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

                                    FORM 10-K

(Mark One)

[X]      ANNUAL  REPORT  PURSUANT  TO  SECTION  13 or  15(d)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996

                                       or

[ ]      TRANSITION  REPORT  PURSUANT  TO SECTION 13 or 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934


         For the transition period from ________________ to __________________

                         Commission File Number 0-20666


                                 MICROTEST, INC.
             (Exact name of Registrant as specified in its charter)

             Delaware                                        86-0485884
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                              Identification No.)

4747 North 22nd Street, Phoenix, Arizona                                   85016
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code      (602) 952-6400

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




Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value                             Nasdaq National Market
                                                                               1
<PAGE>


         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         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 the  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]

         At March 14, 1997,  the aggregate  market value of common stock held by
non-affiliates of the Registrant was approximately $54,955,471.



                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

         Indicate the number of shares  outstanding of each of the  Registrant's
classes of common stock, as of the latest practicable date.

         8,130,647 shares of Common Stock outstanding on March 14, 1997
--------------------------------------------------------------------------------


                       DOCUMENTS INCORPORATED BY REFERENCE

         Materials from the  Registrant's  Proxy Statement  relating to its 1997
Annual Meeting of  Shareholders  (the "Proxy  Statement") to be held on July 23,
1997 have been incorporated by reference into Part III, Items 10, 11, 12 and 13.
                                                                               2
<PAGE>
                                TABLE OF CONTENTS
                                                                            Page
PART
I..............................................................................4

     ITEM 1. BUSINESS..........................................................4
     ITEM 2. PROPERTIES.......................................................19
     ITEM 3. LEGAL PROCEEDINGS................................................19
     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
             HOLDERS..........................................................20

PART
II............................................................................21

     ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY
             SECURITIES AND RELATED SHAREHOLDER MATTERS.......................21
     ITEM 6. SELECTED FINANCIAL DATA..........................................22
     ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................24
     ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................35
     ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
             ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
             DISCLOSURE.......................................................52

PART
III...........................................................................52

     ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE
             COMPANY..........................................................52
     ITEM 11.EXECUTIVE COMPENSATION...........................................52
     ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
             OWNERS AND MANAGEMENT............................................52
     ITEM 13.CERTAIN RELATIONSHIPS AND RELATED
             TRANSACTIONS.....................................................53

PART
IV............................................................................53

     ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
             REPORTS ON FORM 8-K..............................................53

                                                                               3
<PAGE>
                                     PART I


ITEM 1.  BUSINESS.
         ---------

Introduction

         Microtest,  Inc.  ("Microtest" or the "Company") develops,  markets and
supports  products  that make it easier to use,  manage and  service  Local Area
Networks  ("LANs").  The Company has developed and invested in two primary areas
of  the  LAN  market:  network  management  products  and  network  connectivity
products.  Historically,  Microtest's  primary product line has been a family of
easy-to-use,   handheld  network  management  tools  ("Scanners")  that  quickly
pinpoint  cable  problems,  certify  whether LAN cabling will support a proposed
network system and monitor network  activity at the physical layer level.  These
devices operate across multiple cable types and network  management  systems and
cost-effectively  increase LAN  productivity and reliability by reducing network
downtime.

         In 1996, the Company's newest  introductions in the network  management
product line included the  PentaScanner(R)350  device,  the only cable tester to
support the advanced  capabilities  of the new,  wider dynamic range cable types
designed  to  operate  at  350  MHz.  Microtest  also  introduced  the  Internet
COMPAS(TM) product, an option that runs on Microtest's Netware(R) COMPAS product
and  simplifies  troubleshooting  through  the  Internet  and  in  local  TCP/IP
environments.  The  Company  also  introduced  the  MICROSCANNER(TM)  device,  a
low-cost cable tester for verification and  troubleshooting of new and installed
twisted-pair  cabling, and the Multi-Pair  Tester(TM) device, a tool that offers
quick continuity checks and pinpoints shorts, opens and crossed pairs on 25-pair
cabling in data communications and telecommunications environments.

         In  1996,  Microtest  made a number  of  significant  additions  to its
network  connectivity  product line.  Support for Microsoft  Windows  NT(TM) was
added across the product line, enabling Microtest to take full advantage of this
rapidly-expanding  network  operating system.  The Company's  workgroup line was
enhanced  with  the  addition  of  the  DiscPort(R)  XL,  the  next  generation,
high-performance CD-ROM networking solution that allows Novell(R) and Windows NT
workgroups to share up to seven CD-ROM devices  simultaneously.  The DiscPort(R)
Tower  line saw the  addition  of 6X and 8X  drive-speed  models for both 7- and
14-bay units. A token ring Tower has been developed,  which enables Microtest to
sell into the  financial  market  with its large  installed  base of token  ring
networks.  Microtest's  new  DiscPort(R)  Enterprise  Server  signaled  a  major
expansion of the product line.  The Enterprise  Server moves  Microtest into the
burgeoning  enterprise  CD-ROM  networking  arena, by offering  high-performance
CD-ROM servers bundled with the company's award-winning server software.

         In December 1996,  Microtest  acquired Logicraft  Information  Systems,
Inc.,  ("Logicraft")  a worldwide  developer,  integrator  and  manufacturer  of
complete CD-ROM networking and optical storage
                                                                               4
<PAGE>
management solutions for the Windows NT networking environment.  The acquisition
brings  together the  expertise of both  companies  in their  respective  market
segments:  Microtest in the Novell and workgroup environments,  and Logicraft in
the enterprise and NT  environments.  The net result is that Microtest now has a
broader reach throughout the entire CD-ROM networking environment.

         Microtest is a Delaware  corporation,  its principal  executive offices
are located at 4747 N. 22nd Street,  Phoenix,  Arizona 85016,  and its telephone
number is (602)952-6400.

         This Annual  Report on Form 10-K contains  forward-looking  statements.
Additional written or oral forward-looking statements may be made by the Company
from time to time in filings  with the  Securities  and Exchange  Commission  or
otherwise.  The words  "believe,"  "expect,"  "anticipate,"  and  "project," and
similar expressions identify forward-looking statements,  which speak only as of
the date the statement was made. Such forward-looking  statements are within the
meaning of that term in Section 27A of the  Securities  Act of 1933, as amended,
and  Section  21E of the  Securities  Exchange  Act of 1934,  as  amended.  Such
statements may include,  but not be limited to, projections of revenues,  income
or loss, capital expenditures,  plans for future operations,  financing needs or
plans, the impact of inflation and plans relating to products or services of the
Company,  as  well  as  assumptions  relating  to  the  foregoing.  The  Company
undertakes  no  obligation  to  publicly  update or revise  any  forward-looking
statements, whether as a result of new information, future events, or otherwise.

         Forward-looking   statements  are  inherently   subject  to  risks  and
uncertainties,  some of which cannot be predicted or  quantified.  Future events
and actual results could differ materially from those set forth in, contemplated
by, or  underlying  the  forward-looking  statements.  Statements in this Annual
Report,  including  the  Notes  to the  Consolidated  Financial  Statements  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  describe factors,  among others,  that could contribute to or cause
such differences.  Additional  factors that could cause actual results to differ
materially from those expressed in such forward-looking statements are set forth
in  "Business"  and  "Market for the  Company's  Equity  Securities  and Related
Shareholder Matters" in this Report.


Industry Background

         As  organizations  have  recognized  the  benefits of  information  and
equipment sharing,  there has been a significant  increase in the installed base
of LANs. In September  1996,  Dataquest  predicted a 5-year 20% compound  annual
growth rate for network operating systems.

         The growing  dependence  on LANs has created an  increasing  demand for
improved  performance and  reliability,  as well as products and technologies to
maximize equipment and information sharing capabilities. Suppliers of LAN system
technologies  and products have responded with new protocols  (rules that govern
LAN operations),  faster data transmission speeds, more sophisticated  operating
systems,  more  peripheral  hardware  accessories  and more advanced  topologies
(wiring configurations) and cabling alternatives.  The increase in
                                                                               5
<PAGE>
functionality and devices  available for LANs, and the increasing  complexity of
LAN  configurations  have  created a demand for  products  that help  manage LAN
assets and allow users to share expensive network devices.

         Leveraging the growing reliability,  performance and integration of LAN
technologies,  businesses are no longer  satisfied with simply  connecting  PCs.
They now require faster access to a  rapidly-growing  amount of information  and
solutions that facilitate this access and provide a management framework for the
organization of data. This information revolution is manifested in the following
three areas of technology development.

         The  first  area   relates  to  the   incorporation   and  adoption  of
CD-ROM-related technologies.  The availability of low-cost CD-ROM drives and the
standardization  of the file system for CD-ROM discs has enabled  software title
producers and information suppliers to utilize this media for inexpensive, rapid
and efficient distribution of information. Decreasing costs of CD-ROM drives and
discs  should  continue  to fuel the  growth  and  adoption  of  these  devices.
According to a 1995 Disk Trend analysis, shipments of CD-ROM drives are expected
to grow from 34 million units in 1995 to almost 70 million  units in 1998,  with
an average growth rate of 26%.

         The  second  area  relates  to  the  rapid  infrastructure  growth  and
deployment of wide area and Internet technologies. The Internet is positioned as
a truly synergistic  channel for the distribution and access of information with
CD-ROMs.

         The third area that  affects  the nature of  information  access is the
evolution and increasingly  competitive environment of network operating systems
and  services.  With Novell  maintaining  a strong  market share lead in network
servers  installed,  the value and appeal of the Windows NT  application  server
platform is gaining  strength.  The market is transforming  into a heterogeneous
network  environment,  where businesses deploy servers using the technology most
appropriate  for  the  service  to be  performed.  Products  must  appropriately
leverage  the  various  network  operating  system  features  such as  protocols
(TCP/IP,  IPX), services (file systems,  device drivers),  management  (Windows,
SNMP,  Network  Management  Systems,   Security)  and  applications   (Database,
Telephony,  File and Print).  This creates  opportunities  and  requirements for
products to inter-operate in this environment.

Market for the Company's Products

         Network  Connectivity  Products.  As companies require faster access to
larger volumes of information,  the demand for retrieving this  information from
CD-ROM is increasing.  Responding to this continuing market demand,  the Company
has a line of network connectivity products that permit sharing of CD-ROM titles
in a workgroup environment or throughout the enterprise.

         The Company's  current focus on CD-ROM sharing  products in the network
connectivity line reflects major market trends toward the need to access CD-ROMs
quickly and easily on networks. According to Frost & Sullivan, unit shipments of
CD-ROM networking  products are being driven by continual growth in CD-ROM drive
shipments, increased number of CD-ROM
                                                                               6
<PAGE>
titles  available,  continual  growth in CD-R drive  shipments  and an increased
number of LANs and nodes on LANs. The Company's CD-ROM  networking  products are
designed to increase the ease of connecting network users to CD-ROM drives.

         Expanding on the original DiscPort model, Microtest now features a full
range of CD-ROM  networking  products that  encompasses the  requirements of the
expanding  marketplace.  This  changing  market  has  driven the need to provide
products that are designed to meet the specific needs of two key segments of the
CD-ROM Networking market:  workgroup products and enterprise solutions. In 1996,
the Company bolstered its workgroup  offering by broadening the product line and
by adding support for Microsoft  Windows NT. Its enterprise  solutions  offering
was  significantly  enhanced with the addition of complete  CD-ROM servers which
include high availability storage arrays.

         Network  Management  Products.  The  proliferation  of and the  growing
dependence  on LANs has resulted in an increase in the market for products  that
facilitate  system  installation  and help  manage  the  numerous  hardware  and
software network resources.  As a result, the market for handheld test equipment
continues  to  grow.  In  March  1996,  World  Information  Technologies,   Inc.
forecasted that the worldwide  revenue for Handheld  Digital/Data Test Equipment
will grow from $140 million in 1995 to $327 million in 2000.  Microtest develops
handheld test equipment for high-speed LAN applications.

         Equipment and technologies are continuously being developed that enable
the high speed transmission of data over twisted-pair wiring systems. Category 5
unshielded twisted-pair cabling allows users to run applications at speeds up to
100MHz, which supports such sophisticated applications as intranets, multimedia,
and desktop  video.  To ensure that existing or proposed  cabling will support a
particular  high  frequency LAN  application,  industry  standards  require that
cabling be certified  for  compliance.  Microtest has been  instrumental  in the
development of these  certification  standards.  The  consequences of improperly
installed  network cabling include costly network downtime,  lost  productivity,
and data  transmission  problems.  The Company's  scanners  perform the critical
certification  function for modern  twisted-pair  networking  systems and legacy
cabling.  Further,  as new test  requirements  and  certification  standards are
created and evolve,  the Company's Scanners are among the first to feature those
changes.

         As  LANs  are  increasingly  relied  upon to  perform  mission-critical
applications, organizations are requiring increasingly more accessibility. While
new equipment  and  topologies  have been  introduced in an effort to respond to
demands  for  greater  reliability,  LANs remain  relatively  failure-prone.  In
addition,  network  devices  and their  related  cabling are subject to frequent
moves, additions and changes to accommodate office changes, new technologies and
other factors that also increase the need for certification.  As a result, there
is a demand for  products  that can quickly  troubleshoot  networks and identify
server and cable faults so that any problems can be readily resolved.
                                                                               7
<PAGE>
         The PentaScanner+  device is a portable Category 5 cable  certification
and management system that provides  complete 100 MHz certification  reports and
exceeds the current standards for accuracy.

         The Company's COMPAS(TM) troubleshooter runs diagnostic tests on Novell
NetWare networks and reports network, server and most cable faults.

         Microtest  broadened its market appeal as well in 1996 with mass market
solutions such as the low-cost  MICROSCANNER(TM) and Multi-Pair Tester(TM) cable
testers. Each offers "first line of defense" diagnostic capabilities for cabling
networks.  The MICROSCANNER confirms continuity,  wiring configuration and cable
fault  location  in   twisted-pair   cabling.   The   Multi-Pair   Tester  tests
telecommunications,  Category 3 or Category 5 25-pair  cabling  for  continuity,
configuration, and wiring faults.

Company Strategy

         Microtest  strives to make  computer  and  telecommunications  networks
easier to use, and  mission-critical  information  easier to share.  The Company
provides  easy-to-use  devices  and  software to solve  complex  LAN  management
problems.  To effectively serve its customers,  the Company relies on developing
fully integrated  solutions,  optimizing  established  distribution channels and
expanding software content across all types of products.

         Developing Fully Integrated  Solutions.  Microtest develops integrated,
intuitive "plug and play" solutions which can be quickly and easily installed on
a network and brought into everyday use. The Company's  Products are designed to
be  marketed  and  sold  as  complete   solutions  to  common  network  problems
experienced  by users.  For example,  in 1996 the Company  introduced a complete
line of network-ready  DiscPort Towers,  which included the CD-ROM drives, tower
enclosure  and  CD-ROM  networking  software.  Towers are  available  in several
configurations, to accommodate the varying needs of different types of users.

         Optimizing  Established  Distribution Channels. The Company's worldwide
indirect sales channels allow it to reach a broad base of customers efficiently.
Products  are sold  through a  worldwide  network of  distributors  and  through
manufacturers'  representative  organizations and value-added resellers ("VARs")
that market PC-related  hardware and software  products.  Microtest also employs
Major Account sales  representatives  who develop  opportunities with enterprise
customers for fulfillment through channel partners.

         Expanding Software Content.  Increasing  software content in integrated
products, while releasing new software products and software upgrades, continues
to be important to Microtest. In 1996, the Company experienced increases both in
server  software  revenue  (primarily  from  sales of its  CD-NOW!  for  NetWare
product) and software upgrade revenue.
                                                                               8
<PAGE>
Products

         The  Company's  products  consist of a family of handheld  Scanners and
network  troubleshooting  devices which pinpoint cable  problems,  certify cable
across multiple LAN  configurations  and troubleshoot  network faults.  Sales of
network management  products account for 59%, 65% and 81% of the Company's total
revenues in 1996, 1995 and 1994, respectively.  Additionally, the Company offers
a line of LAN connectivity products that allow users to easily share information
on a variety of peripheral devices, including CD-ROMs.

