be
required to expend significant resources to address such failures. In an effort
intended to minimize potential disruption to its internal systems, the Company
intends to perform additional hard-disk back-up of its rudimentary systems and
critical information in advance of the Year 2000.
 
   Similarly, in the event of a failure as a result of Year 2000 issues in any
systems of third parties with whom the Company interacts, the Company could
lose or have trouble accessing or receive inaccurate third party data,
experience internal and external communications difficulties or have difficulty
obtaining components that are Year 2000 compliant from its vendors. The Company
could also experience a slowdown or reduction of sales if customers such as
telecommunications companies or commercial airlines are adversely affected by
Year 2000 issues.
 
                                       20
<PAGE>
 
The Euro Conversion
 
   On January 1, 1999, eleven of the fifteen member countries of the European
Union (the "participating countries") established fixed conversion rates
between their existing sovereign currencies (the "legacy currencies") and the
euro. The participating countries agreed to adopt the euro as their common
legal currency on that date. The euro now trades on currency exchanges for non-
cash transactions.
 
   As of January 1, 1999, the participating countries no longer controlled
their own monetary policies by directing independent interest rates for the
legacy currencies. Instead, the authority to direct monetary policy, including
money supply and official interest rates for the euro, is exercised by the new
European Central Bank.
 
   Following introduction of the euro, the legacy currencies remain legal
tender in the participating countries as denominations of the euro between
January 1, 1999 and January 1, 2002 (the "transition period"). During the
transition period, public and private parties may pay for goods and services
using either the euro or the participating country's legacy currency.
 
   The impact of the euro is not expected to materially affect the results of
operations of Dynatech. The Company operates primarily in U.S. dollar-
denominated purchase orders and contracts, and the Company neither has a large
customer nor vendor base within the countries participating in the euro
conversion.
 
New Pronouncements
 
   In the quarter ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive
Income." SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. SFAS 130 requires, among other things,
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity to be included in other comprehensive
income.
 
   In the quarter ended June 30, 1998, the Company adopted Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions.
 
   In June, 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the reporting of operating
segments in the financial statements. The Company is required to adopt SFAS 131
in the fourth quarter of fiscal 1999 and its adoption may result in the
provision of additional details in the Company's disclosures.
 
   On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133
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. Due to its limited use of derivative instruments,
the Company is assessing the impact of the adoption of SFAS 133 on its results
of operations and its financial position.
 
Exchange Offer of Senior Subordinated Notes
 
   On October 8, 1998, Dynatech LLC commenced an offer to exchange, for the
Senior Subordinated Notes, notes that are registered under the Securities Act
of 1933 and that have materially identical terms (with minor exceptions
relating to payment of additional interest and registration rights). All of the
existing notes originally issued were tendered and exchanged for new notes.
 
                                       21
<PAGE>
 
                           PART II. Other Information
 
Item 1. Legal Proceedings
 
   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 of Massachusetts ("Whistler"), alleging
willful infringement of CMI's patent for a mute function in radar detectors. In
1994, the Company sold its radar detector business to Whistler. The Company and
Whistler have asserted in response that they have not infringed, and that the
patent is invalid and unenforceable. The Company obtained an opinion of counsel
from Bromberg & Sunstein LLP in connection with the manufacture and sale of the
Company's Whistler series radar detectors and will be offering the opinion,
among other things, as evidence that any alleged infringement was not willful.
Litigation is on-going. The Company intends to defend the lawsuit vigorously
and does not believe that the outcome of the litigation is likely to have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
 
Item 2. Changes in Securities and Use of Proceeds
 
   On May 21, 1998, the Company was merged with MergerCo. In the Merger, (i)
each then outstanding share of Common Stock of the Company was converted into
the right to receive $47.75 in cash and 0.5 shares of Recapitalized Common
Stock, which shares were registered on a Registration Statement on Form S-4 and
(ii) the then outstanding 111,590,528 shares of common stock of MergerCo were
converted on a one-for-one basis into an equal number of shares of
Recapitalized Common Stock pursuant to the exemption from registration provided
by Section 4(2) of the Securities Act of 1933, as amended.
 
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>
 3.1     Certificate of Amendment of Certificate of Formation of
         Telecommunications Techniques Co., LLC, filed with the Secretary of
         State of Delaware on December 21, 1998.
 10.1    Amended and Restated Employment Agreement, entered into November 1,
         1998, by and between Dynatech Corporation and John F. Reno.
 10.2    Amended and Restated Employment Agreement, entered into November 1,
         1998, by and between Dynatech Corporation and Allan M. Kline.
 10.3    Amended and Restated Employment Agreement, entered into November 1,
         1998, by and between Dynatech Corporation and John R. Peeler.
 27      Financial Data Schedule.
</TABLE>
 
   (b) Reports on Form 8-K
 
   None
 
                                       22
<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.
 
                                          DYNATECH CORPORATION
 
Date February 3, 1999                     /s/ ALLAN M. KLINE
                                          _____________________________________
                                          Allan M. Kline
                                          Vice President, Chief Financial
                                          Officer and Treasurer
 
Date February 3, 1999                     /s/ ROBERT W. WOODBURY, JR.
                                          _____________________________________
                                          Robert W. Woodbury, Jr.
                                          Vice President, Corporate
                                          Controller and Principal Accounting
                                          Officer
 
 
                                       23