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                       SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549-1004
                                    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, 2000
                                                        or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                        Commission File Number 0 - 20666
                                 MICROTEST, INC.
             (Exact name of registrant as specified in its charter)

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


                             4747 North 22nd Street
                             Phoenix, Arizona 85016
                                 (602) 952-6400
                --------------------------------------------------
               (Address, including zip code, and telephone number,
                      including area code, of registrant's
                          principal executive offices)

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

Common Stock, $.001 par value                            Nasdaq National Market

         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 and (2) has been subject to the filing
requirements for at least the past 90 days.

                                   Yes  x   No
                                       ---    ---

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]

         The aggregate market value of Common Stock held by non-affiliates of
the Registrant was approximately $26,444,275 based on the closing sale price as
reported by the Nasdaq National Market on March 23, 2001.

         The number of shares outstanding of each of the Registrant's classes of
Common Stock, as of March 23, 2001 was 8,576,540 shares of Common Stock ($.001
par value).

                       DOCUMENTS INCORPORATED BY REFERENCE

         Materials from the Registrant's Proxy Statement relating to its 2001
Annual Meeting of Shareholders (the "Proxy Statement") have been incorporated by
reference into Part III, Items 10, 11, 12 and 13.

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                                TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS....................................................2

PART I........................................................................3
ITEM 1 BUSINESS...............................................................3
ITEM 2 PROPERTIES............................................................15
ITEM 3 LEGAL PROCEEDINGS.....................................................16
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................16

PART II......................................................................17
ITEM 5 MARKET FOR THE COMPANY'S COMMON EQUITY SECURITIES AND RELATED
       SHAREHOLDER MATTERS...................................................17
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA..................................19
ITEM 7 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS.................................................20
Item 7A Quantitative and Qualitative Disclosures About Market Risk...........29
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................29
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
       FINANCIAL DISCLOSURE..................................................50

PART III.....................................................................50
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY......................50
ITEM 11 EXECUTIVE COMPENSATION...............................................50
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......50
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................50

PART IV......................................................................51
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.....51



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FORWARD-LOOKING STATEMENTS:

         This Annual Report on Form 10-K contains forward-looking statements.
Additional written or oral forward-looking statements may be made by us 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 plans relating to our
products or services, as well as assumptions relating to the foregoing. We
undertake 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 the "Business" section and in the "Market for the Company's Common Equity
Securities and Related Shareholder Matters" section in this Report.

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                                     PART I


ITEM 1.  BUSINESS

INTRODUCTION

         Microtest, Inc. is a leading producer of network test and measurement
products and network storage and appliance servers. Our two product families,
Network Test and Measurement ("NTM") and Network Appliances and Storage ("NAS"),
include products for computerized networks from local area networks ("LANs") to
intranets and the Internet.

         Our NTM line of handheld network test and diagnostic tools are used in
the installation and operation of premise and campus local area networks. The
NTM product line includes devices for certifying the installation of fiber optic
and copper networks as well as troubleshooting active operational LANs.

         Our network cable testers:

          -    test networks to data communication ("datacom") industry wiring
               standards,

          -    certify whether network cabling will support intended
               applications,

          -    pinpoint fiber optic and copper cabling and connector problems
               and faults, and

          -    provide documentation of network infrastructure.

         Our network diagnostic testers:

          -    monitor network activity and utilization,

          -    verify physical network integrity and cabling lengths,

          -    discover active network components (PCs, hubs, switches, routers,
               etc.), and

          -    analyze data communications through protocol analysis.

         All NTM products are geared toward reducing costly network downtime by
increasing network reliability. The effectiveness and productivity of cable
installers and network technicians are enhanced substantially by quickly testing
and diagnosing network problems.

         We introduced OMNIScanner(TM)2 to our line of NTM products during
November 1999. OMNIScanner2 is a second generation cable Category 5E, Category 6
and Category 7 digital field cable tester and is an enhancement of the
industry's first such device, the OMNIScanner. The OMNIScanner2 employs
proprietary frequency domain digital signal processing technology to deliver
dynamic range and accuracy similar to a laboratory network analyzer. These
products are the first field network testers capable of testing Category 7
cabling systems. Significant changes are occurring within the network cabling
industry and each major cabling standard is undergoing revision to incorporate
new measurements, higher bandwidth and levels of performance. We believe that
these changes in cabling standards may create a replacement market for Category
5 field testing and certification devices, since the new requirements may make
products sold prior to 1998 technologically obsolete.

         OMNIFiber(TM) was introduced during August 1999 and is capable of
testing both multi-mode and single mode fiber optic cable. During the first
quarter of 2001, we introduced the OMNIFiber SM, a laser-based fiber optic
certification adapter specifically for testing single mode links. We believe
that the OMNIFiber line is positioned to address the growing demand for
certifying premise and campus fiber

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optic networks. During October 1999, we introduced SimpliFiber(TM), a line of
entry level fiber optic LED and laser light sources with a matched power loss
meter.

         Our MicroTools(TM) line of network testers was launched with
MICROSCANNER(TM)Pro in late 2000. Targeted at residential networking and IT
professionals, the MicroTools line provides us with a retail brand presence in
distribution points worldwide. We expect to extend the line to include several
new tools including an innovative cable and hub port locator, an entry-level
wiremap verifier and an inductive probe during 2001.

         Our NAS product line consists of a family of server appliances and
storage products, that we call Zervers(TM). Server appliances are network
infrastructure devices designed to facilitate the exchange of information over a
computing network. Server appliances differ from general-purpose servers in that
they are designed to perform specific functions and they are reliable, easier to
use and cost less than general-purpose servers. Our server appliances use Linux
as an open source operating system and encompass hard disk storage devices, as
well as optical (CD-ROM and DVD-ROM) storage devices. Our products are designed
to enable organizations to develop, store, manage and access information and
knowledge bases with ease.

         We introduced a Linux-based server appliance called the FileZerver(TM)
during March 2000. Our FileZerver product is designed to be used in connection
with hard-disk drive ("HDD") storage technology. This product is targeted at
workgroup and departmental users of network attached storage devices and
provides users with storage, file sharing, retrieval and file management
capabilities. Our FileZerver products are targeted to Original Equipment
Manufacturers ("OEMs"), Value Added Resellers ("VARs") and system integrators
that may want to customize the software capabilities of a server appliance and
create a final network attached storage solution for their customers. The
DiscZerver(TM) has been in our NAS product line since June 1998. DiscZerver is a
high performance workgroup and departmental optical CD/DVD server appliance
employing unique CD/DVD image caching technology that increases network access
performance while reducing network access costs for shared CD/DVD applications.
The DiscZerver was significantly enhanced with the introduction of our
DiscZerver Cyclone product offering during June 2000.

         We are a Delaware corporation founded in 1984.


INDUSTRY BACKGROUND

         The world's dependence on computerized networks creates increasing
pressure for improved local area network performance and reliability, starting
at the point of fiber or copper cable installation. As more demands are placed
on computer networks, products that maintain and enhance the performance and
integrity of the network, and that ensure network compliance with continuously
changing U.S. and international standards and technologies, will become more
important. This will likely result in greater dependence upon and increased
reliability requirements for network testing and diagnostic products. To offset
growing complexities in networking, the products used to maintain the networks
will need to be easy to use, install, manage and own.

         Frequently, there are new data communication standards, new protocols,
faster data requirements, enhanced operating systems, better data storage
options, new peripheral hardware, more advanced topologies and signaling
options, and additional cabling options. In particular, significant progress
towards codifying new standards for Category 5E cabling testing has been made.
Codification of new Category 6 cabling standards is expected in the future.
Support of these standards requires increased functionality, including higher
bandwidth (250 MHz), higher dynamic range and new measurements (return loss,
power sum near end crosstalk, equal level far end crosstalk and power sum equal
level far

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end crosstalk). Furthermore, Gigabit Ethernet cabling standards require test
capabilities that are not yet available in the vast majority of existing field
test equipment. Many premise network installations now include at least some
percentage of fiber optic cabling. Verifying these fiber networks within the
same testing context as the copper structured wiring is important to installer
productivity. Many networks incorporate a variety of different technologies and
it is this trend toward complexity that is creating demand for products that
manage network assets. Many of these standards are in development and it is
uncertain when each will become finalized.

         Organizations of all sizes continue to migrate mission-critical
operations and information to their networks. The work environment is becoming
more dependent on organizations' ability to store, retrieve and manage large
volumes of data associated with the explosive growth of information available
from the Internet. Companies are also challenged with the need to facilitate the
efficient sharing of information among multiple users across computer networks.
There is growing demand for products and technologies that maximize network
device and information sharing capabilities. NAS appliances have been developed
to address these challenges faced by organizations in developing their computer
network infrastructure.

         Historically, these network storage and data management needs have been
addressed with optical CD/DVD storage devices and appliances. However, demand
for HDD NAS devices has increased dramatically and demand for optical NAS
devices has declined as the cost of HDD storage has decreased. Significant
growth in the demand for HDD network attached storage appliances has been
predicted by several industry organizations.


MARKET FOR THE COMPANY'S PRODUCTS

         NTM Products. The advancements of equipment and technologies enabling
high-speed data transmission over twisted-pair copper wiring and fiber optic
cabling continue to increase in number and complexity. Ensuring that existing or
newly installed structured wiring can handle these high data speeds is a
critical step in minimizing network downtime, lost productivity and data
transmission problems. Service providers, systems integrators and datacom
installers worldwide use our NTM products to perform critical testing and
certification functions for modern unshielded twisted-pair cable, fiber optic
network systems and legacy cabling. Newer products, such as our OMNIFiber test
device, perform similar certification functions for fiber optic cabling. Once
the network cabling is installed and the network is running, diagnostic features
and management software products continue to help users troubleshoot network
problems with speed and accuracy, minimizing network downtime and increasing
user productivity.

         Telco technicians, low-voltage contractors and electrical contractors
are joining datacom installers in the installation of premise-based computer
networks. We introduced the MicroTools product line during 2000 to address this
trend and believe that these new classes of prospects will expand our NTM
market.

         NAS Products. Our NAS products address the challenges associated with
managing devices and sharing large amounts of information within workgroups. NAS
products include devices with both hard disk storage and optical storage
capabilities. Our NAS products also encompass the licensing of NAS operating
system software. Our newer NAS product offerings are offered to integrators,
VARs and OEMs. Optical NAS products appeal to network administrators, librarians
and information resource professionals in all kinds of organizations. Law firms,
educational institutions, libraries and research facilities also represent some
of the target markets for our NAS line. Our products can be sold as a solution
to address network storage challenges or as an appliance engine that these
customers can customize in order to address specific network appliance
solutions. Our NAS products may be appealing

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to hard disk manufacturers as a means to bundle their storage devices with our
product to create additional sales opportunities for them.


COMPANY STRATEGY

         Our strategy is to offer network test and measurement products and
network attached storage appliances in order to make computer and
telecommunications networks more reliable and mission-critical information
easier to share and use.

         We provide a variety of easy-to-use, hand held products and network
attachable hardware and software products, all designed to address complex
network management problems. Our strategy is to provide NTM product offerings
that address expected future demand for test, measurement and diagnostic devices
associated with the utilization and growth of premise and campus computer
networks. These networks will be comprised of the emerging Category 5E, Category
6 and Category 7 unshielded twisted-pair copper cabling as well as single mode
and multi-mode fiber optic cabling and wireless systems. We also have positioned
ourselves to address the growing future market for residential computer networks
with the introduction of our MicroTools product line.

         Our NAS strategy is to design, market and sell network server appliance
products that allow users to create easy-to-operate, scalable, reliable and cost
effective storage solutions. The NAS market is divided into several segments
that span a wide range of capabilities and prices. The enterprise NAS market is
a high-end market segment generally served by companies significantly larger
than we are, such as EMC and Network Appliance, Inc. In prior years, we offered
an optical NAS device directed at this segment. During 1999, we refocused our
strategy and discontinued our high-end enterprise CD-ROM enterprise systems
business. We are currently focused on the workgroup and departmental NAS market
segment for our server appliance products. Our offerings to this segment will
primarily be our HDD FileZerver products, including our NAS technology embedded
in hardware, or as our NAS operating system software. We believe that our
product cost, reliability, scalability and ease-of-use are appealing to this
segment. Also, we believe that accelerating demands for electronic data storage
as a result of increased Internet usage, increased usage of applications such as
data warehousing and data mining, and emerging applications associated with
voice and video uses are driving additional need for network-centric storage
devices. Several industry publications are predicting substantial growth in the
HDD NAS market over the next several years.


PRODUCTS

         We are a technology leader in providing network test and measurement
products (an industry segment we created through our patented cable radar
technology). We also offer a line of network attached storage devices, referred
to as server appliances.

         NTM Products. Datacom installers and network administrators use our NTM
products to instantly pinpoint fiber optic and copper cabling problems, which
can be a primary cause of network downtime. We design tools with easy-to-use
keypads for entering commands and LCD screens for displaying results. Our NTM
products handle various types of networks and cabling and connector systems. The
tools certify that cable installations will meet the link performance
requirements as well as pertinent industry standards, such as those issued by
the following organizations:

          -    International Standards Organization ("ISO"),

          -    Comite European de Normalisation Electrotechnique ("CENELEC"),

          -    Telecommunications Industry Association ("TIA"), and

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          -    Electronics Industry Association ("EIA").

         Our test and measurement products utilize a variety of technologies,
including Time Domain Reflectometry, Digital Signal Processing, proprietary
ASICs that we have developed and RF signaling technology. These technologies and
our experience and know-how are incorporated into intuitive, easy-to-use,
hand-held instruments that allow cabling and network professionals to use these
powerful technological tools with little training.

         Our NTM products operate across multiple fiber optic and copper cable
types and computer networking systems and cost effectively increase network
productivity and reliability by reducing network downtime. Sales of NTM products
accounted for 76%, 69% and 64% of our total revenues in 2000, 1999 and 1998,
respectively.