         The Company  currently  derives  substantially all of its revenues from
its PentaScanner and DiscPort products. Any decrease in sales of PentaScanner or
DiscPort  products  would  have a  material  adverse  effect  on  the  Company's
business, financial condition and operating results.

         Network Management  Products.  Microtest's  network management products
are used by cable  installers  and LAN  administrators  to identify  network and
physical  cable  problems.  These handheld tools are designed for field use. The
Company's  Cable Scanners  address the various types of networks and cable types
and certify that cable installations will meet the link performance requirements
as well as major industry  standards,  such as those issued by the International
Standards  Organization  ("ISO") and  TIA/EIA.  Microtest's  COMPAS  device is a
product that combines the best features of protocol analyzers, cable testers and
network diagnostic utilities in an easy-to-use portable troubleshooting tool.

         Microtest's  cable  testing  products  utilize  a  patented  gate-array
circuitry  (a  proprietary  cable  radar  technology)  based  upon  Time  Domain
Reflectometry ("TDR"). Using this technology for fault diagnosis,  the Company's
Scanners  transmit  a  high-speed  pulse  into the  tested  cable,  receive  the
reflected  pulse and identify  the  location and nature of the cable fault.  The
fault is reported to the customer in non-technical  terms, such as "short at 270
feet." Generally, these functions can be performed without requiring the network
to be shut down

         Microtest's  PentaScanner+(R)  with 2-Way  Injector+(R)  product is the
industry's premiere certification and cable troubleshooting device. The Category
5 tester  tests  155 Mbps  ATM and  exceeds  TIA/EIA  TSB-67  Level II  accuracy
requirements. The PentaScanner+ with 2-Way Injector+ device provides a 21-second
autotest,  automatic  increment  of circuit ID, an  extensive  cabling  library,
storage of 500 autotests and flash ROM for field updates.  Designed specifically
for  professional  cable  installers,  service  providers and LAN managers,  the
PentaScanner+   with  2-Way  Injector+  device  facilitates  the  certification,
installation,  management and troubleshooting of Category 5 cabling systems. The
PentaScanner+ device uses a one-button autotest function to simplify testing and
a graphical LCD display with on-line help to guide users through  certifying and
trouble-shooting the network. Equipped with a large cable-type reference library
and Flash ROM for instant  upgrades,  the unit  performs a wire map and measures
NEXT,  attenuation,  length, noise and active and passive ACR. The PentaScanner+
device  certifies  whether UTP (Categories  1-5), coax and SCP/ScTP cabling will
support  various  network  types,  including  10BASE-T,  4/16 Mbps  Token  Ring,
100Base-VG,  Arcnet, ISDN, AppleTalk,  T1/E1, TP-Pmd, CDDI, TPDDI, Fast Ethernet
(both proposals), Multimedia 802.9, ATM51 and/or ATM155 Mbps networks.
                                                                               9
<PAGE>
         Microtest  released the  PentaScanner(R)  350 device in 1996,  the only
tester to support  the  advanced  capabilities  of the new,  wider-dynamic-range
cable types that operate at 350 MHz. The PentaScanner 350 device includes all of
the TSB-67 Level II functionality and accuracy of PentaScanner+, and is the only
Category 5 tester with performance  grading.  The PentaScanner 350 device is the
result of an  industry  initiative  that  promotes  the  performance  grading of
premium high-quality  cabling on Category 5 networks.  Link quality depends on a
complex  combination of factors including cables,  components,  and installation
techniques.   With   networks   relying  on  today's   advanced   communications
technologies  to transmit data, it is even more important for LANs with Category
5 cabling to be certified for performance at higher speeds. Prior to the release
of the PentaScanner 350 product, performance could not be tested beyond a simple
pass/fail measurement -- testers could not distinguish between links that barely
met Category 5 requirements and those offering  superior  performance.  With the
PentaScanner  350 device,  users can verify that their  installed  links  exceed
Category 5 performance standards, thereby ensuring support for future high-speed
applications.  The  PentaScanner  350 product is also available with Microtest's
2-Way Injector+ device.

         The Company also sells  software  enhancements  for its  Scanners  that
provide  easy-to-use  methods for storing,  retrieving and managing network test
results  and  cabling  information.  These  enhancements  and  upgrades  include
additional test functionality,  customized test suites, expanded native language
support and communication  capabilities to external equipment and databases. The
company also sells  accessories  that complement the functions  performed by its
Scanner.

         The COMPAS  product is a handheld  LAN  tester  that  provides  network
troubleshooting  functions,  protocol  functions,  cable testing functions,  and
serial  functions on Novell NetWare  networks,  the Internet and in local TCP/IP
environments.  The COMPAS product was designed in a modular fashion,  permitting
users to purchase optional software modules,  such as the NT module  (introduced
in 1997) and the  Internet  module  (introduced  in 1996) to customize a product
which  best  suits  their  network.  The unit  attaches  anywhere  on a LAN (for
example,  at the fileserver,  workstation or hub), provides the user with a main
menu of common  network  problems,  runs a series of  automated  troubleshooting
tests and  identifies  faults.  If the  connection  changes during the test, the
COMPAS product  re-adjusts and starts the test again. The unit provides detailed
information  about  NetWare   fileservers  and  workstations  and  troubleshoots
problems inside NetWare  fileservers via a NetWare Loadable Module ("NLM").  The
unit's on-line help provides  explanations of test results and suggests possible
repair  techniques.  The COMPAS product's NetTap function enables  monitoring of
errors between any network node and the hub. The COMPAS device tests cabling for
length,  crosstalk,  noise, signal level and proper connector wiring. The COMPAS
product can also monitor serial conversations, determine throughput and identify
a workstation's  maximum receive rate. The Internet software module was released
in 1996  and  permits  users to  perform  tests  such as  duplicate  IP  address
detection,  IP ping,  Internet control message protocol ("ICMP")  monitoring and
many  others.  The  NT  software  module,   released  early  in  1997,  provides
information on Windows NT domains, servers, and hosts.
                                                                              10
<PAGE>
         Network Connectivity  Products. The Company's connectivity product line
is  designed  to provide  easy,  cost-effective  linking  and sharing of network
peripheral  devices.  Over the past several  years,  the Company has developed a
variety of connectivity  products,  including its LANPORT(R) product,  which the
Company sold to Intel in 1992, and LANMODEM,  which the Company sold to Xylogics
in 1993. Responding to continuing market needs for network connectivity devices,
the Company has increased its emphasis on this product line, particularly in the
area  of  linking  and  sharing  CD-ROM  devices.   Just  as  Microtest's  first
connectivity product,  LANPORT,  brought "plug-n-play"  capability to networking
printers,  the Company's DiscPort with DiscView product provides a "plug-n-play"
solution to CD-ROM networking.  Microtest's  current CD-ROM product focus in the
network connectivity line reflects major market trends toward the need to access
CD-ROMs quickly and easily on networks.

         The Company  introduced  its first CD-ROM  networking  product into the
network connectivity  product family in 1993 with DiscPort.  The DiscPort device
was built on the foundation  that products that are easy to install,  manage and
use will be successful in the marketplace. As companies require faster access to
larger volumes of information,  the demand for retrieving this  information from
CD-ROM is increasing.  The Company's network  connectivity product line provides
this functionality based with products that are easy to use and intuitive.

         The DiscPort PRO with  DiscView PRO software,  the  Company's  flagship
network  connectivity  product,  provides a means to  install,  manage and share
networked  CD-ROMs  from  anywhere on the  network.  The  DiscPort PRO device is
designed to meet the increasing  needs of workgroups to  conveniently  share and
access  CD-ROMs.  The DiscPort PRO device is easy to install and  configure.  It
plugs into any Thin Ethernet or 10BASE-T  network or attaches  directly onto the
network and allows users to share up to 14 CD-ROM devices.  The product works on
Novell NetWare operating systems and support for Microsoft's  popular Windows NT
operating  system was added in 1996.  The  DiscPort  PRO device  fully  supports
CD-ROM drives on 10mbps  networks and popular  mini-changer  devices such as the
recently introduced Nakamichi 4x8X changer.

         The Company expanded the DiscPort line in 1996 with the introduction of
DiscPort XL, the next generation,  high performance  CD-ROM networking  solution
for workgroups. This product allows users in a workgroup environment to share up
to 7 CD-ROM  devices.  The  DiscPort  XL  features  DiscView(R)  PRO  management
software and offers dynamic security, lets the user auto-mount CDs instantly and
share  them  using as  little as 1.5K of RAM per disc.  The  DiscPort  XL can be
attached  anywhere on a NetWare(R),  IntranetWare(TM)  or Windows NT network for
local  control and access of CD-ROM  libraries.  Also  announced in 1996 was the
addition of CD Internetworking  features for the DiscPort product line. DiscView
PRO's    internetworking    features    include    CDBrowser(TM)    which   lets
Internet/intranet  users browse any CD, and  WebLaunch(TM),  which lets intranet
users launch CD-ROM applications from their web browser.

         To support  the  growing  demand for  turnkey  solutions,  the  Company
expanded its DiscPort Tower product line in 1996.  With the DiscPort Tower line,
the Company has
                                                                              11
<PAGE>
incorporated its powerful CD-ROM networking  technology and embedded it into a 7
and 14 CD-ROM drive configuration. Each Tower comes with all of the features and
benefits of the DiscView PRO management software along with 7 or 14 high quality
4X or 8X CD-ROM  drives.  New  speeds  will be added to the line as they  become
available to the market.

         For enterprise continuing needs,  Microtest offers CD-NOW! for NetWare.
CD-NOW!   is  software  which  turns  any  industry  standard  PC  into  a  high
performance,  high capacity,  dedicated CD-ROM server.  CD-NOW!  includes native
NetWare 4.1  technology  and supports  NetWare 3.x and 4.1.  CD-NOW!  comes with
DiscView PRO management  software which allows users to seamlessly extend CD-ROM
resources  into  workgroups  by using the  Company's  DiscPort  and DiscPort PRO
devices.

          Also introduced in 1996, the CD-NOW! E/Server is the highest-capacity,
highest-performance CD-ROM server on the market and allows users to share CD-ROM
data enterprise-wide.  This attach-and-access solution combines CD-NOW! software
and  integrates  it  with   high-availability   CD-ROM  storage  modules  and  a
high-performance   CPU   module.   CD-NOW!   E/Server   is  built  to   customer
specifications or is available in standard  configurations with 21, 42, or 63 8x
drives for 10/100  Ethernet and Token Ring  networks.  DiscView  PRO  management
software is included for easy CD resource management and access.


Product Integration and Rebranding

         As a result of the acquisition of Logicraft Information Systems,  Inc.,
and integration of complementary  technologies,  the Company will rename some of
its  networking  products as part of an ongoing  effort to simplify  the product
line and unify all products  under the  well-known  DiscPort  brand name. At the
workgroup  level,  DiscPort,  DiscPort PRO,  DiscPort XL and DiscPort Tower will
remain  unchanged.   At  the  enterprise  level,  Microtest  will  offer  CD-ROM
networking  solutions  with  two  new  products:  DiscPort  Enterprise  Servers,
available in rack or tower  configurations,  and DiscPort  Executive,  available
with versions for IntranetWare or Windows NT.

         The   DiscPort   Enterprise   Server  rack   configuration   integrates
Microtest's CD-NOW!  E/Server with Logicraft's LS Server. It enables hundreds of
users enterprise-wide to share numerous titles with point-and-click  simplicity.
It  is  a  fully   integrated   solution   that   features   robust,   reliable,
industry-standard CPU and drive modules.  Systems range from 21 to 63 high-speed
drives for 10/100  Ethernet  and Token Ring  networks  and can be  packaged  for
IntranetWare or Windows NT operating systems.

         The DiscPort  Enterprise Server tower  configuration is a fully modular
solution  that  works  with  nearly  all  network  operating  systems  including
IntranetWare and Windows NT. It features a robust,  reliable,  industry-standard
CPU and  high-speed  hot-swappable  drives  configured as a tower with a locking
security door.  Users can add or replace drives without any network downtime and
configure additional towers together for added expandability.
                                                                              12
<PAGE>
         DiscPort  Executive  integrates the Company's  CD-NOW!  server software
with Logicraft's CD Executive  software.  The  IntranetWare  version of DiscPort
Executive  transforms any PC into a high-performance  CD-ROM server. It includes
the  DiscView  PRO  management  interface  and the  internetworking  features of
WebLaunch and CDBrowser.  It features dynamic security,  dynamic volume sets and
lets users mount CD-ROMs automatically.

         DiscPort  Executive for Windows NT provides all of the advanced  CD-ROM
system management  capabilities needed to turn a standard Windows NT server into
a complete network CD-ROM system. Users can access thousands of CD-ROM resources
from a single drive letter off an NT server.  Its AutoShare(TM)  utility runs in
the background  and catalogs  CD-ROM  volumes,  detects media changes and shares
CD-ROMs  automatically   according  to  predefined   permissions  and  directory
structures.

         Microtest also acquired  Virtual CD-ROM from Logicraft.  Virtual CD-ROM
is software  that allows users to access  CD-ROM  resources  with  unprecedented
speed by  enabling  a user's  hard drive to  function  as a CD-ROM  drive.  Disc
information  is imaged,  compressed  and  stored on the hard  drive for  instant
retrieval.  Wait time is virtually  eliminated  and the CD-ROM drive is freed up
for other uses.

Sales, Distribution and Customers

         Sales. The Company's sales,  marketing and distribution  strategy is to
use a multiple channel,  worldwide  distribution  network.  The network includes
distributors,  VARs and dealers,  as well as selected  OEMs and  licensees.  The
Company's  sales  organization  manages  the  activities  of these  distribution
channels,  directs  sales leads to these  distribution  channels and responds to
sales calls from  distributors,  resellers,  dealers and end users. In addition,
the Company has a telesales  department  that  assists the sales  efforts of its
sales representatives.

         Distribution  Network.  The  Company  sells  its  products  through  an
established  worldwide  network of  distributors,  VARs and dealers  that market
PC-related, and networking hardware and software products. The Company focuses a
significant  amount of its sales and  marketing  resources  on its  distribution
channel,  providing ongoing  communication and support to channel  participants.
Distribution  network  support  programs  include  regular  mailings of product,
promotional  and technical  materials,  participation  in industry  trade shows,
incentive  programs  for  distributors,  VAR  and  dealer  sales  personnel  and
cooperative marketing programs. A dedicated sales force manages and supports the
company's  distributors  and VARs.  The  Company  provides  technical  and sales
product  training to all of its  distributors  and dealers,  who in turn provide
technical and sales training to their customers who purchase Microtest products.
Microtest also provides a strong set of VAR professional  service offerings that
includes  installation   services,   installation  planning  and  pre-sale  site
planning.

         North American sales accounted for  approximately  71%, 64% and 66%, of
the Company's total revenues in 1996, 1995 and 1994, respectively. The Company's
United  States  distributors  include  national  distributors,  cable  and  wire
distributors and catalog merchandisers.
                                                                              13
<PAGE>
         To  address   international   markets,   the  Company   has   developed
relationships  with  distributors  throughout  Europe.  The Company supports its
European distributors through offices located in the United Kingdom and Germany.
In addition,  the Company has developed  relationships with distributors located
throughout Canada,  Mexico, South America and the Pacific Rim. All international
sales are denominated in United States  dollars.  Sales outside of North America
accounted for 29%, 36% and 34% of the Company's total revenues in 1996, 1995 and
1994, respectively.  The decrease in sales outside of North America is primarily
due to a weakening of the European economy in 1996.

