================================================================================
                       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, 1998
                                       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
    of Incorporation)                                     identification number)

                 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  $18,909,592  based on the closing  sale price as
reported by the Nasdaq National Market on March 22, 1999.

     The number of shares  outstanding  of each of the  Registrant's  classes of
Common Stock,  as of March 22, 1999 was 8,289,136  shares of Common Stock ($.001
par value).

                       DOCUMENTS INCORPORATED BY REFERENCE

     Materials from the Registrant's Proxy Statement relating to its 1999 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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<PAGE>
                                TABLE OF CONTENTS


PART I.......................................................................  3

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

PART II...................................................................... 16

   ITEM 5   MARKET FOR THE COMPANY'S COMMON EQUITY SECURITIES AND
            RELATED SHAREHOLDER MATTERS...................................... 16
   ITEM 6   SELECTED CONSOLIDATED FINANCIAL DATA............................. 17
   ITEM 7   MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS........................................ 19
   ITEM 7A  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 28
   ITEM 8   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 28
   ITEM 9   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE......................................... 48

PART III..................................................................... 48

   ITEM 10  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.................. 48
   ITEM 11  EXECUTIVE COMPENSATION........................................... 48
   ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 48
   ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 48

PART IV...................................................................... 49

   ITEM 14  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
            ON FORM 8-K...................................................... 49

                                       2
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

INTRODUCTION

         Microtest,  Inc.  ("Microtest" or the "Company") develops,  markets and
supports  products  that make it easier to use,  manage and  service  Local Area
Networks ("LANs").  Founded in 1984,  Microtest has become a leading producer of
network  management  and  network  connectivity  products  that are  designed to
simplify complex tasks in the networked workplace.

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

         In June 1998,  Microtest  introduced  OMNIScannerTM  to its line of NMP
products.  OMNIScanner  is the  world's  first  digital  certification  tool for
Category 5E and Category 6 cabling. OMNIScanner has proprietary frequency domain
digital signal processing technology,  which provides a dynamic range similar to
a  laboratory  network  analyzer.  OMNIScanner  was also the first field  tester
capable of testing  Category 7 cabling and the first to make equal level far end
crosstalk   measurements,   a   requirement   for   Gigabit   Ethernet   cabling
certification.  This is a time of rapid  change in the cabling  industry.  Every
major cabling standard is undergoing  revision to incorporate new  measurements,
new higher  bandwidth,  and higher levels of performance.  The Company  believes
these changes in cabling  standards are creating a replacement  market for field
testers,  since  the new  requirements  may make the vast  majority  of  network
products  installed prior to 1998 obsolete.  The  OMNIScanner  provides a strong
stable  platform  upon  which the  Company  can build  additional  software  and
hardware options to generate revenues.

         Microtest's  Network  Connectivity  Product  ("NCP") line consists of a
family of thin-server  appliances and server products that allow users to easily
share  information  on a variety of peripheral  devices,  including CD, DVD, and
CD-R drives.  Microtest's connectivity products enable organizations to develop,
store, manage, and access information and knowledge bases with ease. Microtest's
DiscPort(R) and ZerverTM brands of products include CD/DVD-ROM thin servers,  CD
publishing  systems,   Internet  appliances  and  enterprise  servers  that  let
organizations access information instantly with point-and-click ease.

         In 1998, Microtest introduced DiscZerverTM to its line of NCP products.
DiscZerver is a high  performance  workgroup/department  CD/DVD server appliance
employing unique CD/DVD image caching  technology that increases  network access
performance  while  greatly  reducing  network  access  costs for shared  CD/DVD
applications.  The DiscZerver joins the WebZerverTM workgroup intranet appliance
in extending the Company's growing line of Zerver network appliances.

         MICROTEST IS A DELAWARE CORPORATION, ITS PRINCIPAL EXECUTIVE OFFICES
ARE LOCATED AT 4747 N. 22ND STREET, PHOENIX, ARIZONA 85016, AND ITS TELEPHONE
NUMBER IS (602) 952-6400.

