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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-K


              Annual Report pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934
                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
                         Commission File Number: 0-4384

                              MICRODYNE CORPORATION
             (Exact name of Registrant as specified in its charter)

             MARYLAND                             52-0856493
   (State or other jurisdiction of    (IRS Employer Identification Number)
   incorporation or organization)

                  3601 EISENHOWER AVENUE, ALEXANDRIA, VA 22304
               (Address of principal executive offices) (Zip Code)

                                  (703) 329-3700
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $0.10 Par Value
                                (Title of Class)

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
REQUIREMENT FOR THE PAST 90 DAYS.  YES   X     NO
                                       -----      ------

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. ( )

THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, BASED ON THE AVERAGE BID AND ASKED PRICES, APPROXIMATES $63,039,655
AS OF THE CLOSE OF BUSINESS ON DECEMBER 15, 1998.

THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK AS OF THE CLOSE OF BUSINESS ON DECEMBER 15, 1998 IS 13,111,201 SHARES OF
COMMON STOCK, $0.10 PAR VALUE.

DOCUMENTS INCORPORATED BY REFERENCE: THE INFORMATION REQUIRED BY PART III (ITEMS
10,11,12,AND 13) IS INCORPORATED BY REFERENCE FROM THE REGISTRANT'S DEFINITIVE
PROXY STATEMENT REQUIRED TO BE FILED PURSUANT TO REGULATION 14A.

SEE PAGE 44 FOR INDEX OF EXHIBITS.

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MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
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                                     PART I

ITEM 1. BUSINESS.

GENERAL

     Microdyne Corporation ("Microdyne" or "The Company") is engaged in two
businesses in two industries: aerospace electronics and communications
equipment, and outsourced technical support services.

     On August 11, 1998 the Company through its wholly owned subsidiary MCTI
Acquisition Corporation, acquired all of the outstanding stock of Apcom, Inc.
(Apcom) and Celerity Systems, Inc. (Celerity) as well as certain assets and
liabilities of two other affiliated companies, Acceleration Systems, Inc. and
Digital Telcom, for consideration of $16 million plus a contingent earnout
payment of $1 million. See the Company's Notes to the Financial Statements,
detailed in Item 8 of this Form 10-K, for the accounting treatment and further
discussion. The Company refers to the acquired companies as the Advanced
Technology Group (ATG).

     - Microdyne Communications Technologies, Inc. (MCTI) designs, manufactures,
and markets aerospace telemetry receivers, combiners, and signal simulators for
use in data gathering and analysis. MCTI also provides telemetry systems
consultation, evaluation, design, integration and installation services. ATG,
included in the results of MCTI, provides hardware development, design, and
production of wideband digital receiving and processing equipment used in signal
collection and processing. In addition ATG, manufactures data acquisition,
recording, and generation products used in electronic test and measurement
equipment.
     - Microdyne Outsourcing Inc. (MOI), provides outsourced technical services,
including telephone technical support and warranty repair services, for
electronic products companies.

       Microdyne's operations in the networking products segment of the data
communications industry, conducted by its Networking Products Division, were
discontinued in 1997.

       The following table sets forth revenue from each of Microdyne's
subsidiaries for fiscal years 1996, 1997 and 1998:

<TABLE>
<CAPTION>
In Thousands of Dollars                MCTI                  MOI                Total
------------------------------ ------------------------------------------ -------------------
<S>                                    <C>                 <C>                  <C>      
1996                                   $  17,033           $  14,426            $  31,459
1997                                      26,240              17,381               43,621
1998  (1)                                 34,753              23,557               58,310
</TABLE>

(1) MCTI includes the results of ATG for the period July 1, 1998 through
September 30, 1998

SALE OF COMPANY

           On December 3, 1998, the Company signed a definitive agreement with
L-3 Communications Corporation, a Delaware corporation ("L-3 Communications"),
whereby L-3 Communications is to acquire the Company. Under the terms of the
agreement, L-3 Communications, or an affiliate thereof, is to purchase all of
the outstanding shares of the Company's common stock for $5 a share and assume
the outstanding debt of the Company. The total value of the transaction is
approximately $90 million. The transaction is conditioned upon receipt of a
majority of the Company's shares outstanding, approval of L-3 Communications'
lenders, regulatory approvals, and to other customary conditions. Philip T.
Cunningham, Chairman of the Board of Directors of the Company and beneficial
owner of 38% of the outstanding shares of the Company, has agreed to tender his
shares in the transaction.

           Pursuant to the agreement, on December 9, 1998 L-M Acquisition
Corporation, a wholly owned subsidiary

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of L-3 Communications ("L-M Acquisition"), commenced a cash tender offer for all
the Company's outstanding common stock and filed a Schedule 14D-1 relating
thereto with the Securities and Exchange Commission (the "Commission"). That
same day, the Company filed Schedule 14D-9 with the Commission in which the
Company recommended that all stockholders of the Company accept the tender offer
of L-M Acquisition and tender their shares of the Company's common stock to L-M
Acquisition pursuant to L-M Acquisition's offer.

AEROSPACE TELEMETRY

Overview

     Data gathering and analysis is a basic requirement in the testing and
evaluation of any process or operation. When the process or device being
measured is close at hand, it is a relatively simple task to attach probes,
sensors or other measuring devices to the object. These devices convert physical
measurements (e.g., temperature, rotation, pressure) into a variable stream of
electrical current. The current flows over wires and is either shown on an
analog display (a thermometer or voltmeter, for example) or converted into
digital form and fed into a computer file. This well-established practice works
well so long as the object or process to be measured is sufficiently close to
permit wires to connect those probes and sensors with the computer logging the
resulting output.

     Telemetry is the technology of measuring various equipment performance
parameters at a distance, and is required when the object under test is moving
too quickly or is at too great a distance to use direct connection. Information
may consist of readings from hundreds of sensors recording such things as heat,
vibration, stress and operational performance. Each sensor will produce its own
data stream which must be transmitted and captured. In telemetry, data is
gathered, multiplexed, and transmitted at microwave frequencies, usually in a
continuos rapid burst form, toward a ground station. There, a highly selective
radio receiver gathers the information. In other applications such as weather
satellites or space vehicles, the information will consist of data and video
transmissions. The U.S. Government operates several hundred ground stations,
each of which may have racks of telemetry receivers. Other governments also
operate a great number of sites.

     Since 1968, Microdyne has manufactured telemetry receivers, sophisticated
radio receivers that can accurately tune in and track the telemetry signals from
aircraft and space vehicles. During the past several years, Microdyne has
expanded and updated its telemetry product line, including the addition of
card-level products that perform essentially the same functions as the Company's
traditional rack-mounted devices. While there is and will continue to be a
substantial market for stand-alone rack-mounted products, two trends are pushing
telemetry receivers toward becoming board-level systems with computer control.
First, very powerful personal computers can process telemetry data at rates
previously unattainable. Second, telemetry receivers are increasingly being used
in mobile environments such as aircraft and on board ships where the receivers'
light weight and compactness are an advantage over larger rack mounted devices.
The Company's telemetry products include:

     -    A single-card telemetry receiver designed to plug into a VME, VXI or
          PC bus.

     -    A board-level diversity combiner which is a special device to take the
          input of two or more telemetry receivers, each of which has been tuned
          to the same sets of frequencies, but at different polarity, and
          combine those two signal streams into one continuously readable data
          stream. This type of product is required whenever the telemetry stream
          comes from a vehicle that is maneuvering or rotating.

     -    A cosecant squared tracking antenna utilized for short and long range
          tracking facilities. The Antenna Control Unit (ACU) controller
          provides both manual control and auto track functions with
          programmable features. The antennas are available in fixed, mobile and
          transportable configurations.

     -    A compact, lightweight, low power consumption telemetry receiver with
          AC or DC power supplies.

     -    A data simulator that uses state-of-the-art digital processing
          techniques to generate multiple modulation formats covering both
          narrow and wide deviations and data rates. Typically used as a
          bore-site source for test



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          range system calibration, it can also be used as a satellite uplink,
          command generator or test signal source for bench level calibration
          and service.

     New products manufactured in 1998 include the RC-4000(2) and the ATR-2000.
The RC-4000(2) is a rugged portable telemetry receiving system designed for
mobile telemetry tracking and data acquisition. The RC-4000(2) can interface
with two independent tracking antennas or four fixed antennas, or any
combination thereof. The ATR-2000 is a modular, plug and play family of VMEbus
and PCIbus cards based around a central digital signal processing demodulator.
The ATR-2000 provides data conversion, digital tuning, signal generation,
multimode demodulation and video filtering.

     The Company has long been a supplier of telemetry receivers to system
integrators both in the U.S. market and internationally. Since 1989, Microdyne
has actively bid on mid-size systems integration contracts which typically range
from $500,000 to $15 million.

     The growth of the Aerospace Telemetry market may be augmented by several
factors. First, there is a need to upgrade telemetry systems installed in the
1970s. Second, scientists' desire to take more detailed and more frequent
measurement of physical processes, coupled with the ability to process data
input more quickly, is leading to requirements for wider bandwidth receivers.
Third, launches of low-earth-orbit ("LEO") satellites to facilitate new
communications services may spur demand for the installation of new ground
stations, each of which must be equipped with telemetry equipment.

     In addition, the Company has started to address markets beyond its
traditional one for telemetry receivers that serve the R&D, test and evaluation,
and military markets. These new markets and the products for them include:


     -    Antennae. Microdyne has designed, built, and sold low-cost, portable
          antenna for use by the telemetry community. The antenna enhances the
          ability to track and obtain data from missiles during the first
          minutes after launch when the vertical change of the missile taxes the
          tracking ability of most satellite dishes.

     -    Card-level receivers. Microdyne has received requests for proposals
          from organizations with requirements for lower-cost receivers for use
          in a variety of applications. One near-term potential opportunity is
          for receivers to capture and process data from NASA's "Mission to
          Planet Earth" satellite series. Ground stations would be encouraged at
          schools and universities for students to study real-time data from
          these satellites. Lower-cost board-level Microdyne receivers may be
          used for such applications.


Marketing and Sales

     Telemetry systems are used in a variety of applications involving missiles,
aircraft, satellites and other space vehicles. The four major user groups
include government testing ranges, aerospace companies engaged in the
development and manufacture of missiles and satellites, companies that design
and manufacture antennae used in tracking and receiving signals being sent from
missiles and satellites, and meteorological systems used to gather weather data.

     Microdyne markets its products and related systems integration services
directly to these user groups primarily through a sales and marketing department
located at the Company's Ocala, Florida facility as well as through independent
agents. Because most telemetry products and related systems integration services
are purchased directly or indirectly with government funding, much of
Microdyne's marketing effort is channeled into establishing and maintaining name
and product recognition for the Company with government agencies and aerospace
and defense contractors. Microdyne also undertakes projects combining the
Company's telemetry components and subsystems with those of other manufacturers
for customers worldwide. To service these customers, Microdyne maintains
customer support operations in countries around the world.

     The telemetry industry is dependent upon U.S. Government procurement and
can be adversely affected by any substantial decreases in direct U.S.
Government purchases of the Company's products and services, or in indirect


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purchases of products acquired under U.S. Government contracts. The Company
believes there is growth potential both in domestic and international markets.
To address international opportunities, MCTI has established a sales office in
London, and also uses international manufacturers' representatives.

     On October 7, 1998 the Company was awarded a $3.8 million contract from the
Spanish Air Force for major upgrades of test range equipment and systems
integration. In July 1998, the Company signed a Memorandum of Understanding
(MOU) with IN-SNEC, a division of group Intertechnique. The MOU includes
worldwide product distribution, product development, market development and
sales efforts to support a growing satellite communication industry. The Company
also entered into an agreement on October 15, 1998 to distribute Emhiser
Research airborne telemetry transmitters under the Microdyne name. Under the
agreement for exclusive international distribution, MCTI is to distribute
Emhiser's ground-based flight termination equipment, as well as airborne
transmitters and receivers designed for missiles, aircraft, space vehicles and
other airborne systems.


Research and Development and Manufacturing

     Expenditures for MCTI research and development totaled $2.3 million, or
7.7% of MCTI revenue in 1998. This compared to $1.6 million, or 6.1% of MCTI
revenue in 1997 and $1.5 million, or 8.8% of revenue in 1996. Microdyne
maintains a telemetry products manufacturing facility in Ocala, Florida.

Competition

     The Company believes the market for telemetry products and related systems
integration services has entered a new growth stage after a period of years of
stable revenues. Microdyne believes that of marketers of telemetry receivers
sold for use in research, development, test and evaluation, the Company has the
largest market share for such products sold in the world. However, the market
for defense electronics, and systems integration services in particular, is very
competitive and marked by a shift toward fewer, but much larger vendors.
Microdyne believes that the relative maturity of the overall defense electronics
market could attract competition from vendors in related fields of defense
electronics that are seeking to expand total corporate sales by leveraging
relationships with existing customers to include additional product lines in
ancillary fields.


ADVANCED TECHNOLOGY GROUP

APCOM, INC.

Overview

     Modern technologies have facilitated the transfer of vast amounts of
information anywhere in the world within seconds. Given the current state of
world affairs, it has been deemed in the interest of National Security that
Governments collect, process, and analyze these signals.

     Apcom, Inc. designs and produces a wide variety of high performance Radio
Frequency (RF), analog and digital products for use in signal collection and
processing systems. The broad product line spans the entire frequency spectrum
with an emphasis on high dynamic range RF to base band converters for digitizing
systems; flexible digital tuner resamplers and demodulators, and medium to
large-scale signal distribution and switching systems.

     Applications of our products include SIGINT (Signals Intelligence)
collection, storage, processing and geo-location systems, telemetry reception
and processing, generic analog and digital signal processing and a variety of
commercial uses including switching systems and wireless systems testing. All
standard products are commercial off-the-shelf (COTS) items, developed by Apcom.
Custom designs and modifications to standard products are additional services
provided to our customers.

The Company's products include:



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-    OASIS is an Open Architecture Signal Intercept System. The Open System
     Architecture is extremely flexible in that it permits the user to
     reconfigure the system as required with the addition of specific modules.
     The OASIS system can be configured for Signals Collection or Radar Pulse
     Collection and provides analysis, recording, playback, and networked
     capabilities.

-    Looking Glass is the worlds first Signal Analyzer that provides 40 MHz of
     real time bandwidth. Looking Glass is able to process RF inputs from DC to
     19 GHz as well as digital inputs at 100 MS/s rates. Looking Glass is
     designed to provide real-time capture, analysis, and measurement of
     wideband signals in a field site or lab environment.

-    ADR is the Company's Advanced Digital Receiver. This product is the heart
     of the Looking Glass system and provides all digital tuning, filtering, and
     demodulation. Simultaneous AM, FM, LOG, PM, and I&Q demodulation is
     provided for analog inputs up to 40 MHz in bandwidth and digital inputs at
     rates up to 100 MS/s.

Marketing and Sales

     Apcom products and systems are used in applications that include fixed
site, mobile, man portable, and laboratory environments. The major users of
Apcom products include the Government, Government prime contractors, system
integrators, as well as communication service providers. Apcom markets products
to these customers directly from it's Gaithersburg, MD facility, and in concert
with selected independent representatives domestically and internationally.

     While fluctuation in Government spending may effect the Company's
performance, the Intelligence market has been relatively immune and has even
shown some growth. Constant advancements in communications technology make the
transmission of greater amounts of information readily accessible to anyone.
These advancements create challenges to the communications monitoring community,
which require them to invest in the types of products Apcom designs and
manufactures, creating a growth market.

Research and Development and Manufacturing

     Expenditures for research and development totaled approximately $390,000,
or 14% of revenue contributed by Apcom, for the period July 1, 1998 through
September 30, 1998. Apcom maintains manufacturing facilities for its collection
and analysis products in Gaithersburg, Maryland.

Competition

     Due to the technology required to effectively perform communications
monitoring and analysis, competition in the design and production of monitoring
and analysis products is limited to a few competitors. The constant demand for
technology driven solutions require the Company to cultivate and maintain good
working relations within the customer organizations so that effective product
solutions can be developed, produced, and delivered to the market in a timely
manner. The constant technology investment coupled with the unique
characteristics of the customer base, deter traditional defense electronics
vendors from entering this market. While Apcom does face competition in this
market we feel that the combination of quality products, service, and
responsiveness to customers needs enables the Company to compete effectively.

CELERITY SYSTEMS, INC.

Overview

     Electronic test and measurement (ET&M) equipment is a basic requirement for
any company that uses or manufactures electronic products. Everyone from the
copier repair technician to the communications satellite designer relies on test
and measurement equipment for their work. There are thousands of ET&M products


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manufactured and sold today, and most can be grouped into four basic classes
based on the type of function they perform.