         Customers.  The primary target market of the Company's products include
LAN management personnel,  LAN installers,  field service personnel,  resellers,
and technical end users with departmental applications.  The Company's customers
span the broad range of  industries  that utilize  LANs,  including  technology,
industrial,  transportation, retail, health care, financial services, government
and education.  The Company  maintains a customer  support  organization in both
North America and Europe to answer  customer  questions  concerning the usage of
the Company's products.

Product Development

         The Company  believes that its  continued  success will depend upon its
ability to enhance its existing  products,  expand  products into product lines,
introduce new products on a timely basis and continue to develop technology that
can be incorporated into commercially  viable products addressing the demands of
the LAN industry. To facilitate new and continuing product development,  Company
personnel work with  customers,  distribution  channels and leaders in other LAN
industry  segments  to  identify  market  needs and define  appropriate  product
specifications. Microtest employees participate in numerous user groups, working
groups and industry forums.  In addition,  Company employees are involved with a
number of  technical  committees  including  the IEEE 802.3 and the IEEE  802.12
committees,  the ATM Forum,  ISO/IEC,  CNX  Technical  Advisory  Board,  and the
TIA/EIA  organization.  The Company  believes that tracking  developments in the
latest  high-speed  technologies,  like ISDN,  ADSL and ATM, will facilitate the
development of products supporting the networks of the future.

         As one  of the  early  entrants  into  the  cable  troubleshooting  and
certification  markets,  the  Company  has  developed  a  substantial  level  of
proprietary  technology.  The Company  leverages its proprietary  technology and
industry  expertise into new product  offerings to enhance the  troubleshooting,
certification  and  connectivity  capabilities of its product lines. The Company
also routinely evaluates the acquisition or licensing of complementary  products
and technologies.  There can be no assurance that any new products  developed or
acquired by the Company will be successful or profitable.

Acquisitions

         In  recent  years,  the  Company  has  strategically  acquired  network
connectivity  product  offerings.  In December 1996,  the Company  completed the
acquisition  of Logicraft  Information
                                                                              14
<PAGE>
Systems,  Inc.,  a leading  developer  and  manufacturer  of  enterprise  CD-ROM
networking  systems.  The Company acquired all of the capital stock of Logicraft
for approximately $13 million and assumed certain Logicraft liabilities totaling
approximately $4 million,  which were paid off immediately after the closing. As
a result of the  allocation  of the  purchase  price,  the  Company  recorded an
expense of $15.7  million to record the value of  software  research it acquired
relating  to  products  for  which   technological   feasibility  has  not  been
established and for which no alternative future use existed.  Microtest acquired
Logicraft to give it broader reach throughout the entire CD-networking spectrum,
most notably at the enterprise and NT levels.

         In June 1995,  the Company  completed the  acquisition of Optical Media
International  ("OMI"),  a pioneer  in the  CD-ROM  and the CD-R  industry.  The
Company acquired all of the outstanding  capital stock of OMI for  approximately
$4 million in cash and the  assumption of  OMI-related  debt. As a result of the
allocation  of the  purchase  price,  the  Company  recorded  an expense of $8.3
million  and a related  tax  benefit  of $3.2  million  to  record  the value of
software  research it acquired  relating  to  products  for which  technological
feasibility  has not been  established  and for which no alternative  future use
existed . The Company acquired OMI to develop networkable CD-R technology.  CD-R
technology  is used in the areas of  records  archiving,  information  transfer,
computer data back-up and mass storage.

         In August 1995, the Company acquired the technologies of Hotware, Inc.,
an  independent  software  company for $450,000 in cash.  Hotware has  developed
technologies  in the LAN  information  access  market  and has made  significant
contributions  over  the  past  several  years  to  existing  Microtest  product
technology.

         The Company intends to continue to evaluate  acquisition  opportunities
as they are presented from time to time. The Company may face  competition  from
other suppliers or manufacturers  of network  hardware and software  products or
other third parties for acquisition  opportunities that become available.  There
can be no assurance that the Company will identify  acquisition  candidates that
will result in successful combinations in the future. Any future acquisitions by
the Company may result in the incurrence of additional debt and  amortization of
expenses related to goodwill and intangible assets, which could adversely affect
the Company's profitability,  or could involve the potentially dilutive issuance
of additional  equity  securities.  In addition,  acquisitions  involve numerous
risks,   including  difficulties  in  assimilation  of  the  acquired  company's
operations, particularly in the period immediately following the consummation of
such  transactions,  the diversion of the attention of the Company's  management
from other  business,  and the potential  loss of  customers,  key employees and
suppliers of the acquired  company,  all of which could have a material  adverse
effect on the Company's business and operating results.

Manufacturing and Backlog

         The  Company  contracts  with  domestic   manufacturers  to  build  its
products.  These manufacturers comply with industry-accepted (IPC) standards and
are, whenever possible,  ISO 9002 certified.  The Company's internal  operations
consist of supplier  management,  incoming  test and  inspection,  final product
configuration and packaging,  and order consolidation and
                                                                              15
<PAGE>
shipment. The Company retains a skilled,  permanent,  core workforce,  utilizing
temporary employees to accommodate workload fluctuations.  The Company maintains
two authorized  repair  centers,  one in Phoenix,  Arizona and one in the United
Kingdom.

         Certain  components  used  in  the  Company's  products  are  presently
available  from or  supplied  by only one source and others are  available  from
limited  sources.  Although the Company does not have long-term supply contracts
with any of its  component  suppliers,  it has been  able to  obtain  sufficient
supplies of components  and products in a timely manner.  However,  in the event
that  certain of its  suppliers  or contract  manufacturers  were to  experience
financial or other  difficulties that resulted in a reduction or interruption in
supply to the Company,  the Company's  results of operations  would be adversely
affected until the Company established alternate sources.

         In 1995, the Company began the documentation process to become ISO 9001
certified.  The  Company  was  unable to  complete  this  process in 1996 due to
personnel  changes,  but plans to complete it in 1997,  which will  position the
Company for a pre-certification audit. ISO 9001 requires that business processes
are under  control and it provides for  mechanisms  to  continually  improve the
Company's general business practices and products. The Company is committed to a
fully functional quality management system.

         Historically,  the  Company  has  not  maintained  significant  backlog
because it fills  substantially all orders for its products within 30 days after
receipt of a firm purchase order. The Company does not believe that backlog is a
reliable long-term indicator of future sales or earnings.

Competition

         The market for LAN products is extremely  fast-moving and  competitive,
and competition in the Company's market segment is continually increasing. Rapid
technological  advances  and  emerging  industry  standards  can quickly  change
competitive  conditions in the LAN industry.  These changes require frequent new
product  introductions,  added product  features and rapid  improvements  in the
relative price or performance of networking products.  Failure to keep pace with
technological  advances or market changes would  adversely  affect the Company's
competitive  position and operating  results.  The Company's products compete on
the basis of  ease-of-use,  product  features,  quality,  reliability and price.
There can be no assurance  that  existing or future  competitors  of the Company
will not  introduce  comparable  or  superior  products  that  incorporate  more
advanced technology at lower prices.

         The markets served by the Company's  connectivity  products continue to
grow at rates that naturally  attract new entrants into those  markets.  This is
especially true for the CD-ROM  networking  market where the Company's  DiscPort
and CD-NOW!  products currently enjoy a strong market position.  There can be no
assurance that this market position can be maintained or that existing or future
competitors will not introduce comparable or superior connectivity products.
                                                                              16
<PAGE>
         In  the  network  management  and  certification  market,  the  Company
competes   with   products   manufactured   by   Wavetek   Corporation,    Scope
Communications,  Inc.,  Fluke  Corporation and Datacom  Technologies,  Inc. To a
lesser  extent,   the  Company  competes  with   manufacturers  of  time  domain
reflectometers, ohm meters, volt meters and oscilloscopes. The Company's network
troubleshooting  products  compete with the products from Scope  Communications,
Inc.,  and Fluke  Corporation.  To a lesser  extent,  the Company  competes with
manufacturers of software-based protocol analyzers, such as Triticom and Intel.

         The Company's network connectivity  products compete with products from
Meridian Data, Micro Design International, CBIS, Reed Technology and Information
Services,   Inc.,  Ornetix,   SciNet,  Inc.,  Compact  Devices,  Inc.  and  Axis
Communication,  Inc.  The Company also  competes  indirectly  with  suppliers of
personal computers and network operating systems,  such as Microsoft and Novell,
to the extent that these companies include CD-ROM  networking  utilities as part
of their operating systems.

         The  Company's  competitors  include large  domestic and  international
companies,  many of  which  have  significantly  greater  financial,  technical,
manufacturing,  marketing,  sales and  distribution  resources than the Company.
There can be no assurance  that the Company's  current or potential  competitors
will not develop  products  comparable  or superior  to those  developed  by the
Company or adapt more quickly than the Company to new or emerging  technologies,
evolving industry trends, or changing customer  requirements.  There also can be
no  assurance  that the Company  will have the  financial  resources,  technical
expertise, or marketing,  sales,  distribution,  customer service, and technical
support capabilities to compete successfully.

Proprietary Rights

         Microtest  relies upon a  combination  of copyright,  trademark,  trade
secret and patent protection to establish and protect the Company's  proprietary
rights in its products and  technologies.  In  addition,  the Company  generally
enters into  nondisclosure  and  confidentiality  agreements with its employees,
distributors,  customers and suppliers with access to sensitive  information and
limits  access  to and  distribution  of its  software  documentation  and other
proprietary   information.   The  Company  has  several  trademarks,   including
Microtest(R),  DiscPort(R),  DiscView(R),  PairScanner(R),   PentaScanner(R),and
Fiber Eye(R), as well as Logicraft's  disk-caching technology called FastCD(TM),
and disc management utility called AutoShare(TM).

         The Company  embodies a substantial  portion of its TDR technology in a
custom gate array to deter  reverse  engineering.  The  Company  has  obtained a
United States patent on a portion of its technology related to TDR.

         In 1996,  the Company  obtained two  additional  patents on a technique
that enables high-speed (100 Mbps) channel measurements to be made without being
impaired by high levels of crosstalk typically found in unshielded  twisted-pair
connector systems.
                                                                              17
<PAGE>
         The Company has filed other United States patent applications which are
currently  pending.  The first patent  application,  filed in 1993,  describes a
technique  to expand the  application  of LAN Media  Servers to control  various
types of  equipment.  A second  patent  application,  which was filed in January
1996,  relates to the creation and  installation  of a foreign file system.  The
Company continues to evaluate the desirability of additional patent applications
relating to its diagnostics and connectivity technologies.

         There  can be no  assurance  that  any  patents  will  issue  from  the
above-described applications.  Further, there can be no assurance that the steps
taken by the Company to protect its proprietary rights will be adequate to deter
misappropriation of its technology or independent third-party development of its
technology,  or that its patents or registered  trademarks  can be  successfully
enforced.  Because of the rapid pace of technological  change in the LAN product
industry,  the Company believes that patent  protection for its products is less
significant  to its success than the  knowledge,  ability and  experience of its
employees and the frequent  introduction  and market  acceptance of new products
and product enhancements.

         Given the rapid pace of technological  development in the LAN industry,
there can be no assurance that certain aspects of the Company's  products do not
or will not infringe the existing or future  proprietary  rights of others.  The
Company  believes  that  if such  infringement  existed,  it  could  obtain  the
requisite  licenses or rights to use such technology.  However,  there can be no
assurance  that such  licenses or rights  could be obtained or obtained on terms
that would not have a material adverse effect on the Company.

Employees

         As of March 14, 1997,  the Company  employed 267 persons on a full-time
basis: 102 in sales, marketing and customer support, 38 in manufacturing,  87 in
research  and  development  and 40 in  administration.  Many  of  the  Company's
employees are highly skilled in certain  disciplines and the Company's continued
growth and success will depend in part on its ability to retain  management  and
key employees and, where appropriate,  hire new employees. The Company has never
had a work stoppage,  no employees are represented by a labor  organization  and
the Company considers its employee relations to be good.
                                                                              18
<PAGE>
ITEM 2.  PROPERTIES.
         -----------

         The Company's  principal corporate offices and research and development
facilities are located in a 49,000 square foot facility in Phoenix, Arizona. The
lease for this facility commenced October 1, 1992, and continues for a period of
eight  years,  but may be canceled  without  penalty  after five years.  Current
monthly rental payments for this facility are approximately $55,000. The Company
may decide to terminate the lease effective  October 1, 1997.  Accordingly,  the
Company is in the process of finding a new  facility  and plans on  remaining in
the Phoenix  metropolitan  area. If there is a significant  interruption  in the
Company's  business  as a result of moving to a new  facility,  it could  have a
material adverse effect on the Company's  business and operating  results in the
quarter in which such moves  occurs.  The Company  also leases sales and support
offices in California, Illinois and the United Kingdom. Logicraft leases offices
for sales, support and research and development in New Hampshire and Germany


ITEM 3.  LEGAL PROCEEDINGS.
         ------------------

         In September and October 1996, the Company,  Richard G. Meise,  Richard
R.  Douglas  and David C.  Bolles were named as  defendants  in two  shareholder
lawsuits brought in the Maricopa County Superior Court for the State of Arizona,
entitled James T. Zelloe, et al. v. Microtest, Inc. et al., Cause No, CV96-16655
and Richard  Fluegel et al. v.  Microtest,  Inc. et al.,  Cause No.  CV96-19144.
These  shareholder  lawsuits  have been  consolidated.  The  plaintiffs in these
lawsuits  purport to represent a class of plaintiffs who purchased the Company's
common stock between April 13, 1995 and January 17, 1996. The plaintiffs allege,
among  other  things,  that  certain  statements  made  by the  Company  and its
representatives,  as well as the financial statements contained in the Company's
Quarterly  Reports on Form 10-Q filed during 1995, were false and misleading due
to the Company's  purported improper  recognition of revenue on certain sales of
products to  distributors  and  resellers in  violation  of  generally  accepted
accounting  principles.  More  specifically,  the plaintiffs allege that certain
sales of products to  distributors  and resellers were contingent on resale and,
as a result,  the Company should not have  recognized  revenue on such sales and
did not properly  reserve for returns on such sales.  Furthermore,  according to
the  plaintiffs,  the Company  should have  disclosed that future demand for its
products  would be  constrained by the alleged excess levels of products held by
its  distributors  as a result of the Company's  purported  contingent  sales in
1995. The lawsuits  include causes of action for securities fraud and common law
fraud and seek  unspecified  damages  and the  recovery of  attorneys'  fees and
costs. The Company  maintains that its statements and financial  statements were
true  and  correct  and  that its  recognition  of  revenue  was  proper  and in
accordance with generally accepted accounting  principles.  The Company believes
that the shareholder class action lawsuits are without merit, and has to filed a
motion to dismiss the lawsuits and intends to  vigorously  defend  against them.
The Company currently expects that the ultimate  resolution of the lawsuits will
not have a material  effect on the  Company's  financial  condition or operating
results;  however,  if  the  shareholder  lawsuits  were  ultimately  determined
adversely  to the  Company,  it would  have a  material  adverse  effect  on the
Company's financial condition and operating results.
                                                                              19
<PAGE>
         The Company is involved in various other legal  proceedings  incidental
to its business. Management does not believe that any of these legal proceedings
will have a material  adverse  effect on the  financial  condition  or operating
results of the Company.


ITEM 4.  SUBMISSION OF MATTERS.
         ----------------------

         The  Company  did not submit  any matter to a vote of its  shareholders
during the fourth quarter of 1996.
                                                                              20
<PAGE>
                                     PART II

ITEM 5.  MARKET  FOR  THE  COMPANY'S   COMMON  EQUITY   SECURITIES  AND  RELATED
         -----------------------------------------------------------------------
         SHAREHOLDER MATTERS.
         --------------------

General

         The  Company's  common  stock has been  traded on the  Nasdaq  National
Market ("Nasdaq") since October 30, 1992, under the symbol "MTST." The following
table sets forth the  quarterly  high and low closing sales prices of the common
stock as reported on Nasdaq.

