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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004



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FORM 10-Q

(Mark One)

| |  |                                                                                        
| |  | ---------------------------------------------------------------------------------------
| |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2001

or

| |  |                                                                                         
| |  | ----------------------------------------------------------------------------------------
| |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number 0-20666

MICROTEST, INC.

(Exact name of registrant as specified in its charter)

|                                |  |                                     
|------------------------------- |  | ------------------------------------
|Delaware                        |  | 86-0485884                          
|                               
|                               
|                               
|                               
|(State or other jurisdiction of |  | (IRS employer identification number)
|                               
|                               
|                               
|                               
|incorporation)                 

4747 North 22nd Street
Phoenix, Arizona 85016(602) 952-6400

(Address, including zip code, and telephone number,
including area code, of registrants
principal executive offices)

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 the
filing requirements for at least the past 90 days.

Yes x No

At May 10, 2001 there were 8,576,540 shares of common stock outstanding,
exclusive of treasury shares held by the Registrant.

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TABLE OF CONTENTS



|                                                                                              |                                                                                                         |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                                                                              | Consolidated Balance Sheets- March 31, 2001 (unaudited) and December 31, 2000                          
|                                                                                              | Consolidated Statements of Operations- (unaudited) Three Months Ended  March 31, 2001 and April 1, 2000
|                                                                                              | Consolidated Statements of Cash Flows- (unaudited) Three Months Ended March 31, 2001 and April 1, 2000 
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|PART II.  OTHER INFORMATION                                                                  
|Item 1.  Legal Proceedings                                                                   
|Item 6.  Exhibits and Reports on Form 8-K                                                    
|SIGNATURE                                                                                    
|EX-99                                                                                        



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##### Table of Contents



MICROTEST, INC. AND SUBSIDIARIES
INDEX

|                              |                                                                                               |                                                                                                        |       |      |      |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ----- | ---- | ---- |  | 
|                              |                                                                                               |                                                                                                        |       |      | Page | 
|                              |                                                                                               |                                                                                                        |       |      |      | 
|PART I. FINANCIAL INFORMATION
|                             
|                             
|                             
|                             
|                              | Item 1. Financial Statements                                                                 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Consolidated Balance Sheets-
        March 31, 2001 (unaudited) and December 31, 2000                  |       | 3    |     
|                             
|                             
|                             
|                             
|                              |                                                                                               | Consolidated Statements of Operations- (unaudited)
Three Months Ended
March 31, 2001 and April 1, 2000 |       | 4    |     
|                             
|                             
|                             
|                             
|                              |                                                                                               | Consolidated Statements of Cash Flows- (unaudited)
Three Months Ended
March 31, 2001 and April 1, 2000 |       | 5    |     
|                             
|                             
|                             
|                             
|                              |                                                                                               | Notes to Consolidated Financial Statements                                                             |       | 6-10 |     
|                             
|                             
|                             
|                             
|                              | Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                                                                        | 11-13 |     
|                             
|                             
|                             
|                             
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                        | 13    |     
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION   
|                             
|                             
|                             
|                             
|                              | Item 1. Legal Proceedings                                                                     |                                                                                                        | 14    |     
|                             
|                             
|                             
|                             
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                        | 15    |     
|                             
|                             
|                             
|                             
|SIGNATURE                     |                                                                                               | 15                                                                                                     |      



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MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

