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, 1997

                                       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 23, 1998,  the aggregate  market value of common stock held by
non-affiliates of the Registrant was approximately $43,611,630.



                   (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.

         8,209,248 shares of Common Stock outstanding on March 23, 1998
--------------------------------------------------------------------------------


                       DOCUMENTS INCORPORATED BY REFERENCE

         Materials from the  Registrant's  Proxy Statement  relating to its 1998
Annual Meeting of Shareholders (the "Proxy Statement") 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..................................................16
     ITEM 3.     LEGAL PROCEEDINGS...........................................17
     ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITIY
                 HOLDERS.....................................................17

PART
II...........................................................................18

     ITEM 5.     MARKET FOR THE COMPANY'S COMMON EQUITY
                 SECURITIES AND RELATED SHAREHOLDER MATTERS..................18
     ITEM 6.     SELECTED FINANCIAL DATA.....................................19
     ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............21
     ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................34
     ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH
                 ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                 DISCLOSURE..................................................53

PART III.....................................................................53

     ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE
                 COMPANY.....................................................53
     ITEM 11.    EXECUTIVE COMPENSATION......................................53
     ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                 OWNERS AND MANAGEMENT.......................................53
     ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............54

PART IV......................................................................54

     ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
                 REPORTS ON FORM 8-K.........................................54

                                                                               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").  Founded in 1984,  Microtest has become a leading producer of
network  management  and  network  connectivity  products  that are  designed to
simplify complex tasks in the workplace.

         Microtest's   Network  Management  Product  ("NMP")  line  of  handheld
certification  and  troubleshooting  tools  are  used  in the  installation  and
operation of networks.  The handheld  scanners  quickly  certify whether network
cabling  will  support the  proposed  network  infrastructure,  monitor  network
activity when the network is in use,  pinpoint  cable  problems when they arise,
and provide documentation of the network  infrastructure.  Products in this line
operate  across  multiple  cable  types  and  network  management  systems,  and
cost-effectively  increase  network  productivity  and  reliability  by reducing
network downtime.

         In  late  1997,   Microtest   introduced   CertiFiber(TM),   the  first
certification tool for fiber optic networks.  CertiFiber  simplifies the process
of certifying LAN fiber cable  installations to industry  standards by instantly
delivering  a  pass/fail  result  with the push of a single  button.  CertiFiber
satisfies the growing need among cable installers to reduce the time it takes to
install and certify an  ever-increasing  number of fiber and mixed  copper/fiber
networks.  Organizations  continue  to place  mission  critical  operations  and
information  knowledge  bases onto networks of increasing  size and  complexity.
Using  CertiFiber  at the time of  installation  verifies  that the  network can
safely and reliably deliver the speed and accuracy users will demand.

         Microtest's  Network  Connectivity  Product  ("NCP") line consists of a
family of  mini-server  and server  products  that allow  users to easily  share
information  on a  variety  of  peripheral  devices,  including  CD-ROM  drives.
Microtest  connectivity products enable organizations to develop,  store, manage
and access information and knowledge bases with ease. The Company's  DiscPort(R)
brand  of  products  includes  CD-ROM  and  DVD-ROM  mini  servers,  towers  and
enterprise  servers that let  organizations  access  information  instantly with
point-and-click ease.

         In 1997,  Microtest introduced  WebZerver(TM),  an intranet mini-server
that simplifies the process of creating departmental  intranet sites.  According
to the Gartner  Group,  an  increasing  number of  organizations  are  utilizing
intranets to facilitate access and retrieval of critical information.  WebZerver
simplifies  intranet   installation  and  content   publishing,   letting  users
collaborate and share knowledge and information quickly and easily.

         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.
                                                                               4
<PAGE>
         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 and 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 year 2000 issues 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

         The computer networking industry, which includes local area networking,
enterprise  networking,  intranets and the Internet continues to grow at a rapid
rate. In September 1996, Dataquest predicted that the LAN market will experience
a 5-year, 20% compound annual growth rate.

         Organizations'   growing   dependence  on  networks  causes  increasing
pressure for improved network performance and reliability, starting at the point
of cable installation.  As more demands are placed on the network, products that
maintain  and  enhance  the  integrity  of the  LAN,  and  that  ensure  network
compliance with  continuously  changing U.S. and international  standards,  will
become ever more important.

         Adding  to  the  increased  demand  on  networks  is the  trend  toward
increased complexity.  Each year, there are new standards, new protocols, faster
data requirements,  enhanced operating systems, better data storage options, new
peripheral  hardware,  more advanced  topologies  (wiring  configurations),  and
additional  cabling options.  Moreover,  many networks  incorporate a variety of
different  technologies and it is this trend toward complexity which is creating
demand for products that manage network assets.
                                                                               5
<PAGE>
         Organizations are continuing to migrate mission-critical operations and
information to the network,  making the work  environment ever more dependent on
the network's ability to have multiple users share information efficiently. This
growing  dependence on networking has caused  increasing demand for products and
technologies that maximize device and information sharing  capabilities.  CD-ROM
remains the mass  information  storage  medium of choice because of its low cost
and easy access via network CD-ROM servers. As the cost of CD-Recordable  drives
continue to fall, more organizations may utilize this storage medium as a viable
alternative to other,  more expensive memory options.  The move toward intranets
for information capture and distribution has also gained momentum.

Market for the Company's Products

         Network   Management   Products.   In  March  1996,  World  Information
Technologies,  Inc.  predicted  that the market for handheld  digital/data  test
equipment  would exceed $300 million by the year 2000 and,  according to Kessler
Marketing  Intelligence  Corporation,  $175  million of that  market will be for
fiber test instruments.  This is because equipment and technologies  continue to
be developed  allowing  high-speed data transmission over twisted-pair and fiber
optic wiring. In fact, according to World Information Technology, 36% of premise
wiring will be fiber by 1999.  Ensuring that existing or newly installed  wiring
can handle  these  high data  speeds is a critical  step in  minimizing  network
downtime,  lost  productivity  and data  transmission  problems  later.  Service
providers  and systems  integrators  worldwide use  Microtest's  NMP products to
perform the critical certification  functions for modern twisted-pair networking
systems  and  legacy  cabling.   Newer  products  (CertiFiber)  perform  similar
certification  functions for fiber optic  cabling.  Once the network  cabling is
installed and the network is running,  management  software products continue to
help users  troubleshoot  network  problems  with speed and accuracy  minimizing
network downtime and increasing user productivity.

         Network  Connectivity  Products.  Microtest's NCP products  address the
challenges  associated  with  managing  devices  and  sharing  large  amounts of
information  within   workgroups,   or  enterprises.   Network   administrators,
librarians, and information resource professionals in all kinds of organizations
such as law firms, educational institutions,  libraries, and research facilities
are  some  of the  target  markets  for  Microtest's  NCP  line.  CD-ROM  is the
information  storage medium of choice and,  according to Frost & Sullivan,  unit
shipments  of CD-ROM  networking  products  are being driven by increases in the
amount  of  content  available  on CD and  DVD.  Microtest's  CD-ROM  networking
products are designed to increase the ease of  connecting  network  users to the
content  stored on CD-ROMs and DVD-ROMs.  Newer NCP product  offerings have also
enabled network users to utilize newer popular  storage devices and media,  such
as Jaz(TM) and Zip(TM) drives.  NCP core  technologies  have broadened to expand
beyond the scope of CD devices, to encompass these newer popular media types, as
well as the Internet and intranets.

         Network  administrators  charged with  developing  a structure  through
which an  organization  can develop an  enterprise-wide  intranet is one primary
market. According to Forrester Research,  companies will migrate to full service
intranets for 1) making easier connections with
                                                                               6
<PAGE>
the  outside  world;  2)  standardizing  multiple  competing  suppliers;  and 3)
lowering costs. This market is growing rapidly.  Tierney & Partners,  in a study
conducted for the American Management  Association (AMA),  indicated that 36% of
all  companies  have an intranet for  inter-organizational  communications.  The
report  predicted this figure would grow to 68% by 1999.  NCP core  technologies
have  proven to be  extensible  and  adaptable  to  target  these  newer  market
opportunities.

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.

         Expand Software Content.  The Company continues to expand the amount of
software  in its  products  to  enable it to meet  market  demands  for  greater
functionality and easier adaptation.  Increasing  software content in integrated
products, while releasing new software products and software upgrades, continues
to be important to Microtest.

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  accounted  for 55%, 59% and 81% of the  Company's
total revenues in 1997, 1996 and 1995, 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.
                                                                               7
<PAGE>
         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.  Cable installers and information system
administrators  use  Microtest's  NMP  products to instantly  pinpoint  physical
cabling problems,  which can be a primary cause of network downtime. The Company
designs scanners with easy-to-use  keypads for entering commands and LCD screens
for displaying  results.  The Company's NMP products handle the various types of
networks  and cables 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"),  Telecommunications
Industry  Association  ("TIA") and  Electronics  Industry  Association  ("EIA").
Microtest's  scanner products utilize a variety of technologies,  including Time
Domain  Reflectometry  (TDR),  Digital  Signal  Processing,   proprietary  ASICs
developed by Microtest,  as well as  Microtest's  knowledge base in making cable
measurements.  These  technologies and know-how are incorporated into intuitive,
easy to use handheld  scanners that allow cabling and network  professionals  to
use these powerful technological tools with little or no training.