Period                                                        High         Low
------                                                        ----         ---
 1995       First Quarter . . . . . . . . . . . . . . . . . .$24.25      $15.875
            Second Quarter . . . . . . . . . . . . . . . . .  22.75       18.50
            Third Quarter . . . . . . . . . . . . . . . . . . 25.25       19.75
            Fourth Quarter . . . . . . . . . . . . . . . . .  19.735       9.75
 1996       First Quarter . . . . . . . . . . . . . . . . . . 12.25        5.00
            Second Quarter . . . . . . . . . . . . . . . . .  12.25        7.00
            Third Quarter . . . . . . . . . . . . . . . . . . 11.50        7.00
            Fourth Quarter . . . . . . . . . . . . . . . . .  10.875       6.875

         The closing price of the  Company's  Common Stock on March 14, 1997 was
$7.25 per share.

         As of March 14,  1997,  there  were  8,130,647  shares of common  stock
outstanding,  which were held of record by 200  holders.  The Company  estimates
that there are  approximately  6,887  beneficial  owners of the Company's common
stock.

         The Company has not paid any cash  dividends on its Common  Stock.  The
Company  presently  intends to retain  earnings for use in its business and does
not  anticipate  paying  cash  dividends  on  its  outstanding   shares  in  the
foreseeable future.

Factors That May Affect Future Stock Performance

         The performance of the Company's common stock is dependent upon several
factors,  including  those set forth below and in  "Management's  Discussion and
Analysis of Financial  Condition  and Results of  Operations -- Factors That May
Affect Future Results and Financial Condition."

         Possible  Volatility of Stock Price - The Company believes that factors
such  as  announcements  of  developments  related  to the  Company's  business,
announcements by competitors,  quarterly fluctuations in the Company's financial
results, conditions in the CD-ROM networking industry, conditions in the network
management and certification industry,
                                                                              21
<PAGE>
changes in the general  economy,  and other factors could cause the price of the
Company's Common Stock to fluctuate substantially.  In addition, in recent years
the stock market in general,  and the market for shares of small  capitalization
technology stocks in particular,  have experienced extreme  fluctuations,  which
have often been unrelated to the operating  performance  of affected  companies.
Such  fluctuations  could have a material  adverse effect on the market price of
the Company's Common Stock.

         Certain  Charter and Bylaw  Provisions - The Company's  Certificate  of
Incorporation and Bylaws empower the Board of Directors, without approval of the
shareholders, to fix the rights and preferences and to issue shares of preferred
stock and divide the  Company's  Board of Directors  into three  classes.  These
provisions, as well as other provisions in such documents, could have the effect
of deterring  unsolicited takeovers or delaying or preventing changes in control
or management of the Company, including transactions in which shareholders might
otherwise receive a premium for their shares over the current market prices.

ITEM 6.  SELECTED FINANCIAL DATA.
         ------------------------

         The following  selected  consolidated  financial data should be read in
conjunction  with the Company's  Consolidated  Financial  Statements and related
Notes and with "Management's  Discussion and Analysis of Financial Condition and
Results of Operations"  included  elsewhere  herein.  The  consolidated  balance
sheets as of December  31, 1995 and 1996,  and the  consolidated  statements  of
operations,  stock holders' equity and cash flows for each of the three years in
the period ended December 31, 1996 and the independent auditors' report thereon,
are included in Item 8 of this Form 10-K.
                                                                              22
<PAGE>
<TABLE>
<CAPTION>
                                                                Years Ended December 31,
                                                  ------------------------------------------------------


                                                     1992      1993        1994       1995        1996
                                                     ----      ----        ----       ----        ----
                                                         (in thousands, except per share amounts)
<S>                                               <C>        <C>         <C>        <C>         <C>
Statement of Income Data:
Revenues ......................................   $ 26,487   $ 22,142    $ 39,574   $ 52,537    $ 50,442
Cost of sales and services ....................     10,316      9,680      16,584     21,961      20,452
                                                  --------   --------    --------   --------    --------
     Gross profit .............................     16,171     12,462      22,990     30,576      29,990
Total operating expenses ......................     11,087     15,045      16,212     22,192      24,939
Restructuring charges, purchased R & D
   and other unusual items(1) .................       --        3,358)       --       (8,776)    (15,697)
Income from sale of technology(1) .............      6,245        959        --         --          --
                                                  --------   --------    --------   --------    --------
Income (loss) from operations .................     11,329     (4,982)      6,778       (392)    (10,646)

Interest income - net .........................        243        729         743      1,232         762
                                                  --------   --------    --------   --------    --------
Income (loss) before income taxes .............     11,572     (4,253)      7,521        840      (9,884)

Provision (benefit) for income taxes ..........      4,432     (1,730)      2,231       (305)      1,711
                                                  --------   --------    --------   --------    --------
Net income (loss) .............................   $  7,140   $ (2,523)   $  5,290   $  1,145    $(11,595)
                                                  ========   ========    ========   ========    ========
Net income (loss) per common and
   equivalent share (1) .......................   $   1.05   $  (0.34)   $   0.64   $   0.13    $  (1.43)
                                                  ========   ========    ========   ========    ========
Net income (loss) excluding restructuring
   charges, purchased R & D, other unusual
   items and income from sale of technology (1)   $  3,287   $ (1,100)   $  5,290   $  6,531    $  4,102
                                                  ========   ========    ========   ========    ========
Net income (loss) per common and
   equivalent share excluding restructuring
   charges, purchased R & D, other unusual
   items and income from sale of technology (1)   $   0.49   $  (0.14)   $   0.64   $   0.77    $   0.50
                                                  ========   ========    ========   ========    ========
Shares used in per share calculation ..........      6,769      7,503       8,269      8,534       8,104
Shares used in per share calculation excluding
 restructuring charges,  purchased R & D, other
unusual items and income from sale of
technology ....................................      6,769      7,739       8,269      8,534       8,251

Balance Sheet Data:
Working capital ...............................   $ 32,613   $ 29,576    $ 36,635   $ 39,128    $ 26,583
Total assets ..................................     39,080     36,537      47,642     50,158      43,313
Shareholders' equity ..........................     35,389     33,433      40,579     43,027      31,672
</TABLE>
(1)      See  "Management's  Discussion and Analysis of Financial  Condition and
         Results of Operations"  for a discussion of the impact on net income of
         restructuring charges,  purchased R & D, other unusual items and income
         from sale of technology.
                                                                              23
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         -----------------------------------------------------------------------
         OF OPERATIONS.
         --------------

Introduction

         The Company  develops and markets network  management and  connectivity
products. Its network management products certify whether cabling will support a
proposed LAN installation,  as well as troubleshoot  cable and other faults that
occur on established LANs. Its connectivity products facilitate both the storage
of information  on CD-ROM  devices,  as well as the sharing of that  information
among LAN users.

         In 1996,  the  Company  achieved  net  revenues  of $50.4  million  and
recorded a net loss of $11.6 million or $(1.43) per share in 1996.  This differs
from the Company's  previously  announced  unaudited  results of net revenues of
$52.5  million  and a net  loss of $10.7  million  or  $(1.31)  per  share.  The
difference  is due  to a  recent  determination  by the  Company  that  reserves
relating to end user direct  sales were  inadequate.  As a result,  net revenues
attributable to such sales  decreased as a result of a $2.1 million  increase in
the reserves for fourth  quarter sales made through OMI's direct sales  program.
The Company also recently  determined that its interim unaudited results for the
second,  third and fourth quarters of 1996 required  adjustments as discussed in
Note 10 to the Company's Consolidated Financial Statements included elsewhere in
this Annual Report.

         The Company is making  changes in the  structure of the end user direct
sales  program,  and the  changes  will impact  operating  results for the first
quarter of 1997.  In addition to changes to this  program,  the Company has been
affected by an overall slowing in the growth of the network  products  industry,
which also will negatively impact first quarter operating results.  Accordingly,
the Company will not meet internal operating expectations for the quarter.

         Despite overall growth in 1995, during the fourth quarter of 1995 there
was a  significant  slowing in the market for the Company's  products  following
increased  sales to certain  distributors  during the third  quarter of 1995. In
addition,  sales of the Company's relatively new diagnostic product, COMPAS, did
not ramp up as quickly as anticipated.

         The  Company's  operating  results  have  been  volatile  over the past
several years,  particularly on a quarter to quarter basis.  For a discussion of
factors that may affect the Company's  business,  financial condition and future
results,  see "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations  -- Factors That May Affect  Future  Results and Financial
Condition" included in this Report.
                                                                              24
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
         (in thousands)                                     1994       Change       1995       Change      1996
-------------------------------------------------------   --------    --------    ---------    ------   --------
<S>                                                       <C>            <C>     <C>           <C>      <C>
Revenues                                                  $ 39,574         33%   $  52,537        -4%   $ 50,442
Gross profit                                                22,990         33%      30,576        -2%     29,990
   As a percentage of revenues                                58.1%                  58.2%                59.5%
Sales & marketing                                            8,739         44%      12,585        14%     14,334
   As a percentage of revenues                                22.1%                  24.0%                28.4%
Research & development                                       4,063         46%       5,913         8%      6,414
   As a percentage of revenues                                10.3%                  11.3%                12.7%
General & administrative                                     3,410          8%       3,694        13%      4,191
   As a percentage of revenues                                 8.6%                   7.0%                 8.3%
Interest income                                                743         66%       1,232       -38%       762
   As a percentage of revenues                                 1.9%                   2.3%                 1.5%
Income taxes excluding tax benefit from purchased R & D       2,231        38%       3,085       -45%      1,711
   Effective tax rate                                         29.7%                  32.1%                29.4%
Net Income (Loss)                                            5,290        -78%       1,145     -1113%    (11,595)
   As a percentage of revenues                                13.4%                   2.2%                -23.0%
Net Income (Loss) Excluding
restructuring charges, purchased                             5,290         23%      6,531        -37%      4,102
R % D and other unusual items
   As a percentage of revenues                                13.4%                 12.4%                  8.1%
</TABLE>



Revenues - Product sales decreased 4%                    [GRAPHIC OMITTED]
from 1995 to 1996. This is mainly due to            Bar Graph showing revenue
increased competition in the Category 5             as  $26.5   million   for
cable testing market and a softening of             1992,  $22.1  million for
the European economy in 1996. Product sales         1993,  $39.6  million for
increased from 1994 to 1995 primarily due           1994,  $52.5  million for
to the increased demand in the domestic and         1995  and  $50.4  million
international marketplaces for DiscPort products.   for 1996.

         International sales were $14.8 million, $19.1 million and $13.4 million
in 1996,  1995 and 1994,  or 29%, 36% and 34% of total  revenues,  respectively.
International  sales  decreased in both absolute  dollars and as a percentage of
total revenue during 1996 primarily due to the above mentioned  weakening in the
European economy in 1996. International sales increased in both absolute dollars
and as a percentage of total revenue during 1995 due to an increased  demand for
the Company's DiscPort products in its international markets.
                                                                              25
<PAGE>
   [GRAPH OMITTED]                      Gross Profit -Gross profit decreased 2%
Bar Graph showing Gross                 in 1996.  This  decrease  is due to the
Profit for 1992 of $16.2                decrease   in   revenue   during   1996
million, 1993 of $12.5                  partially offset by the introduction of
million, 1994 of 23.0                   a     manufacturers'     representative
million, 1995 of $30.6                  program.   Discounts  to  many  of  the
million, and 1996 of                    Company's  distributors were lowered as
$30.0 million                           a result of this program.  Gross profit
                                        increased   33%  in  1995  due  to  the
                                        corresponding  33%  increase  in  total
                                        revenues  during the same time  period.
                                        Gross profit as a  percentage  of total
                                        revenues may fluctuate on a quarterly
basis due to a variety of factors,  including  changes in product  and  customer
mixes,  the  introduction  of new products by the Company or its competitors and
other competitive factors, such as pricing pressures.



Sales & Marketing Expenses- Sales and
marketing expenses increased in both
absolute dollars and as a percentage
of total revenues from 1995 to 1996.
The increase is largely due to the                [GRAPH OMITTED]
implementation of the above mentioned   Bar Graph  showing  sales and marketing
manufacturers' representative           expenses of $6.2 million in 1992,  $7.7
compensation program, as well as the    million in 1993,  $8.7 million in 1994,
addition of personnel to bolster the    $12.6   million  in  1995,   and  $14.3
Company's sales force. Sales and        million in 1996.
marketing expenses increased in both
absolute dollars and as a percentage
of revenue from 1994 to 1995.
Increased advertising and promotional
expenses, commissions and sales,
marketing and support personnel were
the main contributors to the increase
during this period.
                                                                              26
<PAGE>
       [GRAPHIC OMITTED]                Research & Development  Expenses - 1996
Bar Graph showing research and          research   and   development   expenses
development expenses of $3.4 million    increased in absolute  dollars and as a
in 1992, $4.7 million in 1993, $4.1     percentage   of   total   revenues   as
million in 1994, $5.9 million in        compared   to   1995    research    and
1995, and $6.4 million in 1996.         development  expenses  primarily due to
                                        an increase in the number of prototypes
                                        developed  in 1996 as compared to 1995.
                                        Research   and   development   expenses
                                        increased in both absolute  dollars and
                                        as a percentage of revenue from 1994 to
                                        1995. This increase is due primarily to
                                        an increase in personnel  stemming from
                                        the  acquisition  of  OMI  and  use  of
                                        outside services.



General & Administrative Expenses- General and administrative expenses increased
during 1996 in both  absolute  dollars and as a  percentage  of revenues  mainly
because of an increase in expenses related to the settlement of a lawsuit during
the first quarter of 1996, as well as the legal
costs associated with the defense of two
shareholder lawsuits filed during the
last half of 1996. General and                     [GRAPHIC OMMITED]
administrative expenses increased in    Bar   Graph    showing    general   and
absolute dollars but decreased as a     adminstrative  expenses of $1.5 million
percentage of total revenues from       in 1992,  $2.7  million  in 1993,  $3.4
1994 to 1995. The increase in           million in 1994,  $3.7 million in 1995,
absolute dollars was due primarily to   and $4.2 million in 1996
increased legal and consulting fees
as well as increased headcount and
administrative costs associated with
OMI. The decrease in general and
administrative expenses as a
percentage of total revenues was due
to the higher sales volumes in 1995
compared with 1994.
                                                                              27
<PAGE>
       [GRAPHIC OMITTED]                Interest  -  The   Company's   interest
Bar Graph showing interest income of    income  decreased  from  1995  to  1996
$243,000 in 1992, $729,000 in 1993,     primarily  due  to  a  reallocation  of
$743,000 in 1994, $1,232,000 in 1995,   investments  in   anticipation  of  the
and $762,000 in 1996.                   Company's  acquisition   activities  in
                                        1996. The Company  invests the majority
                                        of its excess  cash in  municipal  bond
                                        funds with  maturities  ranging  from 7
                                        days to 3 months.



        [GRAPHIC OMITTED]               Effective  Tax  Rate  -  Excluding  the
Bar Graph showing the effective tax     effects  of   purchased   research  and
rate excluding tax benefit related to   development,  the Company experienced a
purchased R & D of 38% for 1992, 41%    decrease  in its  effective  income tax
for 1993, 30% for 1994, 32% for 1995,   rate  during  1996.  The  decrease  was
and 29% for 1996.                       mainly due to the  recognition of R & D
                                        tax   credits   earned  in  1996.   The
                                        Company's   1995   effective  tax  rate
                                        includes a tax benefit of $3.4  million
                                        related  to   purchased   research  and
                                        development.  Excluding  the effects of
                                        purchased research and development, the
                                        Company's effective tax rate was 32% in
                                        1995. This represents
an increase from 30% in 1994. The increase was primarily due to the  realization
of net operating loss carryforwards  during 1994 for which a valuation allowance
had previously been established.

