<PAGE>   1
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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 29, 1996
                         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. (X)

THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, BASED ON THE AVERAGE BID AND ASKED PRICES, APPROXIMATES $47,080,107
AS OF THE CLOSE OF BUSINESS ON DECEMBER 17, 1996.

THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK AS OF THE CLOSE OF BUSINESS ON DECEMBER 17, 1996 IS 12,832,203 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 34 FOR INDEX OF EXHIBITS.

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MICRODYNE CORPORATION                           1996 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 three
businesses within its industry segment of data communications products and
services:
  - Through its Networking Products Division, the Company designs, manufactures,
markets and supports a broad line of data communications hardware products that
facilitate inter-computer communications via local area networks (LANs).
  - Through its Aerospace Telemetry Division, Microdyne designs, manufactures,
and markets aerospace telemetry receivers, combiners, and signal simulators for
use in data gathering and analysis.
  - Through its Manufacturer Support Services Division, Microdyne provides
outsourced technical services for computer products companies.

  The following table sets forth revenue from each of Microdyne's operations for
fiscal years 1994, 1995 and 1996:

<TABLE>
<CAPTION>

                                                                        Years Ended
                                                         ---------------------------------------------
                                                          Sept. 30,           Oct. 1,        Sept. 29,
                                                             1994              1995            1996
                                                          ---------           -------        ---------
                                                                          (in thousands)
<S>                                                       <C>              <C>                <C>
Networking Products.....................                  $  80,281        $ 140,620          $  67,695
Aerospace Telemetry.....................                     12,255           17,358             17,033
Manufacturer Support Services...........                      8,021           12,100             14,427
Industrial Telemetry(1)..................                       738               --                 --
                                                          ---------        ---------          ---------
     Total Revenue...........................             $ 101,295        $ 170,078          $  99,155
                                                          =========        =========          =========

</TABLE>

----------
(1)  Industrial Telemetry was sold in December 1993.

NETWORKING PRODUCTS

Overview

  The computer networking industry represents one of the fastest growing
segments of the technology industry. Industry growth has been a product of a
rising number of personal computers in use within organizations, generational
upgrades of computers, standardization of network operating system software, the
rising importance of network communications as an organizational productivity
tool and the increasing speed and flexibility of networks. According to
International Data Corporation ("IDC"), in 1996 there are an estimated 189
million PCs installed in businesses worldwide and 118 million PCs, or 62%, are
connected to LANs. By 1999, the installed base of business PCs is projected to
rise to 290 million, of which 220 million, or 76%, are expected to be connected
to a network.

  Local area networks connect groups of personal computers, file servers,
printers and other devices, thereby facilitating communications among those
devices. The following is a brief description of the principal components of a
LAN:

  Adapter cards. Most LANs utilize one of two generally accepted networking
topologies: Ethernet (approximately 80% of networks, according to IDC) or Token
Ring (approximately 20%). Generally, Ethernet LANs transmit data over a network
at 10 megabits per second ("Mb" or "Mbps"); Token Ring LANs generally operate at
4 or 16Mbps. A new standard called Fast Ethernet (also called 10/100 Ethernet or
100BaseT) transmits data at 100Mbps. For any PC connected to a network there is
a need for a LAN adapter card, which translates data to and from the computer in
a format understandable to the network. The adapter card must conform to the LAN
topology (Ethernet, Fast Ethernet, or Token Ring), to the internal architecture
of the PC (the 16-bit ISA bus or 32-bit PCI and EISA buses), the physical
dimensions of the PC (such as the credit-card-sized PCMCIA adapter cards
required for laptop computers), and to the physical wiring scheme of the network
(there are three commonly used wiring systems, the most popular one of which is
called 10BaseT). As such, there are numerous permutations of adapter cards
required to meet the needs of network users, and differentiating features that
further segment the market. Microdyne designs, manufactures, markets, and sells
each of the adapter cards described above.

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  Concentrators and hubs. In addition, small groups of networked PCs are linked
by devices called concentrators or unmanaged hubs, which control data traffic
within a small group of PCs. Concentrators generally do not have on-board
microprocessors to provide "intelligence" to the data switching process. Hubs
that have such built-in microprocessors are generally called "managed" hubs and
can handle more PCs and peripherals at higher data rates. Microdyne markets and
sells concentrators and unmanaged hubs.

  File server and printer adapter cards. Hubs and concentrators are, in turn,
connected to file servers and printers, each of which also requires a
specialized adapter card linking the device to the network. File servers may
also have links to redundant storage devices to ensure against loss of data in
the event of a catastrophic failure of the file server; such links require
specialized adapter cards at each device called mirrored server links. Microdyne
designs, manufactures, markets and sells file server adapter cards, and markets
and sells print servers and mirrored server link hardware.

  Switches. Beyond a certain size, LANs experience congestion as too many users
vie for the available bandwidth of the network. To accomodate the needs of
larger organizations, LANs of either the same or different topologies can be
connected by switches, which route inter-computer traffic among different LANs.
Microdyne markets and sells several configurations of LAN switches connecting
Ethernet to Ethernet, Fast Ethernet to Fast Ethernet, and Ethernet to Fast
Ethernet.

  Other adapter cards. Minicomputers and mainframe computers may also reside on
a LAN and such connections require adapter cards specific to the operating
system of each larger computer. Microdyne designs, manufactures, markets and
sells minicomputer and mainframe computer adapter cards.

  Other networking products. Contiguous or non-contiguous LANs are connected
together via routers, which are devices that provide protocol translation and,
literally, "route" data traffic between networks. Microdyne does not offer such
products, which are generally considered wide-area-networking devices.

The changing role of networks

  Networks have become an essential element of organizational productivity.
Initially, LANs performed simple file and print sharing tasks among a group of
PC users. As a result of faster processing capabilities of PCs, inexpensive,
more powerful mass storage file and application servers, generally falling
hardware prices and faster network speeds, LANs are now used to also deliver
critical applications among network users. These new applications include fax
origination and delivery, e-mail access, document imaging, storage and
manipulation, desktop video conferencing, real-time workgroup use of common
images and other CPU-intensive networking activities. As user requirements for
the network have increased -- including the need for greater throughput speeds
and bandwidth -new bus architectures, network topologies and transmission media
have been developed. The resulting upgrade and sale of new PCs, adapter cards
and ancillary networking hardware to the installed base have further stimulated
market growth.

  The Internet and its graphical adjunct, the World-Wide Web, have contributed
to the explosive growth of PCs both in business and at home. At-home users
generally connect to the Internet via a modem and a telephone line (a connection
scheme which does not utilize any Microdyne products). Computer users within an
organization may also access the Internet via a modem and a dedicated telephone
line but, more likely, the organization maintains a direct connection to an
Internet Service Provider from one or more points on the organization's LAN. In
that case, PC users who wish to connect to the Internet or the World Wide Web do
so via their LAN, and Microdyne's adapter cards, hubs, and switches become an
integral part of the connection process.

  Within the past year, the concept of the intranet has taken hold. An intranet
is a collection of interconnected local area networks within an organization, in
which a file server is designated as the internal organization's equivalent of a
"home page" for employees and others with access to it. Connecting to an
intranet is the same as accessing any other file server on a LAN. Microdyne's
adapter cards, hubs, and switches are an integral aspect of intranet
connectivity.

  LAN usage has expanded from a group of physically proximate users connected by
wires to include remote users requiring periodic access to certain computers and
file servers. The growth of laptop and notebook PCs, combined with improved
modem technology, higher transmission speeds, falling telecommunications costs
and growth in online services and the Internet, have fueled demand for remote
access to and from networks. Remote access allows users to dial-in to LANs from
remote sites and to access external networks (e.g., Compuserve, Lexis/Nexis, the
Internet) via their office PC without the requirement of a dedicated telephone
line or modem. Remote access requires specialized software and board- or system-

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level hardware. Microdyne designs, manufactures, markets and sells board- and
system-level remote access hardware.

The networking environment

  The Company believes that as LANs have evolved, many segments of local area
networking have become non-proprietary, price sensitivity has increased and
buyers have come to favor multi-product vendors. In addition, buyers have become
more cautious about embracing new technology if adopting it renders a large part
of an existing networking investment obsolete. As a result, the Company believes
that an ability to differentiate products through enhancements and added
features, the timing of product introductions, effective distribution and
marketing, efficient manufacturing and a low-cost infrastructure are critical
elements for success.

  The Company has established itself as a leading supplier of LAN adapter cards
which provide the essential connection between computers (including personal
computers, file servers, minicomputers and mainframe computers) and the network.
The Company's products support all established computer bus structures, wiring
systems and network topologies, including Ethernet, Fast Ethernet and Token
Ring. The Company also sells a line of products directed to the remote access
market permitting both dial-up access to LANs and LAN access to remote
databases. The Company believes that its products provide a combination of
reliable, high performance, fully featured solutions at attractive prices.

  To enhance its competitiveness, Microdyne offers a broad mix of networking
products that meet both the broad needs of those who build and maintain
networks, as well as specialty products that occupy niches within the networking
market. Microdyne's product family consists of more than 100 individual products
grouped into the principal categories of Fast Ethernet, Ethernet, and Token Ring
adapter cards, hubs, and switches; remote access products; wide-area and IBM
connectivity products; and minicomputer connectivity. Microdyne also sells
Bundled Products consisting of Microdyne hardware packaged with Novell Inc.'s
("Novell") NetWare. The Company leverages Novell's position as the largest
supplier of LAN operating system software through a perpetual, exclusive right
to distribute certain networking products using Novell trade dress. Microdyne
also sells products under the Eagle and EP brands.

Distribution

  Products of the kind sold by Microdyne's Networking Products Division are
generally sold in one of three ways: The first is via direct sale to large
end-user organizations by bid. Generally, except for sales to the U.S.
Government via GSA schedules, Microdyne does not sell to such organizations. The
second method is to sell products directly to very large system integrators,
which install PCs and networks for clients. Generally, Microdyne does not sell
to such system integrators. These two channels of distribution are characterized
by intense marketing efforts. The third channel of distribution, described more
fully below, is the two-step distribution channel. According to IDC, this
channel accounted for more than 75% of all networking products sold in the
United States in 1994.

  The two-step distribution process consists of distributors and resellers.
Electronics distributors stock products from hundreds of manufacturers. The
industry includes several hundred distributors specializing in computer products
and these firms serve regional, national or international markets. Microdyne's
largest distributors include Ingram Micro Corporation, Southern Electronics
Corporation, Tech Data, Inc., Merisel Inc. and C2000 GmbH. The customers of
those distributors are, in turn, more than 50,000 worldwide computer products
value-added resellers ("VARs") which sell to smaller systems integrators that
specify, assemble and install networks for end user customers; and integrators,
which install components and systems as a service to customers. The Company
believes that selling through distributors carries specific benefits, including
limiting the Company's customers to a finite number of generally well-financed
entities, limiting the amount of finished-goods inventory which the Company must
carry and lessening the need for a direct sales force.

  Microdyne treats sales to distributors outside the United States (or
U.S.-based distributors with a majority of their sales in international markets)
in a manner substantially similar to U.S.-based accounts. All products are
priced to distributors in U.S. dollars, and distributors assume any risk of 
currency fluctuation.