                                       3
<PAGE>
         THIS ANNUAL  REPORT ON FORM 10-K CONTAINS  FORWARD-LOOKING  STATEMENTS.
ADDITIONAL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS MAY BE MADE BY THE COMPANY
FROM TIME TO TIME IN FILINGS  WITH THE  SECURITIES  AND EXCHANGE  COMMISSION  OR
OTHERWISE.  THE WORDS  "BELIEVE,"  "EXPECT,"  "ANTICIPATE,"  AND  "PROJECT," AND
SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS,  WHICH SPEAK ONLY AS OF
THE DATE THE STATEMENT WAS MADE. SUCH FORWARD-LOOKING  STATEMENTS ARE WITHIN THE
MEANING OF THAT TERM IN SECTION 27A OF THE  SECURITIES AND EXCHANGE ACT OF 1934,
AS AMENDED.  SUCH STATEMENTS MAY INCLUDE,  BUT NOT BE LIMITED TO, PROJECTIONS OF
REVENUES,  INCOME OR LOSS,  CAPITAL  EXPENDITURES,  PLANS FOR FUTURE OPERATIONS,
FINANCING  NEEDS OR PLANS,  THE IMPACT OF INFLATION,  YEAR 2000 ISSUES AND PLANS
RELATING TO PRODUCTS OR SERVICES OF THE COMPANY, AS WELL AS ASSUMPTIONS RELATING
TO THE  FOREGOING.  THE COMPANY  UNDERTAKES NO OBLIGATION TO PUBLICLY  UPDATE OR
REVISE ANY FORWARD-LOOKING  STATEMENTS,  WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS, OR OTHERWISE.

         FORWARD-LOOKING   STATEMENTS  ARE  INHERENTLY   SUBJECT  TO  RISKS  AND
UNCERTAINTIES,  SOME OF WHICH CANNOT BE PREDICTED OR  QUANTIFIED.  FUTURE EVENTS
AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN, CONTEMPLATED
BY, OR  UNDERLYING  THE  FORWARD-LOOKING  STATEMENTS.  STATEMENTS IN THIS ANNUAL
REPORT,  INCLUDING  THE  NOTES  TO THE  CONSOLIDATED  FINANCIAL  STATEMENTS  AND
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS,"  DESCRIBE FACTORS,  AMONG OTHERS, THAT COULD CONTRIBUTE TO OR CAUSE
SUCH DIFFERENCES.  ADDITIONAL  FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS ARE SET FORTH
IN  THIS  "BUSINESS"  SECTION  AND IN  THE  "MARKET  FOR  THE  COMPANY'S  EQUITY
SECURITIES AND RELATED SHAREHOLDER MATTERS" SECTION IN THIS REPORT.

INDUSTRY BACKGROUND

         The computer networking industry, which includes local area networking,
enterprise  networking,  intranets and the Internet continues to grow at a rapid
rate.  Recent  Dataquest  projections  indicate  compound  growth  rates  in the
networking market will exceed 20% in the near-term.

         The world's  dependence  on networks  creates  increasing  pressure for
improved  network  performance and  reliability,  starting at the point of cable
installation.  As more demands are placed on the network, products that maintain
and enhance the 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  these  network
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.

         Each  year,  there  are  new  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, 1998 saw significant progress towards
new standards for Category 5E and Category 6 cabling. Support of these standards
requires higher  bandwidth (250 MHz),  higher dynamic range and new measurements
(return  loss,  power  sum near end  crosstalk  ("NEXT"),  equal  level  far end
crosstalk  and power sum equal  level  far end  crosstalk).  Furthermore,  draft
Gigabit Ethernet cabling  standards  require test  capabilities not available in
the vast majority of existing field test equipment.  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.

                                       4
<PAGE>
         Organizations  of  all  sizes  continue  to  migrate   mission-critical
operations and information to their networks,  making the work  environment more
dependent on the  network's  ability to have  multiple  users share  information
efficiently.  The move toward intranets for information capture and distribution
has also gained  momentum.  This growing  dependence  on  networking  has caused
increasing  demand  for  products  and  technologies  that  maximize  device and
information sharing capabilities.

         CD-ROM remains the mass information storage medium of choice because of
its low  cost  and  easy  access  via  network  CD-ROM  servers.  As the cost of
CD-Recordable  drives  continue to fall,  more  organizations  may utilize  this
storage medium as a viable alternative to other, more expensive memory options.