| |                                               |                                                                                                                                 |                                      |        |             |        |        |              |        |        | 
| | --------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------ | ----------- | ------ | ------ | ------------ | ------ | ------ | 
| |                                               |                                                                                                                                 |                                      |        | March 31,   |        |        | December 31, |       
| |                                               |                                                                                                                                 |                                      |        | 2001        |        |        | 2000         |       
| |                                               |                                                                                                                                 |                                      |        |             |        |        |              |       
| |                                               |                                                                                                                                 |                                      |        | (unaudited) |       
| |                                               |                                                                                                                                 | ASSETS                              
|
|
|
|
| | CURRENT ASSETS:                              
|
|
|
|
| |                                               | Cash and cash equivalents                                                                                                       |                                      | $      | 17,964      |        |        | $            | 14,479 |       
|
|
|
|
| |                                               | Accounts receivable, net of allowances for doubtful accounts of $340
and $518, and sales returns of $505 and $387, respectively |                                      |        | 7,766       |        |        |              | 7,977  |       
|
|
|
|
| |                                               | Inventories, net                                                                                                                |                                      |        | 2,795       |        |        |              | 3,372  |       
|
|
|
|
| |                                               | Prepaid expenses and other current assets                                                                                       |                                      |        | 927         |        |        |              | 963    |       
|
|
|
|
| |                                               | Income taxes receivable                                                                                                         |                                      |        | 12          |        |        |              | 3,533  |       
|
|
|
|
| |                                               | Deferred income taxes                                                                                                           |                                      |        | 945         |        |        |              | 805    |       
| |                                               |                                                                                                                                 |                                      |        |             |        |        |             
| |                                               |                                                                                                                                 | Total current assets                 |        |             | 30,409 |        |              |        | 31,129 | 
| |                                               |                                                                                                                                 |                                      |        |             |        |        |             
| | PROPERTY AND EQUIPMENT, NET                   |                                                                                                                                 |                                      | 1,763  |             |        |        | 1,764        |       
| |                                               |                                                                                                                                 |                                      |        |             |        |        |             
| | OTHER ASSETS:                                
|
|
|
|
| |                                               | Capitalized software, net of accumulated amortization of $2,375
and $2,224, respectively                                        |                                      |        | 395         |        |        |              | 546    |       
|
|
|
|
| |                                               | Deferred income taxes                                                                                                           |                                      |        | 2,149       |        |        |              | 2,289  |       
|
|
|
|
| |                                               | Other                                                                                                                           |                                      |        | 366         |        |        |              | 379    |       
| |                                               |                                                                                                                                 |                                      |        |             |        |        |             
| |                                               |                                                                                                                                 | Total other assets                   |        |             | 2,910  |        |              |        | 3,214  | 
| |                                               |                                                                                                                                 |                                      |        |             |        |        |             
| |                                               | $                                                                                                                               | 35,082                               |        |             | $      | 36,107 |             
| |                                               |                                                                                                                                 |                                      |        |             |        |        |             
| |                                               |                                                                                                                                 | LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
| | CURRENT LIABILITIES:                         
|
|
|
|
| |                                               | Accounts payable                                                                                                                |                                      | $      | 2,304       |        |        | $            | 2,366  |       
|
|
|
|
| |                                               | Accrued liabilities                                                                                                             |                                      |        | 1,903       |        |        |              | 1,771  |       
|
|
|
|
| |                                               | Accrued payroll and benefits                                                                                                    |                                      |        | 1,155       |        |        |              | 1,618  |       
| |                                               |                                                                                                                                 |                                      |        |             |        |        |             
| |                                               |                                                                                                                                 | Total current liabilities            |        |             | 5,362  |        |              |        | 5,755  | 
| |                                               |                                                                                                                                 |                                      |        |             |        |        |             
| | COMMITMENTS AND CONTINGENCIES (Note 6)       
|
| | STOCKHOLDERS' EQUITY:                        
|
|
|
|
| |                                               | Preferred stock, $.001 par value, 5,000,000 shares
authorized; no shares issued and outstanding                                 |                                      |        |            |        |        |              |       |       
|
|
|
|
| |                                               | Common stock, $.001 par value, 15,000,000 shares
authorized; 8,809,753 shares and 8,801,799 shares issued,
respectively         |                                      |        | 9           |        |        |              | 9      |       
|
|
|
|
| |                                               | Additional paid-in capital                                                                                                      |                                      |        | 35,687      |        |        |              | 35,666 |       
|
|
|
|
| |                                               | Foreign currency translation loss                                                                                               |                                      |        | (17         | )      |        |              |       |       
|
|
|
|
| |                                               | Accumulated deficit                                                                                                             |                                      |        | (4,741      | )      |        |              | (4,105 | )     
| |                                               |                                                                                                                                 |                                      |        |             |        |        |             
| |                                               |                                                                                                                                 | 30,938                               |        |             |        | 31,570 |             
|
|
|
|
| | Less: treasury stock, at cost, 233,213 shares |                                                                                                                                 |                                      | (1,218 | )           |        |        | (1,218       | )     
| |                                               |                                                                                                                                 |                                      |        |             |        |        |             
| |                                               |                                                                                                                                 | Total stockholders' equity           |        |             | 29,720 |        |              |        | 30,352 | 
| |                                               |                                                                                                                                 |                                      |        |             |        |        |             
| |                                               | $                                                                                                                               | 35,082                               |        |             | $      | 36,107 |             
| |                                               |                                                                                                                                 |                                      |        |             |        |        |             

The accompanying notes are an integral part of these consolidated balance sheets.