  Because Microdyne reports revenue based upon sale of products to distributors,
which in turn are not the final customers for products, the Company places
considerable emphasis on tracking the sale of products from distributors to
resellers, VARs, and integrators. The quality of such sales information (called
"POS," for Point of Sale data) varies widely among distributors. POS from the
largest, U.S.-based distributors is


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available weekly and, although subject to revision, is generally accurate.
During the past year, Microdyne has invested in creating active programs to
obtain and interpret POS data from all distributors in all locations.

Extended Distribution Program; Novell Agreements

  Beginning in 1993, Microdyne broadened its distribution network by adding a
second group of distributors for which Microdyne served as a source of both
networking hardware products and Novell NetWare network operating system
software. Microdyne combined its networking hardware products with appropriate
Novell NetWare in one package. The resulting combinations (called "Bundled
Products" beginning in 1994) were sold under the Extended Distribution Program.
Pursuant to an agreement with Novell, Microdyne sought out distributors that
were not otherwise authorized by Novell to sell NetWare and other Novell
software products. Distribution terms and discount policies were set by Novell.
The Company believed that by participating in the Extended Distribution Program,
Microdyne enhanced its position as a supplier of networking hardware products
and increased the likelihood that its products would be recommended by these
distributors. Sales rose rapidly through the end of 1995, but declined after the
first quarter of FY1996 as Novell decreased the discount available to Microdyne
for the purchase of NetWare, making the sale of Bundled Products less
attractive, and altered its distribution policies and practices.

   In April, 1996, Microdyne obtained the perpetual, exclusive,
non-royalty-bearing rights to market a series of hardware products in Novell
trade dress, in return for a payment of $6.8 million in cash and notes. The
April 1996 agreement superceded an earlier series of agreements between the two
companies, signed between 1989 and 1995, under which the Company manufactured
and distributed various networking products utilizing Novell licensed technology
and trade dress. Those agreements, which required Microdyne to pay a royalty
based on sales into distribution, reserved to Novell the right to grant
identical rights to other manufacturers and to terminate Microdyne's rights at
any time. Microdyne paid $6.4 million of royalties under those earlier
agreements in FY1995.

Marketing, Sales and Customer Support

  Because there are several levels of intermediaries between the Company and its
end user customer, Microdyne devotes its sales resources to working with
distributors ("push" programs) and must rely upon marketing efforts to reach
resellers and end user customers ("pull" programs). It is critical to the
Company's success that distributors' telemarketing representatives are familiar
with Microdyne's products and can explain to their customers how Microdyne
products are differentiated from those of its competitors. To that end, the
Company conducts periodic training programs for its distributors' telemarketing
representatives. The Company may also periodically run push programs including
promotions and rebates aimed at distributors' telemarketing representatives.

  The Company's pull programs are aimed at resellers and end users. These
programs take the form of print advertising in computer industry trade
publications that reach resellers and corporate information systems managers,
direct mail to resellers, trade press publicity about new products and product
features, participation in the networking industry's trade shows, promotions
designed to increase sales in a specific period, and rebates.

  The Company uses its Novell and Eagle brand names to establish and retain
customer loyalty to Microdyne's products. Microdyne believes the Novell name
connotes quality and reliability in the minds of customers, and that the Eagle
name is well established in the minds of many customers as a reliable,
price-competitive brand.

  As part of the Company's acquisition of the IRMAtrac product line, Attachmate
assumed certain obligations for the continued sale of those products for a
period of five years commencing in 1994. Microdyne is dependent upon
Attachmate's efforts for the sale of Token Ring products.

  Microdyne maintains a toll-free telephone technical support center in
Alexandria, Virginia and San Jose, California where help is available 12 hours a
day, five days a week. Networking products have a lifetime warranty against 
failure or defective workmanship. Products are replaced upon submission of 
the failed product together with purchase documentation.

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Research and Development

  Research and development activities are carried out at the Company's facility
in San Jose, California by a staff of approximately 30 engineers. Research and
development expense in fiscal 1996 declined slightly to $3.5 million from $3.8
million in fiscal 1995. Expenditures for research and development in the
Networking Products Division was $2.3 million in 1994. Certain software
development expenses are capitalized, the amortization of which is included as
part of "Amortization of Intangibles" in the Consolidated Statements of
Operations.

  The Company focuses its engineering efforts on product cost reduction,
extension of existing product lines and enrichment of features on existing
products. The Company has historically obtained new technologies or new products
primarily through OEM relationships or the purchase of technology as part of
larger business acquisitions. Each of the four acquisitions completed between
July 1994 and September 1995 contributed specific new products and/or
technologies to Microdyne.

Manufacturing and Supply

  Because of variable demand for its products and the availability of low-cost
contract production capabilities, Microdyne outsources virtually all of its
board-level Networking Products manufacturing to contract manufacturers, which
are primarily established, U.S.-based corporations. The Company believes it can
maintain a high level of quality while reducing its cost of goods sold below
that which the Company would incur if it manufactured products in-house. The
Company believes there are a sufficient number of contract manufacturers to
ensure adequacy of supply for the foreseeable future. Microdyne has experienced
no substantial difficulty purchasing components and raw materials in the open
market from multiple suppliers; however, certain integrated circuits are
available from a single vendor and can require long lead times to obtain in
quantity.

Competition

  The networking products market is very competitive. The Company believes its
ability to compete successfully depends on a number of factors, including:
price; product features; product quality; performance and reliability; name
recognition and reputation; international certification; retention of
experienced sales, marketing and service personnel; development of new products
and enhancements; and adherence to rapidly changing industry standards.

  Microdyne competes with a number of vendors including 3Com Corporation,
Standard Microsystems Corporation and Intel Corporation. Each has significantly
greater financial, marketing, technical and other resources as well as the
capacity to obtain components at lower cost either by purchasing large
quantities of such components or by fabricating such components in-house. These
competitors have the financial resources to lower prices in order to increase
market share, and may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, devote greater resources to
the development, promotion and sale of their products or control the timing of,
or respond more effectively to, new product introductions.

AEROSPACE TELEMETRY

Overview

  Data gathering and analysis is a basic requirement in the testing and analysis
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 wires. 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

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in a 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 operates
dozens of sites.

  Since 1968, Microdyne has manufactured telemetry receivers, sophisticated
radio receivers that can accurately tune in and hold 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 new telemetry products include:

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

    - A board-level diversity combiner which is a special device to take the
      input of two 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.

  Other Aerospace Telemetry products include compact telemetry receivers and a
sophisticated signal simulation source for use in calibrating telemetry
equipment and systems, to ensure that a system is set up correctly and fully
operational prior to a mission; and diversity combiners that allow data loggers
to record an uninterrupted stream of data from two receivers, regardless of the
polarity of the signal from the telemetry source.

  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 systems contracts in the $500,000 - $15 million range.

  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.
And, third, planned launches of low-earth-orbit ("LEO") satellites to facilitate
new communications services may spur demand for the installation of many 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 prototypes of a 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.

  - New 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 opportunity is for receivers to capture and process
data from NASA's "Mission to Planet Earth" satellite series planned for launch
in 1997. 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.

  While each of the preceding are prospective opportunities, each opens a new, 
multi-million-dollar market to the Company. However, there can be no assurance 
that the Company will realize such opportunities.

Marketing and Sales

  Telemetry systems are used in a variety of applications involving missiles,
aircraft, satellites and other


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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 directly to these user groups through a sales
and marketing department located at the Company's Ocala, Florida facility.
Because most telemetry products 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.

  Government agency and Government prime contractor revenue in fiscal 1996 was
$9.3 million, or 54.7% of total Aerospace Telemetry revenue, compared to $9.6
million, or 55.3% in 1995. The telemetry industry is dependent upon Government
procurement and can be adversely affected by any substantial decreases in direct
Government purchases of the Company's products and services, or in indirect
purchases of products acquired under Government contract. The Company believes
there is growth potential both in domestic and international markets. To address
international opportunities, the Aerospace Telemetry Division has established a
sales office in London, and also uses international manufacturers'
representatives.

Research and Development and Manufacturing

  Expenditures for Aerospace Telemetry research and development totaled $1.5
million, or 8.8% of telemetry revenue in 1996. This compared to $1.4 million, or
8.0% of telemetry revenue in 1995 and $1.2 million, or 9.7% of revenue in 1994.
Microdyne maintains a telemetry products manufacturing facility in Ocala,
Florida.

Competition

  The Company believes the market for telemetry products has entered a new
growth stage after a period of years of stable revenues. Microdyne believes that
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 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.

MANUFACTURER SUPPORT SERVICES

Overview

  There has been a growing trend in recent years toward the providing of labor
from third-party organizations -- "outsourcing" -- of both technical and
non-technical positions in industry. Outsourcing enables an organization to cope
with changes in growth, seasonality, and constraints on the number of full-time
worked counted as employees. Outsourcing allows an organization to focus its
internal and human resources on activities which will creates the highest rate
of return. Outsourcing may also lower an organization's cost of doing business.
Examples of outsourcing 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 in 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, including, as of September 29,
1996, a staff of 271 full-time and 160 part-time employees in the customer's
facilities near Los Angeles, California and in Indianapolis, Indiana. The
Company's revenue is based on 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.

  The Company maintains a contract with its customer which was renewed for a
period of five years in March 1996.

-------------------------------------------------------------------------------
                                     PAGE 7

<PAGE>   9

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------


Marketing

  Microdyne believes it has the skills and depth of management to expand its
Manufacturer Support Services business. While the Company's primary focus is
maintaining and expanding its relationship with its current customer, 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 new customers through such efforts.

Competition

  The competition for Manufacturer Support Services is both in-house sourcing
and other organizations that specialize in outsourcing. Microdyne's customer
may, upon notice, sever its contract with the Company and elect to perform these
tasks either using its own employees or a third-party support vendor. The
Company believes its relationship with its customer is excellent, and is
evidenced by the fact that the level of work performed for the customer has
expanded significantly during the past two years. Also, for the past three
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.

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 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 1996 and 1995, $13.5 million, or 14% and $13.1 million, or 8%,
respectively, of Microdyne's total sales were derived from contracts and
subcontracts involving the U.S. Government and its agencies. For fiscal 1996 and
1995, U.S. Government sales as a percentage of each activity's sales were as
follows:

<TABLE>
<CAPTION>


                                                   Fiscal 1996      Fiscal 1995
                                                   -----------      -----------
       <S>                                             <C>              <C>
       Aerospace Telemetry.................            55%              55%
       Networking Products.................             6%               3%
       Manufacturer Support Services.......             0%               0%

</TABLE>

BACKLOG


  Revenue backlog believed to be firm amounted to $5.0 million at September 29,
1996, and $4.8 million at October 1, 1995. Backlog by activity was as follows:

<TABLE>
<CAPTION>


                                                  Fiscal 1996      Fiscal 1995
                                                  -----------      -----------

       <S>                                           <C>              <C>
       Networking Products.................          $1,335,000       $2,170,000
       Aerospace Telemetry.................           3,663,000        2,671,000

</TABLE>


  The Company does not believe backlog is a meaningful indicator of future
business trends. Microdyne's Networking Products operation is not based upon
either long lead times for delivery or contract delivery schedules. Rather, with
the exception of back-ordered products, Networking Products are generally
shipped upon receipt of order. Aerospace Telemetry backlog is dependent upon the
receipt or renewal of Government contracts, the timing over which the Company
has no control.