         A partial listing of current products in our NTM line is as follows:

<TABLE>
<CAPTION>

               Fiber Optic Cable                    Copper Cable                         Network
                Testing Devices                Certification Devices                Diagnostic Devices
               -----------------               ---------------------                ------------------
<S>                                     <C>                                <C>
       -         OMNIFiber(TM)           -       OMNIScanner(TM)2           -         MICROSCANNER(TM)Pro
       -         OMNIFiber(TM)SM         -       OMNIScanner(TM)            -         COMPAS(R)Internet
       -         CertiFiber(R)           -       OMNIScanner(TM)LT          -         COMPAS(R)NT
       -         SimpliFiber(TM)         -       PentaScanner(R)350         -         COMPAS(R)Netware
                                         -       PentaScanner(R)+
</TABLE>


FIBER OPTIC TESTING DEVICES --

         OMNIFIBER transforms our OMNIScanner copper cable testing devices into
a fiber optic tool for testing and certification of multi-mode and single mode
fiber premise networks. OMNIFiber measures optical loss, delay and length over
two fibers simultaneously and compares the results against the selected LAN
standard for instant pass/fail analysis, using a "one button" Autotest feature.
OMNIFiber can save and store up to 1,000 autotests. Saved results can be
uploaded later to a PC using our ScanLink(TM) software in order to create
reports and manage accumulated data.

         OMNIFIBER SM, introduced in March 2001, is a laser-based version of the
OMNIFiber specifically designed for testing single mode links such as high
performance fiber optic links now appearing in certain premise and campus
environments.

         CERTIFIBER is the original multi-mode fiber certification tool.
CertiFiber measures optical loss, delay and length over two fibers
simultaneously. The results are compared against the applicable LAN standard for
instant pass/fail analysis. CertiFiber has storage and upload features similar
to the OMNIFiber.

         SIMPLIFIBER is an affordably priced optical source and power meter kit
designed to measure the loss of multi-mode and single mode fiber optic cables.
It is designed for simple connection to networks and the wavelength of the
source and meter units are automatically synchronized. SimpliFiber has storage
and upload features similar to our other fiber optic test devices.

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COPPER CABLE CERTIFICATION DEVICES --

         OMNISCANNER2, OMNISCANNER AND OMNISCANNER LT are capable of certifying
all cabling classes from Category 3 through Category 6, and testing Category 7
cable up to 300 MHz, an industry first. The OMNIScanners are the only field
testers capable of making accurate measurements on Category 7 cabling.
OMNIScanner2 was introduced during 1999 and is a second generation advanced
cabling certification instrument. The OMNIScanner line was introduced for well
over a year prior to the introduction of a similar product offering from
competitors. It includes productivity and usage advancements over the
OMNIScanner while maintaining OMNIScanner's full digital vector measurement
system, which delivers industry leading accuracy and dynamic range. The
OMNIScanner2 supports removable mass storage flash cards for storing thousands
of custom configurations and autotest results. OMNIScanner LT was introduced in
March 2001 and is considered to be a very cost effective Category 5E/6 cable
tester.

         OMNIScanner with ScanLink(TM) provides a powerful combination of high
bandwidth certification and cable management software. Installers that are
testing to Category 5E and draft Category 6 standards are moving to the
OMNIScanner2 product because pre-existing field test products have been
incapable of making the demanding measurements that these standards require.
Evaluations of the OMNIScanner2 from industry experts as well as independent
laboratory analyses indicate the OMNIScanner accurately meets, and even
surpasses, all of the new requirements. As the rate of these new cabling
technologies, such as Category 5E and Category 6, increases so will the demand
for additional products such as OMNIScanner2.

         PENTASCANNER350 includes all of the Technical Service Bulletin 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. PentaScanner350 also shows the available headroom for future growth of
the LAN. Using PentaScanner350 ensures a highly reliable cable installation
that will meet future performance requirements without costly rewiring.

         PENTASCANNER+, with 2-Way Injector+, has been our most popular cable
verification system and is capable of verifying cable links to 100 MHz
performance specifications. PentaScanner+ offers professional cable installers,
service providers and network administrators an easy-to-use, hand-held 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 and Attenuation-to-Crosstalk Ratio from both ends of the
installed network cable link which saves installation test time. This product
enables cable installers to purchase a hand-held tool that provides
cable-testing accuracy indistinguishable from a network analyzer.


NETWORK DIAGNOSTIC DEVICES --

         MICROSCANNER PRO is part of the MicroTools product line, introduced
during 2000, specifically designed for home networking professionals, datacom
specialists and IT/network managers. The line includes both an IT version
and a residential version. MICROSCANNER Pro 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 Pro 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 Pro quickly verifies cabling by
combining the length measurement, using Time Domain Reflectometry technology,
with wiremap.

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MICROSCANNER Pro saves time and money by locating faults and identifying the
sources of cabling problems.

         COMPAS products are computer network diagnostic and troubleshooting
devices designed for IT administrators, network technicians and third-party
service providers who are tasked with solving common, everyday problems on
Ethernet networks. COMPAS combines the best features of cable testers, protocol
analyzers, network diagnostic utilities and asynchronous data communications
testers into a hand-held, 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. Our COMPAS product line consists of the following products:

     -   COMPAS INTERNET allows users to easily isolate incorrectly configured
         hosts and determine whether the problem is related to a faulty network
         router on the company's intranet, or on the Internet at large. This
         simple diagnosis can save many hours of labor in troubleshooting
         network problems. COMPAS Internet performs tests such as Duplicate IP
         address detection, IP PING, IP host summary list and detail and
         Internet Control Message Protocol monitoring and trace route. Domain
         Name System support is also included for simplified troubleshooting and
         Dynamic Host Control Protocol support for automatic configuration.

     -   COMPAS NT provides information about Windows NT(TM) networks to users
         in seconds. The COMPAS NT enables users to identify the domains and
         hosts on their NT networks. COMPAS NT supports IP, NetBeui and IPX
         protocols and configures itself from a Dynamic Host Control Protocol
         server.

     -   COMPAS NETWARE diagnoses problems inside NetWare. It also troubleshoots
         Ethernet cabling, protocol and serial link problems. This product has a
         unique NetTap(TM) feature that lets users plug in COMPAS between any
         network node and the hubs to monitor traffic or test the network.


         NAS Products. Our NAS products enable organizations to access, share
and store large amounts of information easily through the use of products with
either HDD or optical (CD-ROM/DVD) storage capabilities. Our NAS products
integrate anywhere on an Ethernet-based computer network. As part of our new
product development, we work directly with customers, distribution channels and
leaders in other network industry segments to identify market needs and define
appropriate product specifications.

         Our NAS products utilize a Linux-based operating system. Linux is an
open-source operating system known for its reliability, performance,
scalability, customizability and low memory requirements. Workgroups now require
instant access to mission-critical information, reference information, research
data and even multimedia files. NAS 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.

         Our NAS products include:

          -    FileZerver(TM),

          -    LinuxZerver(TM),

          -    DiscZerver(TM),

          -    DiscZerver(TM)VT, and

          -    VirtualCD(TM).

         FILEZERVER is a hard disk network attached storage system introduced
during March 2000. Our FileZerver is an intelligent storage solution platform
for web-extracted information, collaboration and

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other storage needs. The product has been designed with browser-based management
providing for easy setup and ease of use. The FileZerver was engineered to
expand as user needs for additional capacity arise. Features of the FileZerver
product include:

     -    scaleability to over two terabytes of storage capacity,

     -    built-in data protection, with an auto tape backup feature,

     -    RAID 0 (striping), RAID 1 (mirroring), and RAID 5 (distributed data
          and parity),

     -    communication capabilities with a variety of network clients,
          including: Microsoft NT, NetWare 5, Apple, UNIX and Internet,

     -    "hot swap" capability,

     -    10 different language localization, and

     -    "hot spare" capability.


         LINUXZERVER is similar to our FileZerver product, however it is
designed to enable OEMs and integrators to customize application appliances.
LinuxZerver is an appliance platform designed as a backup server, or small
business all-in-one appliance.

         DISCZERVER was introduced to our optical NAS product family during 1998
and was significantly enhanced with our DiscZerver Cyclone product during June
2000. The DiscZerver product is a unique optical image-caching appliance that
provides high performance data access to CD/DVD-based information while reducing
costs for such systems over non-caching devices.

         DISCZERVERVT is a unique embodiment of the DiscZerver. Our DiscZerver
technology is used to create a "virtual tower" of CD/DVD-ROMs in a small, low
cost, easily installed and managed network attached storage device. This product
is delivered with various storage capacities to suit the varying needs of
different users.

         VIRTUALCD is sold by H+H Zebtrumfuer Rechnerkommunikation ("H+H"), one
of our German subsidiaries. VirtualCD is a software product that allows users to
access CD-ROM information at significant speeds by imaging, compressing and
downloading CD-ROM data to the user's hard disk drive for faster retrieval,
together with other network management software. VirtualCD is available as
private labeled retail software through a number of key publishing partners
worldwide, or directly through the Internet at the H+H website.

         We currently derive substantially all of our revenues from our
OMNIScanner and Zerver product lines. Any decrease in revenues of OMNIScanner or
Zerver products would have a material adverse effect on our business, financial
condition and operating results.


SALES, DISTRIBUTION AND CUSTOMERS

         Sales. Our sales, marketing and distribution strategy is to use a
multiple channel, worldwide distribution network. The network includes
distributors, VARs and integrators as well as selected OEMs and licensees. Our
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, we maintain
telesales departments that assist the efforts of our sales representatives.

         Distribution Network. We sell our products through an established
worldwide network of distributors, VARs and integrators that market PC-related
hardware and software products. We focus a significant amount of sales and
marketing resources on our distribution channel, providing ongoing communication
and support to channel participants. Our marketing activities include:

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          -    ads in trade magazines,

          -    regular mailings of product, promotional and technical materials,

          -    participation in industry trade shows,

          -    incentive programs for distributors and VAR sales personnel,

          -    cooperative marketing programs,

          -    seminars and training, and

          -    customer promotions.

         A dedicated sales force manages and supports our distributors, VARs and
dealers. We provide technical and sales product training to all of our
distributors and dealers, who in turn provide technical and sales training to
their customers who purchase our products.

         North American sales accounted for approximately 57%, 61% and 68% of
total revenue for the years ended December 31, 2000, 1999 and 1998,
respectively. Our United States distributors include national distributors,
cable and wire distributors and catalog merchandisers.

         We have developed relationships with distributors throughout Europe.
Our European distributors are supported through offices located in the United
Kingdom and Germany. Our Pacific Rim customers are supported through our
Singapore office and our Beijing, China office (opened in March 2000). We have
also developed relationships with distributors located in Canada, Mexico and
Central and South America. International sales are primarily denominated in
United States dollars. Revenues outside of North America accounted for 43%, 39%
and 32% of total revenues in 2000, 1999 and 1998, respectively.

         Customers.  The primary target markets for our NTM products include:

          -    LAN management personnel,

          -    LAN installers,

          -    system integrators,

          -    field service personnel,

          -    resellers, and

          -    technical end users with departmental applications.

         End user customers span a broad range of industries that utilize LANs,
including technology, industrial, transportation, retail, health care, financial
services, government and education. Our product distributors often influence LAN
installers.

         Our NAS products are primarily sold through indirect distribution
channels. The targets for our NAS products include:

          -    system integrators,

          -    VARs,

          -    distributors, and

          -    OEMs.

         Major customers each accounting for more than 10% of total revenue in
either 2000, 1999 or 1998 were Graybar Electric Company, Inc., Tech Data
Corporation and Ingram Micro Inc. We maintain a customer support organization in
both North America and Europe to answer customer questions concerning the use of
our products.

                                       11
<PAGE>   13
PRODUCT DEVELOPMENT

         Our continued success will depend upon our ability to enhance 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 networking industry.
To facilitate new and continuing product development, our personnel work
directly with customers, distribution channels and leaders in other network
industry segments to identify market needs and define appropriate product
specifications. Our employees participate in numerous professional groups and
technical committees including the following:

          -    Institute of Electrical & Electronic Engineers ("IEEE") 802.3
               committee,

          -    Electronics Industry Association/Telecommunications Industry
               Association ("EIA/TIA"),

          -    Comite European de Normalisation Electrotechnique ("CENELEC"),

          -    ISO, International Electro-technical Commission ("IEC"),

          -    Certified Network Expert ("CNX") Technical Advisory Board,
               TIA TR41.8.1,

          -    Building Industry Consulting Services International ("BiCSi"),

          -    Home Automation Networking Association ("HANA"), and

          -    Storage Network Industry Association ("SNIA").

         We believe that the development of products supporting the network
needs of the future will be facilitated by tracking developments in the latest
high-speed network technologies, such as:

<TABLE>
<CAPTION>

                    Network Test and Measurement                               Network Appliance and Storage
                    ----------------------------                               -----------------------------
<S>                                                                      <C>
        -         Bluetooth                                                -         Linux and embedded Linux
        -         Very High Speed Digital Subscriber Line ("VDSL")         -         InfiniBand
        -         Asymmetric Digital Subscriber Line ("ADSL")
        -         Gigabit Ethernet and beyond
        -         Asynchronous Transfer Mode ("ATM")
</TABLE>


         As one of the early entrants into the cable troubleshooting and
certification markets, we have developed a substantial amount of proprietary
technology. A substantial portion of our Time Domain Reflectometry technology is
embodied in a custom gate array to deter reverse engineering. We have obtained
several United States patents on portions of our technologies. We attempt to
leverage our proprietary technology and industry expertise into new product
offerings to enhance the troubleshooting, certification and connectivity
capabilities of our product lines. We also routinely evaluate the acquisition or
licensing of complementary products and technologies. We may not be able to
develop or acquire new products, or if developed or acquired, new products may
not be successful or profitable.


ACQUISITIONS

         In prior years, we acquired network storage and connectivity product
offerings in efforts to enhance our strategic position. We intend to continue to
evaluate selective acquisition opportunities as they may be presented from time
to time. We may face competition from other suppliers or manufacturers of
network hardware or software products or other third parties for acquisition
opportunities. There can be no assurance that we will identify acquisition
candidates that will result in successful future combinations. Future
acquisitions may result in the incurrence of additional debt and amortization of
expenses related to goodwill and intangible assets, which could adversely affect
our profitability or could involve the potentially dilutive issuance of
additional equity securities. Acquisitions involve numerous risks, including:

                                       12
<PAGE>   14
          -    difficulties in assimilation and integration of the acquired
               company,

          -    diversion of management's attention,

          -    incompatibility of acquired systems, and

          -    loss of customers, key employees and suppliers of the acquired
               company.