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MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)

|                                                                |                            |                          |       |                     |       |   |          |       |       | 
|--------------------------------------------------------------- | -------------------------- | ------------------------ | ----- | ------------------- | ----- | - | -------- | ----- | ----- | 
|                                                                |                            |                          |       | Three months ended, |      
|                                                                |                            |                          |       |                     |      
|                                                                |                            |                          |       | March 31,           |       |   | April 1, |      
|                                                                |                            |                          |       | 2001                |       |   | 2000     |      
|                                                                |                            |                          |       |                     |       |   |          |      
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|NET REVENUE                                                     |                            | $                        | 9,597 |                     |       | $ | 11,601   |      
|                                                               
|                                                               
|                                                               
|                                                               
|COST OF REVENUE                                                 |                            |                          | 4,284 |                     |       |   | 4,945    |      
|                                                                |                            |                          |       |                     |       |  
|                                                                |                            | Gross profit             |       |                     | 5,313 |   |          |       | 6,656 | 
|                                                                |                            |                          |       |                     |       |  
|OPERATING EXPENSES                                             
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Sales and marketing        |                          |       | 3,156               |       |   |          | 2,975 |      
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Research and development   |                          |       | 2,144               |       |   |          | 1,993 |      
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | General and administrative |                          |       | 893                 |       |   |          | 1,368 |      
|                                                                |                            |                          |       |                     |       |  
|                                                                |                            | Total operating expenses |       |                     | 6,193 |   |          |       | 6,336 | 
|                                                                |                            |                          |       |                     |       |  
|INCOME (LOSS) FROM OPERATIONS                                   |                            |                          | (880  | )                   |       |   | 320      |      
|                                                               
|                                                               
|                                                               
|                                                               
|OTHER INCOME, NET                                               |                            |                          | 244   |                     |       |   | 134      |      
|                                                                |                            |                          |       |                     |       |  
|INCOME (LOSS) BEFORE INCOME TAXES                               |                            |                          | (636  | )                   |       |   | 454      |      
|                                                               
|                                                               
|                                                               
|                                                               
|INCOME TAX PROVISION                                            |                            |                          |      |                     |       |   | (20      | )    
|                                                                |                            |                          |       |                     |       |  
|NET INCOME (LOSS)                                               |                            | $                        | (636  | )                   |       | $ | 434      |      
|                                                                |                            |                          |       |                     |       |  
|BASIC EARNINGS (LOSS) PER SHARE                                 |                            | $                        | (0.07 | )                   |       | $ | 0.05     |      
|                                                                |                            |                          |       |                     |       |  
|Weighted
average common shares outstanding - basic              |                            |                          | 8,575 |                     |       |   | 8,383    |      
|                                                                |                            |                          |       |                     |       |  
|DILUTED EARNINGS (LOSS) PER SHARE                               |                            | $                        | (0.07 | )                   |       | $ | 0.05     |      
|                                                                |                            |                          |       |                     |       |  
|Weighted
average common equivalent shares outstanding - diluted |                            |                          | 8,575 |                     |       |   | 9,133    |      
|                                                                |                            |                          |       |                     |       |  

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

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MICROTEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)