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                                     PAGE 8

<PAGE>   10

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------


EMPLOYEES

  As of September 29, 1996, Microdyne had 574 full-time and 168 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>

                                                     September 29, 1996                      October 1, 1995
                                                     ------------------                      ---------------
                                                 Full-time         Part-time          Full-time          Part-time
                                                 ---------         ---------          ---------          ---------
<S>                                                <C>                <C>                <C>               <C>
Networking Products...............                 138                  0                182                0
Aerospace Telemetry...............                 152                  0                138                0
Manufacturer Support Services.....                 271                160                252               85
Corporate ........................                  19                  2                 16                0
                                                  ----                ---                ---              ---
     Total........................                 580                162                588               85
                                                  ====               ====                ===              ===
</TABLE>

  Networking Products employees are located principally in Alexandria, Virginia
and San Jose, California; Aerospace Telemetry employees are located principally
in Ocala, Florida; Manufacturer Support Services employees are located at
customer-owned facilities near Los Angeles, California and in Indianapolis,
Indiana. Corporate employees are located in Alexandria, Virginia.

INDUSTRY SEGMENTS AND OTHER DATA

ITEM 2. PROPERTIES.

  At September 29, 1996, the Company's principal facilities consist of the
following:

<TABLE>
<CAPTION>

    Location                    Facility Size         Own/Lease                         Function
----------------               --------------         ---------        ------------------------------------------------
<S>                            <C>                    <C>              <C>
Alexandria, VA                 26,000 sq. ft.         Leased           Headquarters, Networking Products Div. mktg/sales
Ocala, FL                     112,000 sq. ft.         Owned            Aerospace Telemetry Division
San Jose CA                    95,000 sq. ft.         Leased           Networking Products Div. mfg/engrg/warehouse
</TABLE>



  A portion of the Ocala facility was financed by and stands as collateral for
industrial revenue bonds, of which $254,000 was outstanding at September 29,
1996. The Ocala facility includes 5.5 acres of land. The industrial revenue bond
was repaid in October 1996.

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 1995 to a vote of
security holders, either through the solicitation of proxies or otherwise.

                                     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 October 1, 1995                            Fiscal Year Ended September 29, 1996
                             ---------------------------------                            ------------------------------------
                                       Quarter ended:                                                Quarter ended:
<S>             <C>            <C>             <C>            <C>            <C>             <C>             <C>            <C>
                12/31/94       3/31/95         6/30/95        10/1/95        12/31/95        3/31/96         6/30/96        9/29/96
                --------       --------        --------       --------       --------        --------        --------       --------
High            10.625         15.500          21.625         26.375          31.250         17.750          9.750          7.000
Low              4.500         10.125          13.875         18.875          14.750          5.750          6.375          4.375

</TABLE>

  As of October 1, 1996, there were an estimated 951 holders of record of the
Common Stock. The Company estimates there are approximately 4,500 shareholders
whose shares are held in "street" name. As of October 1, 1996, there were no
unregistered sales of the Company's securities.




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                                     PAGE 9
<PAGE>   11

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------


ITEM 6.  SELECTED FINANCIAL DATA.

STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>

                                                                              Years Ended
                                       -------------------------------------------------------------------------------------------
                                        September 30,       September 30,       September 30,       October 1,       September 29,
                                            1992               1993                1994               1995              1996
                                            ----               ----                ----               ----              ----
                                                                  (in thousands, except per share data)
<S>                                         <C>               <C>               <C>                <C>                <C>
Revenue                                     $72,693           $78,174           $ 101,294          $ 170,078          $  99,155
Cost of goods sold                           41,035            52,525              73,259            117,308             71,819
                                             ------            ------             -------            -------           --------
Gross profit                                 31,658            25,649              28,035             52,770             27,336
Operating expenses:
Selling, general and administrative          23,710            18,032              16,650             23,629             23,372
Research and development                      3,886             4,172               3,282              4,707              4,167
Amortization of intangibles                      --                --                 304              1,233              2,587
Restructuring charges                         8,503             3,462                  --                 --                 --
                                              -----             -----              ------             ------             ------
Total operating expenses                     36,099            25,666              20,236             29,566             30,126
                                             ------            ------              ------             ------             ------
Earnings (loss) from operations              (4,441)              (17)              7,799             23,204             (2,790)
Other income (expense)                         (176)             (468)               (499)            (2,804)            (2,161)
                                              -----            ------              ------            -------             ------
Earnings (loss) before income taxes          (4,617)             (485)              7,300             20,400             (4,951)
Provision (benefit) for income taxes         (2,461)             (252)              2,701              7,806             (2,007)
                                             -------            ------             ------             ------             ------
Net earnings before cumulative effect                                                                         
 of accounting change                        (2,156)             (233)              4,599             12,594             (2,944)
Cumulative effect of accounting change.          --             1,744                  --                 --                 --
                                            -------           -------              ------             ------             ------
Net earnings (loss)                         $(2,156)          $ 1,511           $   4,599         $   12,594          $  (2,944)
                                            =======           =======           =========         ==========          =========
Net earnings (loss) per share               $ (0.15)          $  0.10           $    0.35         $     0.96          $    (.23)
                                            =======           =======           =========         ==========          =========
Shares used in computing net earnings                                                                         
  (loss) per share                           14,592            14,428              13,088             13,096             12,811
                                             ======            ======              ======             ======             ======

<CAPTION>

BALANCE SHEET DATA

                                         September 30,     September 30,      September 30,         October 1,     September 29,
                                             1992               1993              1994                1995               1996
                                             ----               ----              ----                ----               ----
<S>                                         <C>               <C>               <C>                <C>                <C>
Cash, cash equivalents, and
  short-term investments                   $  1,602          $  2,135          $  2,628            $  4,587          $  1,791
Working capital                              17,711            19,965            22,744              40,572            28,676
Total assets                                 45,226            48,174            55,840             110,382            79,994
Long-term obligations                           425               817            11,675              16,999            11,071
Total stockholders' equity                   24,119            26,094            18,290              39,488            36,524

</TABLE>


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                                     PAGE 10


<PAGE>   12

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

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

OVERVIEW

  Microdyne's fiscal 1996 results were affected by several events in the
Company's Networking Products Division which overshadowed the excellent
performance of the Company's Aerospace Telemetry and Manufacturer Support
Services divisions. These events included an excess of distribution channel
inventory resulting from an over-estimation of end-user demand for Microdyne's
networking products during 1995, and the adverse effect of changes in Novell,
Inc.'s ("Novell") distribution policies.

- Beginning in the first quarter of 1996 and continuing throughout the year,
Microdyne sold less product to distributors than those same distributors sold to
end user customers. The $52.7 million of Networking Products hardware shipped in
1996 was substantially less than the Company believes was sold to end user
customers in the same period, based on sales reports supplied to the Company by
distributors.

- In late 1995 Novell initiated changes in the net effective discount on NetWare
available to Microdyne, which made the sale of NetWare network operating system
software bundled with Microdyne hardware products ("Bundled Products") less
financially attractive to Microdyne in 1996. Fiscal 1995 sales also included
non-recurring demand for NetWare upgrades, the sale of which was curtailed in
December 1995. As a result, Microdyne's sales of Bundled Products declined from
1995 to 1996, from $51.5 million to $15.7 million, with $10.3 million of such
sales occurring in the first quarter.

- The aerospace telemetry market in which Microdyne competes is in the midst of
a growth cycle. This growth 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 to serve these audiences.

- The outsourcing industry, of which the Company's Manufacturer Support Services
division is a part, is experiencing rapid growth. 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. Microdyne believes its core competency in this field 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.

         The above discussion contains forward-looking statements that involve
risks and uncertainties. In addition, certain other factors could cause actual
results to differ materially from management's expectations. The following risk
factors apply to Microdyne's businesses in fiscal 1997 and beyond:

         The networking products industry is one of continuing evolution. While
the LAN adapter card segment is comparatively technologically stable, network
speeds are increasing. In 1996, LAN adapter card manufacturers agreed on a
standard for 100 megabit per second, or "Fast" Ethernet. By mid-year, industry
reports showed that Fast Ethernet sales accounted for more than 15% of total LAN
adapter card demand. Fast Ethernet adapter card prices, which began the year at
a 50% premium to the traditional 10Mbps Ethernet cards, closed to within a 20%
pemium by year-end. While Microdyne believes it has a defensible market share of
the 10Mbps adapter card market, there can be no assurances that the Company's
Fast Ethernet products will be adopted by users, or that Microdyne will be
accorded a similar share of the market.

         For Microdyne to effectively compete in the LAN adapter card industry,
it must match both the price and the features of cards offered by its
competitors. Microdyne believes that, at present, its product prices and
features compare favorably to those of the industry leader. However, Microdyne
believes the coming year will be one of rapid change, with probable decreases in
prices for both 10Mbps and Fast Ethernet products. Should prices decline faster
than Microdyne's ability to reduce manufacturing costs, gross margins will be
adversely affected.

         Microdyne competes against companies far larger than itself, which
offer broader families of networking products, which have substantially greater
marketing resources, and which can call directly on the resellers and end users.
The Company believes the cumulative effect of such competition has the potential
to erode Microdyne's sales over time.

         Microdyne's Networking Products revenue does not always accurately
reflect underlying end-user demand for its products. Determining the appropriate
stocking level for products requires that the Company rely on periodic Point of
Sale ("POS") reports from distributors to assess end-user demand. The
reliability and timeliness of POS information from distributors is not uniform.
The Company endeavors to pro-actively obtain the most reliable reports of sales
out of distribution but, even so, results may be unreliable for reasons beyond
the control of the Company. POS data can only reflect past demand for current
products; not future demand for new or existing products. Ultimately, the
Company must use its best judgement as to what represents adequate distributor
stocks.

         Microdyne believes the use of Novell trade dress (including the Novell
name) on certain of its networking products benefits the Company and accords it
a certain level of continuing demand. In April 1996, Microdyne acquired the
perpetual, exclusive, non-royalty-bearing rights to market more than 30 products
in Novell trade dress, for which Microdyne paid $6.8 million. The marketplace's
perception of Novell's product quality and longevity directly affects the value
of the Novell name on Microdyne's products. This value may be diminished by
erosion of Novell's share of the network operating system market.


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                                     PAGE 11

<PAGE>   13

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

         The Company's Networking Products Division continues to depend upon
Novell for certain technology and marketing rights. Changes in Novell policies,
channels of distribution, or corporate direction could adversely affect the
Division by impairing the value of its assets or limiting its access to products
and technology.