MARKET FOR THE COMPANY'S PRODUCTS

         NETWORK  MANAGEMENT   PRODUCTS.   The  advancements  of  equipment  and
technologies  enabling  high-speed data transmission over twisted-pair and fiber
optic  wiring  continue  to  increase in number and  complexity.  Ensuring  that
existing  or newly  installed  wiring  can handle  these  high data  speeds is a
critical  step in  minimizing  network  downtime,  lost  productivity  and  data
transmission  problems.  NCP service providers and systems integrators worldwide
use Microtest's NMP products to perform the critical certification functions for
modern twisted-pair  networking systems and legacy cabling. Newer products, such
as the Company's CertiFiber,  perform similar certification  functions for fiber
optic cabling. Once the network cabling is installed and the network is running,
management  software  products  continue  to  help  users  troubleshoot  network
problems with speed and accuracy minimizing network downtime and increasing user
productivity.

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

         According to Forrester Research, companies will migrate to full service
intranets  for:  (1) making  easier  connections  with the  outside  world,  (2)
standardizing multiple competing suppliers,  and (3) lowering costs. This market
is  growing  rapidly.   In  a  study  conducted  for  the  American   Management
Association,  Tierney & Partners  indicated  that 36% of all  companies  have an
intranet for  inter-organizational  communications.  The report  predicted  this
figure  would  grow to 68% by  1999.  Core  technologies  of the  Company's  NCP
products have proven to be extensible and adaptable to target these newer market
opportunities.

                                       5
<PAGE>
COMPANY STRATEGY

         The  Microtest  strategy  is to make  computer  and  telecommunications
networks easier to use and  mission-critical  information  easier to share.  The
Company  provides  a variety  of  easy-to-use  hand held  products  and  network
attachable  hardware and  software  products,  all  designed to address  complex
network  management  problems.  To effectively serve its customers,  the Company
relies  on  developing  fully  integrated  solutions,   optimizing   established
distribution  channels and expanding  technological  and software content across
all product ranges.

         DEVELOPING FULLY INTEGRATED  SOLUTIONS.  Microtest develops integrated,
intuitive hand-held and "plug and play" solutions that can be quickly and easily
used to certify  networks or be used on networks in everyday  use. The Company's
products  are  designed  to be  marketed  and sold as  complete  solutions  that
eliminate common network problems experienced by users. For example, in 1998 the
Company   introduced   OMNIScanner,   the  industry's  first  Category  6  cable
certification  tool and Discport  VT, the  successor  product to its  successful
DiscPort product line that offers fast, efficient tower-like capability packaged
in a small space.

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

         EXPAND SOFTWARE CONTENT.  The Company continues to expand the amount of
software  in its  products  to  enable it to meet  market  demands  for  greater
functionality and easier adaptation.  Increasing  software content in integrated
products, while releasing new software products and software upgrades, continues
to be a part of Microtest's strategy.

PRODUCTS

         Microtest is a leading supplier of computer network  certification  and
management  products,  an  industry  segment  the  Company  created  through its
patented cable radar technology. The Company's handheld cable test tools quickly
pinpoint cable problems, certify whether network cabling will support a proposed
network system, and monitor network activity. They operate across multiple cable
types and network  management  systems  and cost  effectively  increase  network
productivity  and  reliability by reducing  network  downtime.  Sales of network
management  products  accounted  for  64%,  56% and 59% of the  Company's  total
revenues in 1998, 1997 and 1996, respectively. In addition, the Company offers a
line of LAN connectivity  products that allow users to easily share  information
on a variety of peripheral devices, including CD-ROMS.

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

         NETWORK  MANAGEMENT  PRODUCTS.  Cable installers and information system
administrators  use  Microtest's  NMP  products to instantly  pinpoint  physical
cabling problems,  which can be a primary cause of network downtime. The Company
designs tools with easy-to-use keypads for entering commands and LCD screens for
displaying  results.  The  Company's  NMP products  handle the various  types of
networks  and cables and  certify  that cable  installations  will meet the link
performance  requirements  as well as major  industry  standards,  such as those
issued by the International  Standards Organization ("ISO"),  Comite European de

                                       6
<PAGE>
Normalisation   Electrotechnique   ("CENELEC"),    Telecommunications   Industry
Association ("TIA") and Electronics Industry  Association  ("EIA").  Microtest's
test and measurement products utilize a variety of technologies,  including Time
Domain  Reflectometry  ("TDR"),  Digital Signal  Processing,  proprietary  ASICs
developed  by  Microtest,  RF  signaling  technology,  as  well  as  Microtest's
knowledge base in making cable measurements. These technologies and know-how are
incorporated into intuitive, easy-to-use,  hand-held scanners that allow cabling
and network professionals to use these powerful  technological tools with little
or no training.