     Voltmeters, oscilloscopes, spectrum analyzers, and logic analyzers
represent the acquire/process/report class of ET&M equipment that take in some
form of electronic data information, process this information into a usable
form, and report this processed information to the user in order to better
understand the device being tested.

     Signal generators, tone generators, and digital data generators are part of
the generate/stimulate class of ET&M equipment that produce electronic data
information to feed to a device being tested in order to see how it responds to
this input stimulus. The generate/stimulate and the acquire/process/report
instruments are often used together in testing.

     The third class of ET&M equipment are those that both generate and
acquire/process/report information in a single instrument. Examples of this
equipment include bit error rate testers, vector voltmeters, network analyzers,
and automated testers which provide information to the user more quickly and in
the exact form required for analysis.

     The fourth class of ET&M equipment are those that simulate the test device
or surrounding environment in order to test its effects on other devices
attached to and supporting this device. Cellular telephone channel simulators
and circuit and chip emulators are examples.

     Since 1994, Celerity Systems has manufactured highly modular high speed
data acquisition, data generation, and storage products for use in a wide range
of next generation ET&M equipment that directly targets the test requirements of
the advanced electronics products. The products are based on VME and VXI modules
that provide a compact, modular and open configuration, and support all four
classes of ET&M equipment described above.

     Celerity Systems currently manufactures over 30 VME/VXI module products,
and develops integrated semi-custom test systems from these products and third
party VME/VXI products in support of customer requirements for advanced ET&M
equipment. Advanced ET&M equipment products using these modules that have been
developed include Pentium or SPARC-based Deep Memory Arbitrary Waveform
Generators, 802.11 Wireless LAN Test Sets, High Speed Pulse Measurement Systems,
and Virtual Test Instruments.

The Company's newest electronics test and measurement products include:

- The Access2000 family of VME/VXI modules with data acquisition, storage, and
generation capabilities to 300 MS/s and 4 GB of storage. These modules provide
additional capability for the semi-custom test system markets.

- The GigaSTORE RAID-based storage products which can acquire and generate
analog, digital, or serial data at rates up to 100 MS/s for up to 24 minutes.
This system uses a SPARC-based controller and can be networked to other
equipment for remote control and data transfer.

- The CS65000 Deep Memory Arbitrary Waveform Generator which can output data at
rates up to 750 MS/s using 6 GBytes of high speed memory. This system is Pentium
or SPARC-based and runs Windows NT or Solaris operating systems.

     Celerity Systems products have the unique capability of being able to
synchronize multiple channels of analog and digital input or output modules with
approximately 10 picosecond resolution for coherent sampling or generation. A
special product is the Pulse Processor (VME-PEG100) which is designed to capture
and store the parameters of radar signals such as time of arrival, pulse width
and pulse amplitude.

     Celerity Systems continues to see its markets move towards completely
integrated turn-key systems in support of the advanced ET&M equipment
requirements, including pulse processing, data collection, waveform generation,
and automated testing using embedded and desktop SPARC, Pentium, and Alpha
processors. Celerity Systems expects 


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this trend to continue as customers are compelled to use open architecture
commercial off the shelf products to meet the time to market requirements of
their own advanced designs, and is well positioned to support these systems with
its core product modules.

     Celerity Systems products are purchased by customers with contract values
ranging from $3,000 up to $2.5 million.

Marketing and Sales

     Data acquisition, recording and generation products are used in a variety
of ET&M applications including telecommunications analysis, wireless
communication systems development and radar and sonar analysis. Celerity Systems
markets its products and systems directly to clients primarily through a sales
and marketing department located at Celerity Systems office in Cupertino, CA as
well as through independent agents in the United States, Asia-Pacific and
Europe. All customer support is handled through our office in Cupertino, CA.

Research and Development and Manufacturing

     Expenditures for Celerity Systems research and development totaled
approximately $217,000, or 10% of revenue contributed by Celerity, for the
period July 1, 1998 through September 30, 1998. Celerity maintains a
manufacturing facility in Cupertino, California.

Competition

     Celerity Systems believes that the market for its data acquisition,
recording and generation products will continue to grow in support of the needs
for high speed and wireless electronics testing in these rapidly expanding
markets. Celerity Systems holds only a small percentage of the market share in
this market while the opportunities for advanced semi-custom turn-key test
systems continue to grow. There can be no assurance, however, that Celerity
Systems will realize such opportunities.





OUTSOURCING  SUPPORT SERVICES
Overview

     There has been a growing trend in recent years toward providing human
resources from third-party organizations - "outsourcing" - of both technical and
non-technical positions. Outsourcing enables an organization to cope with
changes in growth, seasonality, and constraints on the number of full-time
workers counted as employees. Outsourcing allows an organization to focus its
internal and human resources on activities which will create the highest rate of
return. Outsourcing may also lower an organization's cost of doing business.
Microdyne's outsourcing services include staffing and operating telephone
technical support centers, warranty repair, and after-warranty service centers.

     Since 1989, the Company has provided outsourced services to one large
electronics manufacturer. The activities performed on behalf of this customer
include telephone technical support, component and board repair, warranty
administration, and the operation of a large transit warehouse. Microdyne
provides its customer with trained personnel in the customer's facilities near
Los Angeles, California and in Indianapolis, Indiana as well as in Microdyne's
own facility in Southern California. The Company's revenue is based on the
number of telephone technical support minutes spent on a service call, the
number of units repaired or refurbished, or, alternately, the number of
employees assigned to each aspect of the customer's business, the number of
hours worked by those employees and the rate at which Microdyne is paid for such
services.

     In September 1997, Microdyne opened a new facility in Southern California
to handle product repair services and 


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telephone technical support (TTS), and has a capacity for up to 230 telephone
support representatives. The facility is expected to provide Microdyne with the
ability to provide both telephone technical support and warranty repair services
to its customers from one location.

     The Company maintains a contract with this customer which was renewed for a
period of five years in March 1996. Microdyne has also signed an additional
contract with another customer which began in October of 1997.

     On October 1, 1998, the Company announced that MOI has signed agreements
for outsourcing services for Toshiba America Information System's Computer
Services Division and En Pointe. MOI will provide PC-board repair services at
Toshiba's facility in Irvine, CA. Through a Memorandum of Understanding (MOU),
MOI has already begun providing after hours help-desk and technician-dispatch
support at its new TTS facility in Torrance, CA for En Pointe.

Marketing

     Microdyne believes it has the skills and depth of management to expand its
outsourcing Support Services business. While the Company's primary focus is
maintaining and expanding its relationship with its current customers, Microdyne
believes it has the resources and qualifications to serve other customers, and
is currently exploring ways to capitalize on its expertise. There can be no
assurances that the Company will gain other new customers through such efforts.

Competition

     The competition for outsourcing Support Services includes providing
services at the customer's facilities ("in-sourced") and well as providing
services at a facility maintained by the Company ("out-sourced"). Competitors in
this rapidly growing industry vary in both their size and in the scope of their
services. In a very competitive environment, Microdyne's outsourcing customers
may, upon notice, sever their contracts with the Company and elect to perform
these tasks either using its own employees or a another third-party support
vendor. The Company believes its relationship with its customers is excellent,
and is evidenced by the fact that the level of work performed for one specific
customer has expanded significantly during the past two years. Also, for the
past four years, the Company's customer has been ranked #1 in customer service
in its product area by a respected periodical.

     Microdyne seeks to reduce the risk of being displaced by either in-house
staff or another third-party provider by continually recruiting highly skilled
staff to meet the customer's growing requirements, by upgrading the work skills
of its staff through training, and by providing its staff with a career path to
reduce turnover and increase efficiency so as to lower costs to the customer. In
September 1997, Microdyne opened a new telephone technical support facility in
Southern California, near Los Angeles, which provides the Company with
additional capacity and flexibility to expand services to its current and future
customers from one location.

DISCONTINUED OPERATIONS

    During fiscal year 1997, the operations of Microdyne's Networking Products
Division (NPD) were restructured and subsequently discontinued. Prior to the
discontinuance of its operations, NPD designed, manufactured, marketed and
supported a broad line of data communications hardware products that facilitated
inter-computer communications via local area networks (LANs). Local area
networks connect groups of personal computers, file servers, printers and other
devices, thereby facilitating communications among those devices.

    The operations of the Networking Products Division were discontinued after
18 months of disappointing financial performance results for the division during
1996 and 1997. The disappointing financial performance and decision to dispose
of the division by Microdyne were the result of several inherent economic and
competitive factors of the networking products segment of the data
communications industry.

    The decision to discontinue the Networking Products Division's operations
was made and announced in June 1997. As of December 15, 1998, the plan for the
disposal of the assets of NPD has been substantially completed. 


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The disposal of the assets of the Networking Products Division included an
agreement to license its Fast Ethernet ISA adapter card product line and
technology to Intel Corporation (completed in November 1997), and an agreement
with Sundaynet Computer Company Ltd. to license the NE2000plus series Ethernet
adapter technology and trade dress rights. In addition, Microdyne wrote down or
disposed of substantially all of the division's inventory by December 18, 1997.
The sale of the fixed assets of the Networking Products Division was achieved
through an auction held during October 1997. The Company continues to provide
warranty support for certain discontinued products that carried lifetime
warranties through the MOI facility in Southern California.

    Microdyne's Financial Statements and accompanying Notes to the Financial
Statements, include additional details regarding the amounts and accounting
treatment of the restructuring reserve and loss on disposal of the discontinued
operations. The Financial Statements and Notes are included elsewhere in this
Form 10K.

PATENTS AND PROPRIETARY RIGHTS

     The Company does not consider that its business is dependent upon patent
protection. Nevertheless, the Company is subject to the risk of adverse claims
and litigation alleging infringement of the proprietary rights of others. From
time to time the Company has received claims of infringement of other parties'
proprietary rights. Although the Company believes that it does not infringe on
the valid patents of others, there can be no assurance that third parties will
not assert infringement claims in the future with respect to the Company's
current or future products, or that any such claims will not require the Company
to enter into license arrangements or result in protracted and costly
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms.

UNITED STATES GOVERNMENT CONTRACTS

    During fiscal 1998 and 1997, $11.8 million, or 20%, and $8.3 million, or
19%, respectively, of Microdyne's total sales from continuing operations were
derived from contracts and subcontracts involving the U.S. Government and its
agencies. For fiscal 1998 and 1997, U.S.

Government sales as a percentage of each subsidiary's sales were as follows:


<TABLE>
<CAPTION>
               Fiscal 1998                Fiscal 1997
               -----------                -----------
<S>                   <C>                        <C>
MCTI                   36%                        32%
ATG                    20%                         --
MOI                     0%                         0%
</TABLE>

BACKLOG

     Revenue backlog believed to be firm amounted to $18.9 million at September
30, 1998, of which ATG represents $10.8 million, and $10.8 million at September
28, 1997. The Company does not believe backlog is a meaningful indicator of
future business trends. MCTI and ATG backlog is dependent upon the receipt or
renewal of U.S. and foreign government contracts, the timing over which the
Company has no control.













--------------------------------------------------------------------------------
                                     PAGE 9
<PAGE>   11
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------

EMPLOYEES

     As of November 30, 1998, Microdyne had 1,045 full-time and 11 part-time
employees. None of Microdyne's employees is covered by a collective bargaining
agreement. The Company believes its labor relations to be generally good.
Employment by operation is as follows:

<TABLE>
<CAPTION>
                                  November 30, 1998                      November 30, 1997
                                  -----------------                      -----------------
                            Full-time            Part-time         Full-time            Part-time
                            ---------            ---------         ---------            ---------
<S>                          <C>                  <C>                 <C>               <C>
MCTI                             196                 2                  198                 1
MOI                              744                 3                  369               247
ATG                               85                 6                   --                --
Corporate                         20                 0                   22                 1
Networking Products (1)            -                 -                   10                 0
                               -----             -----                 ----             -----
     Total                     1,045                11                  599               249
                             =======            ======                =====              ====
</TABLE>

--------
(1) Discontinued in June 1997.

     MCTI employees are located principally in Ocala, Florida; MOI employees are
located at customer-owned and Company leased facilities near Los Angeles,
California and in Indianapolis, Indiana. Corporate employees are located in
Alexandria, Virginia. Employees of ATG are located in Gaithersburg, Maryland and
in Cupertino, California. Employees of the discontinued Networking Products
Division were located principally in Alexandria, Virginia and Torrence,
California.



INDUSTRY SEGMENTS AND OTHER DATA

ITEM 2. PROPERTIES.

     At September 30, 1998, the Company's principal facilities consist of the
following:

<TABLE>
<CAPTION>

     Location         Facility Size         Own/Lease                    Function
-----------------     -------------        -----------       -----------------------------------
<S>                     <C>                    <C>           <C>
Alexandria, VA              9,122 sq. ft.         Leased     Headquarters, MOI marketing and Sales
Ocala, FL                 112,000 sq. ft.          Owned     Aerospace Telemetry
Gaithersburg, MD           18,698 sq. ft.         Leased     ATG, Manufacture of signal processing peripherals
Cupertino, CA              20,330 sq. ft.         Leased     ATG, Production and Research and Development
Torrance, CA               41,471 sq. ft.         Leased     Outsourcing Support Services TTS and warranty repair
</TABLE>

     A portion of the Ocala facility was financed by industrial revenue bonds,
which were repaid in October 1996. The Ocala facility includes 5.5 acres of
land.



ITEM 3. LEGAL PROCEEDINGS

     The Company is not aware of any material legal proceedings against it at
this time.



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

     No matter was submitted during the fourth quarter of fiscal 1998 to a vote
of security holders, either through the solicitation of proxies or otherwise.


--------------------------------------------------------------------------------
                                    PAGE 10
<PAGE>   12
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------

                                     PART II

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

     The Company's Common Stock is traded on the NASDAQ National Market under
the symbol MCDY. The following table sets forth for the fiscal periods indicated
the high and low sales prices of the Common Stock, as reported on the NASDAQ
National Market.

<TABLE>
<CAPTION>
                         Fiscal Year Ended September 30, 1998                               Fiscal Year Ended September 28, 1997
                         ------------------------------------                               ------------------------------------
                                    Quarter ended:                                                     Quarter ended:
            12/31/97        3/31/98         6/30/98         9/30/98        12/31/96        3/30/97         6/29/97         9/28/97
            --------        -------         -------         -------        --------        -------         -------         -------
<S>           <C>             <C>             <C>             <C>             <C>            <C>             <C>             <C>  
High          8.125           6.813           6.563           4.875           8.500          6.500           6.000           6.625
Low           5.750           5.688           3.750           2.375           4.813          4.500           3.688           4.250
</TABLE>

     As of November 30, 1998, there were an estimated 864 holders of record of
the Common Stock. The Company estimates there are approximately 6300
shareholders whose shares are held in "street" name. During the fiscal year
ended September 30, 1998, there were no unregistered sales by the Company of the
Company's securities.


























--------------------------------------------------------------------------------
                                    PAGE 11
<PAGE>   13
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
ITEM 6.  SELECTED FINANCIAL DATA.

STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
                                                                                  Years Ended
                                               ------------------------------------------------------------------------------
                                                 September 30,     October 1,      September 29,    September 28,   September 30,
                                                     1994             1995             1996             1997           1998
                                                     ----             ----             ----             ----           ----
                                                                    (in thousands, except per share data)
<S>                                             <C>               <C>            <C>                <C>             <C>
Revenue                                               20,276            29,458         31,459             43,621        58,310
Cost of goods and services provided                   11,633            16,076         17,701             25,473        36,101
                                                    --------          --------       --------           --------       -------
Gross profit                                           8,643            13,382         13,758             18,148        22,209
Gross margin as a percentage of sales                    43%               45%            44%                42%           38%
Selling, G&A Expense                                   5,232             6,430          7,189              8,511        13,629
SG&A as a percentage of sales                            26%               22%            23%                20%           23%
Research and development                               1,184             1,389          1,466              1,609         2,907
R&D as a percentage of sales                              6%                5%             5%                 4%            5%
Purchased Research and development                        --                --             --                 --         4,392
                                                    --------          --------       --------           --------       -------
Earnings from continuing operations                    2,226             5,563          5,103              8,028         1,281
Other expense, net                                      (554)           (1,820)        (1,831)              (994)         (985)
                                                    --------          --------       --------           --------       -------
Pre-tax earnings from continuing operations            1,672             3,743          3,272              7,034           296
Provision for Income Taxes                              (635)           (1,422)        (1,243)            (1,876)           --
                                                    --------          --------       --------           --------       -------
Net Earnings from Continuing Operations             $  1,037          $  2,321       $  2,029           $  5,158       $   296
                                                    --------          --------       --------           --------       -------

Discontinued operations
  Operating income (loss)                              3,562            10,273         (4,973)           (29,381)           --
   Loss on disposal                                        -                 -              -             (4,222)           --
                                                    --------          --------       --------           --------       -------
Net income (loss), discontinued
   operations                                          3,562            10,273         (4,973)           (33,603)           --
                                                    --------          --------       --------           --------       -------

Net income (loss)                                   $  4,599          $ 12,594       $ (2,944)          $(28,445)      $   296
                                                    ========          ========       ========           ========       =======

Basic earnings (loss) per share, continuing
   operations                                       $   0.08          $   0.18       $   0.16           $   0.40       $  0.02
Basic earnings (loss) per share,
  discontinued operations                           $   0.28          $   0.81       $  (0.39)          $  (2.61)      $    --
Basic earnings (loss) per share                     $   0.36          $   0.99       $  (0.23)          $  (2.21)      $  0.02
Basic weighted average shares (000's)                 12,718            12,680         12,811             12,873        13,037
Diluted earnings (loss) per share, continuing
  operations                                        $   0.08          $   0.18             --                 --       $  0.02
Diluted earnings (loss) per share,
  discontinued operations                           $   0.27          $   0.78             --                 --            --
Diluted earnings (loss) per share                   $   0.35          $   0.96             --                 --       $  0.02
Diluted Weighted average shares (000's)               13,088            13,096         12,811             12,873        13,235



<CAPTION>
BALANCE SHEET DATA

                                              September 30,     October 1,      September 29,     September 28,    September 30,
                                                  1994             1995              1996             1997            1998
                                                  ----             ----              ----             ----            ----
<S>                                            <C>              <C>             <C>              <C>                 <C>
Cash, cash equivalents, and
  short-term investments                           $  2,628         $  4,587        $  1,791         $  1,056            $ 994
Working capital                                      22,744           40,572          28,676           14,413           17,845
Total assets                                         55,840          110,382          79,994           34,541           44,621
Long-term obligations                                11,675           16,999          11,071            9,698           20,821
Total stockholders' equity                           18,290           39,488          36,524            8,402            9,393
</TABLE>





--------------------------------------------------------------------------------
                                    PAGE 12
<PAGE>   14
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following table sets forth certain unaudited quarterly financial
information for each of the Company's last eight quarters.

<TABLE>
<CAPTION>

Dollars in thousands                                    1Q98            2Q98            3Q98            4Q98            1998
------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>              <C>            <C>             <C>            <C>
Revenue:
  Microdyne Communications Technologies Inc.         $ 7,271           $ 7,396         $ 7,688         $ 12,398       $ 34,753
  Microdyne Outsourcing Inc.                           5,414             5,952           5,737            6,454         23,557
                                                     -------           -------         -------         --------       --------
Total revenue                                         12,685            13,348          13,425           18,852         58,310
Cost of goods and services provided                    7,607             7,689           8,135           12,670         36,101
                                                     -------           -------         -------         --------       --------
Gross Profit                                           5,078             5,659           5,290            6,182         22,209
Gross margin as a percentage of sales                    40%               42%             39%              33%            38%
Selling, G&A Expense                                   2,425             2,820           2,883            5,501         13,629
SG&A as a percentage of sales                            19%               21%             21%              29%            23%
Research and Development                                 397               580             599            1,331          2,907
R&D as a percentage of sales                              3%                4%              4%               7%             5%
Purchased Research and Development                      -                 -               -               4,392          4,392
                                                     -------           -------         -------         --------       --------
Earnings from Continuing Operations                    2,256             2,259           1,808           (5,042)         1,281
Operating income as a percentage of sales                18%               17%             13%             (27%)            2%
Other Expense, net                                      (228)             (186)           (154)            (417)          (985)
                                                     -------           -------         -------         --------       --------
Earnings Before Income Taxes                           2,028             2,073           1,654           (5,459)           296
Pre-tax Income as a percentage of sales                  16%               16%             12%             (29%)            1%
Provision for Income Taxes                              -                 -               -                -              -
                                                     -------           -------         -------         --------       --------
Net Earnings from Continuing Operations              $ 2,028           $ 2,073         $ 1,654          ($5,459)      $    296
Net Earnings  from continuing operations
   as a percentage of sales                              16%               16%             12%             (29%)            1%
Earnings (Loss) per share - basic                    $  0.16            $ 0.16         $  0.13          ($ 0.42)      $   0.02
Earnings (Loss) per share - diluted                  $  0.15            $ 0.16         $  0.13             -          $   0.02
Basic weighted average shares (000's)                 12,966            13,038          13,068           13,077         13,037
Diluted weighted average shares (000's)               13,390            13,201          13,103           13,077         13,235

<CAPTION>
Dollars in thousands                                     1Q97            2Q97           3Q97            4Q97            1997
------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>            <C>              <C>            <C>
Revenue:
  Microdyne Communications Technologies Inc.          $  4,786        $  6,633        $ 7,873          $ 6,948         $26,240
  Microdyne Outsourcing Inc.                             3,875           4,132          4,652            4,722          17,381
                                                      --------        --------        -------          -------         -------
Total revenue                                            8,661          10,765         12,525           11,670          43,621
Cost of goods and services provided                      4,767           6,537          7,635            6,534          25,473
                                                      --------        --------        -------          -------         -------
Gross Profit                                             3,894           4,228          4,890            5,136          18,148
Gross margin as a percentage of sales                      45%             39%            39%              44%             42%
Selling, G&A Expense                                     1,810           2,045          2,234            2,422           8,511
SG&A as a percentage of sales                              21%             19%            18%              21%             20%
Research and Development                                   359             384            409              457           1,609
R&D as a percentage of sales                                4%              4%             3%               4%              4%
                                                      --------        --------        -------          -------         -------
Earnings from Continuing Operations                      1,725           1,799          2,247            2,257           8,028
Operating income as a percentage of sales                  20%             17%            18%              19%             18%
Other Expense, net                                        (373)           (265)          (196)            (160)           (994)
                                                      --------        --------        -------          -------         -------
Earnings Before Income Taxes                             1,352           1,534          2,051            2,097           7,034
Pre-tax Income as a percentage of sales                    16%             14%            16%              18%             16%
Provision for Income Taxes                                (514)           (583)          (779)             -            (1,876)
                                                      --------        --------        -------          -------         -------
Net Earnings from Continuing Operations               $    838        $    951        $ 1,272          $ 2,097         $ 5,158
Net Earnings  from continuing operations
   as a percentage of sales                                10%              9%            10%              18%             12%
Earnings (Loss) per share - basic                     $   0.07        $   0.07        $  0.10          $  0.16         ($ 2.21)
Earnings (Loss) per share  - diluted                  $   0.06        $   0.07        $  0.10          $  0.16             -
Basic weighted average shares (000's)                   12,837          12,864         12,877           12,901          12,873
Diluted weighted average shares (000's)                 13,070          13,059         12,919           13,050          12,873
</TABLE>
The quarterly financial data for 1997 has been restated to exclude the results
of Microdyne's Network Products Division, which was discontinued in June 1997.
Restructuring costs and other costs associated with that division are not shown
in 1997.




--------------------------------------------------------------------------------
                                    PAGE 13
<PAGE>   15
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS


                                  INTRODUCTION

      The discussions of Results of Operations as well as Liquidity and Capital
Resources are grouped as follows:

CONTINUING OPERATIONS
CONSOLIDATED--represents the consolidated data of Microdyne Corporation and its
two wholly owned subsidiaries.

MCTI--represents Microdyne's operations related to the development and
manufacture of telemetry receivers, high performance products for use in signal
collection and processing systems, and high-speed data acquisition and storage
products. The products and system integration services provided by MCTI serve
the needs of the aerospace industry, satellite communications providers, and
other users of high-precision, high-reliability long-range monitoring and
control equipment. MCTI is located in Ocala, Florida and the Advanced Technology
Group is located in Gaithersburg, Maryland and Cupertino, California.

      The results of ATG for the period July 1, 1998 through September 30, 1998
have been included with those of MCTI. Apcom, Inc. designs and produces a wide
variety of high performance Radio Frequency (RF), analog and digital products
for use in signal collection and processing systems. These products are used in
SIGINT (Signals Intelligence) collection, storage, processing and geo-location
systems, telemetry reception and a variety of commercial uses including
switching systems and wireless systems testing. Celerity Systems, Inc.
manufactures highly modular high speed data acquisition, data generation, and
storage products for use in a wide range of next generation electronic test and
measurement (ET&M) equipment. Data acquisition, recording and generation
products are used in a variety of ET&M applications including telecommunications
analysis, wireless communication systems development and radar and sonar
analysis.

      The aerospace telemetry market in which Microdyne competes is in the midst
of a growth cycle. According to the U.S. Bureau of the Census, the defense
electronics and communications equipment industries, of which aerospace
telemetry is a part, grew at a combined rate of 17% to $100 billion between
calendar year-end 1995 and 1996 (based on manufacturing factory shipments). The
growth in aerospace telemetry is due to the launching or planned launch of a new
generation of satellites, a desire for more data from vehicles being tested via
telemetry coupled with increased ability to process and evaluate such data, and
an expansion of educational and international opportunities. Microdyne has
developed and is marketing products and services to serve these audiences.
Microdyne is also in the process of developing new products and expanding the
breadth of its services to these markets.

MOI--represents Microdyne's operations as a provider of outsourcing support
services. MOI provides trained technical staff and management of telephone
technical support centers, in-warranty and after-warranty repair services, and
special project staffing. MOI employees are based in Indiana, Virginia, and
California (including the staff for the new outsourced telephone technical
support facility in Southern California which opened in September 1997, but
which had begun operations elsewhere in March 1997).

      The outsourcing industry is experiencing rapid growth. According to market
research conducted by Microdyne, sales in the telephone technical support
industry more than doubled in the period between 1993 and 1997, for a compounded
annual growth rate of 19%. Such growth is a result of organizations' desire to
control costs, constrain headcount, and generally focus human and financial
resources on activities that will produce higher rates of return. As companies
focus on their core business processes, many are choosing to out-source those
services in which they do not have a core competency. Microdyne believes its
core competency in the field of outsourced telephone technical support,
in-warranty and after-warranty repair and special projects staffing can serve as
a template for becoming a provider of high-quality outsourced services to other
customers, though it can provide no assurances of success.




--------------------------------------------------------------------------------
                                    PAGE 14
<PAGE>   16
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
NETWORKING PRODUCTS--represents Microdyne's operations as a supplier of Local
Area Network (LAN) adapter cards which provide the connection between computers
and the network. Microdyne's Networking Products operations were discontinued
during June of 1997. The disposal of the Microdyne's Networking Products
Division (NPD) has been accounted for as a discontinued operation and
accordingly, its operations, including certain restructuring charges, have been
segregated and reported as discontinued operations in Microdyne's financial
statements.

                           FORWARD LOOKING INFORMATION

      The information included in this Management's Discussion and Analysis, and
elsewhere in the form 10K, contains forward-looking statements that involve
risks and uncertainties. Important factors that could cause actual results to
differ materially include: rapid changes in products and technology that may
displace products sold by Microdyne; the competitive industries within which
Microdyne operates; the Company's success in identifying, acquiring and
incorporating commercially successful technology, products or businesses, and in
identifying and taking advantage of growth opportunities; the effect on cash
flow and liquidity of differences between the expected and the actual timing of
collection of accounts receivable, uncertainty associated with certain future
events outside of Microdyne's control which could affect the adequacy of the
amount of the loss estimated for the disposal of the Networking Products
Division; dependence upon a limited customer base at MOI and several large
customers at MCTI; flucuations in call volume at the Company's outsourced
telephone support facility; limited product lines and service offerings relative
to other suppliers; contractual agreements between Microdyne and other
companies; fluctuations in the Company's quarterly results of operations and the
timing of orders from customers; and the Company's relationships with sources of
external financing, and the timing and effect of the transactions contemplated
by the recently announced merger agreement between the Company and L-3
Communications. In addition, any shortfall in revenue or earnings from the
levels expected by securities analysts could have an immediate and significant
effect on the trading price of Microdyne's common stock in any given period.

                              RESULTS OF OPERATIONS

      The following table sets forth, for the periods indicated, selected
information from Microdyne's Consolidated Statements of Operations expressed as
a percentage of revenue. Microdyne's complete financial statements and notes for
the periods indicated are included elsewhere in the form 10K.

<TABLE>
<CAPTION>
YEARS                                                                SEPTEMBER 29,        SEPTEMBER 28,       SEPTEMBER 30,
ENDED                                                                         1996                 1997                1998
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                  <C>                 <C>
Total Revenue                                                                 100%                 100%                100%
Total cost of products sold and service provided                               56%                  58%                 62%
                                                               -------------------------------------------------------------
Gross profit                                                                   44%                  42%                 38%
Operating expenses:
     Selling, general and administrative expense                               23%                  20%                 23%
     Research and development                                                   5%                   4%                  5%
      Purchased Research and development                                        0%                   0%                  7%
                                                               -------------------------------------------------------------
          Total operating expenses                                             28%                  24%                 36%
                                                               -------------------------------------------------------------
Earnings from continuing operations                                            16%                  18%                  2%
Interest and other expense, net                                               (6)%                 (2)%                (1)%
                                                               -------------------------------------------------------------
Earnings from continuing operations before taxes                               10%                  16%                  1%
Provision for income taxes                                                      4%                   4%                  0%
                                                               -------------------------------------------------------------
Net earnings from continuing operations                                         6%                  12%                  1%
                                                               -------------------------------------------------------------
Discontinued operations:

     Income (loss) from discontinued operations                              (16)%                (67)%                  0%
     Loss on disposal                                                           0%                (10)%                  0%
                                                               -------------------------------------------------------------
Net income (loss) from discontinued operations                               (16)%                (77)%                  0%
                                                               -------------------------------------------------------------
Net earnings (loss)                                                          (10)%                (65)%                  1%
                                                               =============================================================
</TABLE>


--------------------------------------------------------------------------------
                                    PAGE 15
<PAGE>   17
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------

FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 28, 1997
      In 1998, Microdyne had net income from continuing operations of $296,000
or $0.02 per share on revenues of $58.3 million, compared to net income from
continuing operations of $5.2 million or $0.40 per share on revenues of $43.6
million in 1997.

      Net income from continuing operations (excluding the acquisition of ATG)
was $5.7 million compared to $5.1 million in 1997, an increase of $.6 million.
The consolidated net income of $296,000 was the result of the following: the
Company recorded a one-time purchase accounting adjustment of $4.4 million to
write off purchased research and development costs that can not be identified
with any products currently being marketed or sold, and thus have no future
alternative use; and the acquisition of ATG resulted in a net loss (before the
purchase accounting adjustment) of $1 million for the period July 1, 1998
through September 30, 1998. The net loss for ATG was primarily due to additional
product costs previously accrued in connection with the acquisition,
lower-than-anticipated revenues during the quarter, and other expenses
associated with the acquisition. ATG results of operations are included with
those of MCTI in the Consolidated Financial Statements. The net loss of $28.4
million in 1997, or $2.21 per share, consisted of net income from continuing
operations of $5.2 million, a loss on discontinued operations of the Networking
Products Division of $29.4 million (including a restructuring charge, net of tax
effect, of $26.6 million), and a loss on disposal of the discontinued operations
of the Networking Products Division of $4.2 million.

      Revenue. Consolidated revenues from continuing operations of $58.3 million
in 1998 increased $14.7 million, or 34%, over 1997 revenues of $43.6 million.
The $14.7 million increase is comprised of a $9.6 million increase at MOI and
MCTI, which was the result of internal growth, and $5.1 million from ATG as a
result of the acquisition.

      MCTI's sales of $34.8 million represented a $8.5 million increase, or 32%,
over 1997 revenue of $26.2 million. Excluding the results of ATG, MCTI's revenue
increased $3.4 million, or 13%, to $29.6 million from $26.2 million in 1997.
Sales for MCTI increased due to improved demand for its products, which
increased $4.8 million, or 28%, to $22.4 million from $17.6 million in 1997.
System integration sales of $7.1 million decreased $1.6 million, or 18%, from
$8.7 million in 1997. Fiscal year 1997 systems integration revenues were
unusually high, however, due to the recognition of a substantial portion of the
$11 million contract with the Italian Ministry of Defense awarded during that
year. MCTI recognized $8.1 million of revenue from that contract in 1997 and
another $2.8 million in 1998. MCTI was also awarded a second contract for $4.9
million by the Italian Ministry of Defense, of which $2.8 million of revenue was
recognized in 1998. In addition, MCTI recognized revenue of approximately $1.5
million from new system integration contracts entered into in 1998. Product and
other sales represented 76% and 67% of revenue in 1998 and 1997, respectively.
System integration sales represented 24% and 33% of revenue in 1998 and 1997,
respectively.