         Microdyne's Networking Products Division has historically operated with
limited backlog because its products are shipped shortly after orders are
received, and frequently realizes a substantial portion of its net revenues in
the last month of the quarter. As a result, revenue in any quarterly period is
substantially dependent on orders booked and shipped in the last month of that
period. Delays in receipt of end-of-quarter orders in a given quarter may
adversely affect the Company's results of operations for that quarter, as the
Company's expense levels are based primarily on full-quarter revenue estimates
and only a small portion of the Company's operating expenses vary with its
revenue. Accordingly, the Company may be subject to significant and
unanticipated quarter-to-quarter fluctuations.

         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 the Company's common stock in any given period. Moreover, in
view of historical selling patterns, the Company may not learn of such
shortfalls until late in the fiscal quarter, which could result in an even more
immediate and adverse effect on the trading price of the Company's stock.
Finally, the Company participates in an intensely competitive industry marked by
rapidly changing technology, which may result in significant volatility of the
Company's common stock price.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected information
from the Company's Consolidated Statements of Operations, expressed as a
percentage of revenue:

<TABLE>
<CAPTION>
                                                  
                                                                                 Years Ended
                                                                      -----------------------------------
                                                                      Sept. 30,      Oct. 1,     Sept. 29,
                                                                        1994          1995         1996
                                                                      --------       -------     --------
         <S>                                                         <C>               <C>           <C>
         Revenue                                                     100.0%            100.0%        100.0%
         Cost of goods sold                                           72.3              69.0          72.4
                                                                     -----             -----         -----
         Gross profit                                                 27.7              31.0          27.6
         Operating expenses:                      
              Selling, general and administrative                     16.4              13.8          23.6
              Research and development                                 3.3               2.8           4.2
              Amortization of intangibles                              0.3               0.7           2.6
                                                                     -----             -----         -----
                   Total operating expenses                           20.0              17.3          30.4
                                                                     -----             -----         -----
         Earnings (loss) from operations                               7.7              13.7          (2.8)
         Other income (expense)                                       (0.5)             (1.6)         (2.2)
                                                                     -----             -----         -----
         Earnings (loss) before income taxes                           7.2              12.1          (5.0)
         Provision (benefit) for income taxes                          2.7               4.6          (2.0)
                                                                     -----             -----         -----
         Net earnings (loss)                                           4.5%              7.4%         (3.0)%
                                                                     =====             =====         =====
</TABLE>


FISCAL YEARS ENDED SEPTEMBER 29, 1996 AND OCTOBER 1, 1995

Revenue. Revenue for fiscal 1996 decreased to $99.2 million from $170.1 million
in fiscal 1995, a decrease of 41.8%. This decrease was a result of lower sales
at the Company's Networking Products division.

         As a result of lower networking hardware sales and higher revenue from
professional service sources, Microdyne now reports revenue derived from
products and revenue derived from services separately. Service revenue accounted
for 15.0% of fiscal 1996 revenue compared to 7.4% in fiscal 1995.

         Networking Products revenue decreased to $68.4 million in 1995 from
$141.3 million in 1994, a decrease of 51.6%. The decrease reflects lower sales
of Bundled Products, which declined from $51.5 million to $15.7 million for the
reasons outlined in the "Overview" above. Sales of networking hardware products
declined from $89.8 million to $52.7 million. The preponderance of this decrease
was due to the Company's decision to re-balance channel inventory held by
distributors.

         The Company shipped less product in each of its principal sales
categories: PC Connectivity products (including Ethernet and Token Ring adapter
cards), and Minicomputer and Mainframe Connectivity products. Within the PC
Connectivity products, Microdyne saw an increase in demand for Fast Ethernet
adapter cards, which the Company believes will gradually replace 10Mbps
technology. Fast Ethernet products accounted for 23.8% of shipments in the
fourth quarter of fiscal 1996.

         The Company also saw increases in two distribution segments in 1996:
sales to other adapter card providers of Microdyne's 100Mbps ISA-bus adapter,
and sales to U.S. Government ("Government") agencies. Microdyne sells its Fast
Ethernet ISA-bus product to three companies on an OEM basis, and its products
are now included on 11 Government contracts, up from six in 1995.

         Microdyne believes there was an absolute decline in demand for
Minicomputer and Mainframe


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                                     PAGE 12
<PAGE>   14

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

Connectivity products in 1996, reflecting the industry's evolution away from
such computing solutions.

         Aerospace Telemetry revenue was relatively stable at $17.0 million in
1996 versus $17.4 million in 1995, largely as a result of continued demand for
the Company's telemetry products. Manufacturer Support Services revenue
increased to $14.4 million from $12.1 million in fiscal 1995, reflecting
continued growth in support activities for this division's customer.

         Gross Profit. Gross profit decreased to $27.3 million in 1996 from
$52.8 million in 1995, and as a percentage of revenue decreased to 27.6% from
31.0%. The decrease in dollars reflects lower sales versus fiscal 1995. The
percentage decrease in gross margin is attributable to lower gross margins in
the Company's Networking Products activity, which was affected by lower
absorption of manufacturing overhead over a small sales base and acceleration of
certain expenses offset partially by lower sales of low-gross-margin Bundled
Products and decreased royalty payments in the fourth quarter. Gross profit was
relative unchanged at the Aerospace Telemetry and Manufacturer Support Services
divisions.

         Selling, General and Administrative. Selling, general and
administrative expense was relatively stable at $23.4 million in 1996 versus
$23.6 million in 1995, but increased as a percentage of revenue to 23.6% from
13.9%. The increase as a percentage of sales was due principally to the
Company's inability to shed committed costs in the first half of the year at the
Networking Products division. By the fourth quarter, annualized SG&A expense had
fallen to $21.8 million. Amortization of product line acquisition costs rose to
$2.6 million in 1996 from $1.2 million in 1995, due principally to the purchase
of National Semiconductor's Ethernet adapter card product line in September 1995
and the acquisition in April 1996 of perpetual rights to market certain
Novell-developed technology and the use of Novell trade dress on certain
products.

         Research and Development. Research and development expense decreased to
$4.2 million in 1996 from $4.7 million in 1995 but increased as a percentage of
revenue to 4.2% from 2.8%. The percentage increase is due principally to
relatively stable R&D costs at the Company's Networking Products division spread
over a lower sales base.

         Other Income (Expense).  Other expense in both 1996 and 1995 includes
interest expense associated with outstanding borrowings against the Company's
line of credit. The higher interest expense in 1996 was due to larger
outstanding borrowings caused by acquisitions and reduction of trade payables.

         Provision for Income Taxes. The Company accrued a benefit from income
taxes of $2.0 million in 1996 versus a provision for income taxes of $7.8
million in 1995. The benefit was due to the Company's net loss for the year.

FISCAL YEARS ENDED OCTOBER 1, 1995 AND SEPTEMBER 30, 1994
Revenue. Revenue for fiscal 1995 increased to $170.1 million from $101.3 million
in fiscal 1994, an increase of 67.9%. This increase was a result of internal
growth in each of the Company's three operations and Networking Products
acquisitions.

         Networking Products revenue increased to $141.3 million in 1995 from
$80.5 million in 1994, an increase of 75.5%. The growth reflects acquisitions by
Microdyne, the continued growth of the LAN products industry and the Company's
increased market share. PC Connectivity products, which include the Company's
Ethernet and Token Ring adapter cards, increased to $76.5 million in 1995 from
$31.6 million in 1994, an increase of 142.0%. The increase reflects recent
acquisitions, particularly the Eagle acquisition in January 1995. Total Ethernet
revenue increased to $60.6 million in 1995 from $27.3 million in 1994. Token
Ring revenue increased to $15.9 million in 1995 from $4.4 million in 1994.
Revenue from sales of Microdyne hardware bundled with Novell software ("Bundled
Products") increased to $51.5 million in 1995 from $28.8 million in 1994.
Reflecting industry trends, Minicomputer Connectivity and Mainframe Connectivity
product revenue declined $4.1 million in 1995 from 1994.

         Aerospace Telemetry revenue increased to $17.4 million in 1995 from
$12.3 million in 1994, largely as a result of demand for the Company's new
telemetry products and Government contracts received late in 1994. Manufacturer
Support Services revenue increased to $12.1 million from $8.0 million in fiscal
1994, reflecting continued growth in support activities for the Company's
customer. The Industrial Telemetry operations, which contributed $738,000 in
1994, was sold in December 1993.

         Gross Profit. Gross profit increased to $52.8 million in 1995 from
$28.0 million in 1994, and as a percentage of revenue increased to 31.0% from
27.7%. The increase in gross margin is attributable to higher gross margins in
the Company's Networking Products activity. Gross profit also increased in the
Aerospace Telemetry and Manufacturer Support Services operations.

         Selling, General and Administrative. Selling, general and
administrative expense grew to $24.4 million in 1995 from $16.7 million in 1994,
but decreased as a percentage of revenue to 14.3% from 16.4%. Amortization of
product line acquisition cost from acquisitions made to date will result in an
annual expense of approximately $1.3 million for the next six fiscal years and
approximately $900,000 in the following year.

         Research and Development. Research and development expense increased to
$5.2 million in 1995 from $3.6 million in 1994 but decreased as a percentage of
revenue to 3.1% from 3.5%. The dollar increase



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                                     PAGE 13
<PAGE>   15

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

is attributable to the addition of former DCA Token Ring engineers in the fourth
quarter of 1994 as well as the development of new products introduced in 1995.

         Other Income (Expense).  Other expense in both 1995 and 1994
includes interest expense associated with outstanding borrowings against the
Company's line of credit. The higher interest expense in 1995 was due to larger
outstanding borrowings which financed the Eagle acquisition. Also included in
1995 are one-time charges totaling $875,000, in connection with the settlement
of a stockholder class action lawsuit filed against the Company in 1992.

         Provision for Income Taxes. Provision for income taxes was $7.8 million
(38.3% of pre-tax earnings) and $2.7 million (37.0% of pre-tax earnings) in 1995
and 1994, respectively. The increase in the effective tax rate resulted in part
from reduced tax credits, the impact of which was partially offset by lower
percentage state income taxes and benefits from the Company's foreign sales
corporation.

LIQUIDITY AND CAPITAL RESOURCES

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

         External financing has been primarily provided through bank borrowings.
As of September 29, 1996, the Company has $17.5 million of bank debt, consisting
of a $3.1 million term note which is repaid in monthly payments and scheduled to
be fully satisfied in May 1997; and $14.4 million in outstanding borrowings
under a revolving line of credit facility (see Note G to the Notes to the
Consolidated Financial Statements). On September 29, 1996, the Company had $1.8
million of cash and $3.1 million available for borrowing under its revolving
credit facility. The Company is required to repay its bank borrowings on a
schedule which will result in the extinguishment of all current bank debt prior
to December 31, 1997. The Company believes that based on its current forecast of
cash generation it will meet that schedule.

         In April 1996, the Company utilized cash and notes to purchase from
Novell the exclusive, royalty-free perpetual right to market certain hardware
and related technology which were previously sold by the Company under license
from Novell, and to convert certain accounts payable. As of September 29, 1996,
notes payable due Novell totaled $7.9 million, of which $2.5 million has been
classified as as short-term obligation and $5.4 million as long-term obligations
on the September 29, 1996 Balance Sheet.