|                                      |                                                |                                                                                          |                                                              |                                           |      |                    |       |        |          |      |     |  
|------------------------------------- | ---------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------------------------------------- | ---- | ------------------ | ----- | ------ | -------- | ---- | --- | -
|                                      |                                                |                                                                                          |                                                              |                                           |      | Three Months Ended |      
|                                      |                                                |                                                                                          |                                                              |                                           |      |                    |      
|                                      |                                                |                                                                                          |                                                              |                                           |      | March 31,          |       |        | April 1, |     
|                                      |                                                |                                                                                          |                                                              |                                           |      | 2001               |       |        | 2000     |     
|                                      |                                                |                                                                                          |                                                              |                                           |      |                    |       |        |          |     
|                                      | CASH FLOWS FROM OPERATING ACTIVITIES:         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                | Net income (loss)                                                                        |                                                              | $                                         | (636 | )                  |       | $      | 434      |     
|                                     
|                                     
|                                     
|                                     
|                                      |                                                | Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
|                                     
|                                     
|                                     
|                                     
|                                      |                                                |                                                                                          | Foreign currency translation loss                            |                                           |      | (17                | )     |        |          |     |    
|                                     
|                                     
|                                     
|                                     
|                                      |                                                |                                                                                          | Depreciation and amortization                                |                                           |      | 432                |       |        |          | 377  |    
|                                     
|                                     
|                                     
|                                     
|                                      |                                                |                                                                                          | Change in accounts receivable allowances                     |                                           |      | (60                | )     |        |          | 91   |    
|                                     
|                                     
|                                     
|                                     
|                                      |                                                |                                                                                          | (Increase) decrease in accounts receivable                   |                                           |      | 271                |       |        |          | (807 | )  
|                                     
|                                     
|                                     
|                                     
|                                      |                                                |                                                                                          | Decrease in income taxes receivable                          |                                           |      | 3,521              |       |        |          | 579  |    
|                                     
|                                     
|                                     
|                                     
|                                      |                                                |                                                                                          | Decrease in inventories                                      |                                           |      | 577                |       |        |          | 394  |    
|                                     
|                                     
|                                     
|                                     
|                                      |                                                |                                                                                          | Decrease in prepaid expenses and other assets                |                                           |      | 49                 |       |        |          | 282  |    
|                                     
|                                     
|                                     
|                                     
|                                      |                                                |                                                                                          | Decrease in accounts payable                                 |                                           |      | (62                | )     |        |          | (613 | )  
|                                     
|                                     
|                                     
|                                     
|                                      |                                                |                                                                                          | Increase (decrease) in accrued liabilities                   |                                           |      | 132                |       |        |          | (109 | )  
|                                     
|                                     
|                                     
|                                     
|                                      |                                                |                                                                                          | Increase (decrease) in accrued payroll and employee benefits |                                           |      | (463               | )     |        |          | 100  |    
|                                      |                                                |                                                                                          |                                                              |                                           |      |                    |       |       
|                                      |                                                |                                                                                          |                                                              | Net cash provided by operating activities |      |                    | 3,744 |        |          |      | 728 |  
|                                      |                                                |                                                                                          |                                                              |                                           |      |                    |       |       
|CASH FLOWS FROM INVESTING ACTIVITIES:
|                                     
|                                     
|                                     
|                                     
|                                      |                                                | Purchase of property and equipment                                                       |                                                              |                                           | (280 | )                  |       |        | (25      | )   
|                                      |                                                |                                                                                          |                                                              |                                           |      |                    |       |       
|                                      |                                                |                                                                                          |                                                              | Net cash used in investing activities     |      |                    | (280  | )      |          |      | (25 | )
|                                      |                                                |                                                                                          |                                                              |                                           |      |                    |       |       
|CASH FLOWS FROM FINANCING ACTIVITIES:
|                                     
|                                     
|                                     
|                                     
|                                      |                                                | Proceeds from sale of common stock                                                       |                                                              |                                           | 21   |                    |       |        | 585      |     
|                                      |                                                |                                                                                          |                                                              |                                           |      |                    |       |       
|                                      |                                                |                                                                                          |                                                              | Net cash provided by financing activities |      |                    | 21    |        |          |      | 585 |  
|                                      |                                                |                                                                                          |                                                              |                                           |      |                    |       |       
|                                      | NET INCREASE IN CASH AND CASH EQUIVALENTS      |                                                                                          |                                                              | 3,485                                     |      |                    |       | 1,288  |         
|                                     
|                                      | CASH AND CASH EQUIVALENTS, beginning of period |                                                                                          |                                                              | 14,479                                    |      |                    |       | 10,431 |         
|                                      |                                                |                                                                                          |                                                              |                                           |      |                    |       |       
|                                      | CASH AND CASH EQUIVALENTS, end of period       |                                                                                          | $                                                            | 17,964                                    |      |                    | $     | 11,719 |         
|                                      |                                                |                                                                                          |                                                              |                                           |      |                    |       |       

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

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MICROTEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION:

The accompanying consolidated financial statements include the accounts of
Microtest, Inc. and its wholly owned subsidiaries (Company). All significant
intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the accompanying consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments, which
are necessary for a fair statement of the results of operations and
consolidated financial position for the interim periods presented. Certain
information and footnote disclosures normally included in full year financial
statements have been condensed or omitted pursuant to interim reporting rules
and regulations. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested that
these financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Companys 2000
Annual Report to shareholders and report on Form 10-K. The results of
operations for the three months ended March 31, 2001 are not necessarily
indicative of the results to be expected for a full fiscal year.

For interim reporting purposes, the Company ends its quarters on the
Saturday closest to the calendar quarter end with the fourth quarter ending on
December 31.

(2) INVENTORIES:

Inventories consist of the following (in thousands):

| |                                                   |   |             |       |   |              |       |       |  
| | ------------------------------------------------- | - | ----------- | ----- | - | ------------ | ----- | ----- | -
| |                                                   |   | March 31,   |       |   | December 31, |      
| |                                                   |   | 2001        |       |   | 2000         |      
| |                                                   |   |             |       |   |              |      
| |                                                   |   | (unaudited) |      
|
| | Raw materials                                     |   | $           | 906   |   |              | $     | 1,286 |  
|
|
|
|
| | Work-in-progress                                  |   |             | 12    |   |              |       | 18    |  
|
|
|
|
| | Finished goods                                    |   |             | 2,026 |   |              |       | 2,215 |  
| |                                                   |   |             |       |   |              |      
| |                                                   |   | 2,944       |       |   |              | 3,519 |      
|
|
|
|
| | Less: Allowance for excess and
obsolete inventory |   |             | (149  | ) |              |       | (147  | )
| |                                                   |   |             |       |   |              |      
| |                                                   | $ | 2,795       |       |   | $            | 3,372 |      
| |                                                   |   |             |       |   |              |      

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(3) EARNINGS (LOSS) PER SHARE:

The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share amounts):

|                                                      |  |                    |       |   |          |   |       | 
|----------------------------------------------------- |  | ------------------ | ----- | - | -------- | - | ----- | 
|                                                      |  | Three Months Ended |      
|                                                      |  |                    |      
|                                                      |  | March 31,          |       |   | April 1, |  
|                                                      |  | 2001               |       |   | 2000     |  
|                                                      |  |                    |       |   |          |  
|                                                      |  | (unaudited)        |      
|                                                     
|Net income (loss)                                     |  | $                  | (636  | ) |          | $ | 434   | 
|                                                      |  |                    |       |   |          |  
|Weighted average common shares
outstanding            |  |                    | 8,575 |   |          |   | 8,383 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Effect of stock options                               |  |                    |      |   |          |   | 750   | 
|                                                      |  |                    |       |   |          |  
|Weighted average common equivalent
shares outstanding |  |                    | 8,575 |   |          |   | 9,133 | 
|                                                      |  |                    |       |   |          |  
|Basic net income (loss) per share                     |  | $                  | (0.07 | ) |          | $ | 0.05  | 
|                                                      |  |                    |       |   |          |  
|Diluted net income (loss) per share                   |  | $                  | (0.07 | ) |          | $ | 0.05  | 
|                                                      |  |                    |       |   |          |  

(4) SEGMENTS:

The Company is organized into two reportable business segments: Network
Test and Measurement (NTM) and Network Appliances and Storage (NAS).

The NTM business segment includes hand-held network test and diagnostic
tools used in the installation and operation of premise and campus local area
networks (LANs). The NTM segment includes devices for certifying the
installation of fiber optic and copper networks as well as troubleshooting
active operational LANs.

The NAS business segment consists of a family of server appliances and
storage products. Server appliances are network infrastructure devices
designed to facilitate the exchange of information over a computing network.
The Companys server appliances use Linux as an open source operating system
and encompass hard disk storage devices, as well as, optical (CD-ROM and
DVD-ROM) storage devices. NAS products are designed to enable organizations to
develop, store, manage and access information and knowledge bases with ease.
The NAS reportable business segment includes the Companys H+H subsidiary that
develops and sells several software products, CD-ROM networking systems and
service maintenance contracts in Europe.

The Company does not measure assets separately for the NTM and NAS
business segments.

7



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The accounting policies of the business segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements. Information
related to the operations of the Company in different business segments for the
three months ended March 31, 2001 and April 1, 2000, respectively, is set forth
below (in thousands).

|                                              |                   |   |       |  |  |     |        |   |       |   |        |        |  
|--------------------------------------------- | ----------------- | - | ----- |  |  | --- | ------ | - | ----- | - | ------ | ------ | -
|                                              |                   |   | NTM   |  |  | NAS |        |   | TOTAL |  
|                                              |                   |   |       |  |  |     |        |   |       |  
|Three Months Ended March 31, 2001 (unaudited)
|                                             
|                                             
|                                             
|                                             
|Net revenue                                   |                   | $ | 7,579 |  |  | $   | 2,018  |   |       | $ | 9,597  |       
|                                             
|                                             
|                                             
|                                             
|Gross profit                                  |                   |   | 4,267 |  |  |     | 1,046  |   |       |   | 5,313  |       
|                                             
|                                             
|                                             
|                                             
|Operating expenses                            |                   |   | 3,716 |  |  |     | 2,477  |   |       |   | 6,193  |       
|                                             
|                                             
|                                             
|                                             
|Segment profit (loss) from operations         |                   |   | 551   |  |  |     | (1,431 | ) |       |   | (880   | )     
|                                             
|                                             
|                                             
|                                             
|Unallocated amounts:                         
|                                             
|                                             
|                                             
|                                             
|                                              | Net other income  |   |       |  |  |     |        |   |       |   |        | 244    |  
|                                             
|                                             
|                                             
|                                             
|                                              | Loss before taxes |   |       |  |  |     |        |   |       |   |        | (636   | )
|                                             
|                                             
|                                             
|                                             
|                                              | Assets            |   |       |  |  |     |        |   |       |   |        | 35,082 |  
|                                             
|                                             
|                                             
|                                             
|Three Months Ended April 1, 2000 (unaudited) 
|                                             
|                                             
|                                             
|                                             
|Net revenue                                   |                   | $ | 8,794 |  |  | $   | 2,807  |   |       | $ | 11,601 |       
|                                             
|                                             
|                                             
|                                             
|Gross profit                                  |                   |   | 4,788 |  |  |     | 1,868  |   |       |   | 6,656  |       
|                                             
|                                             
|                                             
|                                             
|Operating expenses                            |                   |   | 4,000 |  |  |     | 2,336  |   |       |   | 6,336  |       
|                                             
|                                             
|                                             
|                                             
|Segment profit (loss) from operations         |                   |   | 788   |  |  |     | (468   | ) |       |   | 320    |       
|                                             
|                                             
|                                             
|                                             
|Unallocated amounts:                         
|                                             
|                                             
|                                             
|                                             
|                                              | Net other income  |   |       |  |  |     |        |   |       |   |        | 134    |  
|                                             
|                                             
|                                             
|                                             
|                                              | Loss before taxes |   |       |  |  |     |        |   |       |   |        | 454    |  
|                                             
|                                             
|                                             
|                                             
|                                              | Assets            |   |       |  |  |     |        |   |       |   |        | 34,456 |  