      MOI's sales increased $6.2 million, or 36%, to $23.6 million from $17.4
million in 1997. The increase in revenue reflects continued demand for
established support services, as well as demands for technical support and
warranty work provided by MOI's new outsourcing facility in Southern California.
Revenue earned at the customer's facilities ("in-sourced" revenue), was
relatively stable at $17.0 million compared to $16.0 million in 1997. Revenue
earned at the Company's facilities ("out-sourced" revenue) represented $6.5
million in 1998 compared to $1.4 million in 1997, an increase of $5.1 million.

      Gross Profit. Consolidated gross profit as a percentage of revenue
decreased to 38% in 1998 from 42% in 1997. MCTI's gross profit as a percentage
of revenue remained relatively stable while MOI's gross profit as a percentage
of revenue decreased.

      In dollar terms, MCTI's 1998 gross profit of $17.2 million represents a
$4.0 million increase over 1997 gross profit of $13.2 million. This increase is
the result of higher revenues during the year, as well as from the gross profit
contributed by the ATG acquisition. As a percentage of revenue, gross profit
remained relatively stable at 49% during 1998 versus 50% during 1997.




--------------------------------------------------------------------------------
                                    PAGE 16
<PAGE>   18
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
      MOI's gross profit of $5.0 million remained the same for 1998 and 1997. As
a percentage of revenue, gross profit decreased to 21% in 1998 from 28% in 1997.
MOI's gross profit as a percentage of revenue is lower than the previous year
primarily due to activities at its new outsourcing facility in Southern
California. First, the new facility began operations on a limited scale during
September of 1997, with a ramp up to current utilization levels by December of
that year. The facility is currently operating at approximately 50% capacity.
Second, operational and managerial infrastructure was added during 1998 in order
properly prepare the organization to handle increased work volumes from current
and new customers, primarily at the new facility. Once the facility reaches full
capacity, overall gross profits are expected to improve.

      Selling, General and Administrative Expenses (SG&A). Consolidated SG&A
increased by 60% to $13.6 million from $8.5 million in 1997. As a percentage of
revenue, Consolidated SG&A increased from 20% in 1997 to 23% in 1998. Several
factors contributed to the overall $5.1 million increase in SG&A. First, ATG
generated $1.8 million in SG&A expenses for the period July 1, 1998 through
September 30, 1998. Second, there were $1.4 million of unusual charges included
in 1998 SG&A that did not occur in fiscal year 1997. These charges consisted of
$700,000 for severance expenses for an officer of the Company, $550,000 for
additional inventory reserves over and above the company's normal reserve
adjustments, and $187,000 for a capitalized software write-down. Excluding the
results of ATG and the unusual charges, SG&A increased $2.4 million to $10.9
million and represented 20% of revenue (excluding ATG revenue of $5.1 million)
versus 20% in 1997. Finally, the increase in dollar terms is the result of
increased marketing efforts at MOI and MCTI, as well as establishing an
infrastructure for our new outsourcing facility in Southern California. The
Company hired new executive management at MOI, including a President of MOI and
a Vice President of Sales and Marketing, as well as additional support staff to
manage the growth of this subsidiary.

      Research and Development. Research and development expense for continuing
operations increased $1.3 million to $2.9 million in 1998 from $1.6 million in
1997. $0.6 million of this increase is the result of the acquisition of ATG
during 1998. Excluding ATG, research and development was $2.3 million at during
the year, which represents an increase of $0.7 million over 1997. Also excluding
ATG, research and development remained stable at 4% of revenue in 1998 and 1997.
In dollar terms, the increase in research and development is due to MCTI's
continuing investment in new product lines and enhancement of existing products
to improve features and drive down costs.

      The $4.4 million of Purchased Research and Development on the Consolidated
Statement of Operations represents the write off of research and development
acquired from ATG that can not be identified with any existing products
currently being marketed or sold and thus was written off.

      Interest and Other Expense. Interest and Other expense in 1998 includes
interest expense associated with long-term and revolving debt outstanding during
the year, as well as capital lease obligations entered into during 1998. The
lower interest expense in 1998 was due to lower outstanding borrowings during
the majority of the year as compared to 1997. First, the Company lowered the
amount outstanding on its line of credit to $1.3 million from $6.4 million at
September 28, 1997. Second, the company borrowed $16.5 million during August of
this year to finance the purchase of ATG. Excluding the $16.5 million
acquisition loan, the amount of debt outstanding at September 30, 1998 decreased
to $5.9 million from $11.7 million at September 28, 1997. Interest expense on
the $16.5 million acquisition loan for the year included part of the month of
August and all of September, and was $0.2 million. Excluding the effect of the
acquisition, the lower outstanding debt resulted in interest expense that was
$0.2 million lower in 1998 than in 1997.

      Provision for Income Taxes. At June 30, 1997, Microdyne recorded a
valuation allowance of approximately $9.8 million against deferred tax assets,
based upon management's consideration of various factors that will contribute to
Microdyne generating taxable income in the future. Approximately $9.0 million
off that valuation remained at the end of fiscal 1997. The deferred tax assets
arose principally as a result of a net operating loss carry-forward of
approximately $28 million and $26 million as of September 28, 1997 and September
30, 1998, respectively. The income statement effect of this allowance was
charged against tax benefits associated with losses from discontinued
operations. As a result, the Company had no tax provision or benefit for the
year ending September 30, 1998. In September 1998, Microdyne reduced the
valuation allowance by approximately $1.2 million based upon a re-evaluation of
its continuing operations, leaving approximately $7.8 million in the valuation
account.



--------------------------------------------------------------------------------
                                    PAGE 17
<PAGE>   19
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
FISCAL YEARS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
      In 1997, Microdyne had net income from continuing operations of $5.1
million or $0.40 per share on revenues of $43.6 million, compared to net income
from continuing operations of $2.0 million or $0.16 per share on revenues of
$31.4 million in 1996.

      The net loss of $28.4 million in 1997, or $2.21 per share, consists of net
income from continuing operations, as noted above, a loss on discontinued
operations of the Networking Products Division of $29.4 million (including a
restructuring charge, net of tax effect, of $26.6 million) and a loss on
disposal of the discontinued operations of the Networking Products Division of
$4.2 million. In 1996, the net loss of $2.9 million, or $0.23 per share,
included net income from operations, as noted above, and a loss from
discontinued operations of $4.9 million.

      Revenue. Consolidated revenues from continuing operations of $43.6 million
in 1997 increased $12.2 million, or 39%, over 1996 revenues of $31.4 million.
This increase in revenues was the result of internal growth in each of
Microdyne's two subsidiaries.

      MCTI's sales of $26.2 million represented a $9.2 million increase, or 54%,
over 1996 sales of $17.0 million. Sales for MCTI increased as a result of the
improved demand for its product line and system integration services. Systems
integration revenue for MCTI, in particular, grew from approximately $0.8
million in 1996 to approximately $8.7 million in 1997, principally as the result
of a large systems integration contract with the Italian Ministry of Defense.

      MOI 1997 sales of $17.4 million represented a $3.0 million increase, or
20%, over 1996 sales of $14.4 million. MOI sales increased as a result of the
expansion of services provided to existing customers. In particular, the number
of in-sourced staff (staff working directly in the customer facility) increased,
as did the new services of outsourced staff (staff working for customer at a
Microdyne location) in telephone technical support (TTS).

      Gross Profit (Revenue less cost of goods and services provided).
Consolidated gross profit as a percentage of sales from continuing operations in
1997 dipped to 42% from 44% in 1996. The decrease was the result of both
subsidiaries experiencing lower gross profit as a percentage of sales. In
dollars terms, and as a result of higher sales volume, 1997 consolidated gross
profit from continuing operations increased $4.4 million to $18.2 million, a 32%
increase over 1996 gross profit of $13.8 million.

      MCTI's 1997 gross profit of $13.2 million represented a $4.0 million
increase, or 43%, over the 1996 gross profit of $9.2 million. As a percentage of
sales, gross profit declined from 54% to 50% from 1996 to 1997. The primary
factor contributing to the decline in the gross profit was the increase in
systems integration revenue, which carries a significantly lower margin than
product sales, as a percentage of the total revenues.

      MOI's gross profit of $5.0 million represented a $0.4 million increase, or
9%, over the 1996 gross profit of $4.6 million. As a percentage of sales, gross
profit of 29% in 1997 declined from 32% in 1996. Three factors were responsible
for the lower gross profit as a percentage of sales at MOI. First, a new
contract with the existing customer had lower gross profits than in the previous
contract. Second, with the new outsourced TTS facility, additional expenses such
as depreciation and rent were allocated to cost of services provided. These
expenses were not present in the prior year since there was no outsourced TTS
facility. Third, in-sourced revenue per employee did not change commensurately
with the hourly rate paid to the employee. Therefore, as more experienced
employees remained with MOI and received merit and seniority pay increases,
there was a reduction in the gross profit per in-sourced employee, until such
time as commensurate charge rate increases were negotiated with the customer.

      Selling, General and Administrative Expenses (SG&A). Consolidated SG&A for
continuing operations as a percentage of revenue decreased from 23% in 1996 to
20% in 1997. This decrease is the result of a reduction in corporate
headquarters expenditures as a percentage of sales and a reduction in the
advertising expenditures as well as administrative staff at MCTI. Consolidated
SG&A for continuing operations increased 18% to $8.5 million from $7.2 million
in 1996. This increase is primarily the result of increased general management
and human resources expenses for MOI and selling expenses for MCTI. Corporate
SG&A allocated to the discontinued Networking Products Division was $0.9 million
in 1997 and $3.6 million in 1996.



--------------------------------------------------------------------------------
                                    PAGE 18
<PAGE>   20
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
      Research and Development. Research and development expense for continuing
operations increased to $1.6 million in 1997 from $1.5 million in 1996 but
decreased as a percentage of revenue to 3.7% from 4.7%. The percentage decrease
is due principally to relatively stable R&D costs at MCTI spread over a higher
sales base.

      Interest and Other Expense. Other expense in both 1997 and 1996 includes
interest expense associated with outstanding borrowings against Microdyne's line
of credit. The lower interest expense in 1997 was due to lower outstanding
borrowings as a result of the discontinuance of the Networking Products
Division. The amount of debt outstanding on the balance sheet declined from
$25.6 million in 1996 to $11.7 million in 1997. The lower outstanding debt led
to the reduction in interest expense of $0.8 million, or 46%, for the year ended
September 28, 1997. In addition, interest expense directly attributable to the
Networking Products division was allocated to discontinued operations and is not
included in the other expense from continuing operations. For 1997, $0.4 million
of interest was directly charged to discontinued operations. In 1996, the amount
charged to discontinued operations was $0.3 million.

      Provision for Income Taxes. The Company accrued a benefit from income
taxes of $3.7 million in 1997 versus a benefit for income taxes of $2.0 million
in 1996. In 1997, the tax benefit of $3.7 million includes a tax provision for
continuing operations of $1.9 million, a tax benefit from discontinued
operations of $5.0 million, and a benefit from the disposal of discontinued
operations of $0.6 million. In 1996, the tax benefit of $2.0 million includes a
tax provision for continuing operations of $1.2 million and a tax benefit from
discontinued operations of $3.2 million. The benefits were due to Microdyne's
Consolidated net loss for both the years, which were the result of losses
stemming from the operations and disposal of the Networking Products division.

During June 1997, Microdyne recorded a valuation allowance of approximately $9.8
million against deferred tax assets, based upon management's consideration of
various factors which will contribute to Microdyne generating taxable income in
the future. The deferred tax assets arose principally as a result of the
approximately $28 million in net operating loss carry-forward as of September
28, 1997. The income statement effect of this allowance was charged against tax
benefits associated with losses from discontinued operations. In September 1997,
Microdyne reduced the valuation allowance by approximately $0.8 million based
upon a re-evaluation of its continuing operations, which included considering
several new contracts and the level of fourth quarter earnings generated by its
continuing lines of business. No such valuation allowance was considered
necessary in 1996.

DISCONTINUED OPERATIONS
      In March 1997, Microdyne restructured its Networking Products Division by
reducing the amount of product held by distributors and realigning its product
offerings with a new line of low-cost, high-performance adapter cards. The
realignment of the Company's product lines included abandoning certain products
and technology acquired during 1994 through 1996, resulting in the write off of
capitalized acquisition costs and a write down in the net realizable value of
inventory. The financial statement impact of the above actions was to record a
restructuring charge during 1997, which is reflected in the operating loss of
the discontinued operation, of $26,607,000, net of tax effect, which was
comprised of the following:

<TABLE>
     <S>                                                                      <C>
     Write off of abandoned technology and product rights                     $  14,539,000
     Write down of inventories                                                    9,394,000
     Charges associated with product returns and distribution credits,
         net of release of associated reserves                                    2,674,000
                                                                              -------------
                                                                              $  26,607,000
                                                                              =============
</TABLE>

      In the June 1997, the Company elected to exit the networking products
business and to discontinue its Networking Products division. In association
with the decision, the company recorded a charge of approximately $4,222,000
representing the anticipated loss on disposal, net of tax effects, of the
division, including anticipated operating losses until the division is closed or
sold. Management believes the estimate for the loss on disposal of the
discontinued operations is adequate based upon the presently available
information.






--------------------------------------------------------------------------------
                                    PAGE 19
<PAGE>   21
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
      The Condensed Statement of Operations relating to the discontinued
operations for the years ended September 29, 1996, September 28, 1997, and
September 30, 1998 are presented below.

<TABLE>
<CAPTION>
    (In thousands)                                    1996                 1997                 1998
    -------------------------------------------------------------------------------------------------------
<S>                                               <C>                  <C>                      <C>
    Revenue                                        $  67,695            $  24,350                $  --
    Costs and Expenses                                75,917               58,683                   --
                                             -------------------- -------------------- --------------------
    Income (loss) before income taxes                 (8,222)             (34,333)                  --
    Income tax (provision) benefit                     3,249                4,952                   --
                                             -------------------- -------------------- --------------------
    Net income (loss)                              $  (4,973)          $  (29,381)               $  --
                                             ==================== ==================== ====================
</TABLE>



                         LIQUIDITY AND CAPITAL RESOURCES

      During the past three years, Microdyne has financed its operations
principally through internally generated funds. However, Microdyne has secured
external financing in connection with acquisitions and repurchases of common
stock.

      On August 11, 1998 the Company negotiated a loan agreement with
NationsBank, N.A. The agreement provided for a 16.5 million acquisition loan
described below, as well as a $10 million line of credit facility payable on
October 31, 2000. The Company previously had a relationship with Crestar Bank
for a $9 million revolving line of credit facility, which the Company repaid the
outstanding borrowings totaling $4.5 million with the funds available under the
new NationsBank credit facility.

      External financing has been primarily provided through bank borrowings. As
of September 30, 1998, Microdyne had $1.3 million of bank debt under a revolving
line of credit facility (see Note G to the Notes to the Consolidated Financial
Statements). On September 30, 1998, Microdyne had $1.0 million of cash and $8.3
million available for borrowing under its revolving credit facility. Microdyne
is required to repay its bank borrowings by October 31, 2000, unless such
agreements are renewed. Microdyne believes that based on its current forecast of
cash generation it will meet that schedule.

      On August 11,1998 the Company secured a $16.5 million acquisition loan for
the purchase of ATG (see Note G to the Notes to the Consolidated Financial
Statements). As of September 30, 1998, the amount outstanding was $16.5 million
with principal payments due in fixed monthly payments of $275,000 beginning
October 1999 through October 31, 2004. Microdyne believes that based on its
current forecast of cash generation it will be able to adhere to the payment
schedule.

           In April 1996, Microdyne utilized cash and notes to purchase from
Novell, Inc. (Novell) the exclusive, royalty-free perpetual right to market
certain hardware and related technology which were previously sold by Microdyne
under license from Novell, and to convert certain accounts payable into notes
payable. As of September 30, 1998, notes payable due Novell totaled $3.3
million, of which $1.2 million has been classified as a short-term obligation
and $2.1 million as a long-term obligation on the September 30, 1998 Balance
Sheet.