         During fiscal 1996, net cash used by operating activities was $0.9
million, primarily due to a net loss. Decreases in accounts receivable and
inventories were mostly offset by decreases in accounts payable and accrued
expenses. The decreases in accounts receivable and accounts payable reflect the
Company's reduced level of business. Cash used from investing activities was
$1.4 million, most of which reflected the Novell acquisition. Capital
expenditures were minimal and the Company has no material commitments for future
capital expenditures. Cash used in financing activities was $0.4 million
representing payments on notes largely offset by additional borrowings.

         The Company 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 1997. The Company 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
the Company's operations.



-------------------------------------------------------------------------------
                                     PAGE 14

<PAGE>   16

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                             MICRODYNE CORPORATION
                FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED
          SEPTEMBER 30, 1994, OCTOBER 1, 1995, AND SEPTEMBER 29, 1996

<TABLE>
<CAPTION>
                                                            TABLE OF CONTENTS

                                                                                                           Page
                                                                                                           ----
                  <S>                                                                                     <C>
                  REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                                        16
                                                                                                            
                                                                                                            
                  CONSOLIDATED FINANCIAL STATEMENTS                                                         
                                                                                                            
                           CONSOLIDATED BALANCE SHEETS                                                      17
                                                                                                            
                           CONSOLIDATED STATEMENTS OF OPERATIONS                                            18
                                                                                                            
                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                                  19

                           CONSOLIDATED STATEMENTS OF CASH FLOWS                                            20

                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                     21-31


</TABLE>

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                                     PAGE 15

<PAGE>   17

MICRODYNE CORPORATION                           1996 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 29, 1996 and October 1, 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 29, 1996. 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, 29, 1996 and October 1, 1995, and results of its
operations and its cash flows for each of the three years in the period ended
September 29, 1996 in conformity with generally accepted accounting principles.


                                               GRANT THORNTON LLP



Washington, D.C.
October 30, 1996



-------------------------------------------------------------------------------
                                     PAGE 16
<PAGE>   18
MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

                              MICRODYNE CORPORATION
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                October 1,        September 29,
                                                                  1995                1996
                                                                --------             -------
                                                                        (in thousands)
<S>                                                           <C>                   <C>        
ASSETS
CURRENT ASSETS
    Cash                                                        $  4,587             $ 1,791
       Accounts receivable, net (note C).......................   59,681              30,954
       Inventories (notes A2 and D)...........................    25,917              24,100
       Loan receivable -- officers (note K)....................      193                  --
       Income tax receivable (note H)..........................    1,306               1,946
       Prepaid expenses and deposits..........................     1,240               1,231
       Deferred income tax asset (note H).....................     1,243               1,053
                                                                --------             -------
          Total current assets.................................   94,167              61,075

PROPERTY AND EQUIPMENT, net (notes A3 and E)...................    4,749               3,746
PRODUCT LINE ACQUISITION COST (note B).........................   10,333              14,417
DEFERRED INCOME TAX BENEFIT (Note H)                                  --                 113
OTHER ASSETS (note A4).........................................    1,133                 643
                                                                --------             -------
                                                                $110,382             $79,994
                                                                ========             =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
      Current maturities of long-term obligations (note G)..... $  5,483             $15,719
      Accounts payable -- trade................................   26,509               9,365
      Accrued liabilities (note F).............................   21,603               7,315
                                                                --------             -------
          Total current liabilities............................   53,595              32,399

LONG-TERM OBLIGATIONS, net of current maturities (note G)......   16,999              11,071
DEFERRED INCOME TAX PAYABLE (note H)...........................      300                  --
COMMITMENTS AND CONTINGENCIES (note I).........................       --                  --
STOCKHOLDERS' EQUITY (note J)
     Common stock, $.10 par value, authorized 50,000,000,
        shares 12,789,666 shares, issued and outstanding at
        October 1, 1995 and 12,832,203 shares issued and
        outstanding at September 29, 1996......................    1,279               1,283
     Additional paid-in capital................................   10,040              10,016
     Retained earnings.........................................   28,169              25,225
                                                                --------             -------
          Total Stockholders' Equity...........................   39,488              36,524
                                                                --------             -------
                                                                $110,382             $79,994
                                                                ========             =======
</TABLE>

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

-------------------------------------------------------------------------------
                                    PAGE 17
<PAGE>   19

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

                              MICRODYNE CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                     Year ended

                                                   September 30,     October 1,      September 29,
                                                       1994             1995               1996
                                                   -------------     ----------      -------------
<S>                                                  <C>               <C>               <C>       
Revenue
   Product (note A1)..............................   $  93,403        $  157,427        $   84,298
   Service (note A1)..............................       8,891            12,651            14,857
                                                     ---------        ----------        ----------
Total revenue                                          101,294           170,078            99,155

Cost of goods sold and service provided

   Product ........................................     67,593           109,021            61,729
   Service ........................................      5,666             8,287            10,090
                                                     ---------        ----------        ----------
Total cost of products sold and service provided        73,259           117,308            71,819
                                                     ---------        ----------        ----------

     Gross profit..................................     28,035            52,770            27,336

Operating expenses:
     Selling, general and administrative expense...     16,650            23,629            23,372
     Research and development......................      3,282             4,704             4,167
     Amortization of intangibles...................        304             1,233             2,587
                                                     ---------        ----------        ----------
          Total operating expenses.................     20,236            29,566            30,126
                                                     ---------        ----------        ----------

Earnings (loss) from operations....................      7,799            23,204            (2,790)

Other (expense) income
     Interest expense..............................       (554)           (1,820)           (2,113)
     Other.........................................         55              (984)              (48)
                                                     ---------        ----------        ----------
          Earnings (loss) before income taxes......      7,300            20,400            (4,951)

Provision (benefit) for income taxes (note H)
     Current.......................................        644             7,410            (1,783)
     Deferred......................................      2,057               396              (224)
                                                     ---------        ----------        ----------
                                                         2,701             7,806            (2,007)
                                                     ---------        ----------        ----------

         NET EARNINGS (LOSS).......................  $   4,599         $  12,594         $  (2,944)
                                                     =========        ==========        ==========

Earnings (loss) per share..........................  $    0.35         $    0.96         $   (0.23)
                                                     =========        ==========        ==========

Weighted average shares outstanding (note A5)......     13,088            13,096            12,811
                                                     =========        ==========        ==========
</TABLE>

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

-------------------------------------------------------------------------------
                                    PAGE 18
<PAGE>   20

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

                              MICRODYNE CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

     Years ended September 30, 1994, October 1, 1995, and September 29, 1996
<TABLE>
<CAPTION>

                                                                            Common Stock                         
                                                                    ---------------------------        Additional
                                                                    Number of                            paid-in           Retained
                                                                     shares           Par Value          capital           earnings
                                                                     ---------       ----------        -----------       ----------
                                                                                             (in thousands)
<S>                                                                  <C>             <C>               <C>               <C>     
Balance, September 30, 1993 ................................           14,046          $  1,405          $ 13,713          $ 10,976
Issuance of stock associated with
    stock options ..........................................               50                 5               256                --
Issuance of stock associated with                                          10                 1                39                --
    stock purchase plan ....................................
Unrealized loss on marketable
    equity security ........................................               --                --               (33)               --
Purchase and cancellation of common stock ..................           (2,291)             (230)          (12,441)               --
Net earnings ...............................................               --                --                --             4,599
                                                                     --------          --------          --------          --------
Balance, September 30, 1994 ................................           11,815          $  1,181          $  1,534          $ 15,575
Issuance of stock associated with
    stock options ..........................................              965                97             3,526                --
Issuance of stock associated with
    stock purchase plan ....................................               10                 1               112                --
Tax benefit from option exercises ..........................               --                --             4,868                --
Net earnings                                                               --                --                --            12,594
                                                                     --------          --------          --------          --------
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
                                                                     ========          ========          ========          ========

</TABLE>

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

-------------------------------------------------------------------------------
                                    PAGE 19
<PAGE>   21

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

                              MICRODYNE CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>                                                             
                                                                                                        YEAR ENDED
                                                                                    September 30,        October 1,    September 29,
                                                                                         1994               1995             1996
                                                                                        -------        --------------       ------
                                                                                                       (in thousands)
<S>                                                                                    <C>               <C>               <C>      
Increase (Decrease) in Cash
Cash flows from operating activities
   Net earnings (loss) .......................................................         $  4,599          $ 12,594          $ (2,994)
   Adjustments to reconcile net earnings to net cash from
     operating activities, exclusive of effect of acquisitions
     and dispositions:
        Depreciation and amortization ........................................            1,771             2,094             3,293
        Provision for doubtful accounts receivable and
          inventory obsolescence .............................................            1,315             1,734               442
        Changes in assets and liabilities:
           (Increase) decrease in accounts receivable ........................          (10,939)          (30,703)           29,340
           Decrease (increase) in inventories ................................            3,585            (3,865)            1,429
           (Increase) decrease in prepaid expenses ...........................             (557)              159                10
           Decrease in other assets ..........................................              198               392               491
           Decrease (increase) in income tax receivable ......................            3,091            (1,167)             (640)
           Decrease in deferred taxes ........................................            2,057               456                76
           Increase (decrease) in accounts payable and
            other accruals ...................................................            6,883            26,051           (32,399)
                                                                                       --------          --------          -------- 
           Net cash provided by operating activities .........................           12,003             7,745              (902)
Cash flows from investing activities
   Product line acquisitions .................................................           (4,750)          (20,862)           (1,163)
   Additions to property and equipment .......................................             (826)             (887)             (478)
   Cash from sale of subsidiary ..............................................            1,000                --                --
   (Loans to) payments from stockholder/officer ..............................              103              (165)              193
                                                                                       --------          --------          -------- 
           Net cash used in investing activities .............................           (4,473)          (21,914)           (1,448)
Cash flows from financing activities
   Borrowings on (payment on) bank debt ......................................            5,333             7,981            (2,382)
   Issuance of note payable ..................................................               --                --             3,035
   Payments on notes payable .................................................               --                --            (1,079)
   Issuance of common stock ..................................................              300             3,279               238
   Redemption of common stock ................................................          (12,670)               --                --
   Tax benefit adjustment associated with exercise
       of stock options ......................................................               --             4,868              (258)
                                                                                       --------          --------          -------- 
           Net cash provided by (used in) financing activities ...............           (7,037)           16,128              (446)
                                                                                       --------          --------          -------- 
           Net increase (decrease) in cash ...................................              493             1,959            (2,796)
Cash at beginning of year ....................................................            2,135             2,628             4,587
                                                                                       --------          --------          -------- 
Cash at end of year ..........................................................         $  2,628          $  4,587          $  1,791
                                                                                       ========          ========          -------- 

</TABLE>

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


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                                    PAGE 20
<PAGE>   22

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------


                              MICRODYNE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           September 30, 1994, October 1, 1995, and September 29, 1996

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

1.    NATURE OF OPERATIONS

      Microdyne Corporation is comprised of three divisions. Its Networking
Products division develops, manufactures, and markets a broad line of network
connectivity products. Its Aerospace Telemetry division manufactures and sells
aerospace telemetry receivers and ancillary devices, and provides systems
integration services. Its Manufacturer Support Services division provides
outsourced services including telephone technical support and warranty and
product repair.