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##### Table of Contents



Net revenues to unaffiliated customers by geographic area for the three months
ended March 31, 2001 and April 1, 2000, respectively, were as follows (in thousands):

|              |  |                    |       |  |          |   |        | 
|------------- |  | ------------------ | ----- |  | -------- | - | ------ | 
|              |  | Three Months Ended |      
|              |  |                    |      
|              |  | March 31,          |       |  | April 1, |  
|              |  | 2001               |       |  | 2000     |  
|              |  |                    |       |  |          |  
|              |  | (unaudited)        |      
|North America |  | $                  | 4,840 |  |          | $ | 6,133  | 
|             
|             
|             
|             
|International |  |                    | 4,757 |  |          |   | 5,468  | 
|              |  |                    |       |  |          |  
|Net revenue   |  | $                  | 9,597 |  |          | $ | 11,601 | 
|              |  |                    |       |  |          |  

(5) MAJOR CUSTOMERS:

Graybar Electric Company, Inc. accounted for 10% of total net revenues for
the three months ended April 1, 2000.

(6) COMMITMENTS AND CONTINGENCIES:

Litigation

The Company is subject to legal claims in the ordinary course of business.
Management believes that the Companys liability, if any, with respect to such
matters will not have a material adverse effect on the Companys financial
condition, results of operations, or liquidity.

On March 8, 1999 and April 7, 1999, the Company was named as a defendant
in two purported class action lawsuits filed in the United States District
Court for the District of Arizona. The two lawsuits contained substantially
the same allegations and were brought on behalf of a class of persons who
purchased our common stock between April 14, 1998 and March 2, 1999. The
complaints alleged claims under Section 10(b) and SEC Rule 10b-5 of the
Securities and Exchange Act of 1934. The claims further alleged that the
Company made misrepresentations or omissions concerning its financial
statements that artificially inflated the price of the Companys common stock.
On November 29, 1999, a motion to dismiss the lawsuit was filed. On January
10, 2000, the Court heard arguments on the motion to dismiss. During September
2000, the Court ruled in the Companys favor and granted the Companys motion
to dismiss the lawsuit without prejudice. Plaintiffs filed an amended
complaint and the Company filed, and the parties argued, another motion to
dismiss. The Companys motion was granted in March 2001, and the case was
dismissed with prejudice.

The Securities and Exchange Commission (SEC) has conducted an
investigation relating primarily to historical accounting matters of the
Company. The SEC requested and received documents from the Company and took
testimony from certain former employees. During April 2001, the SEC requested
and the Company agreed to extend the statute of limitations for their
investigation until July 2001. The Company, without admitting or denying the
SECs findings has submitted an offer of

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##### Table of Contents



settlement to the SEC providing that the Company would cease and desist
from committing or causing any future violation of SEC rules. There are no
fines or penalties offered as part of this settlement.

Purchase Commitments

The Company utilizes contract manufacturing for virtually all product
requirements. Under these agreements, the Company is obligated to purchase, in
the ordinary course of business, products manufactured under these contracts at
contract prices. Some contracts require the Company to purchase all inventory
and components in the event of contract cancellation. Certain components used
in our products are presently available from or supplied by only one source and
others are available from limited sources. Although we do not have long-term
supply contracts with any of our component suppliers, to date we have been able
to obtain supplies of components and products in a timely manner.

(7) NEW ACCOUNTING PRONOUNCEMENTS:

SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The adoption of SFAS No. 133 did not have a
significant impact on the financial position, results of operations, or cash
flows of the Company because the Company does not currently have a derivative
instrument or engage in hedging activities.

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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statements and Factors That May Affect Results

Except for the historical information contained herein, this Report
contains forward-looking statements within the meaning of The Private
Securities Litigation Reform Act of 1995. Words such as believe, expect,
intend, anticipate, estimate, project, and similar expressions identify
forward-looking statements, which speak only as of the date the statement was
made. Such statements may include, but are not limited to, projections of
revenues, income or loss, capital expenditures, plans for future operations,
financing needs or plans, the impact of inflation, and plans relating to our
products or services, as well as assumptions relating to the foregoing.

Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements. Additional risk
factors that could cause actual results to differ materially from those
expressed in such forward-looking statements are set forth in Exhibit 99, which
is attached hereto and incorporated by reference into this Quarterly Report on
Form 10-Q. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events, or otherwise. This Report should be read in conjunction with our
Report on Form 10-K for the fiscal year ended December 31, 2000.