         These factors could have a material adverse effect on our business and
operating results.


MANUFACTURING

         We are dependent upon a small number of third-party vendors for the
manufacturing of our products. Whenever possible these manufacturers are ISO
9000 certified. All vendors are required to achieve approval via our supplier
evaluation process. Our internal operations consist of supplier management,
quality assurance, final product configuration and packaging and order
consolidation and fulfillment. We retain what we believe is a skilled,
permanent, core workforce, occasionally utilizing temporary employees to
accommodate workload fluctuations.

         We maintain a warehousing operation in the United Kingdom to better
service the European market. We have established authorized customer service
centers in our Phoenix, Arizona, and United Kingdom facilities, as well as in
Argentina, Australia, Brazil, Canada, Japan and Singapore. Our engineering
personnel must certify all service centers.


ISO 9001 COMPLIANCE

         As part of our commitment to customer satisfaction and continuous
improvement, we formally implemented a quality management system several years
ago. During 1998, our quality management system was certified by an accredited
independent auditor to be in compliance with ISO 9001 standards. These standards
provide for the control and improvement of development, operational and business
processes. We are required to demonstrate continued compliance by collection and
review of objective evidence thereof and by subjection to routine independent
audits.


SUPPLIES

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


BACKLOG

         Historically, we have not maintained significant backlog because we
fill substantially all of our orders within thirty days after receipt of a firm
purchase order. We do not believe that backlog is a reliable long-term indicator
of future sales or earnings.

                                       13
<PAGE>   15
COMPETITION

         The market for our products is extremely fast moving and competitive.
Competition in our market segment is continually increasing. Rapid technological
advances and emerging industry standards can quickly change competitive
conditions. This often requires frequent new product introductions, added
product features and rapid improvements in the relative price or performance of
products. Failure to keep pace with technological advances or market changes
would adversely affect our competitive position and operating results. We
believe that our products compete on the basis of ease-of-use, product features,
quality, reliability and price.

         Our products compete with products offered by the following companies:
<TABLE>
<CAPTION>

                  Network Test and Measurement                                      Network Appliance and Storage
                  ----------------------------                                      -----------------------------
<S>                                                                     <C>
        -         Acterna Corporation                                     -         Axis Corporation
        -         Datacom - Textron                                       -         Hewlett-Packard Co.
        -         Fluke Corporation (a division of Danaher Corp.)         -         Maxtor Corporation
        -         Scope Communications (a division of Agilent, Inc.)      -         Network Storage Solutions
                                                                          -         Quantum Corporation
                                                                          -         Western Digital Corporation

</TABLE>

         We compete, to a lesser extent, with manufacturers of time domain
reflectometers, ohmmeters, voltmeters and oscilloscopes. The technological
sophistication of our NTM products has created significant barriers to entry
into this marketplace. There are few competitors currently offering NTM products
with our products' level of sophistication and technology.

         Our competitors include large domestic and international companies,
many of which have significantly greater financial, technical, manufacturing,
marketing, sales and distribution resources than we possess. Further, the
markets served by our network attached storage products continue to grow at
rates that attract new entrants into those markets. Our current or potential
competitors may develop products comparable or superior to those developed by
us, offer them at lower prices or adapt more quickly than we will to new or
emerging technologies, evolving industry trends or changing customer
requirements. We may not have the financial resources, technical expertise, or
marketing, sales, distribution, customer service and technical support
capabilities to compete successfully.


PROPRIETARY RIGHTS

         We rely upon a combination of copyright, trademark, trade secret and
patent protection to establish and protect the proprietary rights in our
products and technologies. In addition, we generally execute nondisclosure and
confidentiality agreements with employees, distributors, customers and suppliers
with access to sensitive information and limit access to and distribution of our
software documentation and other proprietary information. In addition to the
name Microtest(R), we have several trademarks, including:

                                       14
<PAGE>   16
<TABLE>
<CAPTION>

                  Network Test and Measurement                                    Network Appliance and Storage
                  ----------------------------                                    -----------------------------
<S>                                                                   <C>

        -         OMNIScanner(TM)                                       -         FileZerver (TM)
        -         PentaScanner(R)                                       -         LinuxZerver (TM)
        -         CertiFiber(R)                                         -         WebZerver (TM)
        -         MICROSCANNER(TM)                                      -         Zerver (TM)
        -         OmniFiber(TM)                                         -         DiscZerver(TM)
        -         SimpliFiber(TM)                                       -         DiscPort(R)
        -         COMPAS(R)                                             -         VirtualCD(R)

</TABLE>



          Several products embody a substantial portion of our time domain
reflectometry technology in a custom gate array to deter reverse engineering. We
have obtained United States patents on a portion of our technology related to
time domain reflectometry, for a method and apparatus for concurrently measuring
near end crosstalk at two ends of a cable and for developing a foreign file
system establishing a method which uses a native file system virtual device
driver.

         We may be unable to deter misappropriation of our technology. Because
of the rapid pace of technological change in our industry, we believe that
patent protection for our products is less significant to our success than the
knowledge, ability and experience of our employees and the introduction and
market acceptance of new products and product enhancements.

         Given the rapid pace of technological development in our industry, our
products may infringe on the existing or future proprietary rights of others. If
such infringement existed, we may be unable to obtain the requisite licenses or
rights to use such technology.


EMPLOYEES

         At March 23, 2001, we had 204 full-time employees, comprised of 77
employees in sales, marketing and customer support, 27 manufacturing employees,
71 employees performing research and development activities and 29
administrative employees. Many of our employees are highly skilled in certain
disciplines. Our continued growth and success will depend, in part, on our
ability to retain management and key employees and, where appropriate, hire new
employees. We have never had a work stoppage. No employees are represented by a
labor organization. We consider our relations with employees to be good.


ITEM 2.  PROPERTIES

         Our principal corporate office and research and development facilities
are located in a 49,000 square foot facility in Phoenix, Arizona. The lease for
this facility began October 1992 and continues until September 2005, following a
five-year extension signed in 2000. Our monthly rental payments for this
facility average approximately $88,000 over the life of the extension. We
believe that this facility is adequate to meet our needs. We also lease sales
and support facilities in Illinois, Singapore, Germany, China and the United
Kingdom. Our facility in Germany also provides research and development
activities.

                                       15
<PAGE>   17
ITEM 3.  LEGAL PROCEEDINGS

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

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

         The Securities and Exchange Commission ("SEC") has conducted an
investigation relating primarily to our accounting matters. They requested and
received documents from us and have taken testimony from certain former
employees. During November 2000, the SEC requested and we agreed to
extend the statute of limitations for their investigation until April 30, 2001.
During March 2001, we submitted, without admitting or denying the SEC's
findings, an offer of settlement to the SEC providing that we would cease and
desist from committing or causing any future violation of SEC rules. There are
no fines or penalties offered as part of this settlement.


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

         Not applicable.

                                       16
<PAGE>   18
                                     PART II

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

         Our common stock has been traded on the Nasdaq Stock 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 the
Nasdaq National Market.

<TABLE>
<CAPTION>
                                                                                 High             Low
                                                                                 ----             ---
<S>                                                                        <C>                 <C>
         YEAR ENDED DECEMBER 31, 1999
             First quarter                                                     $  4.13          $  2.13
             Second quarter                                                       3.00             2.00
             Third quarter                                                        5.75             2.25
             Fourth quarter                                                      13.00             3.13

         YEAR ENDED DECEMBER 31, 2000
             First quarter                                                       19.75             7.25
             Second quarter                                                      14.75             5.67
             Third quarter                                                       12.50             4.03
             Fourth quarter                                                       4.94             2.38

         YEAR ENDED DECEMBER 31, 2001
             First quarter (through March 23, 2001)                               5.00             2.50

</TABLE>


         On March 23, 2001, the closing price of our common stock was $3.125 per
share and there were approximately 182 holders of record of our common stock.

         We have never paid any cash dividends on our common stock. We currently
plan to retain earnings to finance our growth rather than to pay cash dividends.

FACTORS THAT MAY AFFECT FUTURE STOCK PERFORMANCE

         The performance of our 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."

         OUR STOCK PRICE HAS HISTORICALLY BEEN VOLATILE AND MAY BE VOLATILE IN
THE FUTURE. The market price of our common stock has been volatile since our
initial public offering in 1992. We believe that numerous factors could cause
the price of our common stock to fluctuate substantially, including the
following:

          -    announcements of developments related to our business,

          -    announcements by competitors,

          -    quarterly fluctuations in our financial results,

          -    conditions in the network attached storage industry,

          -    conditions in the network test and measurement industry,

          -    changes in local and global economies,

          -    changes in analysts' estimates of our financial performance, and

          -    other events or factors.

                                       17
<PAGE>   19
       In addition, recently the overall stock market, and the market for
small capitalization technology stocks in particular, has experienced extreme
fluctuations, which have often been unrelated to the operational performance of
affected companies. Such fluctuations could have a material adverse effect on
the market price of our common stock.

         IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US. Our Certificate of
Incorporation and Bylaws empower our board of directors, without approval of our
shareholders, to issue shares of preferred stock, to fix the rights and
preferences, and divide our board of directors into three classes. In addition,
during March 2001, our board of directors adopted a stockholders rights plan to
guard against abusive tactics to gain control of the Company. 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
of our management, including transactions in which shareholders might otherwise
receive a premium for their shares over the current market prices.

                                       18
<PAGE>   20
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

         The following selected consolidated financial data should be read in
conjunction with the 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, 2000 and 1999, and the consolidated statements of operations for
each of the three years in the period ended December 31, 2000, and the
independent auditors' report thereon, are included in Item 8 of this Form 10-K.


<TABLE>
<CAPTION>

                                                                                 Years Ended December 31,
                                                                  -----------------------------------------------------
                                                                  2000        1999        1998         1997        1996
                                                                  ----        ----        ----         ----        ----
                                                                      (in thousands, except per share amounts)
<S>                                                            <C>         <C>         <C>          <C>         <C>
STATEMENT OF INCOME DATA:
Net revenue                                                     $ 44,639    $ 42,759    $ 41,650     $ 49,592    $ 50,442
Cost of revenue (1)                                               19,113      20,020      17,903       20,266      20,452
                                                                ---------------------------------------------------------
     Gross Profit                                                 25,526      22,739      23,747       29,326      29,990
Operating expenses (2)                                            26,015      27,172      26,237       29,254      40,636
                                                                ---------------------------------------------------------
Income (loss) from operations                                       (489)     (4,433)     (2,490)          72     (10,646)
Other income (expense), net                                        1,310         215         324          120         762
                                                                ---------------------------------------------------------
Income (loss) before income taxes                                    821      (4,218)     (2,166)         192      (9,884)
Income tax (provision) benefit                                       926        (103)      1,258          131      (1,711)
Cumulative effect of change in accounting principle (3)                -        (117)          -            -           -
                                                                ---------------------------------------------------------
     Net income (loss)                                           $ 1,747    $ (4,438)     $ (908)       $ 323    $(11,595)
                                                                =========================================================

BASIC EARNINGS PER SHARE:
Income (loss) before change in accounting principle               $ 0.21     $ (0.54)    $ (0.11)      $ 0.04     $ (1.43)
Cumulative effect of change in accounting principle                    -       (0.01)          -            -           -
                                                                ---------------------------------------------------------
                                                                  $ 0.21     $ (0.55)    $ (0.11)      $ 0.04     $ (1.43)
                                                                =========================================================
Weighted average common shares outstanding - basic                 8,470       8,078       8,099        8,249       8,104
                                                                =========================================================

DILUTED EARNINGS PER SHARE:
Income (loss) before change in accounting principle               $ 0.20     $ (0.54)    $ (0.11)      $ 0.04     $ (1.43)
Cumulative effect of change in accounting principle                    -       (0.01)          -            -           -
                                                                ---------------------------------------------------------
                                                                  $ 0.20     $ (0.55)    $ (0.11)      $ 0.04     $ (1.43)
                                                                =========================================================

Weighted average common equivalent shares outstanding -
diluted                                                            8,936       8,078       8,099        8,359       8,104
                                                                =========================================================
BALANCE SHEET DATA:
Working capital                                                 $ 25,374    $ 20,916    $ 22,028     $ 25,641    $ 26,583
Total assets                                                      36,107      34,056      39,350       42,805      43,313
Stockholders' equity                                              30,352      27,460      30,292       32,094      31,672

</TABLE>

(1)  Includes $803,000 charge to reflect write-down of inventories in connection
     with product discontinuance in the year ended December 31, 1999.

(2)  Includes $1,120,000 special charge related to product discontinuance and
     facility closure in the year ended December 31, 1999. Also, includes charge
     for write-off of purchased in-process research and development of
     $15,697,000 in the year ended December 31, 1996.

(3)  Consists of costs expensed in connection with adoption of AICPA Statement
     of Position 98-5, "Reporting on the Costs of Start-up Activities."

                                       19
<PAGE>   21
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


INTRODUCTION

         We are a leading producer of network test and measurement products and
network application servers. Our two product families, Network Test and
Measurement (NTM) and Network Appliance and Storage (NAS), include products for
computerized networks from local area networks (LANs) to intranets and the
Internet.

         Net income was $1.7 million, or $0.20 per diluted share, for the year
ended December 31, 2000. This compares to a net loss of $4.4 million, or $0.55
per diluted share, for the year ended December 31, 1999. During 2000, we
broadened our NTM product offerings into the residential segment with the
introduction of the MicroTools product line, which includes the MICROSCANNER Pro
IT and the MICROSCANNER Pro Residential network testers. We also expanded our
NAS product offerings with the introduction of our first hard-disk drive (HDD)
product, the FileZerver. We upgraded our DiscZerver products with the
introduction of the DiscZerver Cyclone products.

         The loss from operations was reduced by $3.9 million, to an operating
loss of $0.5 million in 2000, compared with an operating loss of $4.4 million
for 1999, after the effect of special charges in 1999. The NTM division provided
operating income of $3.1 million. The NAS division generated a $3.6 million
operating loss, reflecting our development and product launch efforts for the
FileZerver product.