         Net  Income - The  Company's  net  income  decreased  in both  absolute
dollars and as a  percentage  of total  revenues  from 1995 to 1996.  During the
fourth  quarter of 1996,  the  Company  recorded  an expense  for  research  and
development  costs  associated  with software  products for which  technological
feasibility  has not been  established  and for which no alternative  future use
existed  arising  from the  purchase of  Logicraft.  The expense  totaled  $15.7
million.  Excluding this expense,  net income decreased 42% from $6.5 million in
1995 to $4.1  million  in 1996.  This  decrease  is mainly  attributable  to the
decrease  in  revenues,  the  overall  increase in  operating  expenses  and the
decrease in interest  income during 1996. Net income  decreased in both absolute
dollars and as a  percentage  of total  revenues  from 1994 to 1995.  During the
second  quarter of 1995,  the  Company  recorded  an expense  for  research  and
development  costs  associated  with software  products for which  technological
feasibility  has not been  established  and for which no alternative  future use
existed arising from the purchase of OMI. The expense totaled $8.3 million and a
tax  benefit of $3.2  million  was  recognized.  Additionally,  during the third
quarter of 1995,  the Company  recorded an expense for research and  development
costs associated with products for which technological  feasibility has not been
established  and for which no  alternative  future use existed  arising from the
purchase of certain technologies from
                                                                              28
<PAGE>
Hotware,  Inc.  The expense  totaled  $450,000 and a tax benefit of $180,000 was
recognized.  Excluding these items, net income was $6.5 million,  a 23% increase
from 1994.  This  increase  was due to higher  sales  volumes and an increase in
interest income. See Note 5 to  the Consolidated  Financial  Statements included
elsewhere in this Form 10-K.



        [GRAPHIC OMITTED]                          [GRAPHIC OMITTED]
Bar Graph  showing net  income/(loss)   Bar  Graph  showing  net  income/(loss)
of  $7.1  million  for  1992,  $(2.1)   excluding     restructuring    charges,
million  for 1993,  $5.3  million for   purchased  R & D, other  unusual  items
1994,   $1.1  million  for  1995  and   and  income from sale of  technology of
$(11.6) million for 1996.               $3.3 million for 1992,  $(1.1)  million
                                        for 1993,  $5.3 million for 1994,  $6.5
                                        million for 1995 and $4.1 for 1996.




Liquidity and Capital Resources

         To date,  the Company has financed  its  operations  primarily  through
operating cash flow and equity financings. At December 31, 1996, the Company had
cash and cash  equivalents  of $10.3  million.  This  represents  a $9.6 million
decrease in cash and cash  equivalents  from  December  31, 1995 to December 31,
1996.  As a result of the  decrease  in cash and cash  equivalent,  the  Company
intends to secure a $10 million unsecured  revolving credit facility with a bank
which will be used for general  corporate  and working  capital  purposes.  This
decrease in cash and cash  equivalents is mainly  attributable  to the Logicraft
acquisition  and an increase in accounts  receivable.  The  increase in accounts
receivable  is mainly due to a slowing  in the  collection  process  caused by a
mid-year  systems  conversion  along with personnel  turnover in the collections
area and the addition of Logicraft  receivables due to the year-end acquisition.
Accrued  liabilities  also  showed a  significant  increase  due  mainly  to the
assumption   of   Logicraft    liabilities    and   additional    accruals   for
acquisition-related expenses.

         At December 31,  1995,  the  Company's  cash and cash  equivalents  had
decreased  $11.7 million to $19.9 million from December 31, 1994.  This decrease
in cash and cash  equivalents  is  mainly  attributable  to the OMI and  Hotware
acquisitions,  a stock  repurchase  program,  an increase in receivables  and an
increase in  inventory  at year end.  The  increase in  accounts  receivable  is
primarily  attributable  to third quarter  sales  resulting  from  extensions of
payment terms to certain of the Company's distributors.
                                                                              29

<PAGE>
         Capital  expenditures  were $1.1 million in 1996,  $1.4 million in 1995
and $1.3  million in 1994.  The Company  believes  that capital  investments  of
property  and  equipment  will  approximate  $1.0  million in 1997.  The Company
expects  expenditures  related to the  completion  of  in-process  technology of
Logicraft Information Systems, Inc. acquired during 1996 to approximate $700,000
in 1997. The Company expects that existing cash balances,  anticipated cash flow
from operations and the anticipated  revolving credit line referenced below will
satisfy the Company's working capital and capital  expenditure  requirements for
the foreseeable future.

               Inflation

         The  Company  does not  believe  that it is  significantly  impacted by
inflation  because  of  its  rapid  inventory   turnover  and  relatively  small
investment in capital assets.

Factors That May Affect Future Results and Financial Condition

         The Company's  future  operating  results and  financial  condition are
dependent on the Company's  ability to successfully  develop,  manufacture,  and
market  technologically  innovative  products in order to meet dynamic  customer
demand  patterns.  Inherent  in this  process  are a number of factors  that the
Company must successfully  manage in order to achieve favorable future operating
results and financial  condition.  Potential risks and uncertainties  that could
affect the Company's future operating results and financial  condition  include,
without limitation, the factors discussed below.

         Fluctuations in Quarterly  Operating  Results - The Company's  revenues
may vary  significantly  from  quarter to quarter  due to a variety of  factors,
including changes in the Company's product and customer mix, the introduction of
new products by the Company or its  competitors,  and other  factors,  including
pricing pressures and economic  conditions in the United States and Europe.  The
Company  operates with relatively  little backlog and  substantially  all of its
revenues  in each  quarter  result  from orders  received  in that  quarter.  In
addition,   the  Company  incurs  significant  operating  start-up  expenses  in
anticipation of future revenues.  If near-term demand for the Company's products
weakens  or if  orders  are not  shipped  in any  quarter  as  anticipated,  the
Company's  results of operations  for that quarter could be adversely  affected.
The Company's  quarterly  operating results may vary significantly  depending on
various  factors,  including the  introduction  of new products by the Company's
competitors,  market acceptance of new products,  the mix of software and system
sales, , adoption of new technologies  and standards,  prices and other forms of
competition,  the cost,  quality and availability of third party components used
in the Company's systems,  changes in the Company's  distribution  arrangements,
and the inability of the Company to  accurately  monitor end user demand for its
products  due to the  sales  of  products  through  distributors  and  VARs  and
unanticipated  product  returns to the extent such returns  exceed the Company's
reserves  for future  returns.  The  Company's  operating  results  will also be
affected by the economic condition of the computer industry, which has from time
to time experienced cyclical, depressed business conditions, often in connection
with or in anticipation of a decline in general economic conditions.  Due to all
of the foregoing factors, the Company's revenues or operating results may in one
or more future  quarters be below the  expectations of stock market analysts and
investors.  In such event,  the
                                                                              30
<PAGE>
price of the Company's common stock would likely decline, and such decline could
be substantial.

         Dependence  on  Third  Party   Distributors   -  The  Company   derives
substantially all of its product sales through distributors and VARs. Two of the
Company's  distributors accounted for 28% of the Company's revenues in 1996. The
loss of certain distributors or VARs would have a material adverse effect on the
Company's   business  and   operating   results.   The   Company's   contractual
relationships  with its  distributors  and VARs are  generally  cancelable  upon
notice to the Company.  Certain of the Company's  distributors and VARs also act
as  distributors  for competitors of the Company and could devote greater effort
and  resources  to  marketing  competitive  products.  In  addition,   effective
distributors and VARs must devote significant  technical,  marketing,  and sales
resources to an often  lengthy sales cycle.  There can be no assurance  that the
Company's  current  distributors  and VARs will continue to market the Company's
products  effectively or that economic or industry conditions will not adversely
affect such  distributors  and VARs.  Because the  Company  sells a  significant
portion of its products  through  distributors and VARs, it is difficult for the
Company to monitor end user demand for its products on a current basis.  Initial
stocking  orders  may not be  indicative  of  long-term  end  user  demand.  The
Company's  customers  typically  are  allowed by  contract  to return  products,
subject to certain  limitations,  without  charge or penalty.  While the Company
provides for a reserve for future  returns,  there can be no assurance  that the
reserve will adequately cover actual product returns. Excessive or unanticipated
returns could  materially  adversely  affect the Company's  business,  operating
results, or financial  condition.  The Company's operating results could also be
materially adversely affected by changes in distributors'  inventory strategies,
which could  occur  rapidly  and, in many cases,  may not be related to end user
demand.  New products may require different  marketing,  sales, and distribution
strategies  than  those  for the  Company's  current  products.  There can be no
assurance  that the  Company's  distributors  and VARs will choose or be able to
effectively  market  these new  products or to continue to market the  Company's
existing  products.  A  failure  of  the  Company's  distributors  and  VARs  to
successfully  market the Company's  product would have a material adverse effect
on the Company's business and results of operations.

         Dependence  on Third Party  Suppliers - The Company is  dependent  on a
small  number  of  third  party  vendors  for  the  manufacturing  of all of the
Company's products. The Company also is dependent on a small number of suppliers
for  certain  key  components  used in its  product,  including  CD-ROM  drives,
microprocessors,  integrated  circuits and power modules.  The Company purchases
these components  pursuant to purchase orders placed from time to time, does not
carry significant  inventories of these components,  and has no long-term supply
arrangements.  The loss of any of the Company's third-party manufacturers or key
suppliers  could have a material  adverse  effect upon the  Company's  business,
financial  condition and operating  results.  Although the Company believes that
alternative  sources of product  manufacturing and components could be arranged,
the  process of  qualifying  new  suppliers  could be  lengthy.  There can be no
assurance  that any  additional  source  would be  available to the Company on a
timely basis or at a cost acceptable to the Company. Any disruption or reduction
in the future  supply of any key  components  currently  obtained  from  limited
sources  could  have  a  material  adverse  effect  on the  Company's  business,
financial condition and operating results.
                                                                              31
<PAGE>
         Rapid Technological Change;  Potential for Product Defects - The market
for the Company's  products is  characterized by rapid  technological  advances,
evolving  industry  standards  in computer  hardware  and  software  technology,
changes in customer  requirements,  and frequent new product  introductions  and
enhancements.  The  Company's  future  success  will  depend on its  ability  to
continue  to enhance  its  current  product  line and to continue to develop and
introduce new products that keep pace with competitive product introductions and
technological developments,  satisfy diverse and evolving customer requirements,
or otherwise  achieve  market  acceptance.  There can be no assurances  that the
Company will be  successful  in continuing to develop and market on a timely and
cost-effective  basis new  products  or  product  enhancements  that  respond to
technological  advances by others,  or that these  products will achieve  market
acceptance. In addition,  companies in the industry have in the past experienced
delays in the  development,  introduction,  and  marketing  of new and  enhanced
products,  and there can be no assurance  that the Company  will not  experience
delays in the  future.  Any  failure  by the  Company to  anticipate  or respond
adequately to changes in technology and customer preferences, or any significant
delays in product  development or  introduction,  would have a material  adverse
effect on the Company's business, financial condition and results of operations.

         Due to the complexity and  sophistication,  the Company's products from
time to time may contain  defects or "bugs"  which can be  difficult to correct.
Moreover,  as the Company  continues to develop and enhance its products,  there
can be no  assurance  that the  Company  will be able to  identify  and  correct
defects in such a manner as will permit the timely introduction of such product.
Furthermore,  despite  extensive  testing,  the  Company  has from  time to time
discovered  defects only after its  products  have been  commercially  released.
There can be no assurance that product  defects will not cause delays in product
introductions  and  shipments,  cause  loss of or delays  in market  acceptance,
result in increased  costs,  require design  modifications,  or impair  customer
satisfaction.  Any such event could  materially  adversely  affect the Company's
business, financial condition and results of operations.

         Over  the  past  two  years,   CD-ROM  drive  technology  has  advanced
significantly.  Additionally, the pace of new drive introductions has increased.
As a result,  the  Company  may find  itself  holding an  inventory  of obsolete
drives.  Additionally,  the Company's  contracts with its distributors allow for
product return, or price protection  credits,  based on current inventory levels
of current and  obsolete  products  under  certain  limited  circumstances.  The
Company estimates and accrues an allowance for such  occurrences,  but there can
be no assurance that actual  inventory  writedowns,  product  returns,  or price
protection credits will not exceed the Company's estimates. Any of the foregoing
events could  materially  adversely  affect the  Company's  business,  financial
condition and results of operations.

         Competition  - The markets for the  Company's  products  are  extremely
competitive.  The  Company  expects  that  competition  will  increase  as  more
companies  enter the market and as existing  competitors  continue to change and
expand product offerings.  Pricing is very aggressive in the Company's industry,
and the  Company  expects  pricing  pressures  to  continue  to  intensify.  The
Company's  current  competitors  in the CD-ROM  networking  market include other
suppliers of CD-ROM  networking  software and  hardware  such as Meridian  Data,
Inc., Micro Design
                                                                              32
<PAGE>
International,  CBS, Reed Technology and Information  Services,  Inc.,  Ornetix,
SciNet,  Inc., Axis  Communication,  Inc. and Compact Devices,  Inc. The Company
also  competes  indirectly  with  suppliers  of personal  computers  and network
operating  systems such as Microsoft  and Novell,  to the extent such  companies
include CD-ROM  networking  utilities as part of their  operating  systems.  The
Company's  potential  competitors in the hardware area include  companies in the
personal computer market and certain CD-ROM manufacturers. The Company's current
competitors  in the network  management and  certification  market include other
suppliers of network management and certification  software and hardware such as
Wavetek Corporation,  Scope Communications,  Inc., Fluke Corporation and Datacom
Technologies,   Inc.  The  Company's  competitors  include  large  domestic  and
international  companies,  many of which have  significantly  greater financial,
technical,  manufacturing,  marketing, sales and distribution resources than the
Company.  There can be no  assurance  that the  Company's  current or  potential
competitors will not develop products  comparable or superior to those developed
by the  Company  or adapt  more  quickly  than the  Company  to new or  emerging
technologies, evolving industry trends, or changing customer requirements. There
also can be no  assurance  that the Company will have the  financial  resources,
technical expertise, or marketing,  sales,  distribution,  customer service, and
technical support capabilities to compete successfully.

         Product Concentration - The Company currently derives substantially all
of its revenue from its PentaScanner and DiscPort products. The market for these
products is characterized by rapid technological advances, evolving standards in
computer hardware and software technology,  changes in customer requirements and
frequent new product  introductions and  enhancements.  Any decrease in sales of
the Company's  PentaScanner or DiscPort products as a result of the foregoing or
other factors would have a material  adverse  effect on the Company's  business,
financial condition and operating results.

         International  Operations - Sales outside of North America  account for
29%, 36% and 34% of the Company's revenues in 1996, 1995 and 1994, respectively.
An important  element of the Company's  strategy is to expand its  international
operations.  There can be no assurance that the Company will be able to continue
to successfully localize, market, sell and deliver products internationally. The
inability of the Company to successfully expand its international  operations in
a timely  and cost  effective  manner  could  materially  adversely  affect  the
Company's business, financial condition and results of operations. The Company's
business and results of  operations  could be materially  adversely  affected by
risks  inherent  in  conducting  business  internationally,  such as  changes in
currency  exchange rates,  longer payment  cycles,  difficulties in staffing and
managing international  operations,  problems in collecting accounts receivable,
seasonal  reductions in business activity during the summer months in Europe and
certain other parts of the world, and tariffs,  duties and other trade barriers.
The Company seeks to mitigate its direct  exposure to exchange rate  fluctuation
by selling only in United States currency.