2.    PRINCIPLES OF CONSOLIDATION

      The consolidated financial statements include Microdyne Corporation,
Microdyne Ltd., and Microdyne U.K. All significant intercompany amounts have
been eliminated in consolidation.

3.    REVENUE RECOGNITION

      Revenue from the sale of computer hardware, peripheral equipment and
computer networking products, including software, is recognized when the
products are shipped. 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 agreements with distributors allow defective products to be
returned for credit. Distributor terms also permit stock rotation of products, a
standard practice in the electronics industry. The Company from time to time
sells products on a non-cancellation, no-return basis. In such cases, pricing
will reflect the non-cancellable nature of the order. Distributor agreements
also provide distributors with protection against price decreases applicable to
products in distributors' inventories at the time of the decrease. Provision has
been made in the accompanying financial statements for the estimated liability
associated with defective product returns, stock rotations, and price decreases.

      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.

      Generally, in its Networking Products business, the Company must
manufacture products in advance of orders from distributors and must, therefore,
estimate demand as accurately as possible. Distributors provide certain
information regarding their levels of sales to value-added resellers and other
customers, called Point of Sale ("POS") data, but such POS information cannot be
assured to be either timely or accurate. In addition, distributors maintain
target stocking levels of products, and such targeted levels may change without
notice, which could decrease the Company's revenue in a given period. Moreover,
distributors characteristically sell products at a small mark-up to the price
from which they are obtained from manufacturers, and terms of sale may influence
a distributor's decision to carry certain products. Based on inadequate POS and
end user information, unanticipated distributor targeted stocking levels,
unanticipated price competition, or otherwise, the Company may be unable to
estimate production requirements of its distributors and future sales levels
generally, the Company's revenue may fluctuate due to production in excess of
demand. Moreover, the inability of the Company to timely market excess
inventory, if any, on economically viable terms could have a material adverse
effect on the Company. Conversely, if the Company's production is insufficient
to satisfy demand, the Company could be adversely affected.

4.    INVENTORIES

Inventories are stated at the lower of cost or market. Inventories are
standard-cost based, with such standards reviewed periodically against purchase
prices and adjusted as appropriate.



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                                   PAGE 21
<PAGE>   23

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------


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

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.    CAPITALIZED SOFTWARE COSTS

      Included in other assets as of September 29, 1996 is $433,000 in net
capitalized software costs. The Company's policy is to expense the costs
incurred prior to establishment of technological feasibility. The establishment
of technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including anticipated
future gross revenue, estimated economic life and changes in technologies.
Development costs beyond the point of technological feasibility are capitalized.
Amortization, which begins when the product is available for general release,
occurs over the estimated economic life which is typically between one and two
years. Amortization expense associated with capitalized software costs for the
years ended September, 30, 1994, October 1, 1995, and September 29, 1996 was
$473,000, $494,000 and $775,000, respectively.

7.    EARNINGS PER SHARE

      Earnings per common and common equivalent share is computed by dividing
the earnings or loss by the weighted average number of common and common
equivalent shares outstanding during the respective years.

      The weighted average number of shares outstanding with the number of
shares used in the computation of earnings per share is as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                       1994           1995            1996
                                                                       ----           ----            ----
<S>                                                                <C>            <C>             <C>   
Common shares                                                        12,715         12,224          12,811
Common equivalent shares from stock options, when
dilutive                                                                373            872              --
                                                                    -------        -------          ------
                                                                     13,088         13,096          12,811
</TABLE>

8.     FISCAL YEAR

         During fiscal year 1995, the Company changed its fiscal year from
September 30 each year to a 52 or 53 week year ending on the Sunday nearest the
last day of September in each year. Therefore, fiscal years 1995 and 1996 ended
on October 1, 1995 and September 29, 1996, respectively, whereas fiscal year
1994 was under the fiscal calendar which ended on September 30. 1994. All
references to years relate to fiscal years rather than calendar years.

9. 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.

10.     CASH AND CASH EQUIVALENTS

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

11.     RECLASSIFICATIONS

         Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform to the 1996 presentation.


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                                   PAGE 22
<PAGE>   24

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

NOTE B - ACQUISITIONS AND DISPOSITIONS

         In April 1996, the Company purchased from Novell the exclusive
royalty-free perpetual rights to market certain hardware products and related
technology for $6.8 million in cash and notes. See Notes G and I4. The
amortization period for the purchased intangibles, based on management's
estimate of the useful life of the acquired rights, is seven years. The Company
had previously licensed the rights to sell and market such products under
various license agreements.

         In September 1995, the Company acquired the Ethernet product line from
National Semiconductor ("National"). This acquisition included certain
intangibles of $1.8 million and National's 10Mb and 10/100Mb Ethernet adapter
card inventory of approximately $3.5 million. The amortization period for the
intangibles, based on management's estimate of the useful life of the acquired
technology, is seven years.

         In January 1995, the Company acquired the Eagle Technology ("Eagle")
business from Artisoft, Inc. Eagle provided the Company with a family of
Ethernet adapter cards, file server cards, hubs, and print server cards. The
purchase price was $16.5 million, representing $8.3 million in inventory, $7.5
million in goodwill and other intangibles, and $700,000 in fixed assets. The
amortization period for the intangibles, based on management's estimate of the
useful life of the acquired technology, is seven years.

         The Company also acquired certain product lines, inventory, fixed
assets and intellectual property from Gateway Communications, Inc. for two
million dollars in a purchase transaction initiated in June 1994 and completed
in September 1994.

         In July 1994, Digital Communications Associates (DCA) sold to the
Company certain fixed assets, property, rights, and inventory related to DCA's
Token Ring product line. The purchase price was approximately seven million
dollars, representing the net book value of the assets sold and guaranteed
minimum royalties of three million dollars. This minimum royalty commitment
covers five years and the long-term portion is presented as both a product line
acquisition cost and a long-term obligation in the consolidated balance sheets.
Such deferred minimum royalties will be amortized over five years as payments
are made.

         In December 1993, the Company sold the net assets and operations of
Wireless Data Corporation, a subsidiary which manufactured industrial telemetry
products, for one million dollars in cash and a $300,000 note which was
subsequently paid.

         On an ongoing basis, management reviews the valuation and amortization
of product line acquisition cost to determine possible impairment. The
recoverability of product line acquisition cost is assessed by determining
whether the amortization of such cost over its remaining life can be recovered
through projected undiscounted future cash flows.

NOTE C  - ACCOUNTS RECEIVABLE

Accounts receivable are comprised of the following:
<TABLE>
<CAPTION>

                                                                         As of                    As of
                                                                    October 1, 1995         September 29, 1996
                                                                    ---------------         ------------------
                                                                                 (in thousands)
<S>                                                                   <C>                     <C>     
Commercial
Billed                                                                  $ 53,915                $ 25,620
Unbilled                                                                   2,618                   3,362
                                                                        --------                --------         
                                                                          56,533                  28,982
U.S. Government
Billed                                                                     3,774                     591
Unbilled                                                                   1,064                   2,475
                                                                        --------                --------                       
                                                                           4,838                   3,066
Other                                                                         89                      28
                                                                        --------                --------      
                                                                          61,460                  32,076
Allowance for doubtful accounts and other reserves                        (1,779)                 (1,122)
                                                                        --------                --------
                                                                        $ 59,681                $ 30,954
                                                                        ========                ========
</TABLE>



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                                    PAGE 23
<PAGE>   25

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

NOTE C  - ACCOUNTS RECEIVABLE - CONTINUED

         Following is a table depicting the activity in the Company's allowance
for doubtful accounts and other related receivables reserves for the years
ended:
<TABLE>
<CAPTION>
                                September 30,       October 1,      September 29,
                                    1994               1995             1996
                                    ----               ----             ----
                                                (in thousands)
<S>                               <C>                <C>             <C>    
Beginning balance                 $   362            $   923         $ 1,779
Provision charged to operations       954              1,271              50
Amounts written off                  (393)              (415)           (707)
                                  -------            -------          ------
Ending balance                    $   923            $ 1,779         $ 1,122
                                  =======            =======          ======
</TABLE>                                                            


Certain amounts of returns and other charges have been recorded directly to the
statements of operations and are not reflected in the above table.

NOTE D - INVENTORIES

Inventories are comprised of the following:
<TABLE>
<CAPTION>

                                  As of                   As of
                             October 1,1995        September 29,1996
                             --------------        -----------------
                                         (in thousands)
<S>                              <C>                 <C>     
Raw materials                    $  6,122            $  5,945
Work-in-process                     1,145               2,788
Finished goods                     20,449              17,139
                                 --------            --------
                                   27,716              25,872
Less reserves for obsolescence     (1,799)             (1,772)
                                 --------            --------
                                   25,917              24,100
                                 ========            ========
</TABLE>
                                            


The following is a table depicting the activity in the Company's reserve for
obsolescence for the years ended:

<TABLE>
<CAPTION>
                                           September 30,           October 1,          September 29,
                                                1994                  1995                  1996    
                                                ----                  ----                  ----    
                                                                (in thousands)                      
<S>                                          <C>                  <C>                    <C>        
Beginning balance                             $   796              $ 2,005                $ 1,799   
Increase in reserves                                                                                
   Provision charged to operations                321                  463                    388   
   Established upon acquisitions                1,185                1,090                     --   
   Amounts written off to reserves               (297)              (1,759)                  (415)  
                                              -------              -------                -------   
Ending balance                                $ 2,005              $ 1,799                $ 1,772   
                                              =======              =======                =======   
</TABLE>
                                                                              
                                                                  
NOTE E - PROPERTY AND EQUIPMENT

Property and equipment are comprised of the following:

<TABLE>
<CAPTION>
                                               As of                   As of
                                         October 1,1995        September 29,1996
                                         --------------        -----------------
                                                    (in thousands)
<S>                                        <C>                      <C>     
Machinery and equipment                     $  7,619                 $  8,284
Buildings and land                             1,859                    1,859
Furniture and fixtures                         1,411                    1,239
Automobiles                                       91                       51
Leasehold improvements                           147                      172
                                            --------                 --------
                                              11,127                   11,605
Accumulated depreciation and amortization     (6,378)                  (7,859)
                                            --------                 --------
                                            $  4,749                 $  3,746
                                            ========                 ========
</TABLE>
                                                         
-------------------------------------------------------------------------------
                                    PAGE 24
<PAGE>   26
MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------


NOTE F - ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:

<TABLE>
<CAPTION>

                                                     As of                     As of
                                                October 1,1995          September 29,1996
                                                --------------          -----------------
                                                            (in thousands)
<S>                                               <C>                    <C>    
Inventory purchases                                 $16,259                $ 3,938
Commissions and royalties                               798                    695
Payroll and payroll taxes                               928                    944
Vacation                                                584                    631
Amounts associated with product line acquisitions     2,255                     --
Other                                                   779                  1,107
                                                    -------                -------
                                                    $21,603                $ 7,315
                                                    =======                =======
                                                             