         The following table provides a partial  listing of current  products in
the NMP line:


--------------------------------------------------------------------------------
Network Management Products
--------------------------------------------------------------------------------
Cable Certification Tools                  Network Troubleshooting Tools
--------------------------------------------------------------------------------
PentaScanner+(TM)                          NetWare(R) COMPAS(TM)
--------------------------------------------------------------------------------
PentaScanner(TM) 350                       NT COMPAS(TM) Module
--------------------------------------------------------------------------------
CertiFiber(TM)                             Internet COMPAS(TM) Module
--------------------------------------------------------------------------------
MTCrimp(TM)                                Fiber Solution Kit
--------------------------------------------------------------------------------
                                           MICROSCANNER(TM)
--------------------------------------------------------------------------------

         PentaScanner+  with 2-Way  Injector+ is Microtest's  best selling cable
management  system  and  is  capable  of  certifying  cable  links  to  100  MHz
performance specifications.  PentaScanner+ offers professional cable installers,
service providers and network  administrators an easy-to-use,  handheld solution
for installing,  managing and troubleshooting Category 5 and ISO Class D cabling
systems.  The 2-Way Injector+ is an accessory to the PentaScanner+ that measures
Near-End  Crosstalk  (NEXT) and  Attenuation-to-Crosstalk  Ratio (ACR) from both
ends of the  installed  network cable link which saves  installation  test time.
This product enables cable  installers to purchase a handheld tool that provides
cable-testing accuracy indistinguishable from a network analyzer.

         PentaScanner 350 includes all of the Technical Service Bulletin ("TSB")
67  Level  II  functionality  and  accuracy  of  PentaScanner+,  and is the only
Category 5 tester with  Performance  Grading.  Performance  Grading measures and
rates the quality of high-performance  links by analyzing the available headroom
at 100 MHz and offers a variety of  qualitative  performance  grading data,  not
just a pass/fail test result. PentaScanner 350 also shows the

                                                                               8
<PAGE>
available  headroom for future growth of the LAN. Using PentaScanner 350 ensures
a  highly  reliable  cable   installation  that  will  meet  future  performance
requirements without costly rewiring.

         CertiFiber,   introduced  in  late  1997,  is  the  first  fiber  optic
certification  scanner that certifies fiber installations to TIA, ISO, and other
industry  specifications.  CertiFiber  enables  fiber  optic  cable  installers,
electrical   contractors,   field  service   contractors  and  computer  network
administrators  to certify  fiber  optic cable fast and  accurately.  CertiFiber
features a one-button Autotest that provides pass/fail results instantly.  Users
specify the required fiber standard (such as TIA 568A or ISO1108) and the number
of splices and connectors on a segment and, within seconds,  CertiFiber displays
a pass/fail result based on length,  propagation delay and  bi-directional  dual
wavelength loss measurements for 850nm and 1300nm. CertiFiber is the only tester
that can perform all these measurements critical to determining the Optical Link
Budget.

         MICROSCANNER is an entry level scanner that quickly provides  extensive
cable information,  combining length and wiring connections (wiremap) functions.
It is a low cost scanner,  and easily confirms  continuity,  wiremap,  and cable
fault  locations.  MICROSCANNER  is  the  ideal  tool  for  performing  a  fast,
all-in-one  twisted-pair cable check. Small enough to fit in the palm of a hand,
MICROSCANNER quickly verifies cabling by combining the length measurement, using
TDR  technology,  with  wiremap.  MICROSCANNER  saves time and money by locating
faults and identifying the sources of cabling problems.

         Additionally,  Microtest offers MT CRIMP 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 scanners.

         Also part of  Microtest's  NMP line,  NetWare  COMPAS  ("COMPAS")  is a
network troubleshooting tool designed for IT administrators, network technicians
and third-party  service providers who are tasked with solving common,  everyday
problems on Ethernet LANs.  COMPAS  combines the best features of cable testers,
protocol  analyzers,   network  diagnostic  utilities,   and  asynchronous  data
communications testers into a handheld,  portable tool. Users select the network
problem  from a simple  menu and COMPAS  performs a series of tests  designed to
identify the cause of the problem. COMPAS also diagnoses problems inside NetWare
fileservers  via  the  COMPAS  NetWare   Loadable  Module  (NLM).   COMPAS  also
troubleshoots  Ethernet  cabling and protocol and serial link problems.  COMPAS'
unique NetTap(TM) feature lets users plug in COMPAS between any network node and
the hubs, to monitor traffic or test the network.

         Microtest offers two modules for COMPAS as well. The optional NT COMPAS
module provides  information about Windows NT(TM) network in seconds.  Users add
the module to their  COMPAS and see the domains and hosts on their NT  networks.
NT COMPAS supports IP, NetBeui,  and IPX protocols and configures  itself from a
DHCP server. The Internet COMPAS
                                                                               9
<PAGE>
module for COMPAS  troubleshoots  Internet and intranet  connections quickly and
easily.  In addition to the COMPAS  tests,  Internet  COMPAS  allows the user to
easily isolate incorrectly configured hosts and determine whether the problem is
a faulty  router on the company  intranet,  or on the  Internet at large.  Often
times, this simple diagnosis can save many hours of labor in troubleshooting the
problem.  Internet COMPAS performs tests such as Duplicate IP address detection,
IP PING, IP host summary list and detail,  and Internet Control Message Protocol
(ICMP)  monitoring  and trace route.  Also  included is Domain Name System (DNS)
support  for  simplified   troubleshooting,   and  DHCP  support  for  automatic
configuration.

         Network   Connectivity   Products.   Microtest's   NCP   line   enables
organizations  to create,  access,  share and store large amounts of information
easily.  Most of the products in this line focus on CD-ROM technology because it
is still the most  cost-effective and efficient medium for mass data storage and
retrieval.  Workgroups  or  entire  organizations  requiring  instant  access to
mission critical  information,  reference  information,  research data, and even
multimedia files can use CD-ROM as the storage medium and Microtest connectivity
products for instant access and retrieval.  These products  enable network users
to access and share  information,  such as  customer  databases,  legal  briefs,
medical records,  library reference  volumes,  research data, photo images,  and
even sound bytes across a network.

         In 1997,  Microtest  advanced its mini-server  expertise  beyond CD-ROM
into the intranet  technologies and markets.  This new direction is an important
next step in advancing the product line into the Internet age. Continued success
in this product line will  require  Microtest to enhance its existing  products,
expand  products into product  lines,  and introduce  new products  rapidly.  To
facilitate  new and  continuing  product  development,  Company  personnel  work
directly with  customers,  distribution  channels,  and leaders in other network
industry  segments  to  identify  market  needs and define  appropriate  product
specifications.

         The following table provides a partial  overview of current products in
the NCP line:

<TABLE>
-------------------------------------------------------------------------------------------------------
<S>                                  <C>                              <C>
Network Connectivity Products
-------------------------------------------------------------------------------------------------------
Workgroup Mini-Servers                Enterprise Software              Enterprise Systems
-------------------------------------------------------------------------------------------------------
                                      DiscPort(R) Executive for        DiscPort(R) Enterprise Server
DiscPort(R)                           intraNetWare                     (Rack)
-------------------------------------------------------------------------------------------------------
                                      DiscPort(R) Executive for        DiscPort(R) Enterprise Server
DiscPort(R) XL                        Windows NT(TM)                   (Tower)
-------------------------------------------------------------------------------------------------------
DiscPort(R) PRO                                                        LANCD(R)
-------------------------------------------------------------------------------------------------------
DiscPort(R) Towers
-------------------------------------------------------------------------------------------------------
WebZerver(TM)
-------------------------------------------------------------------------------------------------------
</TABLE>

         Microtest's primary NCP brand is DiscPort.  The product line includes a
category of  workgroup  mini-servers  software  and  enterprise  systems.  These
products integrate anywhere on a network and allow for the instantaneous sharing
of  CD-ROMs.  DiscView  PRO is the  common  software  platform  that  features a
transparent  user interface by design,  and enables users to view information on
CDs.
                                                                              10
<PAGE>
         For larger enterprise  applications,  Microtest's  DiscPort  Enterprise
Servers, available in rack and tower configurations, allows enterprises to share
hundreds  of  CD-ROM  titles  with  point-and-click   simplicity.   These  fully
integrated solutions include a CPU running DiscPort Executive software and up to
sixty-three  high-speed  drives.  Its graphical  user  interface  makes managing
CD-ROM  resources  easy,  and users can browse and access CD-ROM  resources from
their  desktop  or their  intranet  browser.  These  servers  are  designed  for
enterprises  with many  users who need to access  mission  critical  information
resources  on CD-ROM.  Microtest  also  enables  integrators  to build their own
enterprise  servers by offering  DiscPort  Executive  software separate from the
hardware. The software is available in intraNetWare and Windows NT versions.

         With the  acquisition  of  Logicraft  Information  Systems  (now  doing
business as Microtest  Enterprise Group ("MEG")),  in 1996,  Microtest  acquired
several  additional  technologies  including  Virtual CD,  which allows users to
access CD-ROM  information at  unprecedented  speed by imaging,  compressing and
downloading CD-ROM data to the user's hard drive for faster retrieval.  In 1997,
the Company introduced DiscPort Enterprise server for Windows NT. Within a short
time,  the  majority  of sales  for these  large  servers  have  moved to the NT
platform.

         In 1997,  Microtest  expanded its line of  mini-servers  and its CD-ROM
storage  platform  with  WebZerver.  WebZerver  helps users  implement  intranet
workgroup sites across  organizations  for  collaborative  document  sharing and
threaded discussions. Should the need arise to provide access to other databases
through the  intranet,  however,  users can quickly and easily  attach  external
storage CD, DVD, Hard Disk, Jaz, or Zip drives.

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,  manufacturer's  representatives  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  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 ads in trade magazines to generate
demand;  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,  VARs and dealers.
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
                                                                              11
<PAGE>
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  76%, 71%, and 64% of
the Company's total revenues in 1997, 1996 and 1995, respectively. The Company's
United  States  distributors  include  national  distributors,  cable  and  wire
distributors, and catalog merchandisers.