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

                           NETWORK MANAGEMENT PRODUCTS

CABLE CERTIFICATION TOOLS                         NETWORK TROUBLESHOOTING TOOLS
-------------------------                         -----------------------------
OMNIScannerTM                                     MICROSCANNERTM
PentaScanner+TM                                   NetWare(R)COMPASTM
PentaScannerTM 350                                NT COMPASTM Module
CertiFiberTM                                      Internet COMPASTM Module
MTCrimpTM                                         Fiber Solution Kit

         OMNIScanner is capable of certifying all cabling  classes from Category
3 - 6 up to 300 MHz, an industry first. It is also the only field tester capable
of  making  accurate  measurements  on  Category  7  cabling.   OMNIScanner  has
significantly  raised the bar for competitive  products.  Seven months after its
introduction there is still no competitive  product available that can match its
capabilities.  OMNIScanner  with ScanlinkTM  provides a powerful  combination of
high bandwidth  certification and cable management software.  Installers who are
testing  to the  draft  Category  5E and  Category  6  standards  are  moving to
OMNIScanner  because  pre-existing  field  testers are  incapable  of making the
demanding  measurements  that these new standards  require.  Evaluations  of the
OMNIScanner  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
OMNIScanner.

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

         PentaScanner 350 includes all of the Technical Service Bulletin ("TSB")
67 Level II functionality and accuracy of PentaScanner+ and is the only Category
5 tester with Performance  Grading.  Performance  Grading measures and rates the
quality of high-performance links by analyzing the available headroom at 100 MHz
and  offers a  variety  of  qualitative  performance  grading  data,  not just a
pass/fail test result.  PentaScanner  350 also shows the available  headroom for
future growth of the LAN. Using PentaScanner 350 ensures a highly reliable cable
installation  that will meet  future  performance  requirements  without  costly
rewiring.

                                       7
<PAGE>
         CertiFiber,   introduced  in  late  1997,  is  the  first  fiber  optic
certification scanner available today that certifies fiber installations to TIA,
ISO, and other  industry  specifications.  CertiFiber  enables fiber optic cable
installers,  electrical  contractors,  field  service  contractors  and computer
network  administrators  to certify  fiber optic cable  quickly and  accurately.
CertiFiber  features a  one-button  Autotest  that  provides  pass/fail  results
instantly.  Users  specify  the  required  fiber  standard  (such as TIA 568A or
ISO1108)  and the number of splices  and  connectors  on a segment  and,  within
seconds,  CertiFiber  displays a pass/fail  result based on length,  propagation
delay and bi-directional dual wavelength loss measurements for 850nm and 1300nm.
CertiFiber is the only  dedicated  fiber optic tester that can perform all these
measurements critical to determining the Optical Link Budget.

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

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

         COMPAS   is  a   network   troubleshooting   tool   designed   for   IT
administrators,  network  technicians and third-party  service providers who are
tasked with  solving  common,  everyday  problems on Ethernet  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.  COMPAS comes with three diagnostic modules:  Internet/IP,  Netware and
NT.

         The  Internet   COMPAS  module  allows  the  user  to  easily   isolate
incorrectly  configured  hosts and  determine  whether  the  problem is a faulty
router  on the  company  intranet  or on the  Internet  at  large.  This  simple
diagnosis can save many hours of labor in troubleshooting the problem.  Internet
COMPAS performs tests such as Duplicate IP address  detection,  IP PING, IP host
summary  list  and  detail  and  Internet  Control  Message  Protocol   ("ICMP")
monitoring and trace route.  Also included is Domain Name System ("DNS") support
for simplified troubleshooting and DHCP support for automatic configuration.

         The Netware COMPAS module  diagnoses  problems inside NetWare.  It also
troubleshoots  Ethernet  cabling,  protocol  and serial link  problems.  COMPAS'
unique  NetTapTM  feature lets users plug in COMPAS between any network node and
the hubs to monitor traffic or test the network.