           During fiscal 1998 net cash provided by operations, net of the affect
of the acquisition of ATG, was $9.9 million. Cash provided by operations was
primarily the result of improved collections of accounts receivable and the
collection of a substantial portion of the previously unbilled accounts
receivable related to the Company's contract with the Italian Ministry of
Defense. Also contributing to the cash provided by operations was a decrease in
inventory, a decrease in income tax receivable, and an increase in accounts
payable and other accruals. Cash used in investing activities was $20.1 million
of which $17.1 relates to the Company's acquisition of ATG. The Company invested
an additional $3.0 million for property and equipment primarily relating to
additional equipment for the MOI facility in California. Microdyne has no
material commitments for future capital expenditures. Cash provided by financing
activities was $10.0 million, representing the proceeds from the issuance of
long-term debt of $16.5 million, payments on bank debt, notes payable, and
capital lease obligations of $8.1 million, proceeds from a sales-lease back
transaction of $1.2 million, and proceeds of $0.4 million from the issuance of
common stock.


--------------------------------------------------------------------------------
                                    PAGE 20
<PAGE>   22
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------


      Microdyne believes its available cash, funds generated from operations,
and funds available under its credit facilities should be sufficient to finance
its continuing operations in fiscal year 1999. In addition, Microdyne may from
time to time consider the acquisition of businesses, products, or technologies
that may require additional funds.


INFLATION
           For the past three years inflation has not had a significant impact
on Microdyne's operations.




YEAR 2000 CONVERSION
           Microdyne is currently evaluating the impact of the year 2000 on
operations, suppliers and customers. The Company has already begun to upgrade
its internal financial and operating systems to bring them into compliance with
year 2000 requirements. We are also in the process of verifying whether our
current products are year 2000 compliant. We expect to complete our evaluation,
testing, and implementation of our Year 2000 plan by the end of fiscal year
1999. Based on our evaluation to date, the Company does not expect the costs for
compliance to be material to the results of operations or to have an impact on
our liquidity or capital resources. Although the Company expects to be in
compliance with Year 2000 requirements on or before December 31, 1999, the
Company can not predict that third party systems will be year 2000 compliant or
that failure to achieve compliance will not have a material impact on
operations. However, nothing has come to the attention of the Company at this
point in our evaluation that would indicate a material impact on the results of
operations of the Company.



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


The Company has a Line of Credit agreement with a commercial bank with a limit
of $9.6 million at September 30, 1998. As of September 30, 1998 and September
28, 1997 the amount outstanding under the line of credit was $1.3 million and
$6.4 million, respectively, with an interest rate of 6.7% and 9.5%. Interest is
payable monthly and is variable based on either: 1) the London Inter-bank Offer
Rate (LIBOR) plus a premium, 2) the Federal Funds rate plus 0.50% plus a
premium, or 3) the Prime Rate plus a premium. The Line of Credit exposure to
market rate fluctuations is limited due to the interest rate paid on a monthly
basis being variable and based on current market conditions.

At September 30, 1998, the Company has a $16.5 million acquisition loan with an
interest rate of 6.9% at September 30, 1998. Interest is payable monthly at
either LIBOR plus a premium, the Federal Funds Rate plus 0.50% plus a premium,
or the Prime Rate plus 0.50%. The loan exposure to market rate fluctuations is
limited due to the interest rate paid on a monthly basis being variable and
based on current market conditions.

The Company does not engage in hedging or derivative transactions with respect
to the interest paid on the line of credit agreement or other obligations.










--------------------------------------------------------------------------------
                                    PAGE 21
<PAGE>   23
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA











                              MICRODYNE CORPORATION
                 FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED
         SEPTEMBER 29, 1996, SEPTEMBER 28, 1997, AND SEPTEMBER 30, 1998


                                TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                                                       Page
                                                                       ----

<S>                                                                      <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                       22


CONSOLIDATED FINANCIAL STATEMENTS

          CONSOLIDATED BALANCE SHEETS                                    23

          CONSOLIDATED STATEMENTS OF OPERATIONS                          24

          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                25

          CONSOLIDATED STATEMENTS OF CASH FLOWS                          26

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     27
</TABLE>












--------------------------------------------------------------------------------
                                    PAGE 22
<PAGE>   24
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------












               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
Microdyne Corporation

We have audited the accompanying consolidated balance sheets of Microdyne
Corporation (the Corporation) as of September 30, 1998 and September 28, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended September 30, 1998.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Microdyne
Corporation as of September 30, 1998 and September 28, 1997, and results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.


GRANT THORNTON LLP



Vienna, Virginia
November 3, 1998








--------------------------------------------------------------------------------
                                    PAGE 23
<PAGE>   25
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
                              MICRODYNE CORPORATION
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                September 28,        September 30,
                                                                    1997                1998
                                                                -------------        -------------
                                                                          (in thousands)
<S>                                                           <C>                   <C>
    ASSETS
    CURRENT ASSETS
        Cash                                                   $    1,056           $     994
        Accounts receivable, net                                   17,327              17,672
        Inventories                                                 4,560               7,397
        Income tax receivable                                       1,022               1,517
        Prepaid expenses and deposits                                 391                 324
        Current assets of discontinued operations                   2,442                 245
        Deferred income tax asset                                   4,056               4,103
                                                               ----------           ---------
            Total current assets                                   30,854              32,252

    PROPERTY AND EQUIPMENT, net                                     3,225               5,849
    GOODWILL                                                            -               5,467
    PRODUCT ACQUISITION COST                                            -                 825
    DEFERRED INCOME TAX ASSET                                         123                 128
    NONCURRENT ASSETS
            OF DISCONTINUED OPERATIONS                                112                   8
    OTHER ASSETS                                                      227                  92
                                                               ----------           ---------

            Total assets                                       $   34,541           $  44,621
                                                               ==========           =========

    LIABILITIES AND STOCKHOLDERS' EQUITY
    CURRENT LIABILITIES
           Current maturities of long-term obligations         $    2,040           $   1,636
           Accounts payable - trade                                 3,094               3,900
           Accrued liabilities                                      6,135               8,871
           Current liabilities of discontinued operations           5,172                   -
                                                               ----------           ---------
               Total current liabilities                           16,441              14,407

    LONG-TERM OBLIGATIONS, net of current maturities                9,698              20,821
    COMMITMENTS AND CONTINGENCIES                                       -                   -
    STOCKHOLDERS' EQUITY
         Common stock, $.10 par value, authorized 50,000,000,
            shares 12,904,313 shares, issued and outstanding
            at September 28, 1997 and 13,103,891 shares issued
            and Outstanding at September 30, 1998                   1,290               1,310
         Additional paid-in capital                                10,332              11,007
         Retained earnings (deficit)                               (3,220)             (2,924)
                                                               ----------            --------
               Total stockholders' equity                           8,402               9,393
                                                               ----------            --------

               Total liabilities and stockholders' equity      $   34,541           $  44,621
                                                               ==========           =========
</TABLE>

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




--------------------------------------------------------------------------------
                                    PAGE 24
<PAGE>   26
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------




                              MICRODYNE CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                                      Year ended
                                                              September 29,          September 28,         September 30,
                                                                  1996                    1997                 1998
                                                              -------------          -------------         ------------
                                                                                     (In thousands)

<S>                                                            <C>                   <C>                  <C>
Revenue:
    Microdyne Communications Technologies Inc.                   $  17,033            $  26,240            $  34,753
    Microdyne Outsourcing Inc.                                      14,426               17,381               23,557
                                                                 ---------           ----------            ---------
        Total Revenue                                               31,459               43,621               58,310
Cost of products sold and service provided:
    Microdyne Communications Technologies Inc.                       7,872               13,098               17,575
    Microdyne Outsourcing Inc.                                       9,829               12,375               18,526
                                                                 ---------           ----------            ---------
Total cost of products sold and service provided                    17,701               25,473               36,101
                                                                 ---------           ----------            ---------
     Gross profit                                                   13,758               18,148               22,209
Operating expenses:
     Selling, general and administrative expense                     7,189                8,511               13,629
     Research and Development                                        1,466                1,609                2,907
     Purchased research and development                                -                      -                4,392
                                                                 ---------           ----------            ---------
          Total operating expenses                                   8,655               10,120               20,928
                                                                 ---------           ----------            ---------

Earnings from continuing operations                                  5,103                8,028                1,281
Interest and other expense, net                                     (1,831)                (994)                (985)
                                                                 ---------           ----------            ---------
          Earnings from continuing operations
           before income taxes                                       3,272                7,034                  296
Provision for income taxes:
     Current                                                         1,104                    -                    -
     Deferred                                                          139                1,876                    -
                                                                 ---------           ----------            ---------

        Net earnings from continuing operations                      2,029                5,158                  296
                                                                 ---------           ----------            ---------

Discontinued operations:
    Loss from discontinued operations, net
    of tax effect of $3,249 and $4,952
    respectively                                                    (4,973)             (29,381)                   -
    Loss on disposal, net of tax effect of $598                          -               (4,222)                   -
                                                                 ---------           ----------
        Net loss from discontinued operations                       (4,973)             (33,603)                   -
                                                                 ---------           -----------           ---------

Net (loss) earnings                                              $  (2,944)          $  (28,445)           $     296
                                                                 =========           ==========            =========

Basic earnings per share, continuing operations                  $    0.16           $     0.40            $    0.02
                                                                 =========           ==========            =========

Basic loss per share, discontinued operations                    $   (0.39)          $    (2.61)           $       -
                                                                 =========           ==========            =========

Basic (loss) earnings per share                                  $   (0.23)          $    (2.21)           $    0.02
                                                                 =========           ==========            =========

Weighted average shares outstanding, basic                          12,811               12,873               13,037


Diluted earnings per share, continuing operations                        -                    -            $    0.02
                                                                                                           =========
Diluted loss per share, discontinued operations                          -                    -                    -
                                                                                                           $    0.02
Diluted earnings per share                                               -                    -            =========


Weighted average shares outstanding, diluted                        12,811               12,873               13,235
</TABLE>

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




--------------------------------------------------------------------------------
                                    PAGE 25
<PAGE>   27
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------






                              MICRODYNE CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

    Years ended September 29, 1996, September 28, 1997 and September 30, 1998

<TABLE>
<CAPTION>
                                                             Common Stock
                                                     ----------------------------       Additional       Retained
                                                     Number of                            paid-in        earnings
                                                      shares           Par Value          capital        (deficit)
                                                     ----------        ---------        ----------       ---------
                                                                             (in thousands)

<S>                                                      <C>            <C>               <C>               <C>
Balance, October 1, 1995                                  12,790         $   1,279         $  10,040         $  28,169
Issuance of stock associated with
    Stock options                                             20                 2                71                 -
Issuance of stock associated with
    stock purchase plan                                       22                 2               163                 -

Adjustment to tax benefit from option exercises                -                 -              (258)                -
Net loss                                                       -                 -                 -            (2,944)
                                                          ------         ---------         ---------         ----------
Balance, September 29, 1996                               12,832         $   1,283         $  10,016         $  25,225
Issuance of stock associated with
    stock options                                             50                 5               219                 -
Issuance of stock associated with
    stock purchase plan                                       22                 2                97                 -
Net loss                                                       -                 -                 -           (28,445)
                                                          ------         ---------         ---------         ----------
Balance, September 28, 1997                               12,904         $   1,290         $  10,332         $  (3,220)
Issuance of stock associated with
    stock options                                            183                18               609                 -
Issuance of stock associated with
    stock purchase plan                                       17                 2                66                 -
Net earnings                                                   -                 -                 -               296
                                                          ------         ---------         ---------         ---------
Balance, September 30, 1998                               13,104         $   1,310         $  11,007         $  (2,924)
                                                          ======         =========         =========         =========
</TABLE>

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




--------------------------------------------------------------------------------
                                    PAGE 26
<PAGE>   28
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
                              MICRODYNE CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                  Sept. 29,          Sept. 28,       Sept. 30,
                                                                                    1996               1997            1998
                                                                               --------------     --------------  --------------
                                                                                                  (in thousands.)

<S>                                                                               <C>             <C>                <C>
Cash flows from operating activities:
     Net (loss) income                                                            $  (2,944)      $   (28,445)         $    296

     Adjustments to reconcile net (loss) income to net cash from operating
          activities:

              Depreciation and amortization                                             550               606             1,634
              Loss on discontinued operations                                         4,973            33,603                 -
              Purchased research and development                                          -                 -             4,392
              Changes in assets and liabilities, net of effect of
               discontinued operations and acquisition of ATG
                  (Increase) decrease  in accounts receivable                          (431)           (7,800)            3,770
                  (Increase) decrease in inventories                                   (270)             (956)            1,140
                  (Increase) decrease in prepaid expenses                               (91)               (7)              112
                  Decrease (increase) in other assets                                   111              (104)              174
                  (Increase) decrease in income tax receivable                         (640)              924               636
                  (Increase) decrease in deferred income tax asset                     (224)           (3,013)               72
                  Increase in accounts payable and other accruals                       380             5,456               630
                                                                                   --------        ----------          --------
                     Net cash provided by continuing operations                       1,414               264            12,856
                     Net cash (used in) provided by discontinued operations          (9,342)           13,978            (2,871)
                                                                                   --------        ----------          --------
                                                                                     (7,928)           14,242             9,985
Cash flows from investing activities:
     Payment for acquisition of ATG                                                       -                 -           (17,088)
     Additions to property and equipment                                               (243)           (1,380)           (3,002)
                                                                                   --------        ----------          --------
                     Net cash used in investing activities                             (243)           (1,380)          (20,090)

Cash flows from financing activities:
     Net borrowings (payments) on revolving bank debt                                10,236            (6,676)           (5,103)
     Payments on notes payable and capital lease obligations                         (4,841)           (7,244)           (2,959)
     Proceeds from issuance of long-term debt                                             -                 -            16,500
     Proceeds from sales-lease back transaction                                           -                 -             1,227
     Issuance of common stock                                                           238               323               378
     Tax (adjustment) associated with exercise of stock options                        (258)                -                 -
                                                                                   --------        ----------          --------
                     Net cash provided by (used in) financing activities              5,375           (13,597)           10,043

Net decrease in Cash                                                                 (2,796)             (735)              (62)
Cash at beginning of period                                                           4,587             1,791             1,056
                                                                                   --------        ----------          --------
Cash at end of period                                                              $  1,791             1,056          $    994
                                                                                   ========        ==========          ========
</TABLE>

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




--------------------------------------------------------------------------------
                                    PAGE 27
<PAGE>   29
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
                              MICRODYNE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 1998

NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.    NATURE OF OPERATIONS

      Microdyne Corporation's continuing business is comprised of two wholly
owned subsidiaries. Its Microdyne Communications Technologies Inc. (MCTI)
subsidiary, which includes MCTI Acquisition Corporation, manufactures and sells
aerospace telemetry receivers and ancillary devices, and provides systems
integration services. Its Microdyne Outsourcing Inc. (MOI) subsidiary provides
outsourced services including telephone technical support and warranty and
product repair. The Company's disposal of its Networking Products division is
described in note O.

      On August 11, 1998 the Company, through its wholly owned subsidiary MCTI
Acquisition Corporation, acquired all of the outstanding stock of Apcom, Inc.
(Apcom), and Celerity Systems Inc. (Celerity) as well as certain assets and
liabilities of two other affiliated companies Acceleration Systems, Inc. and
Digital Telcom for consideration of $16 million plus a contingent earnout
payment of $1 million. See note B - Acquisition. The Company refers to the
acquired companies as the Advanced Technology Group (ATG). ATG provides hardware
development, design, and manufacturing including wideband digital receiving and
processing equipment, signal generators, and recording devices for the
intelligence and surveillance communities. ATG financial results for the period
July 1, 1998 through September 30, 1998 have been included with those of
Microdyne Communications Technologies Inc. in the Consolidated Financial
Statements.

2.    PRINCIPLES OF CONSOLIDATION

      The consolidated financial statements include Microdyne Corporation,
Microdyne Ltd., MCTI Acquisition Corporation, and Microdyne U.K.. All
significant inter-company amounts have been eliminated in consolidation.

3.    REVENUE RECOGNITION

      Service revenue is recognized as service is provided. Revenue from the
manufacture of aerospace telemetry products and systems is recognized using the
percentage-of-completion method where progress is measured based on costs
incurred to date as compared to total expected costs. Estimated losses on
aerospace telemetry contracts, if any, are recognized when they are identified.

      The Company provides terms of net 30 days for most products its sells. On
certain products, these terms may be extended at the discretion of management.

      The Company's business activity is geographically diverse, with sales
within the United States as well as in foreign countries. The Company's exposure
to credit risk associated with nonperformance of these customers in fulfilling
its contractual commitment is limited to the contractual amount of the
receivable.

4.    INVENTORIES

      Inventories are stated at the lower of cost or market. Inventories are
standard-cost based using a FIFO flow assumption, with such standards reviewed
periodically and adjusted as appropriate.