</TABLE>

NOTE G - LONG-TERM OBLIGATIONS

Long-term obligations consists of the following as of:

<TABLE>
<CAPTION>
                                                                                      October 1,1995         September 29,1996
                                                                                      --------------         -----------------
                                                                                                  (in thousands)
<S>                                                                                       <C>                      <C>         
Amounts outstanding on a Line of Credit which limit was $22.5 million at October
1, 1995. Under the terms stipulated under the Company's present Credit Agreement
as amended, the amount available on this Line of Credit is calculated as the
lesser of: the Borrowing Base less amounts outstanding on the Term Note, or (a)
$17.5 million as of September 30, 1996 until December 30, 1996; (b) $14.5
million as of December 31, 1996 until March 30, 1997; (c) $8.0 million as of
March 31, 1997 and until June 29, 1997; and (d) $5.0 million as of June 30, 1997
and at all times thereafter. Borrowing availability for the Line of Credit was
$17.5 million at September 29, 1996. The Borrowing Base Loans (defined as the
sum of outstanding balances on the Line of Credit and Term Note) are
collateralized by a security interest in the Company's receivables, inventories,
equipment, and land and building. Under the Credit Agreement in place at October
1, 1995, interest was payable monthly and was at prime or the London Interbank
Offer Rate (LIBOR) plus a premium that ranged from 1.4% to 1.8%. Under the
present Credit Agreement as amended, interest is payable monthly at prime plus
one percent (prime at September 29, 1996 was 8.25%). The present Credit
Agreement as amended expires on September 30, 1997, unless extended pursuant to
the terms of the Credit Agreement. The Credit Agreement as amended contains
certain restrictive covenants with which the Company had complied as of
September 29, 1996. Amounts outstanding on a $12.0 million Term Note. As of
September 29, 1996, remaining principal is due in fixed monthly payments of               $    12,000              $     14,418
$400,000 through April 1997 and $300,000 due on May 1, 1997. Under the Credit     
Agreement in place at October 1, 1995, interest was payable monthly at either:    
1) the prime rate (which was 8.75% on October 1, 1995); or 2) LIBOR plus a premium
that ranged from 1.5% to 1.9%. Under the present Credit Agreement as amended,      
interest is payable monthly at prime plus one percent.                            
                                                                                                7,900                     3,100
</TABLE>


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                                    PAGE 25
<PAGE>   27

MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------


NOTE G - LONG-TERM OBLIGATIONS - CONTINUED
<TABLE>
<CAPTION>

                                                                    October 1,1995         September 29,1996
                                                                    --------------         -----------------
                                                                              (in thousands)
<S>                                                                  <C>                        <C>        
Amounts outstanding on a $5.8 million acquisition note. Interest is         --                     5,419   
8% with principal and interest of $118,000 to be paid monthly from                                         
May 1996 through April 2001                                                                                
                                                                                                           
Amounts outstanding on a $3.0 million accounts payable financing            --                     2,442   
note. Interest is 8% with principal and interest of $137,000 to be                                         
paid monthly from May 1996 through April 1998                                                              
                                                                                                           
Commitment for minimum royalties due under product line acquisition      2,219                     1,132   
agreement (see note B); payable over five years, expiring in fiscal                                        
year 1999                                                                                                  
                                                                                                           
Industrial revenue bond payable monthly at $4,167 plus interest at         304                       254   
85.5% of prime, due in 2001, collateralized by land                                                        
                                                                                                           
Other                                                                       59                        25   
                                                                      --------                  --------   
                                                                        22,482                    26,790   
Less current portion                                                    (5,483)                  (15,719)  
                                                                      --------                  --------   
                                                                      $ 16,999                  $ 11,071   
                                                                      ========                  ========   
</TABLE>

<TABLE>
<CAPTION>

Long-term debt is due as follows:

         Year ending
         <S>                                      <C>       
         September 28, 1997                       $   15,719
         September 27, 1998                            7,775
         October 3, 1999                               1,196
         October 1, 2000                               1,295
         September 30, 2001                              805
                                                   $  26,790
</TABLE>


         Under Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," effective for fiscal years that end
after December 15, 1995, the Company is required to provide fair value
disclosures of its financial instruments beginning in fiscal year 1996.

         Outstanding Borrowing Base 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 29, 1996 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 noncurrent, based on the
classification of the related assets and liabilities giving rise to the
temporary difference.

-------------------------------------------------------------------------------
                                    PAGE 26
<PAGE>   28
MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

NOTE H - INCOME TAXES   (CONTINUED)

Following are the components of the deferred tax asset (liability) recognized
on the accompanying balance sheet:

<TABLE>
<CAPTION>
                                                                         As of                   As of
                                                                     October 1,1995        September 29,1996
                                                                     --------------        -----------------
                                                                                 (in thousands)
            <S>                                                         <C>                  <C>
            Current                                    
               Inventory                                                $  799               $  891
               Accounts receivable                                         435                   88
               Financial statement income not taxable  
                 until following year, net                                   9                   74
                                                                        ------               ------
                                                                        $1,243               $1,053
            Non-current                                
               Capitalized software costs                               $ (263)              $ (170)
               Intangibles amortization                                    154                  533
               State income taxes                                           92                  113
               Depreciation                                               (266)                 (66)
               Other                                                       (17)                (297)
                                                                        ------               ------ 
                                                                        $ (300)              $  113
                                                                        ------               ------
               Net deferred income tax assets                           $  943               $1,166
                                                                        ======               ======
</TABLE>

         A valuation allowance against deferred tax assets has not been
recognized since there is sufficient prior-year taxable income against which
calculated deferred losses can be applied.

         Following is a reconciliation of the statutory federal income tax rate
to the effective rates reflected in the statement of operations:


<TABLE>
<CAPTION>
                                                         1994                          1995                         1996
                                                         ----                          ----                         ----
                                                              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       $2,482            34.0%        $6,936           34.0%      $(1,683)         (34.0)%
State income taxes, net of federal
benefit                                          572             7.9            931            4.6          (358)          (7.2)
Benefit from foreign sales corporation            --              --           (380)          (1.9)         (113)          (2.3)
Benefits from research and development           (90)           (1.2)            --             --            --             --
credits  
Other items, net                                (263)           (3.7)           319            1.6           147            3.0
Income tax expense (benefit)                  $2,701            37.0%        $7,806           38.3%      $(2,007)         (40.5)%
</TABLE>


NOTE I - COMMITMENTS AND CONTINGENCIES

1.       OPERATING LEASE COMMITMENTS

         The Company is committed under noncancelable operating leases which
expire over the next four years and include purchase and renewal options,
primarily for office space. Rent expense under such leases was $1,244,000,
$1,000,000, and $1,120,000 for the years ended September 30, 1994, October 1,
1995, and September 29, 1996, respectively.

         Future minimum lease payments under such operating leases as of
September 29, 1996 (in thousands) are as follows:

<TABLE>
<CAPTION>
         Year ending
         <S>                                                 <C>
         September 28, 1997                                  $    991
         September 27, 1998                                       584
         October 3, 1999                                          327
         October 1, 2000                                            8
                                                            ---------
                                                             $  1,910
</TABLE>

-------------------------------------------------------------------------------
                                   PAGE 27

<PAGE>   29
MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------
                                           
NOTE I - COMMITMENTS AND CONTINGENCIES  (CONTINUED)

2.       LITIGATION

         In fiscal 1995, the Company settled (and reflected as an $875,000
charge to Other Expense) a shareholder class action lawsuit.

3.       EMPLOYMENT AND NONCOMPETITION AGREEMENTS

         The Company is committed under long-term employment and noncompetition
agreements with an officer. Approximate future minimum annual payments required
under the agreements are $475,000 and expire in fiscal 1999.

4.       ROYALTIES

         Prior to April 1996, the Company paid royalties to Novell in return
for the non-exclusive, worldwide right to manufacture and distribute various
hardware networking products under multiple licensing agreements.

         In April 1996, the Company purchased from Novell the exclusive
royalty-free perpetual right to market certain hardware products and related
technology which had been subject to many of the licensing agreements above.
The $6.8 million purchase price gave the Company the right to sell more than 30
products and product families in Novell trade dress. Previously, the Company's
right to sell under the Novell brand name could be withdrawn at any time by
Novell, and Novell could grant similar rights to other companies. See Note G.

         The Company is required to pay royalties to Attachmate (formerly DCA)
pursuant to that product line acquisition in July 1994 (see Note B). The
residual guaranteed minimum royalty due Attachmate at September 29, 1996 in the
amount of $1,132,000 has been capitalized as a product line acquisition cost
with a corresponding liability. The recovery of the capitalized cost is
dependent upon related sales levels sufficient to generate such outstanding
guaranteed minimum royalty.

         Total royalty expense was $4,560,000, $6,374,000, and $2,445,000 for
the years ended September 30, 1994, October 1, 1995, and September 29, 1996,
respectively. In addition, included in cost of goods sold are product purchases
from Novell of $25,758,000, $43,455,000, and $12,575,000 for the years ended
September 30, 1994, October 1, 1995, and September 29, 1996.

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. One
individual stock option was granted in June 1993 and another in August 1994.
Periods of exercisability vary but are typically over three years. Following is
a summary of transactions:

<TABLE>
<CAPTION>
                                                                                       Shares Under Option
                                                                        1994                  1995                  1996
                                                                        -----                 ----                  ----
<S>                                                                  <C>                   <C>                    <C>
Outstanding, beginning of year                                       1,043,300             1,343,050                660,712
Granted during the year                                                382,250               322,700                519,200
Canceled during the year                                               (35,000)              (39,917)               (42,033)
Exercised during the year (at prices ranging from
    $2.72 to $8.6875 per share)                                        (47,500)             (965,121)               (20,062)
                                                                     ---------             ---------              --------- 
Outstanding, end of year                                             1,343,050               660,712              1,117,817
                                                                     ---------             ---------              ---------
Eligible, end of year for exercise currently
   (at prices ranging from $2.72 to $29.00 per share)                  902,800               253,349                415,038
                                                                     =========             =========              =========
</TABLE>


-------------------------------------------------------------------------------
                                   PAGE 28

<PAGE>   30
MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

NOTE J - STOCK OPTION, STOCK PURCHASE, AND EMPLOYEE BENEFIT PLANS (CONTINUED)

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 fair market value at time of purchase. As
of September 29, 1996, 58,800 shares had been purchased by employees on a
cumulative basis.

3.       EMPLOYEE BENEFIT PLAN

         The Company has a 401(k) plan in effect as of September 29, 1996. This
plan covers all employees over the age of 18 who have completed six consecutive
months of service. The Company's contributions to the plan are based on a
certain percentage of each dollar contributed by the employee. The Company
contributed approximately $50,000, $58,000 and $73,000 in each of the years
ended September 30, 1994, October 1, 1995, and September 29, 1996,
respectively.

NOTE K - RELATED PARTY TRANSACTIONS

The following summarizes transactions with related parties:

         1.  The Company periodically has loaned amounts to its officers. No
amounts are due as of September 29. 1996. Receivables due from officers as of
October 1, 1995 were $193,000.