         The NT COMPAS module provides information about Windows NT(TM) networks
in seconds.  Users add the module to their  COMPAS and see the domains and hosts
on their NT networks.  NT COMPAS  supports IP,  NetBeui,  and IPX  protocols and
configures  itself from a DHCP  server.  The Internet  COMPAS  module for COMPAS
troubleshoots Internet and intranet connections quickly and easily.

                                       8
<PAGE>
         NETWORK  CONNECTIVITY  PRODUCTS.  Microtest's  NCP product line enables
organizations  to create,  access,  share and store large amounts of information
easily.  Many of the  products in this line focus on  CD-ROM/DVD-ROM  technology
because it is still the most cost  effective and efficient  medium for mass data
storage and  retrieval.  Workgroups or entire  organizations  requiring  instant
access to mission critical information, reference information, research data and
even  multimedia  files  can use  CD-ROM as the  storage  medium  and  Microtest
connectivity  products for instant access and retrieval.  These products  enable
network users to access and share information, such as customer databases, legal
briefs, medical records, library reference volumes,  research data, photo images
and even sound bytes across a network.

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

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

                          NETWORK CONNECTIVITY PRODUCTS

WORKGROUP MINI-THIN SERVERS    ENTERPRISE SOFTWARE        ENTERPRISE SYSTEMS
---------------------------    -------------------        ------------------
DiscZerverTM                   DiscPort(R) Executive for  DiscPort(R) Enterprise
DiscPort(R), DiscPort(R) PRO   Windows NTTM               Server (Tower)
DiscPort(R) XL                 DiscPort(R) Executive for  DiscPort(R) Enterprise
WebZerverTM                    intraNetWare               Server (Rack)

         Microtest's  primary NCP brands are Zerver and DiscPort.  These product
lines include  workgroup  thin servers or  appliances,  software and  enterprise
systems.  These  products  integrate  anywhere  on a  network  and allow for the
instantaneous sharing of CD-ROMs, DVD-ROMs and CD-Rs (CD-Recordables).

         For larger  enterprise  applications,  Microtest's  DiscPort  Executive
software  and  DiscPort  Enterprise   Servers,   available  in  rack  and  tower
configurations,  allow  enterprises  to share  hundreds  of CD-ROM  titles  with
point-and-click  simplicity.  These  fully  integrated  solutions  include a CPU
running DiscPort Executive software and up to sixty-three high-speed drives. Its
graphical user interface  makes managing  CD-ROM  resources  easy, and users can
browse and access CD-ROM resources from their desktop or their intranet browser.
These  servers are designed for  enterprises  with many users who need to access
mission  critical  information  resources  on  CD-ROM.  Microtest  also  enables
integrators to build their own enterprise servers by offering DiscPort Executive
software  separate from the hardware.  The software is available in intraNetWare
and Windows NT versions.

         With the  acquisition of Logicraft  Information  Systems in 1996,  (now
doing business as Microtest  Enterprise  Group ("MEG" or "Logicraft")  Microtest
acquired several additional technologies including Virtual CD, which allow users
to access CD-ROM information at unprecedented speed by imaging,  compressing and
downloading  CD-ROM data to the user's hard drive for faster retrieval.  Virtual
CD is now available as private labeled retail  software  through a number of key
publishing partners worldwide.

                                       9
<PAGE>
         In 1997,  Microtest  expanded its line of thin servers with  WebZerver.
WebZerver helps users implement  intranet  workgroup sites across  organizations
for  collaborative  document sharing and threaded  discussions.  Should the need
arise to provide access to other databases through the intranet,  however, users
can quickly and easily attach  external  storage CD, DVD, Hard Disk,  Jaz or Zip
drives.

         In 1998,  Microtest added  DiscZerver to its line of NCP products.  The
DiscZerver  is  a  unique  CD/DVD  image-caching  appliance  that  affords  high
performance  data access to  CD/DVD-based  information  while reducing costs for
such systems substantially over non-caching devices. DiscZerver is now available
through a number of Network Attached Storage ("NAS") vendors worldwide. A unique
embodiment  of the  DiscZerver  is  the  DiscZerver  VT  which  uses  DiscZerver
technology to craft a virtual tower of CD/DVD-ROMs in a small, low cost,  easily
installed and managed package.