         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
in Canada,  Mexico,  South America and the Pacific Rim. All international  sales
are  denominated  in United  States  dollars.  Sales  outside  of North  America
accounted for 24%, 29% and 36% of the Company's total revenues in 1997, 1996 and
1995, respectively.  The decrease in sales outside of North America is primarily
due to a weakening of the European and Asia Pacific economy in 1997 coupled with
the restructuring of the management group of the Company's  European  operations
in  October  1997.  See  footnote 9 in the Notes to the  Consolidated  Financial
Statements for information by geographic area.

         Customers. The primary target market for the Company's products include
LAN management personnel,  LAN installers,  field service personnel,  resellers,
and technical end users with departmental  applications.  The Company's end user
customers  span a  broad  range  of  industries  that  utilize  LANs,  including
technology, industrial, transportation, retail, health care, financial services,
government  and  education.  As  summarized  in  footnote  8 in the Notes to the
Consolidated Financial Statements,  major customers accounting for more than 10%
of total revenue in 1995, 1996 and 1997 were Graybar Electric Company,  Inc. 0%,
11% and 11%,  Ingram  Micro,  Inc.  15%, 18% and 13% and Anixter 21%, 0% and 0%,
respectively.  The Company  maintains a customer  support  organization  in both
North America and Europe to answer customer questions  concerning the use 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 directly with customers,  distribution  channels,  and leaders in
other network industry segments to identify market needs and define  appropriate
product specifications. Microtest employees participate in numerous professional
groups and technical committees including the following: Institute of Electrical
&  Electronic   Engineers   ("IEEE")   802.3   committee,   ISO,   International
Electro-technical Commission ("IEC"), Certified Network Expert ("CNX") Technical
Advisory  Board,  TIA  TR41.8.1,   and  Building  Industry  Consulting  Services
International  ("BICSI"). The Company believes that tracking developments in the
latest  high-speed   technologies,   like  Integrated  Service  Digital  Network
("ISDN"),  Asymmetric Digital Subscriber Line ("ADSL") and Asynchronous Transfer
Mode  ("ATM"),  will  facilitate  the  development  of products  supporting  the
networks of the future.
                                                                              12
<PAGE>
         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 embodies a substantial  portion of its TDR
technology  in a custom gate array to deter reverse  engineering,  and Microtest
has obtained  several  United  States  patents on portions of its  technologies.
Microtest  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  Systems,  Inc.  ("Logicraft"),  a leading
developer and manufacturer of enterprise CD-ROM networking  systems.  Subsequent
to the acquisition,  Logicraft was renamed  Microtest  Enterprise Group ("MEG").
The Company  acquired all of the capital  stock of Logicraft  for  approximately
$12.5 million and assumed certain Logicraft  liabilities totaling  approximately
$4.5 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 CD-R industry.  The Company
acquired all of the  outstanding  stock of OMI for  approximately  $4 million in
cash and the  assumption  of  OMI-related  debt of $660,000.  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 or software  products or
other third  parties for  acquisition  opportunities  as they 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
                                                                              13
<PAGE>
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 shipment.  The Company
retains a skilled,  permanent, core workforce,  utilizing temporary employees to
accommodate workload fluctuations. The Company maintains three authorized repair
centers, one in Phoenix, Arizona, one in the United Kingdom and one in Japan.

         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, to date it has been able to obtain 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.  In 1997, the Company  continued this process by conducting  numerous
internal audits and reviews in preparation for final approval  expected in 1998.
ISO 9001  requires  that  business  processes  are  documented  and ensures that
mechanisms are developed to continually  improve general business  practices and
products.

         Historically,  the  Company  has  not  maintained  significant  backlog
because it fills  substantially  all product orders 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.  This often  requires  frequent new
product introductions, added product features and rapid
                                                                              14
<PAGE>
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.

         In  the  network  management  and  certification  market,  the  Company
competes   with   products   manufactured   by   Wavetek   Corporation,    Scope
Communications,  Fluke Corporation and Datacom Technologies. 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, Fluke Corporation,
Network General,  and  Hewlett-Packard  Company. 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,  Inc.;  Micro  Design  International;  Ornetix;  SciNet,  Procom
Technology,  and Axis Communications,  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.
Further, the markets served by the Company's  connectivity  products continue to
grow at rates that naturally attract new entrants into those markets.  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 at
lower  prices  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(TM),
CertiFiber(TM), and FiberEye(R), as well as MEG's disk-caching technology called
FastCD(TM), and disc management utility software called AutoShare(TM).
                                                                              15
<PAGE>
         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 1997, the Company obtained two additional patents:  one for a method
and apparatus  for  concurrently  measuring  near end crosstalk at two ends of a
cable and one for  developing  a foreign file system  establishing  method which
uses a native file system virtual device driver.

         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 1, 1998,  the Company  employed  218 persons on a full-time
basis: 84 in sales,  marketing and customer support, 31 in manufacturing,  64 in
research  and  development  and 39 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.


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. Current monthly rental payments for this facility are approximately
$75,000.  The Company believes that this facility is adequate to meet its needs.
The Company also leases sales and support  offices in  California,  Illinois and
the United  Kingdom.  The Company's  subsidiaries  lease office space for sales,
support and research and development in New Hampshire and Germany.
                                                                              16
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS.
         ------------------


         The Company is involved in various 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 1997.
                                                                              17
<PAGE>
                                     PART II

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

         The  Company's  Common  Stock has been  traded in the  over-the-counter
market and quoted through the Nasdaq  National Market  ("Nasdaq")  since October
30, 1992,  under the symbol "MTST." The following table sets forth the quarterly
high and low sale prices of the Common Stock as reported on Nasdaq.

      Period                                                    High      Low
      ------                                                    ----      ---
       1996       First Quarter . . . . . . . . . . . . . .    $12.25    $5.00
                  Second Quarter . . . . . . . . . . . . .      12.25     7.00
                  Third Quarter . . . . . . . . . . . . . .     11.50     7.00
                  Fourth Quarter . . . . . . . . . . . . .      10.88     6.88
       1997       First Quarter . . . . . . . . . . . . . .     10.38     4.38
                  Second Quarter . . . . . . . . . . . . .       4.88     3.38
                  Third Quarter . . . . . . . . . . . . . .      6.63     3.81
                  Fourth Quarter . . . . . . . . . . . . .       8.13     3.88

         The closing price of the  Company's  Common Stock on March 23, 1998 was
$5.31 per share.

         As of March 23,  1998,  there  were  8,209,248  shares of Common  Stock
outstanding,  which were held of record by 245  holders.  The Company  estimates
that there are  approximately  6,073  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, changes in the general economy, and other
factors  could  cause  the  price of the  Company's
                                                                              18
<PAGE>
Common Stock to fluctuate substantially.  In addition, in recent years the stock
market in general, and the market for share of small  capitalization  technology
stocks in particular,  have experienced extreme  fluctuations,  which have often
been  unrelated  to  the  operation  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 right 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, 1996 and 1997,  and the  consolidated  statements  of
operations for each of the three years in the period ended December 31, 1997 and
the independent  auditors'  report thereon,  are included in Item 8 of this Form
10-K.
                                                                              19
<PAGE>
<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                                -------------------------------------------------------
                                                                   1993       1994        1995        1996        1997
                                                                   ----       ----        ----        ----        ----
                                                                        (in thousands, except per share amounts)
<S>                                                             <C>         <C>        <C>         <C>         <C>
Statement of Income Data:
Revenues....................................................    $ 22,142    $ 39,574   $ 52,537    $ 50,442    $ 49,592
Cost of sales and services .................................       9,680      16,584     21,961      20,452      20,266
                                                                -------------------------------------------------------
     Gross profit ...........................................     12,462      22,990     30,576      29,990      29,326
Total operating expenses ....................................     15,045      16,212     22,192      24,939      29,254
Restructuring charges, purchased R & D
   and other unusual items(1) ...............................     (3,358)       --       (8,776)    (15,697)       --
Income from sale of  technology(1) ..........................        959        --         --          --          --
                                                                -------------------------------------------------------
Income (loss) from operations ...............................     (4,982)      6,778       (392)    (10,646)         72
Interest income - net .......................................        729         743      1,232         762         120
                                                                -------------------------------------------------------
Income (loss) before income taxes ...........................     (4,253)      7,521        840      (9,884)        192
Provision (benefit) for income taxes ........................     (1,730)      2,231       (305)      1,711        (131)
                                                                -------------------------------------------------------
Net income (loss) ...........................................   $ (2,523)   $  5,290   $  1,145    $(11,595)   $    323
                                                                =======================================================

Diluted net income (loss) per common and
equivalent share (1) ........................................   $  (0.34)   $   0.64   $   0.13    $  (1.43)   $   0.04
                                                                =======================================================

Net income (loss) excluding restructuring charges,
purchased R&D, other unusual items (1) ......................   $ (1,100)   $  5,290   $  6,531    $  4,102    $    323
                                                                =======================================================

Diluted net income (loss) per common and equivalent
share excluding restructuring charges, purchased R&D,
other unusual items (1) .....................................   $  (0.14)   $   0.64   $   0.77    $   0.50    $   0.04
                                                                =======================================================

Shares used in per share calculation ........................      7,503       8,269      8,534       8,104       8,249
                                                                =======================================================

Balance Sheet Data:
Working capital .............................................   $ 29,576    $ 36,635   $ 39,128    $ 26,583    $ 26,256
Total assets ................................................     36,537      47,642     50,158      43,313      41,874
Shareholders' equity ........................................     33,433      40,579     43,027      31,672      32,094
</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.
                                                                              20
<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 1997,  the Company  recorded net  revenues of $49.6  million and net
income of  $323,000  or $.04 per share,  as  compared  to net  revenues of $50.4
million  and a net  loss  of  $11.6  million  or  $(1.43)  per  share  in  1996.
International sales compared to the prior year decreased 8% and 17% for 1997 and
1996,  as compared to an  increase  of 43% in 1995.  The  decrease is due to the
tightening   of  the  European   economy  and  the  loss  of  sales  during  the
restructuring  of the Company's  European  management  group.  The Company fully
integrated  Logicraft,  which was acquired in December 1996,  into its corporate
structure and has began realizing the synergies of the acquisition.