--------------------------------------------------------------------------------
                                    PAGE 28
<PAGE>   30
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
5.    PROPERTY AND EQUIPMENT

      Property and equipment are stated at cost and are depreciated or
amortized using the straight-line method over the following estimated useful
lives:
<TABLE>
<S>                                                    <C>
                     Machinery and equipment                                          3-10 years
                     Buildings                                                          20 years
                     Furniture and fixtures                                            3-5 years
                     Automobiles                                                       3-5 years
                     Leasehold improvements            Shorter of term of lease or life of asset
</TABLE>

6.         FISCAL YEAR

           On December 29, 1997, the Company changed its fiscal year from a
52/53 week fiscal year ending on the Sunday closest to September 30 to a 365-day
fiscal year ending on September 30. Therefore, fiscal years 1996, 1997 and 1998
ended on September 29, 1996, September 28, 1997 and September 30, 1998,
respectively. All references to years relate to fiscal years rather than
calendar years.

7.         USE OF ESTIMATES

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

8.         CASH AND CASH EQUIVALENTS

           For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.

9.         STOCK OPTIONS

           The company accounts for the value of stock options granted in
accordance with Accounting Principles Board Opinion 25 (APB 25), whereby if
stock options exercise prices are set at fair market value or above at the date
of grant, no compensation expense is recognized at that date.

           The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," effective for fiscal years that begin after December 15, 1996.
The new standard encourages all entities to adopt a fair value based method of
accounting for all employee stock option plans. Under this method, compensation
cost is measured at the grant date based on the value of the stock option award
and is recognized over the service period, which is usually the vesting period.
Optionally, a company may continue to use the intrinsic value method, as
described by APB 25, that measures compensation costs only to the extent that
the option price is lower than the quoted market price of the stock at the date
of the award. In fiscal year 1997, the Company elected to continue the
application of Opinion 25, but will comply with the pro forma disclosures of net
income, and earnings per share, as if the fair value based method of accounting
defined in SFAS 123 had been applied.

10.   RECLASSIFICATIONS

           Previously, the Company differentiated revenue and costs of products
sold and services provided by product and service. On April 1, 1998, the Company
began presenting revenue and costs of products sold and services provided by
each wholly owned subsidiary. Therefore, the Consolidated Statements of
Operations for the years ended 1996 and 1997 have been restated to conform to
the 1998 presentation.




--------------------------------------------------------------------------------
                                    PAGE 29
<PAGE>   31
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
NOTE B -  ACQUISITION

      On August 11, 1998, the Company, through its wholly owned subsidiary MCTI
Acquisition Corporation, acquired all of the outstanding stock of Apcom, Inc.
(Apcom) and Celerity Systems Inc. (Celerity), together with certain assets and
liabilities of their affiliated companies Acceleration Systems, Inc. and Digital
Telcom, Inc. (together known as ATG) for consideration of $16 million. Apcom
focuses on the intelligence and surveillance communities for the US Government
providing hardware design and system integration, and wideband digital receiving
and processing equipment. Celerity focuses on hardware development and
manufacturing in support of the Government business being targeted by Apcom and
commercial marketing and sales of the associated equipment. Celerity designs and
manufactures signal generators, recording devices, and high speed mixed signal
test systems.

In addition to the purchase price, the Company incurred approximately $1.3
million for certain acquisition related expenses that are being considered part
of the purchase price. The purchase price also included a contingent earnout
payment of $1 million payable upon the acquired companies achieving a minimum
operating income in fiscal year 1999. The company will incur the liability for
the earnout payment once the minimum operating income has been achieved. The
acquisition was accounted for under the purchase method of accounting for
business combinations and, accordingly, the results of operations are included
in the financial statements as of the effective date of acquisition, July 1,
1998. ATG's results of operations are included with those of MCTI in the
Consolidated Financial Statements. Operations of ATG will be run in conjunction
with those of MCTI. The assets and liabilities were recorded based upon their
fair values at the date of acquisition.

      The Company has allocated the excess purchase price of $10.9 million over
the fair value of net tangible assets acquired to goodwill and purchased
research and development. Goodwill consisted of $5.5 million of the excess
purchase price and will be amortized on a straight-line basis over 25 years.
Purchased research and development represents $5.4 million of the excess
purchase price. Of this purchased research and development, $1 million has been
identified with existing products and will be amortized over the expected life
of those products not to exceed five years. The balance of the purchased
research and development of $4.4 million, can not be identified with any
products currently being marketed and sold, and thus has no future alternative
use. Therefore, the Company has expensed the amount of the purchase price
allocated to purchased research and development of approximately $4.4 million to
operations as of the date of the acquisition in accordance with generally
accepted accounting principles.

      The following unaudited pro forma information presents the revenue, net
income, and earnings per common share from the combination of the operations of
the Company and the acquisition of ATG. The pro forma information is provided as
if the acquisition had occurred at the beginning of both the fiscal year of the
purchase and the immediate preceding fiscal year. The pro forma information is
provided for informational purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred if
the combination occurred at the beginning of each fiscal year presented, nor
does it necessarily reflect the future results of operations of the combined
entity.


<TABLE>
<CAPTION>
                                                                       Year ended:
                                                -----------------------------------------------------------
                                                       September 28, 1997          September 30, 1998

<S>                                                        <C>                         <C>
Revenue                                                    $  59,524                    $ 73,538

Net (loss) income                                          $ (28,312)                   $    946

(Loss) earnings per common share, basic                    $   (2.20)                   $   0.07

Basic weighted average shares                                 12,873                      13,037
</TABLE>





--------------------------------------------------------------------------------
                                    PAGE 30
<PAGE>   32
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
NOTE C  - ACCOUNTS RECEIVABLE

Accounts receivable are comprised of the following:

<TABLE>
<CAPTION>
                                                               As of                 As of
                                                         September 28, 1997    September 30, 1998
                                                         ------------------    ------------------
                                                                      (in thousands)
<S>                                                            <C>                  <C>
             Commercial and foreign governments
             Billed                                            $  3,885             $  4,064
             Unbilled                                            10,528                7,492
             Other                                                   -                   906
                                                                 ------                -----
                                                                 14,413               12,462
             U.S. Government
             Billed                                               1,298                1,945
             Unbilled                                             1,616                3,365
                                                                  -----                -----
                                                                  2,914                5,310
             Less: Allowance for doubtful accounts                    -                 (100)
                                                                                        ----
                                                               $ 17,327              $17,672
                                                               ========              =======
</TABLE>

           Included in the unbilled accounts receivable at September 28, 1997
and September 30, 1998 is approximately $8.0 million and $1.8 million,
respectively associated with revenue recognized on the Company's contracts with
the Italian Ministry of Defense. The Company expects to invoice the customer
early in fiscal year 1999 for unbilled amounts as of September 30, 1998.
Included in other are notes receivables from officers, see note L.



           Following is a table depicting the activity in the Company's
allowance for doubtful accounts and other related accounts receivable reserves
for the years ended:

<TABLE>
<CAPTION>
                                                      September 29,   September 28,  September 30,
                                                           1996           1997            1998
                                                           ----           ----            ----
                                                                     (in thousands)
<S>                                                       <C>           <C>            <C>
           Beginning balance                              $    -         $    -         $     -
           Addition to provision from acquisitions             -              -             100
           Provision charged to operations                     1              -               -
           Amounts written off                                (1)             -               -
                                                          ------         ------         -------
           Ending balance                                 $    -         $    -         $   100
                                                          ======         ======         =======
</TABLE>



NOTE D - INVENTORIES

Inventories are comprised of the following:

<TABLE>
<CAPTION>
                                                   As of                 As of
                                             September 28,1997     September 30,1998
                                             -----------------     -----------------
                                                          (in thousands)

<S>                                                <C>                    <C>
           Raw materials                           $ 2,928                $ 5,486
           Work-in-process                           1,715                  2,935
           Finished goods                              685                    709
                                                   -------                -------
                                                     5,328                  9,130
           Less reserves for obsolescence             (768)                (1,733)
                                                   -------                -------
                                                   $ 4,560                $ 7,397
                                                   =======                =======
</TABLE>





--------------------------------------------------------------------------------
                                    PAGE 31
<PAGE>   33
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
The following is a table depicting the activity in the Company's reserve for
obsolescence for the years ended:

<TABLE>
<CAPTION>
                                                      September 29,    September 28,     September 30,
                                                          1996             1997              1998
                                                          ----             ----              ----
                                                                        (in thousands)
<S>                                                   <C>               <C>                <C>
          Beginning balance                            $  524            $   556            $  768
          Increase in reserves
             Addition to reserves from
             acquisition                                   -                  -               334
             Provision charged to operations              32                212               631
                                                      ------            -------          --------
          Ending balance                               $  556            $   768          $  1,733
                                                       ======            =======          ========
</TABLE>



NOTE E - PROPERTY AND EQUIPMENT

Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
                                                               As of               As of
                                                         September 28,1997    September 30,1998
                                                         -----------------    -----------------
                                                                     (in thousands)
<S>                                                         <C>                    <C>
          Machinery and equipment                            $    4,264              $  7,382
          Buildings and land                                      1,879                 1,852
          Furniture and fixtures                                    692                 1,157
          Leasehold improvements                                    307                   943
                                                             ----------              --------
                                                                  7,142                11,334
          Accumulated depreciation and amortization              (3,917)               (5,485)
                                                             ----------              --------
                                                             $    3,225               $ 5,849
                                                             ==========               =======
</TABLE>

NOTE F - ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
                                                       As of                       As of
                                                 September 28,1997           September 30,1998
                                                 -----------------           -----------------
                                                                  (in thousands)
<S>                                                 <C>                            <C>
         Inventory purchases                          $  2,604                       $  2,294
         Commissions and bonuses                         1,552                          2,204
         Payroll and payroll taxes                       1,111                          1,473
         Vacation                                          405                            641
         Acquisition costs                                   -                            635
         Separation agreement-  See note I                   -                            700
         Other                                             463                            924
                                                      --------                       --------
                                                      $  6,135                       $  8,871
                                                      ========                       ========
</TABLE>




--------------------------------------------------------------------------------
                                    PAGE 32
<PAGE>   34
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
NOTE G - LONG-TERM OBLIGATIONS

Long-term obligations consists of the following as of:
<TABLE>
<CAPTION>
                                                                                     September 28,1997        September 30,1998
                                                                                     -----------------        -----------------
                                                                                                 (in thousands)
<S>                                                                                       <C>                    <C>
Amounts outstanding on a Line of Credit with a limit of $9.6 million at
September 30, 1998. Under the terms stipulated under the Company's present
Credit Agreement, the amount available on this Line of Credit is calculated as
the lesser of: the Borrowing Base or $10.0 million as of August 11, 1998 until
October 31, 2000. Borrowing availability for the Line of Credit was $8.3 million
at September 30, 1998. The Borrowing Base Loans (defined as the sum of
outstanding balances on the Line of Credit and all letters of credit) are
collateralized by a security interest in the Company's accounts receivable,
inventories, equipment, land and buildings. Under the Credit Agreement in place
at September 30, 1998, interest was payable monthly at either: 1) the London
Inter-bank Offer Rate (LIBOR) plus a premium that ranged from 1.0% to 2.35%, 2)
the Federal Funds Rate plus 0.50% plus a premium that ranged from 0.00% to
0.375%, or 3) the Prime Rate plus a premium that ranged from 0.00% to 0.375%. At
September 30, 1998 the interest rate was 6.7%. The present Credit Agreement
expires on October 31, 2000. The Credit Agreement as amended contains certain
restrictive covenants with which the Company had complied as of
September 30, 1998.                                                                        $  6,404               $  1,300


Amounts outstanding on a $16.5 million Acquisition Loan. As of September 30,
1998, principal was due in fixed monthly payments of $275,000 beginning October
1999 through October 31, 2004. Under the Credit Agreement in place at September
30, 1998, interest was payable monthly at either the London Inter-bank Offer
Rate (LIBOR) plus a premium that ranged from 1.0% to 2.50%, the Federal Funds
Rate plus 0.50%, or the Prime Rate plus 0.50%. At September 30, 1998 the
interest rate was 6.9%.                                                                           -                 16,500


Amounts outstanding on a $5.8 million acquisition note. Interest is 8% with
principal and interest of $118,000 to be paid monthly  from May 1997 through
April 2001                                                                                    4,399                  3,295


Amounts outstanding on a $3.0 million accounts payable financing note. Interest
is 8% with principal and interest of $137,000 to be paid monthly from May 1997
through April 1998                                                                              935                      -

Other (see Note I - Capital and Operating Lease Commitments)                                      -                  1,362
                                                                                           --------               --------
                                                                                             11,738                 22,457
Less current portion                                                                         (2,040)                (1,636)
                                                                                           --------               --------
                                                                                           $  9,698               $ 20,821
                                                                                           ========               ========
</TABLE>
Long-term debt is due as follows:

           Year ending
<TABLE>
<CAPTION>
            <S>                                        <C>
            September 30, 1999                         $   1,636
            September 30, 2000                             5,070
            September 30, 2001                             5,817
            September 30, 2002                             3,320
            September 30, 2003                             3,314
            Thereafter                                     3,300
                                                           -----
                                                       $  22,457
                                                       =========
</TABLE>



--------------------------------------------------------------------------------
                                    PAGE 33
<PAGE>   35
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------


           Under Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments," effective for fiscal
years beginning after December 15, 1996, the Company is required to provide fair
value disclosures of its financial instruments.

           The outstanding line of credit and acquisition loans approximate
their fair values as the interest rate fluctuates. The notes payable are not
instruments with readily available market values. The stated note interest rates
are 8% and, based on the currently prevailing prime rate of approximately 8%,
the net book values of the notes payable as of September 30, 1998 approximate
their fair values as calculated.

NOTE H- INCOME TAXES

           The Company provides for income taxes using the liability method.
Deferred income taxes are classified as current or non-current, based on the
classification of the related assets and liabilities giving rise to the
temporary difference.

Following are the components of the deferred tax asset (liability) recognized on
the accompanying balance sheet:
<TABLE>
<CAPTION>
                                                                   As of                         As of
                                                             September 28,1997             September 30,1998
                                                             -----------------             -----------------
                                                                              (in thousands)
<S>                                                             <C>                            <C>
                 Current
                    Inventory                                     $    1,463                     $    1,263
                    Accounts receivable                                  469                            167
                    Net operating loss, current portion                2,107                          2,509
                    Financial statement income not taxable
                     until the following year, net                        17                            164
                                                                  ----------                     ----------
                                                                  $    4,056                     $    4,103

                 Non-current
                    Depreciation                                          46                            (15)
                    Net operating loss, net of current
                     portion                                           9,008                          7,832
                    Other                                                 77                            143
                    Valuation allowance                               (9,008)                        (7,832)
                                                                  ----------                     ----------
                                                                  $      123                     $      128
                                                                  ----------                     ----------
                 Net deferred income tax assets                   $    4,179                     $    4,231
                                                                  ==========                     ==========
</TABLE>

           The provision for income taxes on earnings from continuing operations
before taxes differs from the amount computed by applying the U.S. federal
income tax rate (34%) because of the effect of the following items:

<TABLE>
<CAPTION>
                                                      1996                           1997                         1998
                                                      ----                           ----                         ----
                                                         Percent of                    Percent of                   Percent of
                                                           Pretax                        Pretax                       Pretax
                                             Amount       Earnings        Amount        Earnings        Amount       Earnings
                                             ------       --------        ------        --------        ------       --------
<S>                                          <C>              <C>         <C>             <C>            <C>            <C>
Federal tax (benefit) at statutory rate      $  1,112         34.0%       $2,391          34.0%          $ 101          34.0%
State income taxes, net of
  federal benefit                                 236          7.2           317           4.5              13           4.4
Benefit from foreign sales corporation            (75)        (2.3)            -             -               -
Valuation allowance adjustments                     -          -            (832)        (11.8)           (114)        (38.4)
Other items, net                                  (30)        (0.9)            -             -               -             -
                                          ---------------------------------------------------------------------------------------
Income tax expense (benefit)                 $  1,243         38.0%       $1,876          26.7%          $   0          0.00%
</TABLE>




--------------------------------------------------------------------------------
                                    PAGE 34
<PAGE>   36
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------

           The Company has a net operating loss carry-forward as of September
30, 1998 of approximately $26,000,000 which is available to offset future
taxable income generated through fiscal 2012. In evaluating whether a valuation
allowance is necessary to reserve against the realizability of future tax
benefits associated with this net operating loss and other deductible temporary
differences, management considered various factors which will contribute to the
Company generating taxable income in the future. In 1996 and 1995, management
concluded that an allowance was not necessary. However, in the third quarter of
fiscal 1997, the Company recorded a valuation allowance of approximately
$9,800,000 against deferred tax assets based upon this evaluation. The income
statement effect of this allowance was charged against tax benefits associated
with losses from discontinued operations. In the fourth quarter of fiscal 1997
and in fiscal year 1998, the Company reduced the valuation allowance by
approximately $800,000 and $1,200,000, respectively, based upon a re-evaluation
of its continuing operations, which included considering several new contracts
and the level of earnings generated by its continuing lines of business.