SALES, DISTRIBUTION AND CUSTOMERS

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

         DISTRIBUTION  NETWORK.  The  Company  sells  its  products  through  an
established  worldwide  network of  distributors,  VARs and dealers  that market
PC-related  hardware and software  products.  The Company  focuses a significant
amount  of its  sales  and  marketing  resources  on its  distribution  channel,
providing ongoing communication and support to channel participants.
Distribution network support programs include:

     *    ads in trade magazines
     *    regular mailings of product, promotional and technical materials
     *    participation in industry trade shows
     *    incentive programs for distributors, VAR and dealer sales personnel
     *    cooperative marketing programs

         A  dedicated   sales  force   manages  and   supports   the   Company's
distributors, VARs and dealers. The Company provides technical and sales product
training to all of its distributors and dealers,  who in turn provide  technical
and sales training to their customers who purchase Microtest products. Microtest
also provides a strong set of VAR  professional  service  offerings that include
installation services, installation planning and pre-sale site planning.

         North American sales  accounted for  approximately  68%, 72% and 71% of
the Company's total revenues in 1998, 1997 and 1996, respectively. The Company's
United  States  distributors  include  national  distributors,  cable  and  wire
distributors, and catalog merchandisers.

         In 1998, the Company signed an agreement with  Progressive  Electronics
of Tempe,  Arizona whereby Progressive  Electronics would become an OEM supplier
of the Microtest MicroScanner.  The Company considers OEM suppliers an excellent
distribution vehicle and will consider similar opportunities in the future.

                                       10
<PAGE>
         To  address   international   markets,   the  Company   has   developed
relationships  with  distributors  throughout  Europe.  The Company supports its
European distributors through offices located in the United Kingdom and Germany.
In addition,  the Company has developed  relationships with distributors located
in  Canada,  Mexico,  Central  and  South  America  and  the  Pacific  Rim.  All
international  sales are denominated in United States dollars.  Revenues outside
of North America  accounted for 32%, 28% and 29% of the Company's total revenues
in 1998, 1997 and 1996, respectively.

         CUSTOMERS. The primary target market for the Company's products include
local area network ("LAN") management personnel,  LAN installers,  field service
personnel, resellers and technical end users with departmental applications. The
Company's end user customers span a broad range of industries that utilize LANs,
including technology, industrial, transportation, retail, health care, financial
services,   government  and  education.  As  summarized  in  the  Notes  to  the
Consolidated Financial Statements, major customers each accounting for more than
10% of total revenue in 1998,  1997 or 1996 were Tech Data  Corporation,  Ingram
Micro Inc., and Graybar Electric Company,  Inc. The Company maintains a customer
support  organization  in both  North  America  and  Europe to  answer  customer
questions concerning the use of the Company's products.

PRODUCT DEVELOPMENT

         The Company  believes that its  continued  success will depend upon its
ability to enhance its existing  products,  expand  products into product lines,
introduce  new products on a timely  basis,  and continue to develop  technology
that can be  incorporated  into  commercially  viable  products  addressing  the
demands of the networking  industry.  To facilitate  new and continuing  product
development,  Company  personnel  work  directly  with  customers,  distribution
channels,  and leaders in other  network  industry  segments to identify  market
needs  and  define  appropriate  product  specifications.   Microtest  employees
participate in numerous  professional groups and technical  committees including
the following:

     *    Institute  of  Electrical  &  Electronic   Engineers   ("IEEE")  802.3
          committee
     *    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").

         The  Company   believes  that  tracking   developments  in  the  latest
high-speed  technologies,  like Integrated  Service  Digital  Network  ("ISDN"),
Asymmetric Digital Subscriber Line ("ADSL"),  Very High Speed Digital Subscriber
Line ("VDSL"),  Gigabit Ethernet,  and Asynchronous  Transfer Mode ("ATM"), will
facilitate the development of products supporting the networks of the future.

         As one  of the  early  entrants  into  the  cable  troubleshooting  and
certification  markets,  the  Company  has  developed  a  substantial  level  of
proprietary  technology.  The Company embodies a substantial  portion of its TDR
technology  in a custom gate array to deter reverse  engineering.  Microtest has
obtained  several  United  States  patents  on  portions  of  its  technologies.
Microtest  leverages its proprietary  technology and industry expertise into new
product offerings to enhance the troubleshooting, certification and connectivity
capabilities  of its product  lines.  The Company also  routinely  evaluates the
acquisition or licensing of complementary  products and technologies.  There can
be no assurance that any new products  developed or acquired by the Company will
be successful or profitable.