         During 1996,  the Company  terminated its end user direct sales program
and  implemented  a  manufactures'  representative  program.  As a result of the
manufacturers'   representative   program,  the  Company  lowered  its  discount
structure   to  the   distributors   represented   by  selected   manufacturers'
representatives and, in turn, increased commission expense.

         In December 1996,  the Company  acquired the capital stock of Logicraft
for  approximately   $12.5  million  and  the  assumption  of  $4.5  million  in
liabilities.  As a result of the allocation of the purchase  price,  the Company
recorded  a $15.7  million  expense  to record  the value of  software  research
acquired relating to products for which  technological  feasibility had not been
established and for which no alternative future existed.  Logicraft is now doing
business as Microtest Enterprise Group ("MEG").
                                                                              21
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                     (in thousands)                            1995         Change       1996        Change        1997
--------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>      <C>              <C>     <C>
Revenues                                                      $52,537          -4%     $ 50,442          -2%     $ 49,592
Gross profit                                                   30,576          -2%       29,990          -2%       29,326
   As a percentage of revenues                                  58.2%                     59.5%                     59.1%
Sales & marketing                                              12,585          14%       14,334          13%       16,253
   As a percentage of revenues                                  24.0%                     28.4%                     32.8%
Research & development                                          5,913           8%        6,414          28%        8,212
   As a percentage of revenues                                  11.3%                     12.7%                     16.6%
General & administrative                                        3,694          13%        4,191          14%        4,789
   As a percentage of revenues                                   7.0%                      8.3%                      9.7%
Interest income                                                 1,232         -38%          762         -84%          120
   As a percentage of revenues                                   2.3%                      1.5%                      0.2%
Income taxes excluding tax benefit from purchased R & D         3,085         -45%        1,711        -108%         (131)
Effective tax rate, excluding tax benefit from purchased R&D    32.1%                     29.4%                    -68.2%
Net Income (Loss)                                               1,145       -1113%      (11,595)        103%          323
   As a percentage of revenues                                   2.2%                    -23.0%                      0.7%
Net Income (Loss) excluding restructuring charges,
 purchased R & D other unusual items and Income
 from sale of technology                                         6,531        -37%        4,102         100%             -
   As a percentage of revenues                                   12.4%                     8.1%                      0.0%
</TABLE>


Revenues - Product sales decreased  $800,000 or 2% from $50.4 million in 1996 to
$49.6 million in 1997.  MEG  contributed  $11.3 million to revenue  during 1997.
Product  sales,  excluding MEG decreased  $12.2 million or 24%. The decrease was
attributable to continued market softness in the network  connectivity  products
industry,  intensified  competition and sluggish  European sales.  Product sales
decreased  $2.1  million  or 4% from $52.5  million in 1995 to $50.4  million in
1996.  This  decrease  was a result of increased  competition  in the Category 5
cable testing market and a softening of the European economy in 1996.


         [GRAPH OMMITED]
Bar Graph  showing  revenue as $22.1  million for 1993,  $39.6 million for 1994,
$52.5 million for 1995, $50.4 million for 1996 and $49.6 million for 1997.
                                                                              22
<PAGE>
International  sales were $19.1  million,  $14.8  million and $ 13.7  million in
1995,  1996  and  1997 or 36%,  29% and  28% of  total  revenues,  respectively.
International  sales continued to decrease in 1997 in both absolute  dollars and
as a percentage of sales primarily due to the weakening of the European  economy
and the  restructuring  of the Company's  European  management  group in October
1997.

         [GRAPH OMITTED]
Bar graph showing Gross Profit of $12.5 million for 1993,  $23 million for 1994,
$30.6 million for 1995, $30 million for 1996 and $29.3 million for 1997.



Gross Profit - Gross profit decreased $700,000 or 2% from $30.0 in 1996 to $29.3
in 1997. Gross profit as a percentage of sales remained  comparable at 59.5% and
59.1% for 1996 and 1997, respectively. The decrease in gross profit was a result
of the  decrease in revenue and a charge to the  obsolete  inventory  reserve of
approximately  $400,000  during  the third  quarter  of 1997.  This  charge  was
recorded to account for potentially  excess  inventory  levels of several of the
Company's products that may become obsolete with the introduction of CertiFiber,
which occurred during the fourth quarter.  This decrease was partially offset by
higher  software  content in several of its  products,  which  results in higher
gross margins.

Gross profit  decreased  $600,000 or 2% from $30.6 in 1995 to $29.9 in 1996. The
decrease was primarily  attributable to the decrease in revenue of $2.1 million,
which  was  offset  by  the  introduction  of the  manufactures'  representative
program.  Discounts  to many of the  Company's  distributors  were  lowered as a
result  of  this  program.  The  manufacturers'   representative   program  pays
commissions to selected representatives of the Company for selling the Company's
products from Company's  distributors to end users. As a result of this program,
the Company lowered its discount  structure to the  distributors  represented by
these selected manufacturers' representatives and, in turn, increased commission
expenses.

Sales & Marketing Expenses - Sales and marketing expenses increased $2.0 million
or 14% from $14.3 million in 1996 to $16.3 million in 1997. The increase was due
largely  to an  increase  in  employees  and  other  costs  attributable  to the
Logicraft  acquisition  made  during  the  fourth  quarter  of  1996,  increased
commissions paid as a result of the manufacturers' representative program, which
was introduced in mid-1996, and severance costs associated with restructuring of
the  Company's  European  operations  and sales force to take  advantage  of the
synergies of the Logicraft acquisition.
                                                                              23
<PAGE>
Sales and marketing expenses increased $1.7 million or 14% from $12.6 million in
1995 to $14.3 million in 1996. The increase was due to the implementation of the
manufacturers'  representative  compensation program, as well as the addition of
personnel to bolster the Company's sales force.

         [GRAPH OMITTED]
Bar Graph showing Sales and  Marketing  Expenses of $7.7 million for 1993,  $8.7
Million  for 1994,  $12.6  million  for 1995,  $14.3  million for 1996 and $16.3
million for 1997.

Research & Development  Expenses - Research and development expense increased to
$8.2  million in 1997,  $1.8 million or 28% increase as compared to $6.4 million
in 1996.  The  increase  stemmed  primarily  from an  increase  in the number of
employees due to the acquisition of Logicraft during the fourth quarter of 1996,
as well as the development of an increased number of prototypes than experienced
in 1996. The Company has restructured its research and development work force to
fully integrate MEG into the research and development process.


         [GRAPH OMITTED]
Bar graph showing  Research and  Development  Expenses of $4.7 million for 1993,
$4.1  million for 1994,  $5.9  million for 1995,  $6.4 million for 1996 and $8.2
million for 1997.

The Company capitalized approximately  $1,000,000,  $90,000 and $0 in 1997, 1996
and 1995, respectively, of software development costs for new products for which
technological  feasibility  has been  determined.  These costs will be amortized
over the life of the associated products of approximately two to four years as a
charge to cost of goods sold. These amortization  charges may result in lowering
the Company's net income in future periods.

Research and development  expense increased  $500,000 or 8% from $5.9 million in
1995 to $6.4 million in 1996.  This  increase was primarily  attributable  to an
increase in the number of prototypes developed in 1996 as compared to 1995.
                                                                              24
<PAGE>
General  &  Administrative   Expenses  -  General  and  administrative  expenses
increased  to $4.8  million in 1997,  a $600,000 or 14%  increase as compared to
$4.2 million in 1996. The increase was a result of the increase in personnel and
other administrative costs attributable to the Logicraft  acquisition during the
fourth quarter of 1996,  legal expenses  incurred to defend the Company  against
class-action  lawsuits that were dismissed during the second quarter of 1997 and
an increase in the bad debt reserve of approximately $310,000.


         [Graph Omitted]
Bar Graph showing general and administrative  expenses of $2.7 million for 1993,
$3.4  million for 1994,  $3.7  million for 1995,  $4.2 million for 1996 and $4.8
million for 1997.

General and administrative  expenses increased $500,000 or 13% from $3.7 million
in 1995 million to $4.2 million in 1996.  This increase  resulted from increases
in legal  expenses  related  to the  settlement  of a lawsuit  during  the first
quarter  of  1996,  as well as  legal  costs  associated  with  the  defense  of
shareholder lawsuits filed during the second half of 1996.

         [Graph Omitted] Bar Graph showing interest and other income of $729,000
for 1993, $743,000 for 1994, $1,232,000 for 1995, $762,000 for 1996 and $120,000
for 1997.

Interest & Other Income - Interest and other income (net) decreased  $642,000 or
84% from  $762,000  in 1996 to $120,000 in 1997.  The  decrease in interest  and
other income is  attributable  to a higher  average cash balance  during 1996 as
compared to 1997.  The average cash balance for 1996 and 1997 was  approximately
$21.0 million and $8.0 million,  respectively.  The decrease in the average cash
balance  of  $13.0  million  is a  result  of cash  paid of  $12.5  million  for
Logicraft.  A loss of  $200,000  was  included  in other  income  related to the
disposition of Optical Media International fixed assets during 1997.