RESULTS OF OPERATIONS

         The following table presents selected items from our consolidated
statements of operations expressed as percentages of net revenue, for the years
indicated.

<TABLE>
<CAPTION>

DECEMBER 31,                                         2000           1999          1998
---------------------------------------------------------------------------------------
<S>                                               <C>             <C>           <C>
 Net revenue                                          100%           100%          100%
---------------------------------------------------------------------------------------
 Gross margin                                          57             53            57
---------------------------------------------------------------------------------------
 Operating expenses:
   Sales and marketing                                 28             30            30
   Research and development                            18             17            19
   General and administrative                          12             14            13
   Special charge                                       -              4             -
---------------------------------------------------------------------------------------
 Income (loss) from operations                         (1)           (10)           (6)
---------------------------------------------------------------------------------------
 Net income (loss)                                      4%           (10%)          (2%)
---------------------------------------------------------------------------------------
</TABLE>

                                       20
<PAGE>   22
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 2000

         NET REVENUE. Net revenue increased $1.8 million, or 4.2%, from $42.8
million for the year ended December 31, 1999 to $44.6 million for the year ended
December 31, 2000. Revenue for the NTM division increased $4.7 million, or
16.0%, from $29.4 million in 1999 to $34.1 million in 2000. This increase was
primarily attributable to increased demand for our OMNIScanner, OMNIFiber and
MICROSCANNER products. Total revenue for the NAS division decreased $2.8
million, or 20.9%, from $13.4 million in 1999 to $10.6 million in 2000.
Increases in revenue from the new FileZerver and DiscZerver product line as well
as increased software revenue were offset by the effect of our 1999 closure of
the Nashua, New Hampshire facility and discontinuance of its NAS enterprise
product sales. Revenue associated with these NAS enterprise products was $3.6
million through June 1999, representing that portion of the year ended December
31, 1999 prior to closure of this facility. NAS revenue without the enterprise
products increased $0.8 million or 8.2%. Total revenue for the year ended
December 31, 2000, exclusive of the effect of NAS enterprise product sales in
1999, increased by 13.8% compared to the year ended December 31, 1999.

         International revenues increased $2.5 million, or 14.9%, from $16.8
million for the year ended December 31, 1999 to $19.3 million for the year ended
December 31, 2000, and from 39% of net revenue during 1999 to 43% of net revenue
during 2000. International sales increased during the year ended December 31,
2000 primarily due to increased sales of our OMNIScanner and our VirtualCD
software products worldwide and as a result of expanding our international sales
and marketing presence. Our international expansion included new offices in
Beijing and Shanghai, China during the year ended December 31, 2000.

         GROSS PROFIT. Gross profit increased $2.8 million, or 12.3%, from $22.7
million for the year ended December 31, 1999 to $25.5 million for the year ended
December 31, 2000. Our gross margin increased from 53.2% for the year ended
December 31, 1999 to 57.2% for the year ended December 31, 2000. This increase
in gross profit and margin was due in part to a change in product mix as we sold
more higher margin NTM products, OEM FileZerver software and our VirtualCD
software products. The favorable 2000 gross margin comparison is also partially
attributable to the $0.8 million write-down of product inventories, due to the
discontinuance of the NAS enterprise business, reflected in the 1999 gross
margin. The effect of the write-down of NAS enterprise product inventories was
to reduce the 1999 gross margin by approximately 1.9%.

         SALES AND MARKETING. Sales and marketing expenses decreased $0.3
million, or 2.3%, from $12.8 million for the year ended December 31, 1999 to
$12.5 million for the year ended December 31, 2000. This decrease was primarily
due to decreases in selling costs, partially offset by an increase in
advertising spending.

         RESEARCH AND DEVELOPMENT. Research and development expenses increased
$0.5 million, or 6.8%, from $7.4 million for the year ended December 31, 1999 to
$7.9 million for the year ended December 31, 2000. This increase was primarily
the result of additional development resources provided in connection with the
development and release of the FileZerver and DiscZerver Cyclone products.

         GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased $0.3 million, or 5.2%, from $5.8 million for the year ended December
31, 1999 to $5.5 million for the year ended December 31, 2000. The decrease was
primarily attributable to a reduction in professional fees and depreciation
expense.

                                       21
<PAGE>   23
         OTHER INCOME, NET. Other income, net, increased $1.1 million, from $0.2
million for the year ended December 31, 1999 to $1.3 million for the year ended
December 31, 2000. This increase was primarily the result of increased interest
income on increased cash balances and accrual of interest in connection with a
$3.6 million Federal income tax refund claim, received in January 2001.

         EFFECTIVE TAX RATE. The income tax benefit for the year ended December
31, 2000 was $0.9 million. The income tax provision using the statutory Federal
income tax rate would have been a provision of $0.3 million. The difference of
approximately $1.2 million consisted of the benefit recorded on the favorable
resolution of uncertainties associated with income tax refund claims of $0.6
million (federal and state effect), research and development credits earned of
$0.1 million, as well as a decrease in the previously established valuation
allowance of $0.5 million based on management's estimate of deferred tax assets,
that more likely than not, will be realized.

         NET INCOME (LOSS). Net income increased $6.1 million, from a net loss
of $4.4 million in the year ended December 31, 1999, to net income of $1.7
million in the year ended December 31, 2000. The increase in income was
primarily attributable to the decreased loss from operations from $4.4 million
in 1999 to $0.5 million in 2000 and increases in interest income and our income
tax benefit in 2000.


YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999

         NET REVENUE. Net revenue increased $1.1 million, or 2.6%, from $41.7
million for the year ended December 31, 1998 to $42.8 million for the year ended
December 31, 1999. This increase was primarily attributable to increased NTM and
NAS product demand for our OMNIScanner, OMNIFiber and DiscZerver products,
offset by the effect of our closure of the Nashua, New Hampshire facility and
discontinuance of its NAS enterprise product sales. Revenue associated with
these NAS enterprise products was $3.6 million through June 1999, representing
that portion of the year ended December 31, 1999 prior to closure of this
facility. Revenue associated with these NAS enterprise products was $6.0 million
for the year ended December 31, 1998. Total revenue for the year ended December
31, 1999, exclusive of the effect of these sales in both 1999 and 1998,
increased by 9.8% compared to the year ended December 31, 1998.

         International revenues increased $3.4 million, or 25.4%, from $13.4
million for the year ended December 31, 1998 to $16.8 million for the year ended
December 31, 1999, and from 32.1% of net revenue during 1998 to 39.3% of net
revenue during 1999. International sales increased during the year ended
December 31, 1999 primarily due to increased sales of our OMNIScanner and
DiscZerver products worldwide and as a result of expanding our sales and
marketing presence in Europe, Latin America and the Asia Pacific region.

         GROSS PROFIT. Gross profit decreased $1.0 million, or 4.2%, from $23.7
million for the year ended December 31, 1998 to $22.7 million for the year ended
December 31, 1999. Our gross margin decreased from 57.1% for the year ended
December 31, 1998 to 53.2% for the year ended December 31, 1999. This decrease
in gross profit and margin was partially attributable to the write-down of
product inventories of $0.8 million due to the discontinuance of the NAS
enterprise business. The effect of the write-down of NAS enterprise product
inventories was to reduce gross margin by approximately 1.9%. Additionally, we
experienced a decrease in higher margin DiscPort software and NAS enterprise
product revenue and increases in the amortization of capitalized software,
volume rebates and changes in product mix.

         SALES AND MARKETING. Sales and marketing expenses increased $0.1
million, or 0.8%, from $12.7 million for the year ended December 31, 1998 to
$12.8 million for the year ended December 31, 1999. This increase was primarily
due to increases in trade show expenses, other expenses relating to demo and
evaluation units and sales commission expenses.

                                       22
<PAGE>   24
         RESEARCH AND DEVELOPMENT. Research and development expenses decreased
$0.5 million, or 6.3%, from $7.9 million for the year ended December 31, 1998 to
$7.4 million for the year ended December 31, 1999. This decrease was primarily
caused by lower salary expense incurred after the discontinuance of NAS
enterprise product development activities as a result of our exiting the NAS
enterprise product line. This decrease was offset by a reduction in the amount
of software development costs that were capitalized in 1999. Beginning July
1999, we changed our development process, and believe that new product
development is essentially completed concurrently with the establishment of
technological feasibility. Software costs are currently expensed as incurred.
Software development costs of approximately $0.2 million were capitalized
through the first two fiscal quarters of the year ended December 31, 1999
compared with capitalized software development costs of approximately $1.0
million for the year ended December 31, 1998.

         GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $0.2 million, or 3.6%, from $5.6 million for the year ended December
31, 1998 to $5.8 million for the year ended December 31, 1999. The increase was
primarily attributable to additional professional fees, offset by a decrease in
salaries and wages associated with a reduction in certain staff positions.

         SPECIAL CHARGE. We reflected a $1.9 million total pre-tax charge to
earnings in the year ended December 31, 1999 relating to our exit from the NAS
enterprise systems business and related closure of our Nashua, New Hampshire
facility. Approximately $0.8 million of the charge related to write-down of
discontinued product inventories and was reflected as an increase in cost of
revenue in accordance with EITF 96-9, "Classification of Inventory Markdowns and
Other Costs Associated with a Restructuring." Approximately $1.1 million of the
total charge, primarily consisting of employee severance and benefits, future
lease payments, write-off of certain fixed assets and capitalized software and
additional allowance for evaluation units has been reflected as operating
expense. The total charge has been recorded net of proceeds of approximately
$0.2 million received from the sale our NAS enterprise product maintenance
contracts and related customer database.

         CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. In accordance
with AICPA Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities," we wrote-off previously capitalized international product
translation costs.

         OTHER INCOME, NET. Other income, net, decreased $0.1 million, or 33.3%,
from $0.3 million for the year ended December 31, 1998 to $0.2 million for the
year ended December 31, 1999, primarily the result of decreased interest income.

         EFFECTIVE TAX RATE. Income taxes for the year ended December 31, 1999
consisted of foreign income taxes. The effective income tax rate varies from the
statutory tax rate primarily because of research and development credits earned
as well as an increase in the valuation allowance.

         NET INCOME (LOSS). Net loss increased $3.5 million, from net loss of
$0.9 million in the year ended December 31, 1998, to a net loss of $4.4 million
in the year ended December 31, 1999. The increased loss was primarily
attributable to the $1.9 million special charge relating to our exit from the
NAS enterprise systems business and related closure of our Nashua, New Hampshire
facility, the decrease in the income tax benefit of $1.4 million and the $0.1
million write-off of previously capitalized international product translation
costs.

                                       23
<PAGE>   25
LIQUIDITY AND CAPITAL RESOURCES

         Historically, we have financed our cash requirements principally
through cash flow from operating activities, the sale of common stock through an
initial public offering in October 1992 and the exercise of stock options.

         At December 31, 2000, we held cash and cash equivalents of $14.5
million, compared to cash and cash equivalents of $10.4 million at December 31,
1999. During the year ended December 31, 2000, cash flows provided by operations
were $3.7 million, resulting primarily from net income of $1.7 million, non-cash
depreciation and amortization expense of $2.0 million, reduction in inventories
of $0.9 million, decreases in prepaid expenses and other assets of $0.8 million,
and increases in accrued payroll and benefits of $0.5 million, offset by an
increase in accounts and tax receivables of $0.9 million, an increase in
deferred income taxes of $0.3 million and a decrease in accounts payable and
accrued liabilities of $1.0 million. Cash flows provided by operations were $0.1
million for the year ended December 31, 1999.

         Cash flows used in investing activities were $0.8 million for the year
ended December 31, 2000, primarily related to the acquisition of computer
hardware and software, furniture and fixtures and other equipment. Our capital
expenditure budget for 2001 is approximately $1.6 million, which primarily
includes expected purchases of computer software and hardware and other
equipment.

         Cash flows provided by financing activities was $1.1 million for the
year ended December 31, 2000, due to the exercise of common stock options and
issuance of common stock in connection with our employee stock purchase plan.

         During January 2001, we received $3.6 million from the Internal Revenue
Service, representing the refund of taxes previously paid, together with
interest thereon.

         We expect that our existing working capital, together with cash flows
from operations will be sufficient to meet our operating and capital needs for
existing operations for the twelve months subsequent to December 31, 2000. We
intend to finance our future growth through the use of cash flow from
operations, potential credit facilities received from lenders and the issuance
of common stock. We may seek to raise additional capital through public or
private equity, or debt financing. The availability of capital sources will
depend upon prevailing market and economic conditions, interest rates, our
financial condition and the market price of our common stock.


INFLATION

         Inflation has not been a significant factor in our operations to date.


FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

         Our future operating results and financial condition are dependent on
our 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 we must successfully manage in
order to achieve favorable future operating results and financial condition.
Potential risks and uncertainties that could affect our future operating results
and financial condition include, without limitation, the factors discussed
below.

                                       24
<PAGE>   26
         WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY IN OUR NETWORK APPLIANCE
AND STORAGE DIVISION. In 2000, we suffered a $3.6 million operating loss within
our NAS division reflecting primarily increased research and development and
product launch costs. There can be no assurance that the market for storage
devices will grow at the rate the Company expects, or that FileZerver will
capture sufficient market share and achieve sufficient customer acceptance for
the division to achieve profitability.

         WE MAY HAVE FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Our revenues
may vary significantly from quarter to quarter due to a variety of factors,
including changes in our product and customer mix, the introduction of new
products by us or our competitors, and other factors, including pricing
pressures and economic conditions in the United States, Europe, Latin America
and Asia Pacific. We operate with relatively little backlog and substantially
all of our revenue in each quarter results from orders received in that quarter.
In addition, we incur significant operating start-up expenses in anticipation of
future revenue. If near-term demand for our products weakens or if orders are
not shipped in any quarter as anticipated, our results of operations for that
quarter could be adversely affected. Unanticipated product returns may exceed
our allowances for future returns. Our operating results will also be affected
by the economic condition of the computer and electronics industries, which have
from time to time experienced cyclical, depressed business conditions, often in
connection with or in anticipation of general economic decline. Due to all of
the foregoing factors, our revenues or operating results may be, in one or more
future quarters, below the expectations of stock market analysts and investors.
In such event, the price of our common stock would likely decline, and such
decline could be substantial.