                                       11
<PAGE>
ACQUISITIONS

         In  recent  years,  the  Company  has  strategically  acquired  network
connectivity  product  offerings.  In December 1996,  the Company  completed the
acquisition  of Logicraft  Information  Systems,  Inc., a leading  developer and
manufacturer  of  enterprise  CD-ROM  networking  systems.   Subsequent  to  the
acquisition,  Logicraft  was renamed  Microtest  Enterprise  Group.  The Company
acquired all of the capital stock of Logicraft for  approximately  $12.5 million
and assumed certain Logicraft  liabilities totaling  approximately $4.5 million,
which were paid off immediately after the closing. As a result of the allocation
of the purchase price,  the Company  recorded an expense of $15.7 million in the
fourth quarter of 1996 to record purchased  in-process  research and development
relating  to  products  for  which   technological   feasibility  had  not  been
established and for which no alternative future use existed.  Microtest acquired
Logicraft to give it broader reach throughout the entire CD-networking spectrum,
most notably at the enterprise and NT levels.

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

MANUFACTURING

         The Company is dependent on a small number of  third-party  vendors for
the  manufacturing  of all of the Company's  products.  Whenever  possible these
manufacturers  are ISO 9000 certified.  All are required to achieve approval via
the  Company's  formal  supplier  evaluation  process.  The  Company's  internal
operations  consist of supplier  management,  quality  assurance,  final product
configuration and packaging and order consolidation and fulfillment. The Company
retains a skilled,  permanent, core workforce,  utilizing temporary employees to
accommodate workload fluctuations.

         In 1998, the Company  expanded its warehousing  operation in the United
Kingdom to better service the European market. The Company maintains  authorized
customer service centers in Phoenix, Arizona, the United Kingdom and Japan.

ISO 9001 COMPLIANCE

         In October 1997, as part of its commitment to customer satisfaction and
continuous  improvement,  the Company formally  implemented a Quality Management
System.  In July 1998,  that 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.
The Company is required to  demonstrate  continued  compliance by collection and
review of objective  evidence  thereof and by subjection to routine  independent
audits.

                                       12
<PAGE>
SUPPLIES

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

BACKLOG

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

COMPETITION

         The  market  for  networking  products  is  extremely  fast  moving and
competitive,  and  competition  in the Company's  market  segment is continually
increasing.  Rapid  technological  advances and emerging industry  standards can
quickly change competitive conditions.  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 the  Company's  competitive
position and operating  results.  The Company's products compete on the basis of
ease-of-use, product features, quality, reliability and price.

         In  the  network  management  and  certification  market,  the  Company
competes with products manufactured by Wavetek Corporation, Scope Communications
(a division of Hewlett  Packard),  Fluke Corporation and  Datacom-Textron.  To a
lesser  extent,   the  Company  competes  with   manufacturers  of  time  domain
reflectometers,  ohmmeters, voltmeters and oscilloscopes.  The Company's network
troubleshooting  products  compete  with the  products  from Fluke  Corporation,
Network Associates and Hewlett-Packard Company.

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

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

                                       13
<PAGE>
PROPRIETARY RIGHTS

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

         The Company  embodies a substantial  portion of its TDR technology in a
custom gate array to deter  reverse  engineering.  The  Company  has  obtained a
United States patent on a portion of its technology related to TDR. In 1997, the
Company  obtained two  additional  patents:  one for a method and  apparatus for
concurrently  measuring  near end crosstalk at two ends of a cable,  and one for
developing a foreign file system  establishing a method which uses a native file
system virtual device driver.

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

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

EMPLOYEES

         As of March 1, 1999,  the Company  employed  219 persons on a full-time
basis: 81 in sales,  marketing and customer support, 34 in manufacturing,  69 in
research  and  development  and 35 in  administration.  Many  of  the  Company's
employees are highly skilled in certain  disciplines and the Company's continued
growth and success will depend, in part, on its ability to retain management and
key employees and, where appropriate,  hire new employees. The Company has never
had a work stoppage,  no employees are represented by a labor  organization  and
the Company considers its employee relations to be good.