         Interest and other income  decreased  $470,000 or 38% from $1.2 million
in 1995 to $762,000 in 1996.  The decrease was a result of the  reallocation  of
investments in anticipation of the 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.
                                                                              25
<PAGE>
Effective  Tax Rate - The Company  experienced  a decrease in the  effective tax
rate from 1996 to 1997. The decrease was a result of recognition of research and
development  credits  earned  in  1997.  The  decrease  from  1995 to  1996  was
attributable to the recognition of research and development  credits,  excluding
the effects of purchased research and development.

Net Income - Net income  increased $11.9 million from $(11.6) million in 1996 to
$323,000  in 1997.  The  increase  was  primarily  attributable  to a charge for
research  and  development  expense  in the  fourth  quarter of 1996 of $15.7 to
record the value of  software  research  the Company  acquired in the  Logicraft
acquisition for which technological feasibility had not been established and for
which no alternative  future use existed.  The expense recorded for research and
development  costs were determined  based on allocation of the purchase price to
fair values of assets and liabilities  acquired.  The allocation of the purchase
price to purchased  research and  development  costs was based on an independent
appraisal  of the fair value of complete  and  incomplete  technology  acquired.
Excluding the $15.7 million research and development  charge in 1996, net income
decreased  from $4.1  million in 1996 to $323,000 in 1997.  The  decrease  was a
result of the decrease in revenue, increase in operating expenses and a decrease
in  investment  and other  income.  The Company  has  implemented  cost  control
measures,   including  headcount   reductions,   to  fully  integrate  MEG  into
Microtest's operating plan.

         Net income decreased $12.7 million from $1.1 million in 1995 to $(11.6)
million in 1996.  This decrease was primarily a result of the charge to research
and  development  expense  as  discussed  above.  Excluding  this  expense,  the
remaining  decrease  was mainly  attributable  to the  decrease in revenue,  the
overall  increase in operating  expenses  and the  decrease in interest  income.
During the second quarter of 1995, the Company  recorded an expense for research
and development costs associated with software products for which  technological
feasibility  had not been  established  and for which no alternative  future use
existed  arising from the purchase of Optical Media  International.  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 had not been  established and for which no future use
existed arising from the purchase of certain technologies from Hotware, Inc. The
expense totaled $450,000 and a tax benefit of $180,000 was recognized.

         [Graph Omitted]
Bar Graph showing Net Income/(Loss) of $(2.5) million for 1993, $5.3 million for
1994, $1.1 million for 1995, $(11.6) million for 1996 and $.3 for 1997.

         [Graph Omitted]
Bar Graph showing Net Income excluding Restructuring Charges,  Purchased R&D and
Other  Unusual  Items of $(1.1)  million for 1993,  $5.3 million for 1994,  $6.5
million for 1995, $4.1 million for 1996 and $.3 million for 1997.
                                                                              26
<PAGE>
         Future Results - The Company's future operating results may be affected
by a number of factors,  including general economic  conditions in the Company's
markets,  the Company's  ability to develop,  manufacture  and sell its products
profitably, the strength of the Company's distribution channels,  competition in
general and competitive pricing in particular.


Liquidity and Capital Resources

         The Company has financed its  operations  primarily  through  operating
cash flows and equity financings. At December 31, 1997, the Company had cash and
cash  equivalents of $11.5 million.  This represents a $1.3 million  increase in
cash equivalents  compared to December 31, 1996, due primarily to the collection
of accounts receivable and management of Company payables.

         During the second quarter of 1997,  the Company  obtained a $10 million
unsecured  revolving  credit  facility  with Bank of  America  during,  which is
utilized for general corporate and working capital purposes. The credit facility
carries an interest rate equal to Bank of America's  "Reference Rate" defined by
Bank of America  as "the rate of  interest  in effect  for such day as  publicly
announced  from  time to time by the Bank in San  Francisco,  California  as its
`reference  rate'" or the  Offshore  Rate plus 1.50%.  Major  convenants  of the
credit facility include: (i) the Company, on a consolidated basis, not incurring
a net  and  operating  loss  in  two  consecutive  quarters;  (ii)  the  Company
maintaining  a  modified  quick  ratio of no less than 1.50;  (iii) the  Company
maintaining a Tangible Net Worth of no less than 90% of the  Company's  Tangible
Net Worth at December 31, 1997;  and (iv) the Company not  permitting  its total
liabilities to exceed 0.75 times Tangible Net Worth. No amounts were outstanding
under this  credit  facility  and the Company  was in  compliance  with all loan
covenants at December 31, 1997.

         Capital  expenditures for 1997 were approximately $1.2 million.  During
1997, the Company invested  $600,000 to upgrade computer  hardware and software,
$500,000 in tooling and  approximately  $60,000 in machinery  and  equipment and
furniture and fixtures.  The Company's  capital  expenditure  budget for 1998 is
approximately   $700,000,   which   includes   software,   hardware,   leasehold
improvements   and  other  of  $200,000,   $200,000,   $100,000  and   $200,000,
respectively.

         Management believes cash flows from operations and available cash under
the credit  facility will be sufficient to meet the cash needs of the Company in
the foreseeable future.
                                                                              27
<PAGE>
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,  Europe and Asia
Pacific.  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 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 23% of the Company's  revenue in 1997.  The loss of
certain distributors or VARs would have a
                                                                              28
<PAGE>
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.

     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
                                                                              29
<PAGE>
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 in 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 their  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  three  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 pressure 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 Desin
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
                                                                              30
<PAGE>
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,  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  accounted for
34%, 29% and 28% of the Company's revenue in 1995, 1996 and 1997,  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  - From time to time the Company is  involved  in various  legal
proceedings  incidental  to its business.  Management  does not believe that any
current legal  proceedings  will have a material adverse effect on the financial
condition or operating results of the Company, but there can be no assurances in
this regard.

     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
                                                                              31
<PAGE>
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  operations,  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 of 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  conditional  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.

     Year 2000 Issues - Many currently  installed  computer systems and software
products,  including  several used by the Company,  are coded to accept only two
digit  entries in the date code field.  Beginning  in the year 2000,  these date
code fields will need to accept four digit entries to  distinguish  21st century
dates from 20th century dates. Therefore,  the Company's date critical functions
related to the year 2000 and beyond,  such as sales,  distribution,  purchasing,
inventory  control,  merchandise,  facilities,  and  financial  systems  may  be
adversely  affected  unless  these  computer  systems  are or  become  year 2000
compliant.   The  Company   began  work   several   years  ago  to  prepare  its
computer-based  systems for the year 2000 and is  utilizing  both  internal  and
external resources to identify,  correct, or reprogram, and test its systems for
year 2000  compliance.  The Company is in the final stages of  implementing  the
required  changes to its internal  computer  systems.  The Company  continues to
evaluate the  estimated  costs  associated  with these  efforts  based on actual
experience  and does not expect the future costs of resolving  its internal year
2000 issues to materially  exceed the year 2000 related costs incurred in recent
years.  No assurance  can be given that the Company's  computer  systems will be
year  2000  compliant  in a timely  manner  or that the  Company  will not incur
significant additional expenses pursuing year 2000 compliance. Furthermore, even
if the Company's systems are year 2000 compliant, there can be no assurance that
the Company  will not be  adversely  affected by the failure of others to become
year 2000  compliant or by the failure of the Company's  vendors to provide year
2000 compliant products for resale or configuration by the Company. For example,
                                                                              32
<PAGE>
the Company may be adversely affected by, among other things, warranty and other
claims made by the Company's customers related to product failures caused by the
year 2000  problem,  the  distribution  or  inaccuracy  of data  provided to the
Company  by  non-year  2000  compliant  third  parties,  and the  failure of the
Company's service providers, such as security, data processing,  and independent
shipping companies to become year 2000 compliant. There can be no assurance that
the year 2000 problem will not have a material  adverse effect on the Company in
the future.
                                                                              33
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
         --------------------------------------------

         Consolidated  balance sheets of the Company as of December 31, 1996 and
1997 and consolidated  statements of operations,  stockholders'  equity and cash
flows  for each of the  three  years in the  period  ended  December  31,  1997,
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.
                                                                              34
<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  (the  "Company")  as of December  31, 1996 and 1997,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended  December  31,  1997.  Our
audits also included the  financial  statement  schedule  listed in the Index at
Item 14. These  financial  statements and financial  statement  schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial  statements and financial statement schedule 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 the Company at December 31, 1996
and 1997,  and the results of its  operations and its cash flows for each of the
three years in the period ended  December 31, 1997 in conformity  with generally
accepted accounting  principles.  Also, in our opinion, such financial statement
schedule  when  considered  in  relation  to the  basic  consolidated  financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.