         WE DEPEND UPON THIRD-PARTY DISTRIBUTORS. We derive substantially all of
our product sales through distributors and VARs. One of our distributors
accounted for 11% of our revenue in 2000 and 12% of our revenue in 1999. The
loss of certain distributors, resellers or systems integrators would have a
material adverse effect on our business and operating results. Our contractual
relationships with distributors, resellers and systems integrators are generally
cancelable upon reasonable notice to us. Certain of our distributors, resellers
and systems integrators also act as distributors for our competitors and could
devote greater effort and resources to marketing competitive products. In
addition, effective distributors, resellers and system integrators must devote
significant technical, marketing and sales resources to an often lengthy sales
cycle. There can be no assurance that our current distributors, resellers and
system integrators will continue to market our products effectively or that
economic or industry conditions will not adversely affect such distributors. Our
operating results could also be materially adversely affected by changes in
distributors' inventory strategies, which could occur rapidly, has occurred in
the past and, in many cases, may not be related to end user demand. Such changes
in distributor inventory practices could adversely affect our revenue and
operating results. New products may require different marketing, sales and
distribution strategies than those for our current products. There can be no
assurance that our current distributors will choose or be able to effectively
market these new products or to continue to market our existing products. A
failure of our distributors, resellers and system integrators to successfully
market our products would have a material adverse effect on our business and
results of operations.

         WE DEPEND UPON THIRD-PARTY SUPPLIERS. We are dependent upon a small
number of third-party vendors for the manufacturing of our products. We are also
dependent on a small number of suppliers for certain key components used in our
products, including storage drives, microprocessors, integrated circuits and
power modules. We purchase these components pursuant to purchase orders placed
from time to time, do not carry significant inventories of these components and
have no long-term supply arrangements. The loss of any of our third-party
manufacturers or key suppliers could have a material adverse effect upon our
business, financial condition and operating results. Although we believe that
alternative sources of product manufacturing and components could be arranged,
the process of qualifying new suppliers could be lengthy. We may be unable to
locate additional sources that would be available on a timely basis or at a cost
acceptable to us. Any disruption or reduction in the future supply of any key

                                       25
<PAGE>   27
components currently obtained from limited sources could have a material adverse
effect on our business, financial condition and operating results.

         OUR PRODUCTS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGES. The market for
our products is characterized by:

          -    rapid technological advances and changes,

          -    evolving industry standards in computer hardware and software
               technology,

          -    changes in customer requirements, and

          -    ongoing and frequent new product introductions and enhancements.

         Our future sales success will depend upon our ability to continue to
enhance our current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and technological
developments, satisfy diverse and evolving customer requirements or otherwise
achieve market acceptance. We may be unable to successfully develop and market,
in a timely and cost effective manner, new products or product enhancements that
achieve market acceptance. Companies in our industry have, in the past,
experienced delays in the development, introduction and marketing of new and
enhanced products. We may experience similar delays in the future. Our failure
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 upon our business, financial condition and
results of operations.

         UNEXPECTED PRODUCT DEFECTS COULD AFFECT SALES OR COLLECTION OF
RECEIVABLES. Due to their complexity and sophistication, our products, from time
to time, may contain defects or "bugs" which can be difficult to correct. As we
continue to develop and enhance our products, we may be unable to identify and
correct defects in such a manner that will permit the timely introduction of
such products. Despite extensive testing, we have, from time to time, discovered
defects only after products have been commercially released. Product defects
may:

          -    cause delays in product introductions and shipments,

          -    cause loss of or delays in market acceptance,

          -    result in increased costs,

          -    cause a product recall,

          -    require design modifications,

          -    impair customer satisfaction, and

          -    result in sales or collection delays.

         Any such event could have a material adverse effect on our business,
financial condition and results of operations.

          WE MAY NEED TO WRITE-OFF INVENTORY THAT BECOMES OBSOLETE. Over the
past three years, storage drive technology has advanced significantly. The pace
of new drive introductions has also increased. We generally provide either a
circuit board containing our NAS technology or our NAS operating system software
for sale. We may, however, from time to time, hold limited quantities of storage
drive inventory. Accordingly, we may find ourselves with an inventory of
obsolete drives. Also, we and our competitors continually introduce new
products. New products, and even announcements of new products, by us or our
competitors, may adversely affect sales of our existing products and result in
obsolete inventories. Moreover, our contracts with distributors sometimes
provide for product returns or price protection credits, based on inventory
levels of current and obsolete products under certain limited circumstances. We
estimate and accrue an allowance for such occurrences; nevertheless, actual
inventory writedowns, product returns or price protection credits may exceed our
estimates. Any of the foregoing events could have a material adverse effect on
our business, financial condition and results of operations.

                                       26
<PAGE>   28
         OUR INDUSTRY IS HIGHLY COMPETITIVE. The markets for our products are
extremely competitive. We expect that competition will increase as more
companies enter our markets and as existing competitors continue to change and
expand their product offerings. Pricing is very aggressive in our industry and
we expect pricing pressure to continue to intensify.

         Our current competitors in the network test and measurement market
include:

          -    Acterna Corporation,

          -    Datacom - Textron,

          -    Fluke Networks (a division of Danaher Corporation), and

          -    Scope Communications (a division of Agilent, Inc.).

         Our current competitors in the network storage market include:

          -    Axis Corporation,

          -    Hewlett-Packard Co.,

          -    Maxtor Corporation,

          -    Network Storage Solutions,

          -    Quantum Corporation, and

          -    Western Digital Corporation.

         Our competitors include large domestic and international companies,
many of whom have significantly greater financial, technical, manufacturing,
marketing, sales and distribution resources than we do. Our current or potential
competitors may develop products comparable or superior to those that we have
developed or adapt more quickly to new or emerging technologies, evolving
industry trends, or changing customer requirements.

          WE FACE RISKS ASSOCIATED WITH PRODUCT CONCENTRATION. We currently
derive substantially all of our revenues from our OMNIScanner and Zerver product
lines. The market for these products is characterized by many issues, including:

          -    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 our OMNIScanner or Zerver products would have
a material adverse effect on our business, financial condition and operating
results. The market for NAS products may not continue to grow. Long-term trends
in storage technology remain unclear and some analysts have questioned whether
competing technologies may emerge as an alternative storage solution. If the NAS
market grows more slowly than anticipated, or if NAS products based on emerging
standards other than those which have been adopted become increasingly accepted
by the market, we may not be able to make our NAS division profitable and our
overall operating results could be adversely affected.

         WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. Our
international operations expose us to risks that we would not otherwise have if
we only operated in the United States. Sales outside of North America accounted
for 43%, 39% and 32% of total revenue in 2000, 1999 and 1998, respectively. An
important element of our strategy is to expand international operations. We may
be unable to successfully localize, market, sell and deliver products
internationally. Our inability to successfully expand international operations
in a timely and/or cost effective manner could have a material adverse effect on
our business, financial condition and results of operations. We seek to mitigate
our direct exposure to exchange rate fluctuation by selling primarily in U.S.
currency. However, our business and

                                       27
<PAGE>   29
results of operations could be materially adversely affected by our inability to
manage risks inherent in conducting business internationally, including:

          -    fluctuations in currency exchange rates, creating the risk of
               loss, or potentially making U.S. Dollar denominated pricing less
               competitive and less attractive to customers,

          -    restrictions on the repatriation of funds,

          -    overlap of tax structures and imposition of new taxes,

          -    inflationary conditions,

          -    differing labor regulations,

          -    political and economic instability, including economic
               recessions,

          -    difficulties in staffing and managing international operations,

          -    problems in the timely, or ultimate collection of accounts
               receivable,

          -    seasonal reductions in business activity during the summer months
               in Europe and certain other parts of the world, and

          -    tariffs, duties, import licensing requirements and other trade
               barriers or protections.


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

         We, together with several former officers, were named as defendants in
two purported class action lawsuits filed in United States District Court for
the District of Arizona. These complaints contained substantially the same
allegations and were brought on behalf of purchasers of our stock between April
14, 1998 and March 2, 1999. The complaints alleged claims under Section 10(b) of
the Securities Exchange Act of 1934 and SEC Rule 10b-5 of the Securities and
Exchange Act of 1934. The claims were dismissed with prejudice during March
2001.

         WE DEPEND ON OUR MANAGEMENT AND OTHER KEY PERSONNEL. Due to the
specialized nature of our business, our future success is highly dependent upon
the continued services of key engineering personnel and executive officers and
upon our ability to attract and retain qualified engineering, sales and
marketing, management and manufacturing personnel. Competition for such
personnel is intense. We may be unsuccessful in attracting or retaining
qualified personnel. The loss of any key personnel or our inability to attract
and retain qualified employees could have a material adverse effect on our
business, financial condition and results of operations.

         WE HAVE RISKS ASSOCIATED WITH MANAGING AND FUNDING GROWTH. To manage
our growth, we must continue to implement and improve our operations, financial
and management information systems and expand, train and manage our workforce.
We believe that our success requires substantial capital in order to maintain
the flexibility to take advantage of opportunities as they may arise. We may,
from time to time, as market and business conditions warrant, invest in or
acquire complementary businesses, products, or technologies. Internally
generated cash, marketable securities, debt or the issuance of additional stock
may be used to fund acquisitions or investments. The sale of additional equity
could result in dilution of the equity ownership of our shareholders. Our
failure to effectively manage growth could have a material adverse effect on our
business, financial conditional and results of operations.

         WE DEPEND ON PROPRIETARY RIGHTS TO PROTECT OUR TECHNOLOGY. Our success
depends in part upon protecting our proprietary technology. We rely upon a
combination of intellectual property laws, nondisclosure agreements and other
protective measures to protect our proprietary information. These steps may not
be adequate to deter misappropriation or independent third-party development of
our

                                       28
<PAGE>   30
technology; if challenged, we may be unable to successfully defend our
intellectual property rights. In addition, the laws of certain foreign countries
do not protect certain intellectual property rights to the same extent as the
laws of the United States. Given the rapid development of technology, certain
aspects of our products may infringe upon the existing or future proprietary
rights of others. While we are not currently aware of such infringement, under
those circumstances, we may be unable to acquire necessary licenses or rights to
avoid infringing upon the existing or future proprietary rights of others.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

         Our revenue and capital spending is primarily transacted in U.S.
dollars. However, we do at times enter into transactions in other currencies. No
hedging transactions were entered into during the fiscal year ended December 31,
2000. We will establish revenue and balance sheet hedging programs to protect
against reductions in value and cash flow volatility caused by changes in
foreign exchange rates if transactions in foreign currencies become more
significant. Such programs are intended to reduce market risks, but do not
always eliminate the impact of foreign currency exchange volatility.

         We do not purchase or hold any such derivative financial instruments
for the purpose of speculation or arbitrage. See information/discussion
appearing in subcaption "We face risks associated with international operations"
of "Factors That May Affect Future Results and Financial Condition" set forth
above.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Consolidated balance sheets, as of December 31, 2000 and 1999, and
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000, 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.

                                       29
<PAGE>   31
                          INDEPENDENT AUDITORS' REPORT



Board of Directors and Stockholders of
Microtest, Inc.
Phoenix, Arizona

We have audited the accompanying consolidated balance sheets of Microtest, Inc.
and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United Sates of America.

As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for start-up costs in 1999.





DELOITTE & TOUCHE LLP




Phoenix, Arizona
January 24, 2001, except for footnote 6,
  as to which the date is March 20, 2001

                                       30
<PAGE>   32
                        MICROTEST, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 2000 AND 1999
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                        2000                1999
                                                                                        ----                ----
<S>                                                                                 <C>                  <C>

                                     ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                                           $ 14,479            $ 10,431
  Restricted investments                                                                     -                 293
  Accounts receivable, net of allowances for doubtful accounts of $518
    and $171, and sales returns of $387 and $422, respectively                           7,977               7,828
  Inventories, net                                                                       3,372               4,289
  Prepaid expenses and other current assets                                                963                 864
  Income taxes receivable                                                                3,533               2,777
  Deferred income taxes                                                                    805               1,030
                                                                                        ------              ------
          Total current assets                                                          31,129              27,512
                                                                                        ------              ------

PROPERTY AND EQUIPMENT, NET                                                              1,764               2,238
                                                                                        ------              ------

OTHER ASSETS:
  Capitalized software, net of accumulated amortization of $2,224
    and $1,510, respectively                                                               546               1,260
  Deferred income taxes                                                                  2,289               1,783
  Other                                                                                    379               1,263
                                                                                        ------              ------
          Total other assets                                                             3,214               4,306
                                                                                        ------              ------
                                                                                      $ 36,107            $ 34,056
                                                                                      ========            ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable                                                                     $ 2,366             $ 2,939
  Accrued liabilities                                                                    1,771               2,204
  Accrued payroll and benefits                                                           1,618               1,160
  Accrued deferred compensation                                                              -                 293
                                                                                       -------             -------
          Total current liabilities                                                      5,755               6,596
                                                                                       -------             -------

COMMITMENTS AND CONTINGENCIES (Notes 4, 6, and 7)

STOCKHOLDERS' EQUITY:
  Preferred stock, $.001 par value, 5,000,000 shares
    authorized; no shares issued and outstanding                                             -                   -
  Common stock, $.001 par value, 15,000,000 shares
    authorized; 8,801,799 shares and 8,555,137 shares issued
    respectively                                                                             9                   9
  Additional paid-in capital                                                            35,666              34,521
  Accumulated deficit                                                                   (4,105)             (5,852)
                                                                                       -------             -------
                                                                                        31,570              28,678
  Less: treasury stock, at cost, 233,213 shares                                         (1,218)             (1,218)
                                                                                       -------             -------
          Total stockholders' equity                                                    30,352              27,460
                                                                                       -------             ------
                                                                                      $ 36,107            $ 34,056
                                                                                      ========            ========

</TABLE>
       The accompanying notes are an integral part of these consolidated
                                balance sheets.