         Litigation  - As  described  in this  Annual  Report  under the caption
"Legal  Proceedings,"  the Company is a defendant  in class  action  shareholder
lawsuits and in other  litigation  incidental  to the  Company's  business.  The
Company may be required to incur  substantial  legal fees and costs in defending
against these legal  proceedings,  which could have a material adverse effect on
the Company's  operating results.  Although the Company believes that the claims
asserted against
                                                                              33
<PAGE>
the Company in these  proceedings  are without merit,  there can be no assurance
that the  Company  will be  successful  in  defending  against  any of the legal
proceedings in which it is involved.  Moreover,  although the Company intends to
vigorously  defend  itself  against such  proceedings,  the Company could make a
business  decision  to  settle  such  claims  instead  of  continuing  to  incur
substantial  legal fees and costs.  Further,  there can be no assurance that the
Company  will not be named  as a  defendant  in  additional  legal  proceedings,
especially  if the  Company's  actual  operating  results  do not meet or exceed
anticipated  results. If the Company is unsuccessful in defending against any of
these  proceedings,  decides  to  pay a  substantial  sum to  settle  any of the
proceedings or is named as a defendant in additional legal proceedings, it could
have a material adverse effect on the Company's  business,  financial  condition
and operating results.

         Dependence  on  Key  Personnel;  Management  of  Growth  - Due  to  the
specialized  nature of the Company's  business,  the Company's future success is
highly  dependent upon the continued  services of its key engineering  personnel
and  executive  officers  and upon its ability to attract  and retain  qualified
engineering, sales and marketing, management and manufacturing personnel for its
operations. Competition for such personnel is intense. There can be no assurance
that the Company will be successful in attracting or retaining  such  personnel.
The loss of any key personnel or the  Company's  inability to attract and retain
qualified  employees  could  have a  material  adverse  effect on the  Company's
business,  financial condition and results of operations.  To manage its growth,
the Company must continue to implement and improve its  operational,  financial,
and management  information systems and expand, train, and manage its workforce.
The Company believes that success in its industry requires  substantial  capital
in order to maintain the flexibility to take advantage of  opportunities as they
may arise. The Company may, from time to time, as market and business conditions
warrant,   invest  in  or  acquire   complementary   businesses,   products,  or
technologies.  Such  investment  or  acquisitions  may be funded  by  internally
generated cash,  marketable  securities,  debt or additional equity. The sale of
additional  equity  could  result in  dilution  in the equity  ownership  of the
Company's shareholders. The Company's failure to manage growth effectively could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

         Dependence on  Proprietary  Rights - The Company's  success  depends in
part  upon  protecting  its  proprietary  technology.  The  Company  relies on a
combination of intellectual  property laws,  nondisclosure  agreements and other
protective  measures to protect  its  proprietary  information.  There can be no
assurance,  however,  that the steps  taken by the  Company  will be adequate to
deter  misappropriation or independent third party development of its technology
or that  its  intellectual  property  rights  can be  successfully  defended  if
challenged.  In addition,  the laws of certain foreign  countries do not protect
the Company's intellectual property rights to the same extent as the laws of the
United  States.  Given  the rapid  development  of  technology,  there can be no
assurance  that  certain  aspects of the  Company's  products do not or will not
infringe  upon the existing or future  proprietary  rights of others or that, if
licenses or rights are required to avoid  infringement,  such licenses or rights
could be obtained or obtained on terms that are acceptable to the Company.

                                                                              34
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
         --------------------------------------------

         Consolidated  balance sheets of the Company as of December 31, 1995 and
1996 and consolidated  statements of operations,  stockholders'  equity and cash
flows  for each of the  three  years in the  period  ended  December  31,  1996,
together  with the  related  notes and the  report  of  Deloitte  & Touche  LLP,
independent  auditors,  are set forth on the  following  pages.  Other  required
financial  information is set forth herein,  as more fully  described in Item 14
hereof.
                                                                              35
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES

Consolidated Financial Statements
Years Ended December 31, 1994, 1995 and 1996, and
Independent Auditors' Report
                                                                              36
<PAGE>
INDEPENDENT AUDITORS' REPORT


Board of Directors of
Microtest, Inc.
Phoenix, Arizona

We have audited the accompanying  consolidated balance sheets of Microtest, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the related  consolidated
statements of  operations,  stockholders'  equity and cash flows for each of the
three years in the period ended December 31, 1996.  These  financial  statements
are the  responsibility of the Company'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,  such consolidated  financial  statements present fairly, in all
material respects, the financial position of Microtest, Inc. and subsidiaries at
December 31, 1995 and 1996,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1996,  in
conformity with generally accepted accounting principles.



DELOITTE & TOUCHE LLP
Phoenix, Arizona

March 27, 1997
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                               December 31,
                                                                          --------------------
ASSETS                                                                       1995        1996
<S>                                                                       <C>         <C>
CURRENT ASSETS:
  Cash and cash equivalents                                               $ 19,907    $ 10,282
  Accounts receivable - less allowance for doubtful accounts of
    $521 and $582 and less returns reserve of $919 and $3,030               14,938      17,544
  Inventories - less reserve for obsolescence of $717 and $540 (Note 2)      6,814       6,163
  Prepaid expenses                                                             681         823
  Income taxes receivable (Note 4)                                           2,100         291
  Deferred income taxes (Note 4)                                             1,819       3,121
                                                                          --------    --------

          Total current assets                                              46,259      38,224

EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net (Note 3)                          3,212       3,642

INTANGIBLES AND OTHER ASSETS - Net (Note 3)                                    448         832

DEFERRED INCOME TAXES (Note 4)                                                 239         615
                                                                          --------    --------

TOTAL                                                                     $ 50,158    $ 43,313
                                                                          ========    ========


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                        $  4,757    $  5,579
  Accrued liabilities (Note 9)                                               1,492       4,983
  Accrued payroll and employee benefits                                        882       1,079
                                                                          --------    --------

          Total liabilities                                                  7,131      11,641
                                                                          --------    --------

COMMITMENTS AND CONTINGENCIES (Note 6)

STOCKHOLDERS' EQUITY (Note 7):
  Common stock, .001 par value - authorized, 15,000,000 shares;
    issued, 8,159,058 and 8,159,058 shares                                       8           8
  Additional paid-in capital                                                32,546      32,593
  Retained income/(Deficit)                                                 11,455        (485)
  Common stock in treasury at cost - 63,824 and 27,970 shares                 (982)       (444)
                                                                          --------    --------

          Total stockholders' equity                                        43,027      31,672
                                                                          --------    --------

TOTAL                                                                     $ 50,158    $ 43,313
                                                                          ========    ========
</TABLE>
See notes to consolidated financial statements.
                                      -38-
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                                           -------------------------------
                                              1994        1995      1996
<S>                                        <C>        <C>         <C>
REVENUES (Notes 8 and 9)                   $ 39,574   $ 52,537    $ 50,442

COST OF SALES                                16,584     21,961      20,452
                                           --------   --------    --------

          Gross profit                       22,990     30,576      29,990
                                           --------   --------    --------

OPERATING EXPENSES:
  Sales and marketing (Note 9)                8,739     12,585      14,334
  Research and development                    4,063      5,913       6,414
  General and administrative                  3,410      3,694       4,191
                                           --------   --------    --------

          Total operating expenses           16,212     22,192      24,939
                                           --------   --------    --------

UNUSUAL ITEM - Purchased R & D (Note 5)                 (8,776)    (15,697)
                                           --------   --------    --------

INCOME (LOSS) FROM OPERATIONS                 6,778       (392)    (10,646)

INTEREST INCOME - Net                           743      1,232         762
                                           --------   --------    --------

INCOME/(LOSS) BEFORE INCOME TAXES             7,521        840      (9,884)

INCOME TAX PROVISION/(BENEFIT) (Note 4)       2,231       (305)      1,711
                                           --------   --------    --------

NET INCOME/(LOSS)                          $  5,290   $  1,145    $(11,595)
                                           ========   ========    ========


NET INCOME/(LOSS) PER COMMON
   AND EQUIVALENT SHARE                    $    .64   $    .13    $ (1 .43)
                                           ========   ========    ========

COMMON AND EQUIVALENT SHARES OUTSTANDING      8,269      8,534       8,104
                                           ========   ========    ========
</TABLE>
See notes to consolidated financial statements.
                                      -39-
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                     Common Stock            Treasury Stock     Additional  Retained      Total
                                                  --------------------   ---------------------   Paid-In     Income/   Stockholders'
                                                   Shares     Amount      Shares      Amount     Capital    (Deficit)     Equity
<S>                                                  <C>     <C>            <C>     <C>         <C>         <C>         <C>
BALANCE, JANUARY 1, 1994                             7,632   $      8        (78)   $   (468)   $ 27,693    $  6,200    $ 33,433
  Common stock issued upon:
    Exercise of stock options                          327                                         1,125                   1,125
    Employee Stock Purchase Plan                        30                                           184                     184
    Exercise of stock warrants                                                44         264                     (96)        168
  Disqualifying dispositions of stock options                                                        379                     379
  Net income                                                                                                   5,290       5,290
                                                  --------   --------    --------    --------    --------    --------    --------
BALANCE, DECEMBER 31, 1994                           7,989          8        (34)       (204)     29,381      11,394      40,579
  Common stock issued upon:
    Exercise of stock options                          161                   128       2,019         914      (1,084)      1,849
    Employee Stock Purchase Plan                         9                     7         114         130                     244
  Disqualifying dispositions of stock options                                                      2,121                   2,121
  Treasury stock purchase                                                   (165)     (2,911)                             (2,911)
  Net income                                                                                                   1,145       1,145
                                                  --------   --------    --------    --------    --------    --------    --------
BALANCE, DECEMBER 31, 1995                           8,159          8        (64)       (982)     32,546      11,455      43,027
  Common stock issued upon:
    Exercise of stock options                                                 27         394           4        (279)        119
    Employee Stock Purchase Plan                                              20         254                     (66)        188
  Disqualifying dispositions of stock options                                                         43                      43
  Treasury stock purchase                                                    (11)       (110)                               (110)
  Net loss                                                                                                   (11,595)    (11,595)
                                                  --------   --------    --------    --------    --------    --------    --------
BALANCE, DECEMBER 31, 1996                           8,159   $      8        (28)   $   (444)   $ 32,593    $   (485)   $ 31,672
                                                  ========   ========    ========    ========    ========    ========    ========
</TABLE>
See notes to consolidated financial statements.
                                      -40-

<PAGE>
MICROTEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                            --------------------------------
                                                                              1994        1995        1996
<S>                                                                         <C>         <C>         <C>
OPERATING ACTIVITIES:
  Net income/(loss)                                                         $  5,290    $  1,145    $(11,595)
  Adjustments to reconcile net income/(loss) to net cash provided by
    (used in) operating activities:
      Depreciation and amortization                                            1,751       1,512       1,460
      Deferred provision for income taxes                                     (1,132)        370        (833)
      Allowance for doubtful accounts                                             90         311          61
      Deferred rent                                                              (38)        (27)        (32)
      Loss on sale of marketable securities                                       76
      Compensation expense related to vested, non-qualified stock options          4
      Purchased R & D - net of related tax benefit                                         5,386      15,697
  Change in operating assets and liabilities:
    Accounts receivable                                                         (734)     (8,984)       (321)
    Inventories                                                               (2,315)     (3,300)      1,107
    Prepaid expenses and other assets                                             85        (217)        (20)
    Accounts payable                                                           1,216       1,423      (1,610)
    Accrued liabilities                                                        1,660      (1,053)      1,089
    Income taxes payable                                                       1,496        (941)
    Income taxes receivable                                                    1,687          21       1,852
                                                                            --------    --------    --------

          Net cash provided by (used in) operating activities                  9,136      (4,354)      6,855
                                                                            --------    --------    --------

INVESTING ACTIVITIES:
  Purchases of equipment and leasehold improvements                           (1,278)     (1,383)     (1,056)
  Acquisitions - net of cash acquired                                                     (5,100)    (15,621)
  Proceeds from sale of marketable securities                                  7,895
                                                                            --------    --------    --------

          Net cash provided by (used in) investing activities                  6,617      (6,483)    (16,677)
                                                                            --------    --------    --------

FINANCING ACTIVITIES:
  Proceeds from sale of common and treasury stock                              1,097       2,065         307
  Purchase of treasury stock                                                              (2,911)       (110)
                                                                            --------    --------    --------

          Net cash provided by (used in) financing activities                  1,097        (846)        197
                                                                            --------    --------    --------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              16,850     (11,683)     (9,625)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                  14,740      31,590      19,907
                                                                            --------    --------    --------

CASH AND CASH EQUIVALENTS, END OF YEAR                                      $ 31,590    $ 19,907    $ 10,282
                                                                            ========    ========    ========

</TABLE>
See notes to consolidated financial statements.
                                                                              41
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
--------------------------------------------------------------------------------


1.    BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

      The consolidated  financial  statements include the accounts of Microtest,
      Inc. and its wholly-owned subsidiaries,  Microtest, Inc., International, a
      foreign  sales  corporation,  Optical  Media  International  and Logicraft
      Information Systems, Inc. (collectively,  the "Company"). All intercompany
      transactions are eliminated.  The Company  develops,  markets and supports
      products that make it easier to manage and service local area networks.

      The following are the significant accounting policies of the Company:

      a.  Inventories  are  stated  at the  lower of cost  (first-in,  first-out
          ("FIFO") basis) or market.

      b.  Equipment and leasehold improvements are stated at cost.  Depreciation
          and amortization are computed utilizing the straight-line method based
          on the estimated  useful lives of the related assets or, for leasehold
          improvements,  the lease term, if shorter.  Estimated useful lives are
          as follows:

                                                                     Useful Life

          Equipment                                                  3 - 5 years
          Furniture and fixtures                                         7 years
          Leasehold improvements                                         5 years

      c.  Income Taxes - Income taxes are provided  based upon the provisions of
          Statement  of  Financial   Accounting   Standards  ("SFAS")  No.  109,
          Accounting for Income Taxes,  which among other things,  requires that
          recognition of deferred  income taxes be measured by the provisions of
          enacted tax laws in effect at the date of the financial statements.

      d.  Research and  Development  Expenses - Costs and expenses  which can be
          clearly identified as research and development are charged to research
          and development  expense as incurred.  Costs which relate to prototype
          and  experimental  models which are sold to  customers  are charged to
          cost of sales.

      e.  Revenue  Recognition  - The Company  recognizes  revenue  from product
          sales to  distributors  upon shipment.  Sales to  distributors  in the
          United  States,  Canada and Europe  account  for the  majority  of the
          Company's net sales. The Company recognizes revenue from product sales
          to  direct  end  users  upon  customer  commitment.  The  Company  has
          established  a program  which,  under  specified  conditions,  enables
          distributors  and  resellers  to return  products  to the  Company for
          credit  against  additional  purchases  or in the  event  the  Company
          reduces its selling  prices,  to receive  credits for the reduction in
          selling  price.  The amount of potential  product  returns,  including
          returns under the Company's warranty program,  and credits for selling
          price reductions, is estimated and provided for in the period of sale.
                                                                              42
<PAGE>
      f.  Consolidated   Statements   of  Cash  Flows  -  For  purposes  of  the
          consolidated  statements  of cash  flows,  the Company  considers  all
          highly liquid  investments with an initial maturity of three months or
          less to be cash equivalents.

      g.  Net income  (loss) per common and  equivalent  share has been computed
          using the weighted  average  number of common  shares and common share
          equivalents outstanding during each period. Stock options and warrants
          have been included as common  equivalent shares utilizing the treasury
          stock method only when their effect is dilutive.

      h.  Stock Based  Compensation  - The Company  accounts for its stock based
          compensation plan based on Accounting Principles Board ("APB") Opinion
          No. 25. In October 1995,  the  Financial  Accounting  Standards  Board
          issued SFAS No. 123,  Accounting  for Stock  Based  Compensation.  The
          Company  has  determined  that it will not  change  to the fair  value
          method and will continue to use APB Opinion No. 25 for measurement and
          recognition of employee stock based transactions (Note 7).

      i.  Use  of  Estimates  -  The  preparation  of  financial  statements  in
          conformity with generally accepted accounting  principles  necessarily
          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  these
          estimates.

      j.  Product  Concentration  - The market  for the  Company's  products  is
          characterized  by rapidly  changing  technology,  short  product  life
          cycles and  evolving  industry  standards.  The  Company  has  derived
          substantially  all of its revenues from the development and sales of a
          limited number of cable  management and network  connectivity  devices
          for the local area network ("LAN") industry.

      k.  Reclassifications  - Certain  reclassifications  were made to the 1994
          and 1995 financial statements to conform with the 1996 presentation.