All references to we, our, us, the Company, or Microtest refer
to Microtest, Inc. and its subsidiaries.

Results of Operations

Revenue.Net revenue for the three months ended March 31, 2001 was $9.6
million, representing a 17% decrease from net revenue of $11.6 million for the
corresponding period last year. Revenue decreased primarily due to the overall
slowdown in the domestic economy, which decreased demand for our products
during the 2001 first quarter.

Our products are distributed in both North American and international
markets. North American net revenue was $4.8 million and $6.1 million,
representing approximately 50% and 53% of total net revenue, for the three
months ended March 31, 2001 and April 1, 2000, respectively. The 21% decrease
in North American revenue was primarily the result of lower sales of NTM and
NAS products due to reduced demand associated with slower domestic economic
conditions.

International net revenue was $4.8 million and $5.5 million, representing
50% and 47% of total net revenue for the three months ended March 31, 2001 and
April 1, 2000, respectively. The 13% decrease in international sales in the
first quarter of 2001 from the first quarter of 2000 was primarily due to
decreased sales of our Virtual CD software product in our international
markets.

Gross Profit.Gross profit was $5.3 million, or 55.4% of net revenue, and
$6.7 million, or 57.4% of net revenue for the three months ended March 31, 2001
and April 1, 2000, respectively. The decrease in gross margin percentage was
primarily attributable to lower sales of higher margin NAS software products
(such as Virtual CD) in 2001. This decrease in gross profit was partially
offset by higher margins in the NTM division due to changes in product mix.
Gross margins may fluctuate on a quarterly basis because of product mix,
pricing actions and changes in sales and inventory allowances.

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Sales and Marketing.Sales and marketing expenses were $3.2 million, or
33% of net revenue, and $3.0 million, or 26% of net revenue, for the three
months ended March 31, 2001 and April 1, 2000, respectively. The increase in
sales and marketing expenses as a percentage of net revenue for the three
months ended March 31, 2001, compared to the corresponding period in 2000, is
due to increased marketing expenditures in the NAS segment for our products
introduced during 2000 as well as a decrease in net revenue.

Research and Development.Research and development expenses were $2.1
million, or 22% of net revenue, and $2.0 million, or 17% of net revenue, for
the three months ended March 31, 2001 and April 1, 2000, respectively.
Research and development expenses increased for the three months ended March
31, 2001, compared to the corresponding period in 2000, primarily due to
increased foreign language translation expenses for certain of our NTM products
during the 2001 first quarter.

General and Administrative.General and administrative expenses were $0.9
million, or 9% of net revenue, and $1.4 million, or 12% of net revenue, for the
three months ended March 31, 2001 and April 1, 2000, respectively. The
decrease in general and administrative expenses for the three months ended
March 31, 2001, compared to the corresponding period in 2000, was primarily due
to a decrease in headcount, reduced professional fees, and reduced provision
for doubtful accounts resulting from improved collection of outstanding
receivable balances.

Other Income, net.Other income, net was $0.2 million and $0.1 million
for the three months ended March 31, 2001 and April 1, 2000, respectively. The
increase is primarily due to interest income earned on the higher average cash
balance in the 2001 first quarter.

Liquidity and Capital Resources

We held cash and cash equivalents of $18.0 million at March 31, 2001
compared to $14.5 million at December 31, 2000. Working capital was $25.0
million at March 31, 2001 compared to $25.4 million at December 31, 2000.
During the three months ended March 31, 2001, cash flows provided by operations
were $3.7 million, resulting primarily from noncash depreciation and
amortization of $0.4 million, decreases in inventory of $0.6 million,
collection of income tax receivables of $3.5 million, and decreases in net
receivables and other assets of $0.2 million, offset by a net loss of $0.6
million and decreases in accounts payable and accrued liabilities of $0.4
million. Cash flows used in investing activities were $0.3 million for the
three months ended March 31, 2001, primarily for capital expenditures and
leasehold improvements. Cash flows provided by financing activities were not
significant for the three months ended March 31, 2001.

Historically, we have financed our cash requirements principally through
cash flows from operating activities, the sale of common stock through our
initial public offering in October 1992 and the exercise of stock options. We
have no long-term debt and expect that our existing working capital, together
with cash flows from operations, will be sufficient to meet our operating and
capital needs for the next twelve months.

New Accounting Pronouncements

SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The adoption of SFAS No. 133 did not have a
significant impact on the financial position, results of operations, or cash
flows of the

12



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##### Table of Contents



Company because the Company does not currently have a derivative
instrument or engage in hedging activities.







Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in interest
rates and foreign currency rates. Nevertheless, the fair value of our
investment portfolio or related income would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates, due primarily
to the short-term nature of the major portion of our investment portfolio.