                                       31
<PAGE>   33
                        MICROTEST, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>

                                                                                 2000        1999        1998
                                                                                 ----        ----        ----
<S>                                                                             <C>         <C>         <C>

NET REVENUE                                                                     $ 44,639    $ 42,759    $ 41,650
COST OF REVENUE                                                                   19,113      20,020      17,903
                                                                                 -------     -------     -------
          Gross profit                                                            25,526      22,739      23,747
                                                                                 -------     -------     -------

OPERATING EXPENSES
  Sales and marketing                                                             12,548      12,791      12,720
  Research and development                                                         7,934       7,432       7,912
  General and administrative                                                       5,533       5,829       5,605
  Special charge                                                                       -       1,120           -
                                                                                  ------      ------      ------
          Total operating expenses                                                26,015      27,172      26,237
                                                                                  ------     -------      ------

LOSS FROM OPERATIONS                                                                (489)     (4,433)     (2,490)

OTHER INCOME, NET                                                                  1,310         215         324
                                                                                 -------     -------     -------

INCOME (LOSS) BEFORE INCOME TAXES                                                    821      (4,218)     (2,166)

INCOME TAX BENEFIT (PROVISION)                                                       926        (103)      1,258
                                                                                 -------     -------     -------

INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
  CHANGE IN ACCOUNTING PRINCIPLE                                                   1,747      (4,321)       (908)

CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE, NET OF TAX                                                     -        (117)          -
                                                                                 -------     -------     -------

NET INCOME (LOSS)                                                                $ 1,747    $ (4,438)     $ (908)
                                                                                 =======    ========     =======

BASIC EARNINGS (LOSS) PER SHARE:
  Income (loss) before change in accounting principle                             $ 0.21     $ (0.54)    $ (0.11)
  Cumulative effect of change in accounting principle                                  -       (0.01)          -
                                                                                 -------     -------     -------

          Net income (loss)                                                       $ 0.21     $ (0.55)    $ (0.11)
                                                                                 =======    ========    ========

Weighted average common shares outstanding - basic                                 8,470       8,078       8,099
                                                                                 =======    ========    ========

DILUTED EARNINGS (LOSS) PER SHARE:
  Income (loss) before change in accounting principle                             $ 0.20     $ (0.54)    $ (0.11)
  Cumulative effect of change in accounting principle                                  -       (0.01)          -
                                                                                 -------     -------     -------
          Net income (loss)                                                       $ 0.20     $ (0.55)    $ (0.11)
                                                                                 =======    ========    ========

Weighted average common equivalent
shares outstanding - diluted                                                       8,936       8,078       8,099
                                                                                 =======    ========     =======

</TABLE>


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

                                       32
<PAGE>   34
                        MICROTEST, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                  YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
                                 (in thousands)

<TABLE>
<CAPTION>


                                                       Preferred               Common                Treasury
                                                         Stock                 Stock                   Stock
                                                 ------------------      -----------------      --------------------
                                                 Shares      Amount      Shares     Amount      Shares        Amount
                                                 ------      ------      ------     ------      ------        ------
<S>                                           <C>           <C>        <C>         <C>         <C>          <C>

 BALANCE, December 31, 1997                           -         $ -      8,193         $ 8          34         $ (438)
   Net loss                                           -           -          -           -           -              -
   Issuance of common stock upon
     exercise of stock options                        -           -         15           -           -              -
   Issuance of common stock under
     employee stock purchase plan                     -           -         46           -         (34)           438
   Purchase of treasury stock                         -           -          -           -         233         (1,218)
                                                -------     -------      -----        ----        -----       -------
 BALANCE, December 31, 1998                           -           -      8,254           8         233         (1,218)
   Net loss                                           -           -          -           -           -              -
   Issuance of common stock upon
     exercise of stock options                        -           -        218           1           -              -
   Issuance of common stock under
     employee stock purchase plan                     -           -         83           -           -              -
                                                -------     -------      -----        ----        -----       -------
 BALANCE, December 31, 1999                           -           -      8,555           9         233         (1,218)
   Net income                                         -           -          -           -           -              -
   Issuance of common stock upon
     exercise of stock options                        -           -        195           -           -              -
   Issuance of common stock under                                                                       -
     employee stock purchase plan                     -           -         52           -           -              -
                                                -------     -------      -----        ----        -----       -------
 BALANCE, December 31, 2000                           -         $ -      8,802         $ 9         233       $ (1,218)
                                                =======     =======      =====        ====        =====       =======
<CAPTION>

                                                 Additional                                Total
                                                  Paid-in          Accumulated         Stockholders'
                                                  Capital            Deficit              Equity
                                                ----------         -----------         -------------
<S>                                           <C>                 <C>                 <C>

BALANCE, December 31, 1997                        $32,710            $  (186)            $ 32,094
  Net loss                                             --               (908)                (908)
  Issuance of common stock upon
    exercise of stock options                          29                 --                   29
  Issuance of common stock under
    employee stock purchase plan                      177               (320)                 295
  Purchase of treasury stock                           --                 --               (1,218)
                                                  -------            -------             --------
BALANCE, December 31, 1998                         32,916             (1,414)              30,292
  Net loss                                             --             (4,438)              (4,438)
  Issuance of common stock upon
    exercise of stock options                       1,425                 --                1,426
  Issuance of common stock under
    employee stock purchase plan                      180                 --                  180
                                                  -------            -------             --------
BALANCE, December 31, 1999                         34,521             (5,852)              27,460
  Net income                                           --              1,747                1,747
  Issuance of common stock upon
    exercise of stock options                         951                 --                  951
  Issuance of common stock under
    employee stock purchase plan                      194                 --                  194
                                                  -------            -------             --------
BALANCE, December 31, 2000                        $35,666            $(4,105)            $ 30,352
                                                  =======            =======             ========

</TABLE>

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

                                       33
<PAGE>   35
                        MICROTEST, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                       2000               1999               1998
                                                                     --------           --------           --------
<S>                                                                <C>                <C>                <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                 $  1,747           $ (4,438)          $   (908)
     Adjustments to reconcile net income (loss) to net cash
       provided by operating activities-
   Depreciation and amortization                                        1,962              2,417              1,599
   Change in accounts receivable allowances                               312             (1,436)                64
   (Increase) decrease in deferred income taxes                          (281)               262               (726)
   (Increase) decrease in accounts receivable                            (461)             1,779              3,848
   (Increase) decrease in inventories                                     917              2,283               (648)
   Decrease in prepaid expenses and other assets                          785                771                 68
   (Increase) decrease in income taxes receivable                        (756)               120               (639)
   Decrease in accounts payable and accrued liabilities                (1,006)            (1,931)            (1,755)
   Increase (decrease) in accrued payroll and benefits                    458                300               (157)
                                                                     --------           --------           --------

   Net cash provided by operating activities                            3,677                127                746
                                                                     --------           --------           --------

 CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                                  (774)              (750)              (733)
   Capitalized software                                                    --               (170)            (1,048)
                                                                     --------           --------           --------

   Net cash used in investing activities                                 (774)              (920)            (1,781)
                                                                     --------           --------           --------

 CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from sale of common stock                                   1,145              1,606                324
   Purchase of treasury stock                                              --                 --             (1,218)
                                                                     --------           --------           --------

   Net cash provided by (used in) financing activities                  1,145              1,606               (894)
                                                                     --------           --------           --------

 NET INCREASE (DECREASE) IN CASH AND
 CASH EQUIVALENTS                                                       4,048                813             (1,929)

 CASH AND CASH EQUIVALENTS, beginning of year                          10,431              9,618             11,547
                                                                     --------           --------           --------

 CASH AND CASH EQUIVALENTS, end of year                              $ 14,479           $ 10,431           $  9,618
                                                                     ========           ========           ========


 SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION:

   Cash paid for income taxes                                        $     28           $    139           $     65
                                                                     ========           ========           ========

   Cash paid for interest                                            $     24           $     37           $      9
                                                                     ========           ========           ========

</TABLE>


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

                                       34
<PAGE>   36
                        MICROTEST, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(1)      SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

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

CASH EQUIVALENTS AND RESTRICTED INVESTMENTS

         Short-term investments with maturities at the date of purchase of three
months or less are considered to be cash equivalents. Restricted investments
were equity securities and other investments that were restricted for the
payment of deferred compensation to former officers of the Company.

INVENTORIES

         Inventories are stated at the lower of cost, on a first-in, first-out
basis, or market.

PROPERTY AND EQUIPMENT

         Property and equipment is stated at cost, net of accumulated
depreciation, and is depreciated over the estimated useful lives of the assets
ranging from three to seven years using the straight-line method. Leasehold
improvements are amortized over the lesser of the related lease term or the
estimated useful life of the improvements using the straight-line method
generally ranging from three to five years. Maintenance and repairs that do not
improve or significantly extend the life of assets are expensed as incurred.

CAPITALIZED SOFTWARE DEVELOPMENT COSTS

         Prior to July 1999, software development costs of new products (costs
incurred after development of a working model or a detailed program design and
when technological feasibility has been established) were capitalized and
amortized over the expected number of units to be sold, or three years,
whichever resulted in greater amortization. Beginning July 1999, the Company
changed its development process, and believes that new product development is
essentially completed concurrently with the establishment of technological
feasibility. Accordingly, software development costs are currently expensed as
incurred.

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

         The Company periodically evaluates the carrying value of long-lived
assets and certain identifiable intangibles for impairment 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."
Under SFAS No. 121, long-lived assets and certain identifiable intangible assets
to be held and used in operations are reviewed for impairment whenever events or
circumstances indicate that the carrying amount of the asset may not be fully
recoverable. An impairment loss is recognized if the sum of the expected
long-term undiscounted cash flows is less than the carrying amount of the
long-lived asset being evaluated.

                                       35
<PAGE>   37
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 at the time of sale.

         Sales to Graybar Electric Company, Inc., accounted for 11% and 12% of
net revenue for the years ended December 31, 2000 and 1999, respectively. Sales
to Ingram Micro, Inc. and to Tech Data Corporation accounted for 11% and 10% of
net revenue for the year ended December 31, 1998, respectively.

RESEARCH AND DEVELOPMENT

         Expenses that 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 revenue. Development costs of new software products and the cost of
enhancements to existing software products are expensed as incurred.

EARNINGS PER SHARE

         Basic earnings per share ("EPS") is computed on the weighted average
number of shares of common stock outstanding during each period. Diluted EPS is
computed on the weighted average number of shares of common stock outstanding
plus the effect of stock options, if dilutive, calculated using the treasury
stock method.

         Basic and diluted EPS were the same for the years ended December 31,
1999 and 1998 as the stock options were considered anti-dilutive for these
periods. For the year ended December 31, 2000, the dilutive effect of stock
options resulted in approximately 466,000 additional weighted average common
equivalent shares outstanding.

USE OF ESTIMATES

         In the preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America,
management has made 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. Estimates also affect the reported amounts
of revenue and expenses during the reporting period. Actual results could differ
from those estimates. Because the Company sells a significant portion of its
products through distributors and value added resellers, 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. Significant estimates
included in the Company's financial statements include the allowance for
doubtful accounts, allowance for sales returns, allowance for inventory
valuation and deferred tax valuation allowance.

                                       36
<PAGE>   38
FAIR VALUE OF FINANCIAL INSTRUMENTS

         The Company has estimated the fair value of financial instruments using
available market information and valuation methodologies. Considerable judgment
is required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates may not be indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions or valuation methodologies could have a material effect on the
estimated fair value assumptions. The carrying amount of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximates fair value due to the short-term nature of these instruments.

PRODUCT CONCENTRATION

         The markets for the Company's products are characterized by rapidly
changing technology, short product life cycles and evolving industry standards.
The Company has derived substantially all of its revenue from the development
and sales of a limited number of network fiber and copper cable test and
management devices and network attached storage servers and appliances.

CHANGE IN ACCOUNTING PRINCIPLE

         In accordance with AICPA Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities," the Company expensed $117,000, after the effect
of income tax, of previously capitalized international product translation costs
during the year ended December 31, 1999.

COMPREHENSIVE INCOME

         Effective in 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
displaying comprehensive income, and its components in a full set of
general-purpose financial statements. The adoption of this pronouncement has not
had a significant effect on the Company's financial statements as direct
exposure to exchange rate fluctuations is mitigated by selling primarily in U.S.
dollars.

NEW ACCOUNTING PRONOUNCEMENTS

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

         In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements", which
provides guidance in applying accounting principles generally accepted in the
United States of America to revenue recognition in financial statements.
Application of this pronouncement did not have a material impact on our
operating results or financial condition.

                                       37
<PAGE>   39
(2)      INVENTORIES:

         Inventories consisted of the following at December 31:

<TABLE>
<CAPTION>


                                                                                              2000              1999
                                                                                            -------           -------
                                                                                                  (in thousands)
<S>                                                                                       <C>               <C>

         Raw materials                                                                      $ 1,286           $ 1,154
         Work-in-progress                                                                        18                99
         Finished goods                                                                       2,215             3,738
                                                                                            -------           -------
                                                                                              3,519             4,991
         Less:  Allowance for excess and obsolete inventory                                    (147)             (702)
                                                                                            -------           -------

                                                                                            $ 3,372           $ 4,289
                                                                                            =======           =======
</TABLE>



(3)      PROPERTY AND EQUIPMENT:

         Property and equipment consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                                                              2000               1999
                                                                                           --------           --------
                                                                                                  (in thousands)
<S>                                                                                      <C>                 <C>

         Equipment                                                                        $  9,634           $  9,136
         Furniture and fixtures                                                              1,198              1,128
         Leasehold improvements                                                                736                665
                                                                                          --------           --------
                                                                                            11,568             10,929
         Less:  Accumulated depreciation                                                    (9,804)            (8,691)
                                                                                          --------           --------
                                                                                          $  1,764           $  2,238
                                                                                           ========          ========
</TABLE>


(4)      LEASES:

         The Company leases various facilities and equipment under
non-cancelable operating lease agreements. Rental expense charged to operations
under operating leases totaled approximately $1,369,000, $1,625,000 and
$1,262,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Future minimum lease obligations under non-cancelable operating leases for each
of the years ended December 31 are as follows:

<TABLE>
<CAPTION>
                                                                                       (in thousands)
<S>                                                                                    <C>

          2001                                                                             $ 1,270
          2002                                                                               1,434
          2003                                                                               1,369
          2004                                                                               1,291
          2005                                                                                 951
                                                                                           -------
                                                                                           $ 6,315
                                                                                           =======
</TABLE>


                                       38
<PAGE>   40
(5)      INCOME TAXES:

         Deferred income taxes are provided for differences between results of
operations for financial reporting purposes and income tax purposes.