DELOITTE & TOUCHE LLP

Phoenix, Arizona
February 4, 1998
                                                                              35
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                                                        December 31,
                                                                                               -------------------------------
<S>                                                                                                 <C>              <C>
ASSETS                                                                                             1996             1997
CURRENT ASSETS:
  Cash and cash equivalents                                                                         $ 10,282         $ 11,547
  Accounts receivable - less allowance for doubtful accounts of
    $582 and $892 and less returns reserve of $3,030 and $1,073, respectively                         17,544           12,083
  Inventories - less reserve for obsolescence of
    $540 and $694, respectively  (Note 2)                                                              5,660            5,924
  Prepaid expenses                                                                                       823            1,459
  Income taxes receivable (Note 4)                                                                       291            2,258
  Deferred income taxes (Note 4)                                                                       3,121            2,216
                                                                                               --------------   --------------

              Total current assets                                                                    37,721           35,487

EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net (Note 3)                                                    3,642            3,543

INTANGIBLES AND OTHER ASSETS - Net (Note 3)                                                            1,335            2,777

DEFERRED INCOME TAXES (Note 4)                                                                           615              133
                                                                                               --------------   --------------

TOTAL                                                                                               $ 43,313         $ 41,940
                                                                                               ==============   ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                                                   $ 5,579          $ 4,699
  Accrued liabilities (Note 9)                                                                         4,983            4,130
  Accrued payroll and employee benefits                                                                1,079            1,017
                                                                                               --------------   --------------

              Total liabilities                                                                       11,641            9,846
                                                                                               --------------   --------------
COMMITMENTS AND CONTINGENCIES (Note 6 and 7)

STOCKHOLDERS' EQUITY (Note 7):
  Common stock, $.001 par value - authorized, 15,000,000 shares;
     issued and outstanding, 8,159,058 and 8,193,320 shares, respectively                                  8                8
  Additional paid-in capital                                                                          32,593           32,710
  Retained Deficit                                                                                      (485)            (186)
  Common stock in treasury at cost - 27,970 and 34,196 shares, respectively                             (444)            (438)
                                                                                               --------------   --------------
              Total stockholders' equity                                                              31,672           32,094
                                                                                               --------------   --------------
TOTAL                                                                                               $ 43,313         $ 41,940
                                                                                               ==============   ==============
</TABLE>
See notes to consolidated financial statements.
                                                                              36
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                                                 Years Ended December 31,
                                                            --------------------------------
                                                              1995        1996        1997
<S>                                                         <C>         <C>         <C>
REVENUES (Notes 8 and 9)                                    $ 52,537    $ 50,442    $ 49,592

COST OF SALES                                                 21,961      20,452      20,266
                                                            --------    --------    --------

         Gross profit                                         30,576      29,990      29,326
                                                            --------    --------    --------

OPERATING EXPENSES:
   Sales and marketing (Note 9)                               12,585      14,334      16,253
   Research and development                                    5,913       6,414       8,212
   General and administrative                                  3,694       4,191       4,789
                                                            --------    --------    --------

         Total operating expenses                             22,192      24,939      29,254
                                                            --------    --------    --------

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

INCOME (LOSS) FROM OPERATIONS                                   (392)    (10,646)         72

INTEREST AND OTHER INCOME - Net                                1,232         762         120
                                                            --------    --------    --------

INCOME (LOSS) BEFORE INCOME TAXES                                840      (9,884)        192

INCOME/(BENEFIT) TAX PROVISION (Note 4)                         (305)      1,711        (131)
                                                            --------    --------    --------

NET INCOME/(LOSS)                                           $  1,145    $(11,595)   $    323
                                                            ========    ========    ========

BASIC EARNINGS PER SHARE:
  NET INCOME/(LOSS) PER SHARE                               $   0.14    $  (1.43)   $   0.04
                                                            ========    ========    ========
  WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                   8,073       8,104       8,139
                                                            ========    ========    ========
DILUTED EARNINGS PER SHARE:
  NET INCOME/(LOSS) PER SHARE                               $   0.13    $  (1.43)   $   0.04
                                                            ========    ========    ========
  WEIGHTED AVERAGE COMMON & EQUIVALENT SHARES OUTSTANDING      8,534       8,104       8,249
                                                            ========    ========    ========
</TABLE>
See notes to consolidated financial statements.
                                                                              37
<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, 1995                           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
  Common stock issued upon:
    Exercise of stock options                          1                       1           8           2          (5)          5
    Employee Stock Purchase Plan                      33                      10         102         115         (20)        197
  Disqualifying dispositions of stock options                                                                      1           1
  Treasury stock purchase                                                    (17)       (104)                               (104)
  Net income                                                                                                     323         323
                                                --------    --------    --------    --------    --------    --------    --------
BALANCE, DECEMBER 31, 1997                         8,193    $      8         (34)   $   (438)   $ 32,710    $   (186)   $ 32,094
                                                --------    --------    --------    --------    --------    --------    --------
</TABLE>
                                                                              38
See notes to financial statements.
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                     --------------------------------
                                                                        1995       1996        1997
<S>                                                                  <C>         <C>         <C>
OPERATING ACTIVITIES:
  Net income/(loss)                                                  $  1,145    $(11,595)   $    323
  Adjustments to reconcile net income/(loss) to net cash (used in)/
    provided by operating activities:
      Depreciation and amortization                                     1,512       1,460       1,887
      Deferred provision for income taxes                                 370        (833)      1,387
      Allowance for doubtful accounts                                     311          61         310
      Deferred rent                                                       (27)        (32)        (24)
      Purchased R & D - net of related tax benefit                      5,386      15,697
  Changes in operating assets and liabilities:
    Accounts receivable - net                                          (8,984)       (321)      5,151
    Inventories - net                                                  (3,300)        907        (264)
    Prepaid expenses and other assets                                    (217)        180      (2,340)
    Accounts payable                                                    1,423      (1,610)       (880)
    Accrued liabilities                                                (1,053)      1,089        (891)
    Income taxes payable                                                 (941)
    Income taxes receivable                                                21       1,852      (1,967)
                                                                     --------    --------    --------

             Net cash (used in) provided by operating activities       (4,354)      6,855       2,692
                                                                     --------    --------    --------

INVESTING ACTIVITIES:
  Purchases of equipment and leasehold improvements                    (1,383)     (1,056)     (1,526)
  Acquisition of business                                              (5,100)    (15,621)
                                                                     --------    --------    --------

           Net cash (used in) investing activities                     (6,483)    (16,677)     (1,526)
                                                                     --------    --------    --------

FINANCING ACTIVITIES:
  Proceeds from sale of common and treasury stock                       2,065         307         203
  Purchase of treasury stock                                           (2,911)       (110)       (104)
                                                                     --------    --------    --------

             Net cash (used in) provided by financing activities         (846)        197          99
                                                                     --------    --------    --------

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                      (11,683)     (9,625)      1,265

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                           31,590      19,907      10,282
                                                                     --------    --------    --------

CASH AND CASH EQUIVALENTS, END OF YEAR                               $ 19,907    $ 10,282    $ 11,547
                                                                     --------    --------    --------
</TABLE>
                                                                              39
See notes to consolidated financial statements.
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
--------------------------------------------------------------------------------

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  ("OMI")  and
      Logicraft  Information  Systems,  Inc.  ("Logicraft")  (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.  Long-lived  assets  and
          certain  identifiable  intangible  assets are reviewed for  impairment
          whenever events or changes in circumstances indicate that the carrying
          amount  of  the  asset  may  not be  recoverable  in  accordance  with
          Statement  of  Financial   Accounting   Standards  ("SFAS")  No.  121,
          "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
          Assets to Be Disposed Of." Estimated useful lives are as follows:

                                                               Useful Life

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



          Intangibles  and other  assets - Software  and other  intangibles  are
          amortized  over their  estimated  useful  life of 2 to 4 years and the
          non-compete  agreement is being amortized over its contractual term of
          five  years.   Software   development   costs  are  capitalized   when
          technological feasibility has been established.

      c.  Income Taxes - Income taxes are provided  based upon the provisions of
          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 that relate to prototype
          and experimental models that are sold to customers are charged to cost
          of sales.
                                                                              40
<PAGE>
      e.  Revenue  Recognition - The Company generally  recognizes  revenue from
          product  sales  upon  shipment.  Sales to  distributors  in the United
          States,  Canada and Europe  account for the majority of the  Company's
          net  sales.  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.  During  1996,  the  Company  had a direct  sales
          program under which the Company  recognized revenue from product sales
          to direct end users upon customer  commitment  and shipment.  Customer
          commitment means receipt by the Company of a valid purchase order from
          the customer.

      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.  In March 1997,  the FASB issued  SFAS No. 128,  "Earnings  Per Share",
          which is  effective  for  financial  statements  for both  interim and
          annual  periods  ending  after  December  15,  1997.  The  Company has
          implemented this Statement and, as required, has restated earnings per
          share ("EPS") for all periods  presented.  This new standard  requires
          dual  presentation  of "basic"  and  "diluted"  EPS on the face of the
          earnings statement. Basic earnings per common share is computed on the
          weighted average number of shares of common stock  outstanding  during
          each period.  Earnings per common share assuming  dilution is computed
          on the weighted  average number of shares of common stock  outstanding
          plus additional shares representing the exercise of outstanding common
          stock  options using the treasury  stock  method.  Because the Company
          incurred a loss for the year ended  December 31, 1996,  the effects of
          the potential dilutive securities are not included in the calculation.

      h.  New accounting pronouncements - In June 1997, the FASB issued SFAS No.
          130, Reporting  Comprehensive Income, which is effective for financial
          statement for periods ending after  December 15, 1997 and  establishes
          standards for reporting  and display of  comprehensive  income and its
          components  (revenues,  expenses,  gains and  losses) in a full set of
          general-purpose financial statements. The Company does not believe the
          adoption of SFAS No. 130 will have a material impact on its results of
          operations or financial condition.

          In June 1997, the FASB issued SFAS No. 131,  Disclosure about Segments
          of an  Enterprise  and Related  Information,  which is  effective  for
          fiscal  years  beginning  after  December  15,  1997  and  establishes
          standards  for  the  way  that  public  business   enterprises  report
          information  about operating  segments in annual financial  statements
          and requires that those enterprises report selected  information about
          operating   segments   in   interim   financial   reports   issued  to
          stockholders.  It also establishes  standards for related  disclosures
          about product and services, geographic areas, and major customers. The
          Company does not believe that the adoption of SFAS No. 131 will have a
          significant effect on its reporting of segment information.