Our revenue and capital spending is primarily transacted in U.S. dollars.
However, we do at times enter into transactions in other currencies. No
hedging transactions were entered into during the three months ended March 31,
2001. We will establish revenue and balance sheet hedging programs to protect
against reductions in value and cash flow volatility caused by changes in
foreign exchange rates if transactions in foreign currencies become more
significant. Such programs are intended to reduce market risks, but do not
always eliminate the impact of foreign currency exchange volatility. We do not
purchase or hold any such derivative financial instruments for the purpose of
speculation or arbitrage.

13



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##### Table of Contents



MICROTEST, INC. AND SUBSIDIARIES







PART II. OTHER INFORMATION







Item 1. LEGAL PROCEEDINGS

From time to time, we are subject to litigation in the ordinary course of
business. Our insurance coverage may not be adequate to cover all liabilities
arising out of such claims. We are not engaged in any legal proceedings in the
ordinary course of business that are expected to have a material adverse effect
on our financial condition, results of operations, or liquidity.

We, Richard G. Meise, former Chief Executive Officer, Charles Mihaylo,
former Chief Operating Officer and John OBlock, former Chief Financial
Officer, have been named as defendants in two purported class action lawsuits:
Great Neck Capital Appreciation Investment Partnership, L.P., et. al. v.
Microtest, Inc., et. al.,CIV 99-0438 PHX EHC filed on March 8, 1999, in United
States District Court for the District of Arizona and Banks v. Microtest, Inc.,
et. al., CIV 99-672 PHX EHC filed on April 7, 1999 in United States District
Court for the District of Arizona. The two lawsuits contained substantially
the same allegations and were brought on behalf of a class of persons who
purchased our common stock between April 14, 1998 and March 2, 1999. The
complaints alleged claims under Section 10(b) and SEC Rule 10b-5 of the
Securities and Exchange Act of 1934. The claims further alleged that we made
misrepresentations or omissions concerning our financial statements and public
disclosures that artificially inflated the price of our common stock. The
plaintiffs sought an unspecified amount of actual damages, attorneys fees and
costs. On November 29, 1999, a motion to dismiss the lawsuit was filed. On
January 10, 2000, the Court heard arguments on the motion to dismiss. During
September 2000, the Court ruled in our favor and granted our motion to dismiss
the lawsuit without prejudice. Plaintiffs filed an amended complaint and we
filed, and the parties argued, another motion to dismiss. Our motion was
granted in March 2001, and the case was dismissed with prejudice.

The Securities and Exchange Commission (SEC) has conducted an
investigation relating primarily to historical accounting matters. They
requested and received documents from us and have taken testimony from certain
former employees. During April 2001, the SEC requested and the Company agreed
to extend the statute of limitations for their investigation until July 2001.
We have submitted, without admitting or denying the SECs findings, an offer of
settlement to the SEC providing that we would cease and desist from committing
or causing any future violation of SEC rules. There are no fines or penalties
offered as part of this settlement.

14



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##### Table of Contents









Item 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

|        |  |                                                                                                                                 |  |                                                                                                                             
|------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                 |  | Page or                                                                                                                     
|Number  |  | Description                                                                                                                     |  | Method of Filing                                                                                                            
|        |  |                                                                                                                                 |  |                                                                                                                             
|3.1     |  | Amended and Restated Certificate of Incorporation of the Company, dated May 19, 1992                                            |  | Incorporated by
reference to Exhibit 3.1 to Form S-1 Registration Statement
#147;33-52264                                   
|       
|       
|       
|       
|3.2     |  | Bylaws of the Company                                                                                                           |  | Incorporated by reference to Exhibit 3.2 of the Companys Annual Report on Form 10-K for the period ending December 31, 2000
|       
|       
|       
|       
|99      |  | Private Securities Litigation Reform Act of 1995 Safe Harbor Filed herewith Compliance Statement for Forward-Looking Statements |  | Filed herewith                                                                                                              

(b) Reports on Form 8-K



| |      
| | -----
| | None.







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 hereunto duly authorized.

MICROTEST, INC.

|             |  |                                             
|------------ |  | --------------------------------------------
|May 11, 2001 |  | /s/ Vincent C. Hren                         
|            
|            
|            
|            
|             |  | Vincent C. Hren                             
|            
|            
|            
|            
|             |  | President and Chief Executive Officer       
|            
|            
|            
|            
|            
|            
|            
|            
|            
|May 11, 2001 |  | /s/ William R. Crowell                      
|            
|            
|            
|            
|             |  | William R. Crowell                          
|            
|            
|            
|            
|             |  | Vice President, Secretary and Chief         
|            
|            
|            
|            
|             |  | Financial Officer                           
|            
|            
|            
|            
|             |  | (Principal Financial and Accounting Officer)

15