         No provision is made for U.S. income taxes applicable to accumulated
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations. If such earnings were to be repatriated, such earnings
could be subject to foreign withholding tax and U.S. residual tax. The
determination of the amount of unrecognized withholding and U.S. taxes on those
estimated earnings is not practicable.

         Components of the income tax (benefit) provision for each of the years
ended December 31 are as follows:

<TABLE>
<CAPTION>
                                                                              2000         1999        1998
                                                                              ----         ----        ----
                                                                                     (in thousands)

<S>                                                                         <C>         <C>          <C>

          Current (benefit) provision:
            Federal                                                          $ (605)      $ (225)    $  (697)
            State                                                              (107)         (37)        (24)
            Foreign                                                              67          103         189
                                                                             ------       ------     -------
          Total current benefit                                                (645)        (159)       (532)
          Deferred provision (benefit)                                         (281)         262        (726)
                                                                             ------       ------     -------

          Total income tax (benefit) provision                               $ (926)      $ 103      $(1,258)
                                                                             ======       ======     =======
</TABLE>


         Reconciliation of the difference between income tax (benefit) provision
and income taxes at the statutory U.S. Federal income tax rate for each of the
years ended December 31, is as follows:

<TABLE>
<CAPTION>

                                                                              2000        1999         1998
                                                                              ----        ----         ----
                                                                                     (in thousands)


<S>                                                                         <C>      <C>            <C>
          Computed "expected" tax provision (benefit)                        $  279     $(1,474)     $  (702)
          Tax credits                                                          (126)       (167)        (248)
          Favorable resolution of tax issue                                    (517)          -            -
          Valuation allowance                                                  (538)      1,720            -
          Tax exempt interest income                                              -         (16)         (24)
          Foreign sales corporation benefit                                       -           -         (206)
          State taxes, net                                                      (59)          -          (97)
          Other, net                                                             35          40           19
                                                                             ------      ------      --------

          Total income tax (benefit) provision                               $ (926)    $   103      $(1,258)
                                                                             ======     =======      ========
</TABLE>

                                       39
<PAGE>   41
       The components of deferred income taxes at December 31 are as follows:

<TABLE>
<CAPTION>

                                                                                   2000              1999
                                                                                -------           -------
                                                                                       (in thousands)
<S>                                                                            <C>               <C>

Nondeductible accruals and reserves                                             $   680           $   896
Inventory costs capitalized for income tax purposes                                 125               134
                                                                                -------           -------

     Total current deferred income taxes                                            805             1,030
                                                                                -------           -------

Net operating loss carryforwards                                                  5,172             4,433
Tax credit carryforwards                                                            858               732
Excess of tax over book depreciation                                               (395)             (164)
Other                                                                               102              (174)
                                                                                -------           -------

     Total noncurrent deferred income taxes                                       5,737             4,827

     Less:  valuation allowance                                                  (3,448)           (3,044)
                                                                                -------           -------

     Net noncurrent deferred income taxes                                         2,289             1,783
                                                                                -------           -------

     Total deferred income taxes                                                $ 3,094           $ 2,813
                                                                                =======           =======
</TABLE>

         In January 2001, the Company received approximately $3,600,000 from
the Internal Revenue Service in connection with the refund of previously paid
income taxes and interest thereon. Previously unrecorded tax benefit of
approximately $500,000 was reflected at December 31, 2000 as a result.

         At December 31, 2000, the Company has net operating loss carryforwards
of $11,535,000 and $17,745,000 for federal and state income tax reporting
purposes, respectively. The federal net operating losses expire in the years
2017 through 2020 if not utilized prior to that time. The state net operating
losses expire over various years depending on the various state laws. Federal
and state net operating losses include $2,933,000 and $3,351,000, respectively,
related to the acquisition of Logicraft, Inc. Limitations imposed by Section 382
of the Internal Revenue Code, as amended, impose restrictions on the Company's
ability to utilize the net operating loss of Logicraft. These limitations are
expected to lapse during 2001. The Company also has federal general business and
alternative minimum tax credit carryforwards of approximately $794,000 and
$25,000, respectively. The general business credit carryforwards expire in
various amounts in the years 2011 through 2020 if not utilized prior to that
time. The alternative minimum tax credit may be carried forward indefinitely.

         The Company maintains a valuation allowance as a result of
uncertainties associated with full utilization of net operating loss
carryforwards. The valuation allowance represents the amount of the deferred tax
assets that may not be realized. The Company has not provided a valuation
allowance on that portion of the deferred tax assets that are expected to be
realized through taxable income from future operations. The December 31, 2000
valuation allowance reflects a net increase of approximately $404,000, comprised
of an increase of $942,000 primarily related to future benefits generated by the
exercise of stock options, partially offset by a $538,000 reduction of the
valuation allowance. The valuation allowance reduces deferred tax assets to an
amount that represents the Company's estimate of the amount of deferred tax
assets that, more likely than not, will be realized. The Company's provision for
income taxes may be

                                       40
<PAGE>   42
impacted by adjustments to the valuation allowance that may be required if
circumstances change regarding the realizability of the deferred tax assets of
future periods.


(6)      COMMITMENTS AND CONTINGENCIES:

LITIGATION

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

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

         The Securities and Exchange Commission ("SEC") has conducted an
investigation relating primarily to accounting matters of the Company. The SEC
requested and received documents from the Company and took testimony from
certain former employees. During November 2000, the SEC requested and the
Company agreed to extend the statute of limitations for their investigation
until April 30, 2001. During March 2001, the Company, without admitting or
denying the SEC's findings, submitted an offer of settlement to the SEC
providing that the Company would cease and desist from committing or causing any
future violation of SEC rules. There are no fines or penalties offered as part
of this settlement.

PURCHASE COMMITMENTS

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


(7)      EMPLOYEE BENEFIT PLANS:

EMPLOYEE STOCK PURCHASE PLAN

         The Company has an Employee Stock Purchase Plan (the "ESPP") through
which eligible employees may purchase shares of the Company's common stock at
semi-annual intervals, through periodic payroll deductions. The ESPP is a
qualified employee benefit plan under section 423 of the Internal Revenue Code.
The Company has reserved 400,000 shares of stock for issuance under the ESPP.
The purchase price per share is 85% of the lower of the fair market value of the
common stock at the beginning or at the end of each

                                       41
<PAGE>   43
offering period, as defined. During the years ended December 31, 2000, 1999 and
1998, 52,224, 83,778 and 80,189 shares of common stock were purchased at
weighted average prices per share of $3.71, $2.15 and $3.73, respectively. At
December 31, 2000, 59,097 shares of common stock were available for issuance
under the ESPP.

STOCK OPTION PLANS

         The Company currently has six fixed stock option plans of which two are
still active: 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"), the 1994 Annual Non-Employee Directors Plan ("1994 Annual
Plan") and the 1998 Non-employee Directors Stock Option Plan (the "1998
Directors 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 cancelled upon adoption of the LTIP on May 10, 1995, although grants
outstanding at the time of cancellation were not affected.

         The LTIP permits the granting of 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 permitted a one-time grant of 10,000 options to purchase the
Company's common stock and the 1994 Annual Plan permits an 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 was 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. Upon adoption of the 1998
Directors Plan, the 1993 Directors Plan and the 1994 Annual Plan were
terminated, although grants outstanding at the time of cancellation were not
affected.

         Under the 1998 Directors Plan, non-employee directors are entitled to
two types of option grants. The first is the annual option grant under which the
non-employee director will be granted an option to purchase 1,000 shares in
1998, and 5,000 shares annually thereafter of the Company's common stock on the
third business day following the public release of the Company's year-end
earnings. These annual option grants are immediately exercisable and the
exercise price is equal to the fair market value of the Company's common stock
on the date of grant.

         The second type of option grant is the anniversary option grant under
which the non-employee director will be granted an option to purchase 10,000
shares of the Company's common stock upon first being elected or appointed to
the board of directors. In addition, on the third anniversary, and each
successive third anniversary (if re-elected), each non-employee director will be
granted an option to purchase 10,000 shares of the Company's common stock on the
third business day following the public release of the Company's annual or
quarterly earnings. Twenty-five percent of the anniversary option grant is
immediately exercisable and 25% vests over each of the next three years. In the
event of a "change in control," as defined in the 1998 Director Plan, all
options will become exercisable. The exercise price of the anniversary option
grants is equal to the fair market value of the per share price of the Company's
common stock on the date of grant.

                                       42
<PAGE>   44
         A summary of combined stock option activity with respect to the above
plans for the years ended December 31 is as follows:

<TABLE>
<CAPTION>
                                                                                               Options Outstanding
                                                                                     ------------------------------------
                                                                                                         Weighted Average
                                                                                         Shares           Exercise Price
                                                                                       ---------         ----------------
<S>                                                                                  <C>                 <C>
 Balance, January 1, 1998                                                               1,906,003           $   6.97
   Granted                                                                                314,350               4.66
   Canceled                                                                              (410,369)              8.66
   Exercised                                                                               (5,667)              5.05
                                                                                       ----------              -----

 Balance, December 31, 1998                                                             1,804,317               6.18
   Granted                                                                                549,856               3.15
   Canceled                                                                              (836,183)              4.97
   Exercised                                                                             (217,774)              6.55
                                                                                       ----------              -----

 Balance, December 31, 1999                                                             1,300,216               5.48
   Granted                                                                                484,600               8.27
   Canceled                                                                              (135,356)              7.94
   Exercised                                                                             (194,418)              4.89
                                                                                       ----------              -----

 Balance, December 31, 2000                                                             1,455,042           $   6.20
                                                                                       ==========              =====

</TABLE>

         The following table summarizes information about the stock options
outstanding at December 31, 2000:

<TABLE>
<CAPTION>

                                                   OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                                   ---------------------------------------------------    -----------------------------
                                                      Weighted
                                                      Average           Weighted                         Weighted
                  Range of            Options       Remaining            Average          Options         Average
              Exercise Prices       Outstanding     Contractual Life  Exercise Price    Exercisable    Exercise Price
          -------------------------------------------------------------------------------------------------------------
<S>                   <C>           <C>              <C>               <C>               <C>             <C>
              $ 2.19 - $ 3.25            435,250         8.2               $ 2.72              136,168      $ 2.67
              $ 3.56 - $ 5.00            265,829         6.6               $ 4.42               90,026      $ 4.52
              $ 5.44 - $ 8.00            354,339         7.0               $ 6.67              178,671      $ 6.84
              $ 8.63 - $12.25            371,074         7.9               $ 9.79              149,434      $ 9.84
              $17.75 - $24.25             28,550         4.1               $19.40               28,550      $19.40
          -------------------------------------------------------------------------------------------------------------
              $ 2.19 - $24.25          1,455,042         7.5               $ 6.20              582,849      $ 6.89
          =============================================================================================================
</TABLE>

                                       43
<PAGE>   45
ACCOUNTING FOR STOCK-BASED COMPENSATION

         During 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a fair
value based method of accounting for an employee stock option or similar equity
instruments and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost related to stock options issued
to employees under these plans using the method of accounting prescribed by
Accounting Principles Board ("APB)" Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting in APB Opinion
No. 25 must make pro forma disclosures of net income and earnings per share, as
if the fair value based method of accounting defined in SFAS No. 123 had been
applied.

         The Company has elected to account for its stock-based compensation
plans under APB Opinion No. 25; therefore no compensation cost has been
recognized in the accompanying financial statements for stock-based compensation
plans.

         If the Company had accounted for its stock-based compensation plans
using a fair value based method of accounting, the Company's pro forma net
income (loss) and income (loss) per share for the years ended December 31, 2000,
1999 and 1998 would have been reported as indicated below:

<TABLE>
<CAPTION>

                                                                 2000             1999             1998
                                                              ---------        ---------        ---------
                                                                 (in thousands, except per share amounts)
<S>                                                          <C>               <C>             <C>

Net income (loss):
  As reported                                                 $   1,747        $  (4,438)       $    (908)
  Pro forma                                                        (203)          (4,971)          (2,036)
Diluted net income (loss) per
 common and equivalent share:
  As reported                                                 $    0.20        $   (0.55)       $   (0.11)
  Pro forma                                                       (0.02)           (0.62)           (0.25)

</TABLE>

          The fair value of options granted under the Company's fixed stock
option plans were $5.94, $2.06 and $3.07 for 2000, 1999 and 1998, respectively,
and were estimated on the date of grant using the Black-Scholes option-pricing
model based on the following weighted averaged assumptions:


<TABLE>
<CAPTION>

                                                                     2000          1999          1998
                                                                    ------        ------        ------
<S>                                                               <C>             <C>          <C>
Expected volatility                                                   86.7%         79.0%         77.0%
Expected lives in years                                                  5             5             5
Dividend yield                                                           0%            0%            0%
Risk-free interest rate                                                6.3%          5.1%          5.5%

</TABLE>


                                       44
<PAGE>   46
          The fair value of purchase rights granted under the ESPP were $3.42,
$0.90 and $1.58 for 2000, 1999, and 1998, respectively, and were estimated
using the Black-Scholes option-pricing model based on the following weighted
average assumptions:

<TABLE>
<CAPTION>
                                                                     2000          1999          1998
                                                                    ------        ------        ------
<S>                                                               <C>             <C>          <C>
Expected volatility                                                   86.7%         79.0%         77.0%
Expected lives in years                                                  1             1             1
Dividend yield                                                           0%            0%            0%
Risk-free interest rate                                                6.0%          4.8%          5.3%
</TABLE>


         The pro forma effect of applying SFAS 123 for the years ended December
31, 2000, 1999 and 1998 is not likely to be representative of the effects on
reported net income and earning per share for future years, because options vest
over several years and additional awards are made each year.