      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.
                                                                              41
<PAGE>
      k.  Reclassifications  - Certain  reclassifications  were made to the 1995
          and 1996 financial statements to conform with the 1997 presentation.

      l.  Stock Based  Compensation  - As permitted by SFAS No. 123  "Accounting
          for Stock Based Compensation," the Company measures  compensation cost
          in  accordance  with  Accounting  Principles  Board  Opinion  No.  25,
          "Accounting for Stock Issued to Employees" ("APB 25") but provides pro
          forma  disclosures of net income and earnings per share as if the fair
          value  method (as defined in SFAS 123) had been  applied  beginning in
          1995.

2.    INVENTORIES

           Inventories consisted of the following at December 31:


                                                       1996            1997
                                                      (Amounts in Thousands)

Raw materials                                        $ 1,242          $ 1,367
Work-in-progress                                         153              155
Finished goods                                         4,805            5,096
                                                     -------          -------
Total                                                  6,200            6,618
Less reserve for obsolescence                           (540)            (694)
                                                     -------          -------
Inventories - net                                    $ 5,660          $ 5,924
                                                     =======          =======



3.    EQUIPMENT AND LEASEHOLD IMPROVEMENTS INTANGIBLES AND OTHER ASSETS

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

                                                      1996              1997
                                                     (Amounts in Thousands)

Equipment                                           $ 6,522           $ 8,181
Furniture and fixtures                                1,530             1,020
Leasehold improvements                                  533               542
                                                    -------           -------
Total                                                 8,585             9,743
Less accumulated depreciation and amortization       (4,943)           (6,200)
                                                    -------           -------
Equipment and leasehold improvements - net          $ 3,642           $ 3,543
                                                    =======           =======
                                                                              42
<PAGE>
Intangibles and other assets consisted of the following at December 31:

                                                         1996          1997
                                                        (Amounts in Thousands)
Software                                                 $ 594       $ 1,366
Non-compete agreement and other assets                     741         1,673
                                                         -----       -------
Intangibles - gross                                      1,335         3,039
Less accumulated amortization                                           (262)
                                                         -----       -------
Intangibles - net                                       $1,335       $ 2,777
                                                        ======       =======

4.    INCOME TAXES

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


                                               1995       1996       1997
                                                (Amounts in Thousands)
Current:
  Federal                                    $  (675)   $ 2,326    $(1,427)
  State                                                     149        (91)
  Foreign                                                    69
                                             -------    -------    -------
Total current (benefit) provision               (675)     2,544     (1,518)
Deferred                                         370       (833)     1,387
                                             -------    -------    -------
Total (benefit) provision for income taxes   $  (305)   $ 1,711    $  (131)
                                             =======    =======    =======


        The Company's  current  income tax liability was reduced and  additional
        paid-in  capital  increased  approximately  $2,121,000,  $43,000  and $0
        during 1995, 1996 and 1997,  respectively,  resulting from disqualifying
        dispositions of incentive stock options.  Cash payments for income taxes
        were approximately  $3,329,000,  $750,000 and $0 in 1995, 1996 and 1997,
        respectively,  resulting from  disqualifying  dispositions  of incentive
        stock options.

        A reconciliation of the difference  between the (benefit)/provision  for
        income taxes and income taxes at the statutory  U.S.  federal income tax
        rate is as follows for the years ended December 31:
                                                                              43
<PAGE>
<TABLE>
<CAPTION>
                                                             1995       1996       1997
                                                               (Amounts in Thousands)
<S>                                                       <C>        <C>        <C>
Income taxes at statutory U. S. federal income tax rate   $   286    $(3,361)   $    65
Increase (decrease) in taxes:
  Acquired research and development                                    5,337
  State taxes - net                                            50         90          3
  Research and development credits                           (350)      (111)      (217)
  Tax exempt interest income                                 (363)      (261)       (24)
  Other - net                                                  72         17         42
                                                          -------    -------    -------
Total                                                     $  (305)   $ 1,711    $  (131)
                                                          =======    =======    =======
</TABLE>

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


                                                        1996       1997
                                                     (Amounts in Thousands)
Nondeductible accruals and reserves                   $ 2,880    $ 1,593
Inventory costs capitalized for income tax purposes       241        623
                                                      -------    -------
Total current                                           3,121      2,216
                                                      -------    -------
Excess of tax over book depreciation                      (71)      (322)
Excess of book over tax amortization                      466         18
Other                                                     220        437
                                                      -------    -------
Total noncurrent                                          615        133
                                                      -------    -------
Total deferred income taxes                           $ 3,736    $ 2,349
                                                      =======    =======


5.    ACQUISITIONS

On December 17, 1996,  the Company  purchased all of the issued and  outstanding
shares  of  the  capital  stock  of  Logicraft  a  Delaware   corporation.   The
consideration  for the acquisition of all of the Logicraft stock was $12,517,000
in 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  product 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.
                                                                              44
<PAGE>
On June 6, 1995, the Company  acquired all of the  outstanding  capital stock of
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  since the  effective  date of the  acquisition.  Pro forma
unaudited  consolidated  operating  results of the Company and Logicraft for the
year ended  December 31,  1996,  assuming  the  acquisition  had been made as of
January 1, 1996 is summarized below:


(In Thousands, Except Per Share Amounts)

                                                            1996
Net revenues                                              $ 64,747
                                                          ========
Net income                                                $    171
                                                          ========
Net income per common share                               $    .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 acquisition,  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 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.
                                                                              45
<PAGE>
6.    COMMITMENTS AND CONTINGENCIES

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

                                    (Amounts in
                                     Thousands)
1998                                   1,004
1999                                     995
2000                                     842
2001                                     148
2002                                      12

                                     --------
Total minimum rental payments        $ 3,001
                                     ========


Rent expense for 1995, 1996 and 1997 was approximately  $691,000,  $982,000, and
$1,051,138 respectively.

During the second quarter of 1997, the Company obtained a $10 million  unsecured
revolving  credit  facility  with Bank of America  which is utilized for general
corporate  and  working  capital  purposes.  The  Company  pays  interest  at  a
referenced  rate plus 1.5% and is required to pay a quarterly fee for the unused
portion of the credit facility.  No amounts were  outstanding  under this credit
facility and the Company was in compliance  with all loan  covenants at December
31, 1997.

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
1994 Annual Non-Employee Directors Plan ("1994 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,
                                                                              46
<PAGE>
1995, although grants outstanding at the time of cancellation were not affected.
The LTIP permits the granting of incentive  stock options,  non-qualified  stock
options and other stock-based awards to employees,  officers, and consultants to
purchase the Company's  common stock. 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 Directors
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 1994 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.
                                                                              47
<PAGE>
A summary of the status of the  Company's  five fixed stock  options plans as of
December  31, 1995,  1996,  1997,  and changes  during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
                                          1995                         1996                          1997
                                  --------------------        ----------------------        ----------------------
                                              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                 1,135,821      $7.61        1,432,304     $12.43          1,369,399     $9.00
Granted                             653,330     $18.23          589,148      $8.86            806,028     $5.03
Exercised                          (288,862)     $6.39          (26,567)     $4.74             (1,224)    $4.68
Cancelled                           (67,985)    $11.60         (621,609)    $17.06           (268,200)   $10.40
                               -----------------------------------------------------------------------------------
Outstanding at
end of year                       1,432,304     $12.43        1,373,276      $9.00          1,906,003     $6.97
                               ===================================================================================
Options exercisable at
end of year                         415,939                     622,289                       759,633
                               =============                 ===========                 =============
Weighted average fair
   value of options
   granted during the year                       $9.74                       $4.20                        $5.93
                                             ==========                  ==========                    ===========
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1997:
<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                               12/31/97     Life (in yrs)    Price               12/31/97      Price
----------------------------------------------------------------------------------------------------------------------
<S>                  <C>                      <C>           <C>            <C>                   <C>         <C>
                     $3.69 - $3.81             401,982       7.55           $3.80                 26,982      $3.80
                     $3.88 - $5.25             424,646       7.59           $4.74                219,631      $5.22
                     $5.38 - $7.75             420,393       7.73           $6.47                195,559      $6.88
                     $7.88 - $9.63             409,891       8.09           $8.99                136,568      $8.97
                     $9.69 - $24.25            249,091       6.30          $13.41                180,893     $13.45
                                      --------------------------------------------------------------------------------
                     $3.69 - $24.25          1,906,003       7.55           $6.97                759,633      $8.23
                                      ================================================================================
</TABLE>


On May 18,  1992,  the Company  adopted an  Employee  Stock  Purchase  Plan (the
"Purchase  Plan").  A total of 200,000  shares of common  stock are reserved for
issuance under the Purchase
                                                                              48
<PAGE>
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, 1996 and
1997 was $3.89, $8.29 and $4.79, respectively.  Transactions related to the plan
are summarized as follows:

                                                     Weighted Average
                                        Shares        Purchase Price
                                      -----------------------------------
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
    Purchases                             (43,891)                    $4.48
                                      ------------
Available at December 31, 1997             82,488
                                      ============

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 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,  1996 and 1997 would have been reduced to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                             December 31, 1995   December 31, 1996  December 31, 1997
                                             --------------------------------------------------------
Net income/(loss)
<S>        <C>                                    <C>               <C>                    <C>
           As reported (in '000s)                  $1,145            ($11,595)              $323
           Pro forma (in '000s)                     ($729)           ($13,577)             ($666)

Diluted net income/(loss) per common
   and equivalent share
           As reported                              $0.13              ($1.43)             $0.04
           Pro forma                               ($0.09)             ($1.69)            ($0.08)
</TABLE>

The fair value of options  granted under the Company's  fixed stock option plans
during  1995,  1996 and 1997  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             1997
                                ------------     -------------     ------------

Expected volatility               75.00%            75.00%           92.00%
Expected term                     4 years          4 years           5 years
Dividend yield                     0.00%            0.00%             0.00%
Risk-free interest rate            6.90%            5.45%             6.18%


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-average assumptions used:


                                   1995              1996             1997
                                ------------     -------------     ------------

Expected volatility               75.00%            75.00%           92.00%
Expected term                     1 year            1 year           1 year
Dividend yield                     0.00%            0.00%             0.00%
Risk-free interest rate            6.38%            5.12%             5.80%


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  $137,000,  $117,000,  and
$127,000 during 1995, 1996 and 1997, respectively.