2.    INVENTORIES

      Inventories consisted of the following at December 31:

                                                              1995       1996
                                                          (Amounts in Thousands)

Raw materials                                               $ 1,647    $ 1,242
Work-in-progress                                                 23        153
Finished goods                                                5,861      5,308
                                                            -------    -------
Total                                                         7,531      6,703
Less reserve for obsolescence                                  (717)      (540)
                                                            -------    -------
Inventories - net                                           $ 6,814    $ 6,163
                                                            =======    =======
                                                                              43
<PAGE>
3.    EQUIPMENT AND LEASEHOLD IMPROVEMENTS AND INTANGIBLES

      Equipment  and  leasehold  improvements  consisted  of  the  following  at
December 31:


                                                             1995       1996
                                                          (Amounts in Thousands)

Equipment                                                  $ 5,081    $ 6,522
Furniture and fixtures                                       1,469      1,530
Leasehold improvements                                         503        533
                                                           -------    -------
Total                                                        7,053      8,585
Less accumulated depreciation and amortization              (3,841)    (4,943)
                                                           -------    -------
Equipment and leasehold improvements - net                 $ 3,212    $ 3,642
                                                           =======    =======


      Intangibles consisted of the following at December 31:


                                                             1995       1996
                                                          (Amounts in Thousands)

Purchased software                                         $ 1,355    $   594
Non-compete agreement and other intangibles                    902        238
                                                           -------    -------
Intangibles - gross                                          2,257        832
Less accumulated amortization                               (1,985)
                                                           -------    -------

Intangibles - net                                          $   272    $   832
                                                           =======    =======


      Purchased   software  and  other  intangibles  are  amortized  over  their
      estimated  useful life of 2 to 3 years.  Amortization is accelerated  when
      there is deemed  to be a  reduction  in the  estimated  revenues  or other
      benefits arising from such intangibles.

4.    INCOME TAXES

      The  components  of the  provision  for income  taxes for the years  ended
December 31 are as follows:


                                                    1994       1995      1996
                                                     (Amounts in Thousands)
Current:
  Federal                                         $ 2,982    $  (675)   $ 2,326
  State                                               381                   149
  Foreign                                                                    69
                                                  -------    -------    -------
Total current provision                             3,363       (675)     2,544
Deferred                                           (1,132)       370       (833)
                                                  -------    -------    -------
Total provision for income taxes                  $ 2,231    $  (305)   $ 1,711
                                                  =======    =======    =======
                                                                              44
<PAGE>
      The Company's  current  income tax  liability  was reduced and  additional
      paid-in capital increased approximately  $379,000,  $2,121,000 and $43,000
      during 1994,  1995 and 1996,  respectively,  resulting from  disqualifying
      dispositions  of incentive  stock options.  Cash payments for income taxes
      were approximately  $1,864,000,  $3,329,000 and $750,000 in 1994, 1995 and
      1996, respectively.

      A reconciliation of the difference  between the provision for income taxes
      and income taxes at the statutory United States federal income tax rate is
      as follows for the years ended December 31:
<TABLE>
<CAPTION>
                                                                    1994       1995       1996
                                                                       (Amounts in Thousands)
<S>                                                               <C>        <C>        <C>
Income taxes at statutory United States federal income tax rate   $ 2,557    $   286    $(3,361)
Increase (decrease) in taxes:
  Acquired research and development                                                       5,337
  State taxes - net                                                   451         50         90
  Research and development credits                                   (224)      (350)      (111)
  Tax exempt interest income                                         (104)      (363)      (261)
  Reversal of valuation allowance                                    (599)
  Other - net                                                         150         72         17
                                                                  -------    -------    -------

Total                                                             $ 2,231    $  (305)   $ 1,711
                                                                  =======    =======    =======
</TABLE>

      The components of deferred income taxes at December 31 are as follows:


                                                          1995       1996
                                                      (Amounts in Thousands)

Current:
  Nondeductible accruals and reserves                   $ 1,549    $ 2,880
  Inventory costs capitalized for income tax purposes       270        241
                                                        -------    -------

Total current                                             1,819      3,121
                                                        -------    -------

Noncurrent:
  Excess of tax over book depreciation                     (153)       (71)
  Excess of book over tax amortization                      293        466
  Deferred rent                                              29         10
  Deferred compensation                                      70        210
                                                        -------    -------

Total noncurrent                                            239        615
                                                        -------    -------

Total deferred income taxes                             $ 2,058    $ 3,736
                                                        =======    =======


5.    ACQUISITIONS

      On  December  17,  1996,  the  Company  purchased  all of the  issued  and
      outstanding  shares of capital stock (the "Logicraft  Stock") of Logicraft
      Information  Systems,  Inc.,  a Delaware  corporation  ("Logicraft").  The
      consideration  for  the  acquisition  of all of the  Logicraft  stock  was
      $12,517,000 in
                                                                              45
<PAGE>
      cash.  Additionally,  Microtest assumed  $4,483,000 in debt that Logicraft
      owed to Information Handling Services, Inc. ("IHS"), the previous majority
      owner of  Logicraft.  Immediately  following  the  closing,  this debt was
      repaid.  Logicraft  develops  and sells  CD-ROM  networking  products  and
      technologies.  The acquisition was accounted for using the purchase method
      of accounting,  and accordingly,  the purchase price has been allocated to
      the assets  purchased  and the  liabilities  assumed based upon their fair
      values at the date of  acquisition.  As a result of the  allocation of the
      purchase  price,  the Company  recorded an expense of  $15,697,000  in the
      fourth  quarter  of 1996 to  record  the  value of  software  research  it
      acquired relating to products for which technological  feasibility has not
      been established and for which no alternative future use existed.

      The  Company is still in the process of  evaluating  the fair value of the
      assets of Logicraft and may adjust the allocation of the purchase price in
      1997.

      On June 6, 1995, the Company acquired all of the outstanding capital stock
      of Optical Media International ("OMI"), a California corporation, for cash
      of  $4,000,000  and  assumption  of  OMI-related  debt  of  $660,000.  OMI
      specializes in CD-ROM and  CD-Recordable  technology.  The acquisition was
      accounted for using the purchase  method of accounting,  and  accordingly,
      the  purchase  price has been  allocated to the assets  purchased  and the
      liabilities assumed based upon the fair values at the date of acquisition.
      As a result of the allocation of the purchase price,  the Company recorded
      an expense of  $8,326,000  and related tax  benefit of  $3,210,000  in the
      second  quarter  of 1995 to  record  the  value of  software  research  it
      acquired relating to products for which technological  feasibility has not
      been established and for which no alternative future use existed.

      The  accompanying   consolidated  statements  of  operations  reflect  the
      operating  results of Logicraft and OMI since the  effective  dates of the
      acquisitions.  Pro forma unaudited  consolidated  operating results of the
      Company, OMI and Logicraft for the years ended December 31, 1995 and 1996,
      assuming  the  acquisitions  had been  made as of  January  1,  1995,  are
      summarized below:

                                                    Year Ended
                                  December 31, 1995            December 31, 1996
                                              (In Thousands, Except
                                                 Per Share Amounts)

     Net revenues                           $ 67,796                    $ 64,747
                                            ========                    ========
     Net (loss)                             $ (1,445)                   $    171
                                            ========                    ========
     Net (loss) per common share            $   (.$6)                   $    .02
                                            ========                    ========


      These pro forma results have been prepared for  comparative  purposes only
      and include  certain  adjustments  such as the decrease in interest income
      imputed  on the  consideration  for  the  acquisitions,  the  decrease  in
      amortization  expense  as a result  of  applying  the  purchase  method of
      accounting for the acquisitions  and the increase in amortization  expense
      associated with the  capitalization of certain  acquisition costs. The pro
      forma results exclude the expenses related to the purchase of in-process R
      & D in  1995  and  1996.  The  pro  forma  financial  information  is  not
      necessarily  indicative  of the results of  operations  as they would have
      been had the transactions been affected on the assumed dates.
                                                                              46
<PAGE>
6.    COMMITMENTS AND CONTINGENCIES

      Future minimum rental  payments due under the Company's  office  operating
      leases are as follows:


                                                                     (Amounts in
                                                                      Thousands)
     1997                                                                 $  742
     1998                                                                    241
     1999                                                                    232
     2000                                                                    206
     2001                                                                    148
     2002                                                                     12
                                                                          ------
     Total minimum rental payments                                        $1,581
                                                                          ======


      Rent expense for 1994, 1995 and 1996 was approximately $673,000,  $691,000
      and $982,000, respectively.

      In September and October 1996,  two purported  class action  lawsuits were
      filed against the Company in the Maricopa  County  Superior  Court for the
      State of Arizona.  The suits  allege,  among other  things,  that  certain
      statements  made by the  Company and its  representatives,  as well as the
      financial  statements contained in the Company's Quarterly Reports on Form
      10-Q filed during 1995,  were false and misleading.  The Company  believes
      that  the  shareholder  lawsuits  are  without  merit  and it  intends  to
      vigorously  defend  against  them.  The Company  expects that the ultimate
      resolution  of the  lawsuits  will  not  have  a  material  effect  on the
      Company's  financial  position  and the results of  operations  taken as a
      whole.

      The Company is involved in certain legal matters,  the outcome of which is
      currently unknown.  Management believes that the Company's  liability,  if
      any, will not have a material  adverse  effect on the Company's  financial
      condition and results of operations.

      The Company  utilizes  contract  manufacturing  for  virtually  all of its
      product requirements.  Under these agreements, the Company is obligated to
      purchase in the ordinary course of business  products  manufactured  under
      these contracts at contract prices.  Some contracts require the Company to
      purchase  all   inventory   and   components  in  the  event  of  contract
      cancellation.

7.    EMPLOYEE BENEFIT PLANS

      Stock Plans - The Company currently has five fixed stock option plans: the
      1989  Incentive  Stock  Option  Plan  ("1989  Incentive  Plan"),  the 1989
      Non-Qualified  Stock  Option Plan ("1989  Non-Qualified  Plan"),  the 1995
      Long-Term  Incentive Plan ("LTIP"),  the 1993 Non-Employee  Directors Plan
      ("1993 Directors Plan"), and the 1993 Annual  Non-Employee  Directors Plan
      ("1993 Annual  Plan").  The 1989  Incentive Plan permitted the granting of
      options  to  employees  and the  1989  Non-Qualified  Plan  permitted  the
      granting of options to employees,  directors,  and consultants to purchase
      the  Company's  common stock at not less than the fair market value on the
      date of grant. Both of these plans were canceled upon adoption of the LTIP
      on May 10, 1995,  although grants  outstanding at the time of cancellation
      were not  affected.  The LTIP  permits  the  granting of
                                                                              47
<PAGE>
      incentive stock options, non-qualified stock options and other stock-based
      awards to employees,  officers,  and consultants to purchase the Company's
      common.  The  Company  is  authorized  to grant  options  to acquire up to
      600,000  shares under the LTIP.  The period during which  options  granted
      under the above plans are exercisable is fixed by the Board of Director at
      the date of grant but is not to exceed ten years.  The 1993 Directors Plan
      permits the one-time  grant of 10,000  options to purchase  the  Company's
      common  stock and the 1993 Annual Plan  permits the annual  grant of 5,000
      options  to  purchase  the  Company's  common  stock to each  non-employee
      director  at not less  than the fair  market  value on the date of  grant.
      Under the two directors  plans, the Company is authorized to grant options
      to acquire up to 200,000  shares.  Vesting of options  granted under these
      two plans is defined by the plan with a term not to exceed five years.

      A summary of the status of the Company's five fixed stock options plans as
      of December 31, 1994,  1995,  1996, and changes during the years ending on
      those dates is presented below:
<TABLE>
<CAPTION>

                                    1994                     1995                     1996
                            ----------------------   -----------------------  ----------------------
                                        Weighted                  Weighted                Weighted
                                         Average                  Average                  Average
                                        Exercise                  Exercise                Exercise
                              Shares      Price        Shares      Price        Shares      Price
<S>                           <C>         <C>         <C>          <C>        <C>           <C>
Outstanding at
beginning of year             1,103,938    $4.79      1,135,821     $7.61     1,432,304     $12.43
Granted                         462,850   $11.17        653,330    $18.23       589,148      $8.86
Exercised                      (327,128)   $3.44       (288,862)    $6.39       (26,567)     $4.74
Cancelled                      (103,839)   $5.26        (67,985)   $11.60      (621,609)    $17.06
                           -----------------------  ------------------------ -----------------------
Outstanding at end
of year                       1,135,821    $7.61      1,432,304    $12.43     1,373,276      $9.00
                           =======================  ======================== =======================
Options exercisable at
end of year                     313,547                 415,939                 622,289
                           =============            =============            =============

Weighted average fair
   value of options granted
   during the year                                                  $  9.74                $  4.20
                                                                 ===========              ==========
</TABLE>

      The following table summarizes information about stock options outstanding
      at December 31, 1996:


<TABLE>
<CAPTION>
                                  Options Outstanding                  Options Exercisable
                       ------------------------------------------  -----------------------------
                                         Weighted
                           Number        Average      Weighted         Number        Weighted
                        Outstanding     Remaining      Average       Exercisable     Average
Range of                   as of       Contractual    Exercise          as of        Exercise
Exercise Prices           12/31/96    Life (in yrs)     Price         12/31/96        Price
------------------------------------------------------------------------------------------------
<S>                      <C>              <C>          <C>             <C>            <C>
 $3.80-$5.50               330,250        6.61          $5.13          281,421         $5.11
 $6.25-$9.00               368,465        8.37          $7.82          165,751         $7.73
 $9.50-$13.25              549,132        8.67          $9.93          117,154        $10.24
$14.63-$20.25              114,929        5.49         $18.21           52,863        $18.78
$23.50-$24.25               10,500        3.34         $23.54            5,100        $23.52
                      =========================================================================
 $3.80-$24.25            1,373,276        7.78          $9.00          622,289         $8.09
                       =========================================================================
</TABLE>
                                                                              48
<PAGE>
      On May 18, 1992, the Company  adopted an Employee Stock Purchase Plan (the
      "Purchase  Plan").  A total of 200,000  shares of common stock is reserved
      for issuance under the Purchase  Plan. The Purchase Plan permits  eligible
      employees to purchase common stock through payroll  deductions,  which may
      not exceed 10% of an employee's  compensation,  at 85% of the lower of the
      fair market  value of the common  stock at the  beginning or at the end of
      each offering period, as defined. The weighted-average fair value of those
      purchase rights granted in 1995 and 1996 was $3.89 and $8.29. Transactions
      related to the plan are summarized as follows:




                                                                Weighted Average
                                                    Shares       Purchase Price
                                                   --------      --------------
     Available at December 31, 1993                192,936
        Purchases                                  (29,978)        $    6.13
                                                   --------
     Available at December 31, 1994                162,958
        Purchases                                  (16,080)        $   15.16
                                                   --------
     Available at December 31, 1995                146,878
        Purchases                                  (20,499)        $    9.04
                                                   --------
     Available at December 31, 1996                126,379
                                                   ========



     The Company applies Accounting  Principles Board Opinion No. 25 and related
     interpretations  in  accounting  for its stock option and  purchase  plans.
     Accordingly,  no compensation  cost has been recognized for its fixed stock
     options plans and its stock purchase plan.  Had  compensation  cost for the
     Company's  stock option plans and its stock  purchase plan been  determined
     based on the fair value at the grant  dates for awards  under  those  plans
     consistent with the method of SFAS No. 123, the Company's net income/(loss)
     and  earnings/(loss)  per share for the years ended  December  31, 1995 and
     1996 would have been reduced to the pro forma amounts indicated below:

                                        December 31, 1995      December 31, 1996
                                        -----------------      -----------------
     Net income/(loss)
            As reported (in '000s)          $   1,145            ($  11,595)
            Pro forma (in '000s)            ($    729)           ($  13,577)

     Net income/(loss) per common and
     equivalent share
            As reported                     $       0.13         ($    1.43)
            Pro forma                       ($      0.09)        ($    1.69)

      The fair value of options  granted under the Company's  fixed stock option
      plans  during 1995 and 1996 were  estimated on the date of grant using the
      Black-Scholes  option-pricing  model with the following  weighted-averaged
      assumptions used:
                                                                              49
<PAGE>
                                                       1995              1996
                                                      -------           -------

     Expected volatility                               75.00%            75.00%
     Expected term                                    4 years           4 years
     Dividend yield                                     0.00%             0.00%
     Risk-free interest rate                            6.90%             5.45%


     The fair value of purchase rights granted under the Employee Stock Purchase
     Plan is  measured  using the  Black-Scholes  option-pricing  model with the
     following weighted-averaged assumptions used:

                                                       1995              1996
                                                      -------           -------

     Expected volatility                               75.00%            75.00%
     Expected term                                     1 year            1 year
     Dividend yield                                     0.00%             0.00%
     Risk-free interest rate                            6.38%             5.12%



      401(k) Plan - Under the  Company's  401(k) Plan,  full-time  employees may
      contribute  to  the  Plan  between  1%  and  15% of  their  total  covered
      compensation,  in lieu of  receiving  such  amounts as  taxable  salary or
      wages.  The Company may, in its  discretion,  make matching  contributions
      equal to a percentage of an employee's covered compensation contributed to
      the 401(k) Plan for the year, or in a fixed dollar  amount,  as determined
      each year by the Board of  Directors.  The Company's  contribution  to the
      Plan was  approximately  $78,000,  $137,000 and $117,000 during 1994, 1995
      and 1996, respectively.

8.    EXPORT SALES

      Export  sales,  primarily  to  customers  in  Europe,  were  approximately
      $13,400,000,   $19,080,000   and  $14,783,000  in  1994,  1995  and  1996,
      respectively.

9.    OTHER

      Major  customers  accounting  for more than 10% of total  revenues  in any
      given year are  summarized  below.  Percentage of revenue  amounts are not
      presented if less than 10% in any year.


     Customer                               1994           1995             1996
         A                                   19%            21%
         B                                   15%                             11%
         C                                   14%            15%              18%


      Sales and marketing expenses included advertising expense of approximately
      $1,270,000,   $1,909,000   and   $2,056,000   in  1994,   1995  and  1996,
      respectively.

      Accrued liabilities include accrued acquisition  expenses of $1,093,000 at
      December 31, 1996.
                                                                              50

<PAGE>
10.   UNAUDITED QUARTERLY FINANCIAL INFORMATION



                                                      1995 Quarters
                                    --------------------------------------------
                                        First      Second      Third     Fourth
                                       (In Thousands, Except Per Share Amounts)

     Total revenues                   $ 12,643   $ 14,014    $ 15,154   $ 10,726
     Cost of sales and services          4,762      5,526       6,408      5,265
     Gross profit                        7,881      8,488       8,746      5,461
     Net income/(loss)                   1,876     (3,030)      1,840        459
     Net income/(loss) per common and
       equivalent share               $    .22   $   (.37)   $    .22   $    .06



                                                    1996 Quarters
                                    --------------------------------------------
                                        First     Second      Third      Fourth
                                      (In Thousands, Except Per Share Amounts)

     Total revenues                   $ 11,960   $ 12,666   $ 12,136   $ 13,680
     Cost of sales and services          5,001      5,501      4,853      5,097
     Gross profit                        6,959      7,165      7,283      8,583
     Net income/ (loss)                    707        982        991    (14,275)
     Net income/(loss) per common and
     equivalent share                 $    .09   $    .12   $    .12   $  (1.75)



      Net charges relating to the acquisition of R&D were  $5,116,000,  $.63 per
      common and equivalent  share,  in the second quarter of 1995 and $270,000,
      $.03 per  common  and  equivalent  share,  in the third  quarter  of 1995.
      Charges relating to the acquisition of R & D were  $15,697,000,  $1.92 per
      common and equivalent share, in the fourth quarter of 1996.

      Quarterly results for 1996 vary from the previously  published results due
      to changes to recording  sales under the  Company's  direct end user sales
      program during the second,  third and fourth quarters of 1996.  Previously
      published  Quarterly  Reports on Form 10-Q were changed by reducing second
      quarter  total  revenues,  cost of sales and services,  gross profit,  net
      income  and net  income  per  common  and  equivalent  share by  $654,000,
      $163,000,  $491,000,  $334,000 and $.04,  respectively  and third  quarter
      total revenues,  costs of sales and services, gross profit, net income and
      net  income  per  common  and  equivalent  share  by  $871,000,  $218,000,
      $653,000,  $444,000  and $0.5,  respectively.  As a result of  changes  to
      second and third quarter, fourth quarter total revenues, cost of sales and
      services,  gross  profit,  and net income were  increased  by  $1,525,000,
      $381,000, $1,144,000 and $778,000, respectively, which reduced the loss by
      $.10 per share.

      The sum of quarterly  earnings per share  information may not agree to the
      annual amount due to the use of the treasury stock method.

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

                                   * * * * * *
                                       51
<PAGE>
ITEM 9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING   AND
         ----------------------------------------------------------------------
         FINANCIAL DISCLOSURE
         --------------------

         The Company  has never  filed a Current  Report on Form 8-K to report a
change in accountants  because of a disagreement  over accounting  principles or
procedures, financial statement disclosure or otherwise.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
         ------------------------------------------------

         Information  concerning  continuing  directors,  nominees and executive
officers of the Company is set forth under the caption  "Information  Concerning
Directors,  Nominees and  Officers"  and  "Section  16(a)  Beneficial  Ownership
Reporting  Compliance" in the Registrant's  Proxy Statement relating to its 1997
Annual  Meeting  of  Stockholders  to  be  held  on  July  23,  1997,  which  is
incorporated by reference into this Form 10-K Report.  With the exception of the
foregoing  information  and  other  information  specifically   incorporated  by
reference into this Form 10-K Report,  the Proxy Statement is not being filed as
a part hereof.


ITEM 11. EXECUTIVE COMPENSATION.
         -----------------------

         Information  responsive to this Item 11 is incorporated by reference to
the caption  "Executive  Compensation",  "Employment  Agreements" and "Change of
Control  Arrangements"  in the  Proxy  Statement;  provided,  however,  that the
"Compensation  Committee Report on Executive  Compensation" and the "Stock Price
Performance  Graph"  contained in the Proxy  Statement are not  incorporated  by
reference herein.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         --------------------------------------------------------------

         Information  concerning  the common  stock  beneficially  owned by each
director of the Company, by all officers and directors of the Company as a group
and by each shareholder  known by the Company to be the beneficial owner of more
than 5% of the outstanding  common stock is incorporated  herein by reference to
"Security  Ownership of Certain Beneficial Owners and Management" from the Proxy
Statement.
                                                                              52
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
         -----------------------------------------------

         Information  responsive  to this  Item  13 is  incorporated  herein  by
reference to "Certain Transactions and Relationships" in the Proxy Statement.


                                     PART IV


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

         (a)      Financial Statements and Schedules.
                  -----------------------------------               Page or
                                                                Method of Filing
                                                                ----------------
                  (i)      Financial Statements.
   (1)  Independent Auditors' Report................................     Page 37
   (2)  Consolidated Financial Statements:
         Balance Sheets - December 31, 1995 and 1996................     Page 38
         Statements of Operations - For the Years Ended December 31,
         1994, 1995 and 1996........................................     Page 39
         Statements of Stockholders' Equity - For the Years Ended
         December 31, 1994, 1995 and 1996...........................     Page 40
         Statements of Cash Flows - For the Years Ended December 31,
         1994, 1995 and 1996........................................     Page 41
         Notes to Consolidated Financial Statements - December 31,
         1994, 1995 and 1996........................................     Page 42

                  (ii)     Financial Statements Schedules.

                  Schedules  have  been  omitted   because  of  the  absence  of
                  conditions  under  which  they are  required  or  because  the
                  required material  information is included in the Consolidated
                  Financial  Statements or Notes to the  Consolidated  Financial
                  Statements included herein.

         (b)      Reports on Form 8-K.

                  On December 30, 1996,  the Company  filed a Current  Report on
                  Form 8-K dated December 17, 1996,  disclosing its  acquisition
                  of Logicraft  Information Systems, Inc. The required financial
                  statements  relating to the acquisition were filed on March 3,
                  1997.
                                                                              53
<PAGE>
                  (c)      Exhibits.
                           ---------
<TABLE>
<CAPTION>
Exhibit
Number           Description                                                           Method of Filing
<S>              <C>                                                                   <C>
3.1              Amended and Restated Certificate of Incorporation of the Company,     Incorporated by reference
                 dated May 19, 1992                                                    to Exhibit 3.1 to Form S-1
                                                                                       Registration Statement
                                                                                       #33-52264 ("Form S-1
                                                                                       #33-52264")

3.2              Bylaws of the Company                                                 Incorporated by reference
                                                                                       to Exhibit 3.2 to Form S-1
                                                                                       #33-52264

10.1             Lease Agreement between Camelback Associates II Limited Partnership   Incorporated by reference
                 and the Company dated June 19, 1992, relating to Company's            to Exhibit 10.5 to Form S-1
                 principal offices and facilities                                      #33-52264

10.2             Incentive Stock Option Plan                                           Incorporated by reference
                                                                                       to Exhibit 10.7 of
                                                                                       Amendment No. 1 to Form S-1
                                                                                       #33-52264

10.3             Non-Qualified Stock Option Plan                                       Incorporated by reference
                                                                                       to Exhibit 10.8 of
                                                                                       Amendment No. 1 to Form S-1
                                                                                       #33-52264

10.4             Employee Stock Purchase Plan                                          Incorporated by reference
                                                                                       to Exhibit 10.9 of
                                                                                       Amendment No. 1 to Form S-1
                                                                                       #33-52264
</TABLE>
                                                                              54
<PAGE>
<TABLE>
<S>              <C>                                                                   <C>

10.5             401(k) Retirement Savings Plan                                        Incorporated by reference
                                                                                       to Exhibit 10.12 to Form
                                                                                       S-1 #33-52264

10.6             Non-Employee Directors Stock Option Plan                              Incorporated by reference
                                                                                       to Exhibit 4 to Form
                                                                                       S-8 #33-67948
10.7             Annual Non-Employee Directors Stock Option Plan                       Incorporated by reference
                                                                                       to Exhibit 4 to Form
                                                                                       S-8 #33-79070
10.8             Form of Indemnity agreement between directors and certain officers    Incorporated by reference
                 of the Company and the Company                                        to Exhibit 10.18 to Form
                                                                                       S-1 #33-52264

10.9             Agreement of Purchase and Sale of Stock between Optical Media         Incorporated by reference
                 International and the Company dated June 6, 1995                      to Exhibit 2 of Form 8-K
                                                                                       Report dated June 6, 1995

10.10            1994 Profit Sharing Plan                                              Incorporated by reference
                                                                                       to Exhibit 10.15 of Form
                                                                                       10-K Report dated December
                                                                                       31, 1993

10.11            Long-Term Incentive Plan                                              Incorporated by reference
                                                                                       to Exhibit 10.16 of Form
                                                                                       10-K Report dated December
                                                                                       31, 1994

10.12            Deferred Compensation Plan                                            Incorporated by reference
                                                                                       to Exhibit 10.17 of Form
                                                                                       10-K Report dated December
                                                                                       31, 1994
</TABLE>
                                                                              55
<PAGE>
<TABLE>
<S>              <C>                                                                   <C>
10.13            Agreement of Purchase and Sale of Stock between Logicraft             Incorporated by reference
                 Information Systems, Inc. and the Company dated December 17, 1996     to Exhibit 2 of Current
                                                                                       Report on Form 8-K dated
                                                                                       December 17, 1996

11               Statement Regarding Computation of Per Share Earnings                 Filed herewith

21               Subsidiaries of the Registrant                                        Filed herewith

23               Consent of Deloitte & Touche LLP                                      Filed herewith

24.1             Power of Attorney of Dianne C. Walker                                 Filed herewith

24.2             Power of Attorney of Roger C. Ferguson                                Filed herewith

24.3             Power of Attorney of Steven G. Mihaylo                                Filed herewith

24.4             Power of Attorney of William C. Turner                                Filed herewith
</TABLE>
                                                                              56
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned,  thereunto duly  authorized,  this 31st
day of March, 1997.

                                        MICROTEST, INC.

                                        By:/s/Richard G. Meise
                                           -------------------------------------
                                              Richard G. Meise
                                              President & Chief Executive
                                              Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report on Form 10-K has been  signed  below by the  following  persons  on
behalf of the Company and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Name and Signature                      Title                                               Date
------------------                      -----                                               ----

<S>                                     <C>                                                 <C>
/s/ Richard G. Meise                    Chief Executive Officer, President & Chairman of    March 31, 1997
------------------------
Richard G. Meise                        the Board (Principal Executive Officer)
Roger C. Ferguson


/s/ Richard R. Douglas                  V.P. & Chief Financial Officer (Principal           March 31, 1997
------------------------                Financial and Accounting Officer)
Richard R. Douglas



         *                              Director                                            March 31, 1997
--------------------------
Roger C. Ferguson

         *                              Director                                            March 31, 1997
--------------------------
Steven G. Mihaylo

         *                              Director                                            March 31, 1997
--------------------------
William C. Turner

         *                              Director                                            March 31, 1997
--------------------------
Dianne C. Walker

* By /s/ Richard G. Meise                                                                   March 31, 1997
     ---------------------
         Richard G. Meise
         Attorney-in-Fact
</TABLE>
                                                                              57
<PAGE>
                                 MICROTEST, INC.
                                   EXHIBIT 11
                       STATEMENT OF COMPUTATION OF COMMON
                          AND COMMON EQUIVALENT SHARES

                    (In Thousands, Except Per Share Amounts)


                                                    Year ended December 31,
                                               ---------------------------------
                                                  1994        1995       1996
                                                  ----        ----       ----

Net income/(loss)                              $  5,290    $  1,145    $(11,595)
                                               ========    ========    ========

Common shares outstanding at end of period        7,955       8,095       8,131

Adjustment to reflect weighted average for
   shares issued during period                     (229)        (22)        (27)

Adjustments for options and warrants calculated
   under the treasury stock method:
       Options                                      512         461        --
       Warrants                                      31        --          --
                                               --------    --------    --------

Common and equivalent shares outstanding          8,269       8,534       8,104
                                               ========    ========    ========

Net income/(loss) per share                    $   0.64    $   0.13    $  (1.43)
                                               ========    ========    ========

                                                                              58