NOTE I - COMMITMENTS AND CONTINGENCIES

1.         CAPITAL AND OPERATING LEASE COMMITMENTS

           The Company entered into various capital lease obligations in fiscal
year 1998 that expire at various times through 2003. During the first quarter of
fiscal year 1998, the Company entered into an agreement with Mellon U.S. Leasing
("Mellon") whereby the Company sold and leased back from Mellon certain fixed
assets of MOI. The value of the assets sold and subsequently leased back was
approximately $1.2 million. The remaining capital lease obligations are for
computer equipment purchases and other equipment purchases.

           The Company is committed under non-cancelable operating leases for
office space and equipment that expire over the next four years and include
purchase and renewal options, primarily for office space. Rent expense under
such leases was $1,120,000, $922,000, and $891,000 for the years ended September
29, 1996, September 28, 1997, and September 30, 1998 respectively.

           Future minimum lease payments under such capital and operating leases
at September 30, 1998 (in thousands) are as follows:

<TABLE>
<CAPTION>
            YEAR ENDING                                   CAPITAL        OPERATING
            -----------                                   -------        ---------
             <S>                                           <C>          <C>
             1999                                           $   529      $  1,153
             2000                                               529           904
             2001                                               423           555
             2002                                                21           359
             2003                                                14             -
                                                            -------      --------
            Total minimum lease payments                      1,516      $  2,971
                                                                         ========
            Less - amounts representing interest                154
                                                            -------
            Capital lease obligations                         1,362
            Less - amounts due within one year                  440
                                                            -------
            Noncurrent portion of capital lease
                Obligations                                 $   922
                                                            =======
</TABLE>

2.         EMPLOYMENT AND NON-COMPETITION AGREEMENTS

           The Company is committed under long-term employment and
non-competition agreements with officers of the Company. Approximate future
minimum annual payments required under the agreements are $620,000 and expire in
fiscal 1999. The Company entered into a separation agreement with an officer of
the Company for salary continuance until September 30, 2004 totaling $700,000
which has been charged to operations in the accompanying 1998 consolidated
financial statements. The separation agreement is not based on future
performance and does not contain a non-compete agreement.




--------------------------------------------------------------------------------
                                    PAGE 35
<PAGE>   37
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
NOTE J - STOCK OPTION, STOCK PURCHASE, AND EMPLOYEE BENEFIT PLANS

1.         STOCK OPTION PLANS

           Under the terms of the Company's stock option plans, options to
purchase shares of the Company's common stock have been granted at exercise
prices equal to the market price of the stock at the date of grants.
Accordingly, no compensation expense has been recognized for the plan. The plans
allow the Company to grant options to employees for up to 2,000,000 shares of
common stock. These options, which have variable terms, typically vest at a rate
of one third per year from the date of grant. The maximum term of the options is
five years from the grant date. The 1991 and 1993 stock option plans expire in
fiscal years 2001 and 2004, respectively.

           Had compensation cost been determined based on the fair value of the
options at the grant dates consistent with SFAS 123, the company's net income
and earnings per share would have been:

<TABLE>
<CAPTION>
                                                           1996            1997            1998
                                                       ------------    ------------    -----------
<S>                                                      <C>             <C>             <C>
Net income (loss) from
   continuing operations        As Reported              $  2,029        $  5,158        $    296
                                Pro Forma                $  1,582        $  4,386        $   (474)

Earnings (loss) per share,
   continuing operations        As Reported              $   0.16        $   0.40        $   0.02
                                Pro Forma                $   0.12        $   0.34        $  (0.04)
</TABLE>

           The fair value of each option grant is estimated on the date of the
grant using the Black-Sholes options-pricing model with the following weighted
average assumptions used for grants in 1998, 1997, and 1996, respectively:
expected volatility of 38%, 15%, and 129%, risk free rates of 4.41% and 5.06%
and expected lives of two years.

           Following is a summary of transactions:

<TABLE>
<CAPTION>
                                                                        Shares Under Option
                                                           1996              1997              1998
                                                           -----             ----              ----
<S>                                                       <C>              <C>              <C>
Outstanding, beginning of year                              660,712          1,117,817        1,454,969
Granted during the year                                     519,200            604,000          670,500
Canceled during the year                                    (42,033)          (217,062)        (160,266)
Exercised during the year (at prices ranging from
    $2.72 to $6.19 per share)                               (20,062)           (49,786)        (183,262)
                                                          ---------         ----------      -----------
Outstanding, end of year                                  1,117,817          1,454,969        1,561,941
                                                          ---------         ----------      -----------
Eligible, end of year for exercise currently
   (at prices ranging from $2.72 to $8.69 per share)        415,038            510,705          669,380
                                                          =========        ===========      ===========
Weighted average stock option exercise price              $    6.10        $      5.01      $      3.79
                                                          =========        ===========      ===========
</TABLE>

           In addition to the outstanding options above, there are 110,000
options granted to external directors as of September 30, 1998. The exercise
prices of these options range from $5.63 to $7.94.

2.         STOCK PURCHASE PLAN

           The Company has an Employee Stock Purchase Plan whereby eligible
employees may authorize payroll deductions up to 15% of their regular base
salary to purchase shares at 85% of the fair market value at time of purchase.
As of September 30, 1998, 97,000 shares had been purchased by employees on a
cumulative basis.




--------------------------------------------------------------------------------
                                    PAGE 36
<PAGE>   38
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------



3.         EMPLOYEE BENEFIT PLAN

           The Company maintains a defined contribution retirement plan for its
employees. This plan covers all regular, full-time employees over the age of 18
who have completed six consecutive months of service. Under this plan, employees
may contribute a percentage of their salary, subject to certain limitations. The
Company has elected to match a portion each year based on each dollar
contributed by the employee. The Company contributed approximately $73,000,
$61,000, and $111,000 in each of the years ended September 29, 1996, September
28, 1997, and September 30, 1998 respectively.

NOTE K - EARNINGS PER SHARE

           During the first quarter of fiscal year 1998, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". This
statement establishes new standards for computing and presenting earnings per
share. Basic earnings per share 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 earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Diluted
earnings per share were calculated as net income divided by the diluted
weighted-average number of common shares. Diluted weighted-average number of
common shares was calculated using the treasury stock method for Common Stock
equivalents, which included Common Stock available pursuant to stock options.
The following is a reconciliation of the earnings per share calculations:

<TABLE>
<CAPTION>

                                                                           For the year ended:
                                             September 26, 1996             September 28,1997         September 30,1998
                                          --------------------------------------------------------------------------------
<S>                                              <C>                            <C>                      <C>     
Income:
  Net earnings from continuing
  operations                                     $  2,029                       $   5,158                $    296

  Loss from discontinued
  operations, net of tax effect                    (4,973)                        (33,603)                    --
                                                 -------------------------------------------------------------------
  Net (loss) earnings                            $ (2,944)                      $ (28,445)               $    296
                                                 ===================================================================

  Basic weighted average shares                    12,811                          12,873                  13,037
  Effect of dilutive securities:
          Stock Options                              --                              --                       198
                                                 -------------------------------------------------------------------
  Diluted weighted average shares                  12,811                          12,873                  13,235
                                                 ===================================================================
</TABLE>



NOTE L - RELATED PARTY TRANSACTIONS

The following summarizes transactions with related parties:

           1.   As of October 1, 1997, the Company entered into an agreement
                with an officer of the Company. Under the terms of the
                agreement, the officer exchanged two notes receivable totaling
                $506,000 for 116,702 shares of the Company's stock. The shares
                were available to the officer pursuant to the exercise of stock
                options granted under the Company's stock option plans. The note
                receivable bears interest at the rate of 6% annually and is to
                be paid in full no later than October 1, 2000. The note and
                accrued interest remain outstanding as of September 30, 1998.




--------------------------------------------------------------------------------
                                    PAGE 37
<PAGE>   39
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
           2.   As of March 1, 1998, the Company provided a non-interest bearing
                bridge loan to an officer of the Company in the amount of
                $400,000 for the purchase of his principal residence. $250,000
                of the note is due 60 days after the sale of his current
                residence and the remainder of the note is due in five years.
                The note receivable remains outstanding as of September 30,
                1998.

           3.   In September 1995, the Company appointed a partner of a law firm
                as one of the Company's outside directors. The Company incurred
                approximately $271,000, $66,000, and $541,000 in expenses
                associated with the services of this law firm in fiscal years
                1996, 1997, and 1998 respectively. Included in the legal fees
                for fiscal year 1998 were approximately $350,000 of legal fees
                related to the acquisition of ATG.

NOTE M - INDUSTRY SEGMENTS, EXPORT REVENUE, AND CONCENTRATIONS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information." The standard requires entities to
disclose financial and descriptive information about its reportable segments.
The Company has implemented SFAS 131 this year. The Company operates in two
business segments: MCTI and MOI. MCTI manufactures and sells aerospace telemetry
receivers and ancillary devices, and provides systems integration services. In
addition, MCTI provides hardware development, design, and manufacturing
including wideband digital receiving and processing equipment, signal
generators, and recording devices for the intelligence and surveillance
communities. MOI provides outsourced services including telephone technical
support and warranty and product repair. The Company's reportable segments are
strategic business units that offer different products and services. They are
managed separately because each business requires different technology and
marketing strategies. Information about the Company's operations in the segments
for the three years ended September 30, 1998 is as follows:

 <TABLE>
<CAPTION>
In Thousands of Dollars                                                            Corporate          Consolidated
                                            MCTI                  MOI              and Other              Total
---------------------------------------    -------------- -------------------- ------------------- --------------------
<S>                                         <C>                 <C>                  <C>                <C>
Net sales to unaffiliated customers
-----------------------------------
1996                                         $ 17,033            $ 14,426                    -            $ 31,459
1997                                           26,240              17,381                    -              43,621
1998                                           34,753              23,557                    -              58,310

Earnings from continuing operations
-----------------------------------
1996                                         $  4,135            $  3,506             $ (2,538)           $  5,103
1997                                            6,569               3,503               (2,044)              8,028
1998                                            1,980               1,728               (2,427)              1,281

Identifiable assets
-------------------
1996                                         $ 13,016            $  2,579             $  5,397            $ 20,992
1997                                           21,028               4,258                6,701              31,897
1998                                           32,200               5,195                6,969              44,364

Capital Expenditures
--------------------
1996                                         $    189            $      -             $     54            $    243
1997                                              267                 922                  191               1,380
1998                                              801               1,992                  209               3,002

Depreciation and Amortization Expense
-------------------------------------
1996                                         $    451            $      2             $     97            $    550
1997                                              519                  22                   65                 606
1998                                              816                 710                  108               1,634
</TABLE>




--------------------------------------------------------------------------------
                                    PAGE 38
<PAGE>   40
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
           Export revenue accounted for approximately 14%, 22%, and 15% of total
sales in fiscal years 1996, 1997 and 1998, respectively. Following is the detail
of total revenue by geographic region:

<TABLE>
<CAPTION>

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

<S>                                             <C>               <C>                <C>       
Domestic                                        $  27,268         $  33,971          $   49,528
Europe                                              2,018             8,417               7,752
Pacific Rim                                         1,203               861                 866
Canada                                                342               156                   4
Latin America and other                               628               216                 160
                                                ------------------------------------------------------
   Total Revenue                                $  31,459         $  43,621          $   58,310
                                                ======================================================
</TABLE>

           Three customers represented approximately 40%, 18% and 10%,
respectively of the Company's total revenues for the year ended September 30,
1998.

NOTE N - SUPPLEMENTAL CASH FLOW AND INCOME STATEMENT INFORMATION

           The Company paid the following amounts for interest and income taxes
as follows:

<TABLE>
<CAPTION>
                                                  Year Ended              Year Ended              Year Ended
                                              September 29, 1996      September 28, 1997      September 30, 1998
                                              ------------------      ------------------      ------------------

                                                                        (in thousands)
<S>                                                <C>                  <C>                    <C>
Interest                                            $      1,846         $     1,074            $       986
Income taxes                                        $        105         $        17            $        24
Non-cash investing activities:
  Capital lease obligation
   incurred                                         $         -          $         -            $       447
Non-cash financing activities:
  Note receivable for stock
purchcase                                           $         -          $         -            $       317
</TABLE>

           In fiscal year 1998, the Company exchanged a note receivable for
116,702 shares of stock.  The Company holds the shares as collateral against
the note.


NOTE O - DISCONTINUED OPERATIONS

           In the second quarter of fiscal 1997, management restructured its
Networking Products business by reducing the amount of product held by
distributors and realigning its product offerings with a new line of low-cost,
high-performance adapter cards. The realignment of the Company's product lines
included abandoning certain products and technology acquired during 1994 through
1996, resulting in the write-off of capitalized acquisition costs. The financial
statement impact of the above actions was to record a restructuring charge
during 1997, which is reflected in the operating loss of the discontinued
operation, of $26,607,000, net of tax effect, which was comprised of the
following:
<TABLE>
<S>                                                                                   <C>
             Write off of abandoned technology and product rights                     $  14,539,000
             Write down of inventories                                                    9,394,000
             Charges associated with product returns and distribution credits,
                 net of release of associated reserves                                    2,674,000
                                                                                       ------------
                                                                                      $  26,607,000
</TABLE>




--------------------------------------------------------------------------------
                                    PAGE 39
<PAGE>   41
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
           In the third quarter of 1997, the Company elected to exit the
networking products business and to discontinue its Networking Products
division. In association with the decision, the company recorded a charge of
approximately $4,222,000 representing the anticipated loss on disposal, net of
tax effects, of the division, and includes anticipated operating losses until
the division is closed or sold.

           The disposal of the Networking Products Division has been accounted
for as a discontinued operation and accordingly, its operations, including the
above restructuring charges, have been segregated and reported as discontinued
operations in the accompanying Consolidated Balance Sheets, Consolidated
Statements of Operations, and Consolidated Statements of Cash Flows. The
Condensed Statement of Operations relating to the discontinued operations for
the years ended September 29, 1996, September 28, 1997, and September 30, 1998
are presented below.

<TABLE>
<CAPTION>

    (In thousands)                                    1996                 1997                 1998
    -------------------------------------------------------------------------------------------------------
<S>                                               <C>                  <C>                      <C>
    Revenue                                        $  67,695            $  24,350                $  --
    Costs and Expenses                                75,917               58,683                   --
                                             -------------------- -------------------- --------------------
    Loss before income taxes                          (8,222)             (34,333)                  --
    Income tax  benefit                                3,294                4,952                   --
                                             -------------------- -------------------- --------------------
    Net loss                                       $  (4,973)           $ (29,381)                $ --
                                             ==================== ==================== ====================
</TABLE>

           During fiscal year 1998, revenue and expenses associated with the
discontinued operations were applied against the $4,222,000 charge established
in fiscal year 1997. At September 30, 1998, the reserve for the loss on
discontinued operations had been fully used.

NOTE P - ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE

           REPORTING COMPREHENSIVE INCOME

           In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," effective for fiscal years beginning after December 15,
1997. This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Statement
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. As the company does not currently have any
components of comprehensive income, it is not expected that this statement will
affect the Consolidated Financial Statements.

NOTE Q - SUBSEQUENT EVENTS (UNAUDITED)

      On December 3, 1998, the Company signed a definitive agreement with L-3
Communications Corporation, a Delaware corporation ("L-3 Communications"),
whereby L-3 Communications is to acquire the Company. Under the terms of the
agreement, L-3 Communications, or an affiliate thereof, is to purchase all of
the outstanding shares of the Company's common stock for $5 a share and assume
the outstanding debt of the Company. The total value of the transaction is
approximately $90 million. The transaction is conditioned upon receipt of a
majority of the Company's shares outstanding, approval of L-3 Communications'
lenders, regulatory approvals, and to other customary conditions. Philip T.
Cunningham, Chairman of the Board of Directors of the Company and beneficial
owner of 38% of the outstanding shares of the Company, has agreed to tender his
shares in the transaction. Pursuant to the agreement, on December 9, 1998 L-M
Acquisition Corporation, a wholly owned subsidiary of L-3 Communications ("L-M
Acquisition"), commenced a cash tender offer for all the Company's outstanding
common stock and filed a Schedule 14D-1 relating thereto with the Securities and
Exchange




--------------------------------------------------------------------------------
                                    PAGE 40
<PAGE>   42
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
Commission (the "Commission"). That same day, the Company filed Schedule 14D-9
with the Commission in which the Company recommended that all stockholders of
the Company accept the tender offer of L-M Acquisition and tender their shares
of the Company's common stock to L-M Acquisition pursuant to L-M Acquisition's
offer.