8.    OTHER

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


Customer                                    1995        1996       1997
Graybar Electric Company, Inc.                          11%        11%
Ingram Micro, Inc.                          15%         18%        13%
Anixter                                     21%


Sales and  marketing  expenses  included  advertising  expense of  approximately
$1,909,000, $2,056,000, and $1,668,000 in 1995, 1996 and 1997, respectively.
                                                                              50
<PAGE>
9.    FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS

The Company did not have sales or  transfers  between  geographic  areas  during
1995, 1996 or 1997

<TABLE>
<CAPTION>
                                                          1995            1996            1997
                                                                (Amounts in Thousands)
<S>                                                      <C>             <C>            <C>
Sales to unaffiliated customers:
Americas                                                 $ 30,762        $ 29,765       $ 33,281
Direct                                                                      2,582          1,315
OEM                                                         2,675           3,312          1,328
                                                         --------        --------       --------
     Total domestic sales to unaffiliated customers        33,437          35,659         35,924
                                                         --------        --------       --------
Europe                                                     15,911          11,665         10,974
Asia Pacific                                                3,189           3,118          2,694
                                                         --------        --------       --------
     Total sales to unaffiliated customers               $ 52,537        $ 50,442       $ 49,592
                                                         ========        ========       ========
</TABLE>

10.   UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
                                                                      1996 Quarters (As Originally Reported)
                                                        ------------------------------------------------------------------
<S>                                                            <C>              <C>              <C>             <C>
                                                                 First           Second           Third           Fourth
                                                                    (In Thousands, Except Per Share Amounts)
Total revenues                                                 $ 11,960         $ 13,320         $ 13,007        $ 13,680
Cost of sales and services                                        5,001            5,664            5,071           5,097
Gross profit                                                      6,959            7,656            7,936           8,583
Net income/ (loss)                                                  707            1,316            1,435         (14,275)
Net income/(loss) per common and equivalent share                 $ .09            $ .16            $ .17         $ (1.75)

                                                                    1996 Quarters (As Restated in 1996 Form 10-K)
                                                        ------------------------------------------------------------------
                                                                 First           Second           Third           Fourth
                                                                    (In Thousands, Except Per Share Amounts)
Total revenues                                                                  $ 12,666         $ 12,136
Cost of sales and services                                                         5,501            4,853
Gross profit                                                                       7,165            7,283
Net income                                                                           982              991
Net income per common and equivalent share                                         $ .12            $ .12

                                                                                  1997 Quarters
                                                        ------------------------------------------------------------------
                                                                 First           Second           Third           Fourth
                                                                    (In Thousands, Except Per Share Amounts)
Total revenues                                                 $ 11,113         $ 11,945         $ 12,391        $ 14,143
Cost of sales and services                                        4,347            5,004            5,335           5,580
Gross profit                                                      6,766            6,941            7,056           8,563
Net (loss)/income                                                  (986)             132              332             845
Net income per common and equivalent share                       $ (.12)           $ .02            $ .04           $ .10
</TABLE>
                                                                              51
<PAGE>
Charges relating to the acquisition of R & D were $15,697,000,  $1.92 per common
and equivalent share, in the forth quarter of 1996.

Quarterly  results for 1996 vary from the  originally  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.  With respect to its now
discontinued  end user direct  sales  program,  the company  increased  recorded
reserves by $2.1 million in the fourth quarter of 1996 as actual returns related
to sales made between  September and December 1996 were greater than expected as
a result of changes in the  product mix sold  through the end user direct  sales
program that occurred in the fourth quarter of 1996.  The recorded  reserves for
direct  sales as of  December  31, 1996 have  proven to be  sufficient  to cover
actual product returns and allowances. Originally 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, cost 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 $.05, respectively.  As a result of changes to the second and third
quarter,  fourth  quarter  total  revenues,  cost of sales and  services,  gross
profit,  and  net  income  were  increased  by a net  of  $1,525,000,  $381,000,
$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.

                                   * * * * * *

                                                                              52
<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 1998
Annual Meeting of Stockholders to be held May 12, 1998, 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 Registrant's 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" and "Employment  Agreements" 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.
                                                                              53
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         ----------------------------------------------

                  Information  responsive to this item 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
         ----------------------------------------------------------------
<TABLE>
<CAPTION>
         (a)           Financial Statements and Schedule.                        Page or
                                                                             Method of Filing
                                                                             ----------------
<S>          <C>                                                                     <C>
         (i) Financial Statements
         (1) Independent Auditors' Report....................................     Page 35
         (2) Consolidated Financial Statements:
                  Balance Sheets - December 31, 1996 and 1997................     Page 36
                  Statements of Operations - For the Years Ended December 31,
                  1995, 1996 and 1997........................................     Page 37
                  Statements of Stockholders' Equity - For the Years Ended
                  December 31, 1995, 1996 and 1997...........................     Page 38
                  Statements of Cash Flows - For the Years Ended December 31,
                  1995, 1996 and 1997........................................     Page 39
                  Notes to Consolidated Financial Statements - December 31,
                  1995, 1996 and 1997........................................     Page 40


         (ii) Financial Statement Schedules.
         (iii) See Item 14(c) below.

         Independent Auditors' Report........................................     Included in Auditors'
                                                                                  Report at Page 35
         Schedule II - Valuation and Qualifying Account                           Page 60
</TABLE>

         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 of Form 8-K.

                  During the last quarter of 1997,  the Company filed no reports
                   on Form 8-K.

                                                                              54
<PAGE>
         (c)      Exhibits.
<TABLE>
<CAPTION>
Exhibit                                                                                Page or
Number           Description                                                           Method of Filing
------           -----------                                                           ----------------

<S>              <C>                                                                  <C>
3.1              Amended and Restated Certificate of Incorporation of the              Incorporated by reference
                 Company, 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                       Incorporated  by reference
                 Limited Partnership and the Company dated                             to Exhibit 10.5 to Form S-1
                 June 19, 1992, relating to Company's                                  #33-52264
                 principal offices and facilities

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>
                                                                              55
<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

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
                                                                                       190K 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

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

10.14            1998 Director Compensation Plan                                       Filed herewith

11               Statement Regarding Computation of Per Share Earnings                 Filed herewith
</TABLE>
                                                                              56
<PAGE>
<TABLE>
<S>              <C>                                                                  <C>
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
24.5             Power of Attorney of Kent C. Mueller                                  Filed herewith
</TABLE>
         (d)      See Item 14 (a)(ii)
                                                                              57
<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, 1998.

                                MICROTEST, INC.

                                By:      /s/ Charles V. Mihaylo
                                         ------------------------------
                                         Charles V. Mihaylo
                                         President & Chief Operating 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>
          *                             Chairman of the Board, Chief Executive              March  31, 1998
------------------------------          Officer (Principal Executive Officer)
Richard G. Meise

/s/ Charles V. Mihaylo                  President and Chief Operating Officer               March  31, 1998
-------------------------------
Charles V. Mihaylo

/s/ John J. O'Block                     Vice President & Chief Financial Officer            March  31, 1998
------------------------------          (Principal Financial and Accounting Officer)
John J. O'Block

          *                             Director                                            March 31, 1998
------------------------------
Roger C. Ferguson

          *                             Director                                            March  31, 1998
------------------------------
Steven G. Mihaylo

          *                             Director                                            March  31, 1998
------------------------------
William C. Turner

          *                             Director                                            March  31, 1998
------------------------------
Dianne C. Walker

          *                             Director                                            March 31, 1998
------------------------------
Kent C. Mueller

* By /s/ Charles V. Mihaylo                                                                 March  31, 1998
    --------------------------
         Charles V. Mihaylo
         Attorney-in-Fact
</TABLE>
                                                                              58
<PAGE>
                                 MICROTEST, INC.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                            Balance at        Charged to                   Balance
                                            Beginning           Costs &                   at End of
                                            of Period          Expenses    Deductions      Period
                                            ---------          --------    ----------      ------
<S>      <C>                                  <C>          <C>              <C>       <C>  <C>
Allowance for doubtful accounts
         1997                                 $   582      $    490         $    180  (1)  $  892
         1996                                     521           354              293  (1)     582
         1995                                     210           319                8  (1)     521
Reserve for obsolete inventories:
         1997                                 $   540      $  1,497          $ 1,343       $  694
         1996                                     717                            165          540
         1995                                   1,319                            602          717
Accumulated depreciation and amortization:
         1997                                 $ 4,943      $  1,625          $   368       $6,200
         1996                                   3,841         1,460              358        4,943
         1995                                   2,408         1,512               79        3,841
Reserve for product returns:
         1997                                 $ 3,003      $  1,899          $ 3,829       $1,073
         1996                                     919         6,239            4,155        3,003
         1995                                                   919                           919
</TABLE>

(1) Amounts represents write-offs of accounts receivable balances.
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