         2.  In September 1995, the Company appointed a partner of a law firm as
one of the Company's outside directors. The Company incurred $271,000 and
$295,000 in expense associated with the services of this law firm in fiscal
1995 and fiscal 1996, respectively.

NOTE L - INDUSTRY SEGMENTS, EXPORT REVENUE, AND CONCENTRATIONS

         The Company operates in one business segment, data communications.
Within data communications, the Company's dominant activity is the manufacture,
sale and distribution of networking products to commercial customers. Export
revenue accounted for approximately 29%, 25%, and 25% of total sales in fiscal
years 1994, 1995, and 1996, respectively.

         Following is detail of export revenue by geographic region:

<TABLE>
<CAPTION>
                                                             (Percentage of total export revenue)
                                                          1994               1995               1996
                                                          ----               ----               ----
                                                                        (in thousands)
<S>                                                      <C>                 <C>                <C>
Europe                                                    70%                 60%                73%
Pacific Rim                                               13%                 24%                11%
South America and other                                   17%                 16%                16%
</TABLE>

         Revenue from two customers comprised 11% and 10%, respectively, of the
Company's total revenue in the fiscal year ended September 29, 1996.

         Approximately 47%, 73%, and 37% of the Company's revenue in the years
ended September 30, 1994, October 1, 1995, and September 29, 1996,
respectively, was generated pursuant to a number of manufacturing and
technology agreements and licenses. Most of these licenses were superseded by
the April 1996 agreement which gave the Company the exclusive royalty-free 
perpetual right to market certain hardware products. See Note B.




-------------------------------------------------------------------------------
                                   PAGE 29

<PAGE>   31
MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

NOTE M - 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 30, 1994         September 29, 1995         October 1, 1996
                                     ------------------         ------------------         ---------------
                                                                  (in thousands)
<S>                                  <C>                         <C>                        <C>
Interest                             $       513                 $      1,524               $      2,128
Income taxes                         $       256                 $      4,235               $        169
</TABLE>


         During fiscal year 1995, the Company realized tax benefits of
$4,610,000 from the exercise of stock options resulting in a reduction in income
taxes payable and an increase in additional paid-in capital.

NOTE N - ACCOUNTING STANDARDS

1.   ACCOUNTING FOR STOCK-BASED COMPENSATION

         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, 1995.
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 Opinion 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 expects 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.

2.   ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
     ASSETS TO BE DISPOSED OF

         The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of," effective for fiscal years
that begin after December 15, 1995. The new standard requires a company to
review for impairment long-lived assets and certain identifiable intangibles to
be held and used whenever events or changes in circumstances indicate the the
carrying amount of an asset may not be recoverable. If the events or changes in
circumstances are present, an impairment loss should be recognized. The
Company's long-lived assets consist of land and buildings in Ocala, Florida;
purchased intangibles; and capitalized software costs. In management's opinion,
no events or changes in circumstances exist relating to the Company's
long-lived assets that would have resulted in any impairment losses being
recognized had the Company implemented SFAS 121 in fiscal year 1996 and earlier
years.




-------------------------------------------------------------------------------
                                   PAGE 30

<PAGE>   32
MICRODYNE CORPORATION                           1996 ANNUAL REPORT ON FORM 10-K
-------------------------------------------------------------------------------

NOTE O -- 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                             1Q96            2Q96              3Q96             4Q96             1996
<S>                                           <C>              <C>              <C>              <C>             <C>
Revenue:
  Product                                     $29,348          $13,939          $20,950          $20,061         $ 84,298
  Service                                       3,669            3,607            3,633            3,948           14,857
                                              -------          -------          -------          -------         --------
Total revenue                                  33,017           17,546           24,583           24,009           99,155
Cost of product sold and service provided:
  Product                                      22,024           10,560           16,145           13,000           61,729
  Service                                       2,381            2,504            2,449            2,756           10,090
                                              -------          -------          -------          -------         --------
Total costs                                    24,405           13,064           18,594           15,756           71,819
Gross Profit                                    8,612            4,482            5,989            8,253           27,336
Gross margin as a percentage of sales            26.1%            25.5%            24.4%            34.4%            27.6%
Selling, G&A Expense                            5,978            6,376            5,560            5,458           23,372
SG&A as a percentage of sales                    18.1%            36.3%            22.6%            22.7%            23.6%
Research and Development                        1,161            1,042              981              983            4,167
R&D as a percentage of sales                      3.5%             5.9%             4.0%             4.1%             4.2%
Amortization of intangibles                       451              530              769              837            2,587
                                              -------          -------          -------          -------         --------
Earnings from Operations                        1,022           (3,466)          (1,321)             975           (2,790)
Operating income as a percentage of sales         3.1%           -19.8%            -5.4%             4.1%            -2.8%
Other Expense, net                               (445)            (502)            (598)            (616)          (2,161)
                                              -------          -------          -------          -------         -------- 
Earnings Before Income Taxes                      577           (3,968)          (1,919)             359           (4,951)
Pre-tax Income as a percentage of sales           1.7%           -22.6%            -7.8%             1.5%            -5.0%
Provision for Income Taxes                        219           (1,508)            (729)              11           (2,007)
                                              -------          -------          -------          -------         -------- 
Net Earnings                                  $   358          $(2,460)         $(1,190)             348         $ (2,944)
Net Earnings as a percentage of sales             1.1%           -14.0%            -4.8%             1.4%            -3.0%
Net Earnings (Loss) per Share                 $   .03          $ (0.19)         $ (0.09)         $  0.03         $  (0.23)
Weighted average shares (000's)                12,793           12,806           12,811           12,828           12,811

Dollars in thousands                             1Q95             2Q95             3Q95             4Q95             1995

Revenue:
  Product                                     $28,911          $37,678          $44,377          $46,461         $157,427
  Service                                       2,908            2,899            3,286            3,558           12,651
                                              -------          -------          -------          -------         --------
Total revenue                                 $31,819          $40,577          $47,663          $50,019         $170,078
Cost of product sold and service provided:
  Product                                      20,165           25,885           30,714           32,257          109,021
  Service                                       1,864            2,037            2,113            2,273            8,287
                                              -------          -------          -------          -------         --------
Total costs                                    22,029           27,922           32,827           34,530          117,308
Gross Profit                                    9,790           12,655           14,836           15,489           52,770
Gross margin as a percentage of sales            30.8%            31.2%            31.1%            31.0%            31.0%
Selling, G&A Expense                            4,735            5,549            6,312            7,033           23,629
SG&A as a percentage of sales                    14.9%            13.7%            13.2%            14.1%            13.9%
Research and Development                        1,058            1,230            1,318            1,098            4,704
R&D as a percentage of sales                      3.3%             3.0%             2.8%             2.2%             2.8%
Amortization of intangibles                       104              384              483              262            1,233
                                              -------          -------          -------          -------         --------
Earnings from Operations                        3,893            5,492            6,723            7,096           23,204
Operating income as a percentage of
  sales                                          12.2%            13.5%            14.1%            14.2%            13.6%
Litigation settlement expense                    (875)              --               --             (109)            (984)
Other Expense, net                               (180)            (555)            (537)            (548)          (1,820)
                                              -------          -------          -------          -------         -------- 
Earnings Before Income Taxes                    2,838            4,937            6,186            6,439           20,400
Pre-tax Income as a percentage of sales           8.9%            12.2%            13.0%            12.9%            12.0%
Provision for Income Taxes                      1,107            1,925            2,413            2,361            7,806
                                              -------          -------          -------          -------         --------
Net Earnings                                  $ 1,731          $ 3,012          $ 3,773          $ 4,078         $ 12,594
Net Earnings (Loss) per Share                 $   .14          $   .24          $   .29          $  0.31         $   0.96
Shares outstanding (000's)                     12,431           12,669           13,149           13,281           13,096
</TABLE>


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                                   PAGE 31

<PAGE>   33
MICRODYNE CORPORATION                            1996 ANNUAL REPORT ON FORM 10-K
--------------------------------------------------------------------------------

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 1996.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 This information is incorporated by reference from the Company's definitive
1997 Proxy Statement.

ITEM 11.  EXECUTIVE COMPENSATION

 This information is incorporated by reference from the Company's definitive
1997 Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 This information is incorporated by reference from the Company's definitive
1997 Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

   This information is incorporated by reference from the Company's definitive
1997 Proxy Statement.

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

   No Form 8-K was filed during the last quarter of fiscal 1996.



--------------------------------------------------------------------------------
                                    PAGE 32

<PAGE>   34
MICRODYNE CORPORATION                            1996 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

                By:  /s/ Philip T. Cunningham             December 18, 1996
                    ----------------------------
                    Philip T. Cunningham
                    President and Chief Executive Officer

 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/ Philip T. Cunningham                   President                                 December 18, 1996
-------------------------------            Chief Executive Officer
Philip T. Cunningham                       and Director

PRINCIPAL FINANCIAL OFFICER:

/s/ Christian Spitz                        Chief Financial Officer                   December 18, 1996
-------------------------------
Christian Spitz

/s/  Gregory W. Fazakerley                 Director                                  December 18, 1996
-------------------------------
Gregory W. Fazakerley

/s/  H. Brian Thompson                     Director                                  December 18, 1996
-------------------------------
H. Brian Thompson

/s/  Curtis M. Coward                      Director                                  December 18, 1996
----------------------------------
Curtis M. Coward
</TABLE>



--------------------------------------------------------------------------------
                                    PAGE 33
<PAGE>   35

MICRODYNE CORPORATION                            1996 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.

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
                                                                       (File No. 33-47710).

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

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<PAGE>   36
MICRODYNE CORPORATION                            1996 ANNUAL REPORT ON FORM 10-K
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<TABLE>
<S>                   <C>                                           <C>
10.11                 Second Amendment to Credit                       Filed with this Form 10-K
                      Agreement among the Registrant,
                      Crestar Bank and NBD bank, dated
                      June 30, 1996.

10.12                 Third Amendment to Credit                        Filed with this Form 10-K
                      Agreement among the Registrant,
                      Crestar Bank and NBD bank, dated
                      August 19, 1996.

10.13                 Fourth Amendment to Credit                       Filed with this Form 10-K
                      Agreement among the Registrant,
                      Crestar Bank and NBD bank, dated
                      September 27, 1996.

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.

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
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MICRODYNE CORPORATION                            1996 ANNUAL REPORT ON FORM 10-K
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<TABLE>
<S>                   <C>                                           <C>

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

10.30                 Technology Purchase Agreement                    Filed with this Form 10-K
                      between Novell Inc. and the Registrant
                      Dated April 22, 1996

10.31                 Agreement between Epson America, Inc.            Filed with this Form 10-K
                      and the Registrant Dated March 20, 1996.

11.1                  Statement regarding computation of               Filed with this Form 10-K 
                      per-share earnings.

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, February
                      28, 1992, May 6, 1992, March 3, 1995,
                      November 2, 1995, and October 7, 1996.

27.1                  Financial Data Schedule                          Incorporated by reference
                                                                       to Exhibit No. 27 to
                                                                       Amendment No. 1 to the
                                                                       Registrant's 1995 Form S-3
                                                                       Registration Statement.
</TABLE>



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