401(k) PLAN

         The Company has a contributory retirement and profit-sharing plan (the
"401(k) Plan") covering eligible employees meeting certain requirements. The
401(k) Plan qualifies under Section 401(k) of the Internal Revenue Code and
allows employees to contribute up to 15% of their compensation, subject to
maximum annual statutory limitations. The Company may make discretionary
matching contributions equal to a percentage of an employee's 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 401(k) Plan was approximately $105,000, $102,000 and $116,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.

STOCK REPURCHASE

          On April 14, 1998, the Company's board of directors authorized the
repurchase of up to 800,000 shares of its common stock, or approximately 10% of
all shares issued as of that date, for issuance under the Company's stock option
and purchase plans. The Company repurchased 233,213 shares at an average per
share price of $5.24. During the third quarter of 1998, the board of directors
discontinued the repurchase of the Company's common stock.

                                       45
<PAGE>   47
(8)      SPECIAL CHARGE:

         The Company recorded a total of $1,923,000 as a pre-tax charge to
earnings in the year ended December 31, 1999, in connection with its exit from
the NAS enterprise systems business, related closure of its Nashua, New
Hampshire facility and restructuring its management organization. The total
charge includes $803,000 for the write-down of discontinued product inventories
and $1,120,000 for employee severance and benefits, future lease payments,
write-off of certain fixed assets and capitalized software and additional
allowance for evaluation units. The total charge was reflected net of proceeds
of approximately $200,000 received from the sale of NAS enterprise product
maintenance contracts and related customer database. In accordance with EITF
96-9, "Classification of Inventory Markdowns and Other Costs Associated with a
Restructuring", $803,000 has been reflected as additional cost of revenue, and
$1,120,000 has been reflected as an operating expense in the accompanying
consolidated statements of operations.


(9)      SEGMENT REPORTING:

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

         The NTM business segment includes hand held products used as network
certification and troubleshooting tools in the installation and operation of
computerized networks. The NTM segment consists of devices for testing fiber
optic and copper networks, as well as, active operational LANs. The NTM business
segment consists of products that are used by service providers and system
integrators to perform critical cabling certification and network diagnostics.

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

         The accounting policies of the business segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements. Information
related to the operations of the Company in different business segments is set
forth below.

         Prior to 2000, the Company did not measure assets or operating expenses
separately for the NTM and NAS business segments. Beginning in 2000, the Company
began measuring operating expenses separately for the NTM and NAS business
segments. The Company does not currently measure assets separately for the
business segments. Accordingly, segment information for the year ended December
31, 2000 includes operating expenses for the NTM and NAS business segments.

                                       46
<PAGE>   48
<TABLE>
<CAPTION>
                                                             NTM               NAS              TOTAL
                                                           --------          --------         --------
                                                                           (in thousands)
<S>                                                       <C>                <C>             <C>
 YEAR ENDED DECEMBER 31, 2000
   Net revenue                                             $ 34,086            $ 10,553        $ 44,639
   Gross profit                                              19,249               6,277          25,526
   Operating expenses                                        16,118               9,897          26,015
   Segment profit (loss) from operations                      3,131              (3,620)           (489)
   Unallocated amounts:
     Net other income                                                                             1,310
     Income before taxes                                                                            821
     Assets                                                                                      36,107

 YEAR ENDED DECEMBER 31, 1999
   Net revenue                                             $ 29,391  (1)       $ 13,368        $ 42,759
   Gross profit                                              16,148  (2)          6,591          22,739
   Unallocated amounts:
     Operating expenses                                                                          27,172
     Net other income                                                                               215
     Loss before taxes                                                                           (4,218)
     Assets                                                                                      34,056

 YEAR ENDED DECEMBER 31, 1998
   Net revenue                                             $ 26,796            $ 14,854        $ 41,650
   Gross profit                                              14,503               9,244          23,747
   Unallocated amounts:
     Operating expenses                                                                          26,237
     Net other income                                                                               324
     Loss before taxes                                                                           (2,166)
     Assets                                                                                      39,350

</TABLE>


(1)      Includes $3,629,000 of revenue from the NAS enterprise systems market
         which was exited during 1999.

(2)      Includes $803,000 write-down of discontinued product inventories
         recorded in connection with the Company's exit from the NAS enterprise
         systems market.

                                       47
<PAGE>   49
         Net revenues to unaffiliated customers by principal geographic area is
set forth below for each of the years ended December 31:

<TABLE>
<CAPTION>
                                                       2000           1999            1998
                                                    --------        -------          ------
                                                                (in thousands)
<S>                                               <C>            <C>               <C>
North America                                        $25,387        $25,981 (1)      $28,294 (1)
International                                         19,252         16,778           13,356
                                                    --------        -------          -------

Net revenues                                         $44,639        $42,759          $41,650
                                                    ========        =======          =======
</TABLE>

(1)  Includes $3,629,000 and $6,003,000 of NAS Enterprise Systems revenue in the
     years ended December 31, 1999 and 1998, respectively.



(10)     SUPPLEMENTAL FINANCIAL INFORMATION:

         A summary of additions and deductions related to the allowances for
accounts receivable and inventory is set forth below for each of the years ended
December 31:

<TABLE>
<CAPTION>

                                                  Beginning of                                   End of
                                                      Year       Additions      Deductions        Year
                                                  ------------   ---------      ----------       ------
<S>                                               <C>            <C>            <C>             <C>
ALLOWANCES FOR DOUBTFUL ACCOUNTS:
    Year ended December 31, 2000                     $  171        $  470        $  (123)        $  518
                                                     ======        ======        =======         ======
    Year ended December 31, 1999                     $  637        $  461        $  (927)        $  171
                                                     ======        ======        =======         ======
    Year ended December 31, 1998                     $  892        $  401        $  (656)        $  637
                                                     ======        ======        =======         ======

ALLOWANCES FOR SALES RETURNS:
    Year ended December 31, 2000                     $  422        $1,842        $(1,877)        $  387
                                                     ======        ======        =======         ======
    Year ended December 31, 1999                     $1,392        $2,029        $(2,999)        $  422
                                                     ======        ======        =======         ======
    Year ended December 31, 1998                     $1,073        $5,375        $(5,056)        $1,392
                                                     ======        ======        =======         ======

ALLOWANCES FOR EXCESS AND OBSOLETE INVENTORY:
    Year ended December 31, 2000                     $  702        $  224        $  (779)        $  147
                                                     ======        ======        =======         ======
    Year ended December 31, 1999                     $  674        $1,299        $(1,271)        $  702
                                                     ======        ======        =======         ======
    Year ended December 31, 1998                     $  694        $  672        $  (692)        $  674
                                                     ======        ======        =======         ======
</TABLE>

                                       48
<PAGE>   50
(11)     SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

         Selected unaudited quarterly financial data for the years ended
December 31, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>


                                                                        2000 Quarters
                                         ----------------------------------------------------------------------
                                          First         Second          Third          Fourth         Total
                                         ------        --------        --------      ---------      ----------
                                                      (in thousands, except per share amounts)
<S>                                     <C>          <C>             <C>             <C>            <C>

Net revenue                              $11,601        $11,021        $ 10,493         $11,524       $44,639
Cost of revenue                            4,945          4,723           4,517           4,928        19,113
Gross profit                               6,656          6,298           5,976           6,596        25,526
Total operating expenses                   6,336          6,198           6,481           7,000        26,015
Net income (loss)                            434            574            (236)            975   (1)   1,747
EPS - Diluted                             $ 0.05        $  0.06        $  (0.03)        $  0.11       $  0.20
</TABLE>

(1)      Includes income tax benefit of $0.9 million primarily related to
         favorable resolution of tax issues and adjustments of valuation
         allowance.


<TABLE>
<CAPTION>
                                                                      1999 Quarters
                                         ----------------------------------------------------------------------
                                          First         Second          Third          Fourth         Total
                                         ------        --------        --------      ---------      ----------
                                                      (in thousands, except per share amounts)
<S>                                     <C>          <C>             <C>             <C>          <C>

 Net revenue                             $ 9,001        $ 9,595        $11,297       $12,866        $42,759
 Cost of revenue                           3,951          5,442          5,146         5,481         20,020
 Gross profit                              5,050          4,153          6,151         7,385         22,739
 Total operating expenses                  6,804          7,792          5,701         6,875         27,172
 Net income (loss)                        (1,502)        (3,945)           523           486         (4,438)
 EPS - Diluted                           $ (0.19)       $ (0.49)       $  0.06      $   0.06        $ (0.55)
</TABLE>


         Cost of revenue and total operating expenses for the year ended
December 31, 1999 reflect a special charge of $803,000 and $1,120,000,
respectively, related to closure of the Company's Nashua, New Hampshire facility
and management restructuring.

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

         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.

                                       49
<PAGE>   51
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE

         None.


                                    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 2001
Annual Meeting of Stockholders to be held May 31, 2001, which is incorporated by
reference into this Form 10-K Report.


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.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information concerning the common stock beneficially owned by each of
our directors by all of our officers and directors as a group and by each
shareholder known by us 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.


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.

                                       50
<PAGE>   52
                                     PART IV


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

(a)    FINANCIAL STATEMENTS AND SCHEDULE.

          (i)  Financial Statements
<TABLE>
<CAPTION>
                                                                                             Page
                                                                                            -------
<S>                                                                                       <C>
               (1) Independent Auditors' Report                                             Page 30
               (2) Consolidated Financial Statements:
                    -    Balance Sheets - December 31, 2000 and 1999                        Page 31
                    -    Statements of Operations - For the Years Ended December 31,
                         2000, 1999 and 1998                                                Page 32
                    -    Statements of  Changes in Stockholders' Equity - For the Years
                         Ended December 31, 2000, 1999 and 1998                             Page 33
                    -    Statements of Cash Flows - For the Years Ended
                         December 31, 2000, 1999 and 1998                                   Page 34
                    -    Notes to Consolidated Financial Statements - December 31,
                         2000, 1999 and 1998                                                Page 35


          (ii)  Financial Statement Schedules                                               Page 48

          (iii) See Item 14(c) below

</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.

         None.

                                       51
<PAGE>   53
(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 Company,     Incorporated by reference to
                 dated May 19, 1992                                                    Exhibit 3.1 to Form S-1
                                                                                       Registration Statement
                                                                                       #33-52264 ("Form S-1
                                                                                       #33-52264")

3.2              Bylaws of the Company

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

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

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

10.4             Employee Stock Purchase Plan                                          Incorporated by reference to
                                                                                       Exhibit 10.9 of Amendment No.
                                                                                       1 to Form S-1 #33-52264

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 #33-79070

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 former      Incorporated by reference to
                 officers of the Company and the Company                               Exhibit 10.18 to Form S-1
                                                                                       #33-52264

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


                                       52
<PAGE>   54
<TABLE>
<S>            <C>                                                                   <C>
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 to
                 Information Systems, Inc. and the Company dated December 17, 1996     Exhibit 2 of Current Report
                                                                                       on Form 8-K dated December
                                                                                       17, 1996

10.14            1998 Director Compensation Plan                                       Incorporated by reference
                                                                                       to Appendix A of the
                                                                                       Company's 1998 Proxy Statement

21               Subsidiaries of the Registrant

23               Consent of Deloitte & Touche LLP

24.1             Power of Attorney of Kent C. Mueller
24.2             Power of Attorney of Roger B. Hackett
24.3             Power of Attorney of Dianne C. Walker
24.4             Power of Attorney of William C. Turner

</TABLE>



                                       53
<PAGE>   55
                                   SIGNATURES

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

                                    MICROTEST, INC.
                                    /s/  Vincent C. Hren
                                    --------------------------------------------
                                    Vincent C. Hren
                                    President and Chief Executive Officer

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

<TABLE>
<CAPTION>
   Name and Signature                                         Title                                      Date
   ------------------                                         -----                                      ----
<S>                                <C>                                                             <C>

-------------------------------
Kent C. Mueller*                         Chairman of the Board                                       March 30, 2001


/s/  Vincent C. Hren
-------------------------------
Vincent C. Hren                          President and Chief Executive Officer                       March 30, 2001


/s/  William R. Crowell                  Vice President, Chief Financial Officer, Secretary and
-------------------------------          Treasurer (Principal Financial and Accounting Officer)      March 30, 2001
William R. Crowell


-------------------------------
Roger B. Hackett*                        Director                                                    March 30, 2001



-------------------------------
William C. Turner*                       Director                                                    March 30, 2001



-------------------------------
Dianne C. Walker*                        Director                                                    March 30, 2001


*By /s/  Vincent C. Hren
-------------------------------
    Vincent C. Hren
    Attorney-in-Fact                                                                                 March 30, 2001
</TABLE>

                                       54
<PAGE>   56

                                EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit                                                                                Page or
Number           Description                                                           Method of Filing
-------          -----------                                                           ----------------
<S>            <C>                                                                   <C>
3.1              Amended and Restated Certificate of Incorporation of the Company,     Incorporated by reference to
                 dated May 19, 1992                                                    Exhibit 3.1 to Form S-1
                                                                                       Registration Statement
                                                                                       #33-52264 ("Form S-1
                                                                                       #33-52264")

3.2              Bylaws of the Company

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

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

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

10.4             Employee Stock Purchase Plan                                          Incorporated by reference to
                                                                                       Exhibit 10.9 of Amendment No.
                                                                                       1 to Form S-1 #33-52264

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 #33-79070

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 former      Incorporated by reference to
                 officers of the Company and the Company                               Exhibit 10.18 to Form S-1
                                                                                       #33-52264

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



<PAGE>   57
<TABLE>
<S>            <C>                                                                   <C>
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 to
                 Information Systems, Inc. and the Company dated December 17, 1996     Exhibit 2 of Current Report
                                                                                       on Form 8-K dated December
                                                                                       17, 1996

10.14            1998 Director Compensation Plan                                       Incorporated by reference
                                                                                       to Appendix A of the
                                                                                       Company's 1998 Proxy Statement

21               Subsidiaries of the Registrant

23               Consent of Deloitte & Touche LLP

24.1             Power of Attorney of Kent C. Mueller
24.2             Power of Attorney of Roger B. Hackett
24.3             Power of Attorney of Dianne C. Walker
24.4             Power of Attorney of William C. Turner

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