           On December 2, 1998 the Company's Board of Directors elected to
forgive an officer of the Company $400,000 of the $506,000 note receivable to
the Company, effective January 2, 1999 (see footnote L- Related Party
Transactions). The terms of the remainder of the loan are unchanged.

           On October 21, 1998 the Company's Board of Directors elected to
forgive an officer of the Company $200,000 of the $400,000 bridge loan
receivable to the Company (see footnote L- Related Party Transactions). Of the
amount forgiven, $65,000 was forgiven on October 21, 1998 and the remainder will
be forgiven in March of 1999. The terms of the remainder of the loan are
unchanged.

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

      There were no changes in or disagreements with Accountants on accounting
and financial disclosures in fiscal year 1998.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      This information is incorporated by reference from the Company's
definitive 1999 Proxy Statement.

ITEM 11.  EXECUTIVE COMPENSATION

      This information is incorporated by reference from the Company's
definitive 1999 Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      This information is incorporated by reference from the Company's
definitive 1999 Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      This information is incorporated by reference from the Company's
definitive 1999 Proxy Statement.

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

(a)    Documents filed as part of this report:

      (1)  Financial Statements

           The Consolidated Financial Statements of the Company and the related
           report of the Company's independent public accountants have been
           filed under Item 8-Financial Statements and Supplementary Data.

      (2)  Financial Statement Schedules

           All supporting schedules other than those listed below have been
           omitted because they are not required or the information to be set
           forth therein is included in the financial statements or in the notes
           thereto.

           Report of Independent Public Accountants on Financial Statement
Schedule




--------------------------------------------------------------------------------
                                    PAGE 41
<PAGE>   43
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------

      (3)  Exhibits

           The exhibits filed or incorporated by reference as part of this
report are set forth in the Exhibit Index

(b)   Reports on Form 8-K: On August 26, 1998 the Company filed a report on Form
      8-K to report the purchase of all the outstanding stock of Apcom Inc.,
      Celerity Systems, Inc., and the assets and certain liabilities of
      Acceleration Systems, Inc. and Digital Telcom. On October 26, 1998 the
      Company filed a report on Form 8-K/A amending the previously filed Form
      8-K to include the Financial Statements of the businesses acquired and Pro
      Forma financial information.

(c)   See Item 14(a)(3) above

(d)   See Item 14(a)(2)

























--------------------------------------------------------------------------------
                                    PAGE 42
<PAGE>   44
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------

SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

MICRODYNE CORPORATION

<TABLE>
<S>                      <C>                                                        <C> 
                         By:  /s/  Michael E. Jalbert                               December 16, 1998
                              ---------------------------
                                   Michael E. Jalbert
                                   President and Chief Executive Officer
</TABLE>

   Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<S>                                     <C>                                         <C> 
PRINCIPAL EXECUTIVE OFFICER:

/s/ Michael E. Jalbert                  President                                   December 16, 1998
------------------------------
Michael E. Jalbert                      Chief Executive Officer


PRINCIPAL FINANCIAL OFFICER:

/s/ Massoud Safavi                      Chief Financial Officer                     December 16, 1998
------------------------------
Massoud Safavi


/s/  Phillip T. Cunningham              Director                                    December 16, 1998
------------------------------          Chairman, Board of Directors
Phillip T. Cunningham

/s/  Gregory W. Fazakerley              Director                                    December 16, 1998
------------------------------
Gregory W. Fazakerley

/s/  H. Brian Thompson                  Director                                    December 16, 1998
--------------------------------
H. Brian Thompson

/s/  Curtis M. Coward                   Director                                    December 16, 1998
----------------------------------
Curtis M. Coward

/s/  Christopher Maginniss              Director                                    December 16, 1998
----------------------------------
Christopher Maginniss
</TABLE>












--------------------------------------------------------------------------------
                                    PAGE 43
<PAGE>   45
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT No.               DESCRIPTION                                                SEQUENTIAL PAGE NO.

<S>                       <C>                                                        <C>
2.1                       Merger Agreement between                                   Incorporated by reference
                          Federal Technology Corporation                             to Exhibit 2.1 to the
                          and Registrant, dated March 7,                             Registrant's 1991 Form S-4
                          1991.                                                      Registration Statement.

2.2                       Stock and Asset Purchase agreement                         Incorporated by reference to the
                          dated August 11, 1998 by and among                         Company's Form 8-K dated
                          MCTI Acquisition Corporation,                              August 26, 1998.
                          Microdyne Corporation, Gary W. Gallupe,
                          Lillian M. Gallupe, Geoffrey D. Trimmer,
                          Jack Anderson, Dean Kobashigawa and the
                          other Stockholders Named Herein and Digital
                          Telcom, Inc. and Accelerations Systems, Inc.

3.1                       Articles of Merger.                                        Incorporated by reference
                                                                                     to Exhibit 3.1 to the
                                                                                     Registrant's 1991 Form S-4
                                                                                     Registration Statement.

3.2                       Articles of Amendment and                                  Incorporated by reference
                          Restatement of Articles of                                 to Exhibit 4(A)(1) to the
                          Incorporation of Registrant.                               Registrant's 1989 Form S-2
                                                                                     Registration Statement.

3.3                       Bylaws of Registrant.                                      Incorporated by reference
                                                                                     to Exhibit 4(B)(1) to the
                                                                                     Registrant's 1990 Form S-3
                                                                                     Registration Statement.

4.1                       Specimen Common Stock                                      Incorporated by reference
                          Certificate.                                               to Exhibit 49A) to the
                                                                                     Registrant's 1979
                                                                                     Registration Statement
                                                                                     (File. No. 2-634130).

10.3                      Form of Amended and Restated                               Incorporated by reference
                          1991 Key Employee Stock                                    to Exhibit 4.1 to the
                          Option Plan.                                               Registrant's Registration
                                                                                     Statement on Form S-8
                                                                                     dated May 6, 1992
                                                                                     (File No. 33-47709).

10.7                      Form of 1993 Non-Employee                                  Incorporated by reference
                          Directors Stock Option Plan.                               to Exhibit 10.7 to
                                                                                     Registrant's 1994
                                                                                     Form 10-K Annual Report

10.8                      Form of 1992 Employee Stock                                Incorporated by reference
                          Purchase Plan.                                             to Exhibit 4.1 to the
                                                                                     Registrant's Registration
                                                                                     Statement on Form S-8
                                                                                     dated May 6, 1992
</TABLE>



--------------------------------------------------------------------------------
                                    PAGE 44
<PAGE>   46
MICRODYNE CORPORATION                           1998 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------
                                                            (File No. 33-47710).

<TABLE>
<S>                       <C>                                                      <C>
10.9                      Credit Agreement dated                                   Incorporated by reference
                          January 27, 1995 among the                               to Exhibit 10.11 to
                          Registrant, Crestar Bank and                             Amendment No. 2 to the
                          NBD Bank                                                 Registrant's 1995 Form S-3
                                                                                   Registration Statement

10.10                     First Amendment to Credit                                Incorporated by reference
                          Agreement among the Registrant,                          to Exhibit 10.12 to
                          Crestar Bank and NBD bank, dated                         Amendment No. 2 to the
                          October 26, 1995                                         Registrant's 1995 Form S-3
                                                                                   Registration Statement

10.11                     Second Amendment to Credit                               Incorporated by reference
                          Agreement among the Registrant,                          to Exhibit 10.11 to
                          Crestar Bank and NBD bank, dated                         Registrant's 1996 Form
                          June 30, 1996.                                           10K Annual Report

10.12                     Third Amendment to Credit                                Incorporated by reference
                          Agreement among the Registrant,                          to Exhibit 10.12 to
                          Crestar Bank and NBD bank, dated                         Registrant's 1996 Form
                          August 19, 1996.                                         10K Annual Report


10.13                     Fourth Amendment to Credit                               Incorporated by reference
                          Agreement among the Registrant,                          to Exhibit 10.13 to
                          Crestar Bank and NBD bank, dated                         Registrant's 1996 Form
                          September 27, 1996.                                      10K Annual Report


10.14                     Incentive Stock Option Plan of                           Incorporated by reference
                          1988 ("1988 Plan").                                      to Exhibit No. 1 to
                          Registrant's Form 8-K                                    Report dated April 27,
                                                                                   1988 (File No. 0-4384).

10.15                     Amendment of 1988 Plan adopted                           Incorporated by reference
                          by the Board of Directors on                             to Exhibit No. 4(F)(1)(a) to
                          June 27, 1989.                                           Registrant's 1989 Form
                                                                                   10-K Annual Report.

10.16                     Amendment of 1988 Plan adopted                           Incorporated by reference
                          by the Board of Directors on                             to Exhibit No. 10(G)(3) to
                          January 25, 1990.                                        Registrant's 1990 Form
                                                                                   10-K Annual Report.

10.18                     Microdyne Corporation 401-K                              Incorporated by reference
                          Summary Plan Description.                                to Exhibit No. 10.18 to the
                                                                                   Registrant's September 30, 1992
                                                                                   10K.

10.19                     Federal Technology Corporation                           Incorporated by reference
                          Long-Term Incentive Plan.                                to Exhibit No. 10 to the
                                                                                   Registrant's June 21, 1991
                                                                                   Form 10-K.
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<S>                       <C>                                                      <C>
10.20                     Token Ring Purchase Agreement                            Incorporated by reference
                          dated July 26, 1994 between the                          to Exhibit 1 to the
                          Registrant and Digital                                   Registrant's Form 8-K
                          Communications Associates.                               Report dated July 29, 1994.
                                                                                   (File No. 0-4384)

10.21                     Noncompetition Agreement dated                           Incorporated by reference
                          June 21, 1995 between Microdyne                          to Exhibit 10.1 to
                          Corporation and Philip T.                                Amendment No. 1 to the
                          Cunningham                                               Registrant's 1995 Form S-3
                                                                                   Registration Statement

10.22                     Executive Employment Agreement                           Incorporated by reference
                          dated October 24, 1995 between                           to Exhibit 10.2 to
                          Microdyne Corporation and Philip                         Amendment No. 1 to the
                          T. Cunningham                                            Registrant's 1995 Form S-3
                                                                                   Registration Statement

10.23                     WNIM Purchase Agreement dated                            Incorporated by reference
                          June 14, 1994 between Microdyne                          to Exhibit 10.3 to
                          Peyton Street Corporation and                            Amendment No. 1 to the
                          Gateway Communication, Inc.                              Registrant's 1995 Form S-3
                                                                                   Registration Statement

10.24                     Asset Purchase Agreement dated                           Incorporated by reference
                          June 14, 1994 between Microdyne                          to Exhibit 10.4 to
                          Peyton Street Corporation and                            Amendment No.1 to the
                          Gateway Communications, Inc.                             Registrant's 1995 Form S-3
                                                                                   Registration Statement

10.25                     Asset Purchase Agreement dated                           Incorporated by reference
                          January 6, 1995 between the                              to Exhibit 1 to the
                          Registrant and Artisoft, Inc.                            Registrant's Form 8-K
                                                                                   dated January 6, 1995

10.26                     Asset Purchase Agreement dated                           Incorporated by reference
                          January 6, 1995 between the                              to Exhibit 1 to the Registrant's
                          Registrant and Artisoft, Inc.                            Form 8-K dated January 6, 1995

10.27                     Asset Purchase Agreement dated                           Incorporated by reference
                          September 12, 1995 between the                           to Exhibit 1 to Amendment
                          Registrant and National                                  No.1 to the Registrant's 1995 Form
                          Semiconductor Corporation                                S-3 Registration Statement

10.28                     License Agreement between                                Incorporated by reference
                          Novell Inc. and the Registrant                           to Exhibit No. 10.8 to Amendment No.
                          Dated July 31, 1992                                      2 to the Registrant's 1995 Form
                                                                                   S-3 Registration Statement

10.29                     OEM Agreement between                                    Incorporated by reference
                          Novell Inc. and the Registrant                           to Exhibit No. 10.9 to Amendment No.
                          Dated June 14, 1994                                      2 to the Registrant's 1995  Form S-3
                                                                                   Registration Statement
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<S>                       <C>                                                      <C>
10.30                     Technology Purchase Agreement                            Incorporated by reference
                          between Novell Inc. and the Registrant                   to Exhibit 10.30 to the Registrant's
                          Dated April 22, 1996                                     1996 Form 10-K Annual Report


10.31                     Agreement between Epson America, Inc.                    Incorporated by reference to Exhibit 10.31
                          and the Registrant Dated March 20, 1996.                 to the Registant's 1996 Form 10-K Annual Report

10.32                     Amendment One to the agreement                           Incorporated by reference to the Registrant's
                          between Epson America, Inc. and the                      Annual Report on Form 10-K for the year
                          Registrant Dated January 20, 1997                        ended September 28, 1997.

10.33                     Amendment Two to the agreement                           Incorporated by reference to the Registrant's
                          between Epson America, Inc. and the                      Annual Report on Form 10-K for the year
                          Registrant Dated August 1, 1997                          ended September 28, 1997.

10.34                     Agreement between Alpine Electronics                     Incorporated by reference to the Registrant's
                          of America Inc. and the Registrant                       Annual Report on Form 10-K for the year
                          Dated September 26, 1997                                 ended September 28, 1997.

10.35                     Fifth Amendment to Credit                                Incorporated by reference to the Registrant's
                          Agreement among the Registrant,                          Annual Report on Form 10-K for the year
                          Crestar Bank and NBD bank                                ended September 28, 1997
                          Dated March 14, 1997

10.36                     Sixth Amendment to Credit                                Incorporated by reference to the Registrant's
                          Agreement among the Registrant,                          Annual Report on Form 10-K for the year
                          Crestar Bank and NBD bank                                ended September 28, 1997
                          Dated June 17, 1997

10.37                     Seventh Amendment to Credit                              Incorporated by reference to the Registrant's
                          Agreement among the Registrant,                          Annual Report on Form 10-K for the year
                          Crestar Bank and NBD bank                                ended September 28, 1997
                          Dated September 15, 1997

10.38                     Employment Agreement dated                               Incorporated by reference to the Registrant's
                          February 10, 1997 between Microdyne                      Annual Report on Form 10-K for the year
                          Corporation and Michael E.                               ended September 28, 1997
                          Jalbert

10.39                     Agreement between the Italian Ministry                   Incorporated by reference to the Registrant's
                          of Defense and the Registrant                            Annual Report on Form 10-K for the year
                          Dated December 6, 1996                                   ended September 28, 1997

10.40                     Eighth Amendment to Credit Agreement                     Incorporated by reference to the Company's
                          dated as of December 24, 1997, between                   Quarterly Report on Form 10-Q for the
                          Microdyne Corporation and Crestar Bank                   quarterly period ended December 31, 1997.

10.41                     Master Lease Agreement dated as of                       Incorporated by reference to the Company's
                          December 23, 1997 between Mellon                         Quarterly Report on Form 10-Q for the
                          US Leasing, and Microdyne Corporation                    quarterly period ended December 31, 1997.
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<S>                       <C>                                                      <C>
10.42                     Credit Agreement dated as of August 11,                  Incorporated by reference to the Company's
                          1998 among Microdyne Corporation as                      Form 8-K dated August 26, 1998.
                          borrower and NationsBank, N.A. as
                          Banks and NationsBank, N.A. as Agent

10.43                     Agreement between the Spanish                            Filed with this Form 10-K
                          Air Force and the Registrant dated
                          October 30, 1998

10.44                     Agreement between INSNEC                                 Filed with this Form 10-K
                          and the Registrant dated
                          October 29, 1998

10.45                     Agreement between Emheiser                               Filed with this Form 10-K
                          and the Registrant dated August
                          28th, 1998

10.46                     Agreement between the Italian                            Filed with this Form 10-K
                          Ministry of Defense and the
                          Registrant dated November 3, 1997

23.1                      Consent of Grant Thornton to the                         Filed with this Form 10-K
                          incorporation by reference in the
                          Registration Statements on Form S-8
                          dated December 27, 1991, May 6, 1992,
                          March 3, 1995, April 26, 1995, and
                          October 15, 1996.


27.1                      Financial Data Schedule                                  Filed with this Form 10-K
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