                                       14
<PAGE>
ITEM 2. PROPERTIES

         The Company's  principal corporate offices and research and development
facilities are located in a 49,000 square foot facility in Phoenix, Arizona. The
lease for this facility commenced October 1, 1992, and continues for a period of
eight years. Current monthly rental payments for this facility are approximately
$75,000.  The Company believes that this facility is adequate to meet its needs.
The Company also leases sales and support  offices in  California,  Illinois and
the United  Kingdom.  The Company's  subsidiaries  lease office space for sales,
support and research and development in New Hampshire and Germany.

ITEM 3. LEGAL PROCEEDINGS

         The Company is involved in various legal proceedings  incidental to its
business.  Management does not believe that any of these legal  proceedings will
have a material adverse affect on the financial  condition or operating  results
of the Company.

         On March 8, 1999, a purported  class action  lawsuit was filed  against
Microtest,  Inc. and certain former officers in the United States District Court
for the District of Arizona.  The suit claims that  Microtest  violated  Section
10(b) of the Securities Exchange Act of 1934 by making public misrepresentations
or failing to disclose material facts regarding its financial results.  The suit
was  filed as a class  action on behalf of all  purchasers  of  Microtest  stock
between April 14, 1998 and March 2, 1999. Microtest intends to vigorously defend
the suit. The eventual outcome of this claim cannot be predicted with any degree
of legal certainty.

         The  Securities  and  Exchange  Commission  ("SEC")  is  engaged  in an
investigation  relating primarily to accounting matters of the Company.  The SEC
has not, to date,  asserted  any  specific  claim or remedy with  respect to the
Company.

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

         The  Company  did not submit  any matter to a vote of its  shareholders
during the fourth quarter of 1998.

                                       15
<PAGE>
                                     PART II

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

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

         PERIOD                                            HIGH          LOW
         ------                                            ----          ---

          1998    First  Quarter .......................  $ 6.63       $ 4.63
                  Second  Quarter ......................    5.63         4.50
                  Third  Quarter .......................    5.50         3.22
                  Fourth  Quarter ......................    3.75         2.34

          1997    First  Quarter .......................  $10.38       $ 4.38
                  Second  Quarter ......................    4.88         3.38
                  Third  Quarter .......................    6.63         3.81
                  Fourth  Quarter ......................    8.13         3.88

         The closing price of the  Company's  Common Stock on March 22, 1999 was
$2.28 per share.

         As of March 22,  1999,  there  were  8,289,136  shares of Common  Stock
outstanding,  which were held by over 400  shareholders  of record.  The Company
estimates that there are approximately  6,000 beneficial owners of the Company's
Common Stock.

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

FACTORS THAT MAY AFFECT FUTURE STOCK PERFORMANCE

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

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

                                       16
<PAGE>
         CERTAIN  CHARTER AND BYLAW  PROVISION.  The  Company's  Certificate  of
Incorporation and Bylaws empower the Board of Directors, without approval of the
shareholders,  to  issue  shares  of  preferred  stock,  to fix the  rights  and
preferences,  and divide the Company's  Board of Directors  into three  classes.
These provisions, as well as other provisions in such documents,  could have the
effect of deterring  unsolicited  takeovers or delaying or preventing changes in
control  or  management  of  the  Company,   including   transactions  in  which
shareholders might otherwise receive a premium for their shares over the current
market prices.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

         The following  selected  consolidated  financial data should be read in
conjunction  with the Company's  Consolidated  Financial  Statements and related
Notes and with "Management's  Discussion and Analysis of Financial Condition and
Results of Operations"  included  elsewhere  herein.  The  consolidated  balance
sheets as of December  31, 1998 and 1997,  and the  consolidated  statements  of
operations  for each of the three years in the period  ended  December 31, 1998,
and the independent  auditors'  report  thereon,  are included in Item 8 of this
Form 10-K.

                                       17
<PAGE>
<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                           -----------------------------------------------------------
                                             1998         1997         1996         1995        1994
                                             ----         ----         ----         ----        ----
                                                        (in thousands, except per share amounts)
<S>                                        <C>          <C>          <C>          <C>          <C>
STATEMENT OF INCOME DATA:
Net revenue .............................  $ 41,650     $ 49,592     $ 50,442     $ 52,537     $39,574
Cost of revenue .........................    17,903       20,266       20,452       21,961      16,584
                                           --------     --------     --------     --------     -------

   Gross profit .........................    23,747       29,326       29,990       30,576      22,990
Total operating expenses(1) .............    26,237       29,254       40,636       30,968      16,212
                                           --------     --------     --------     --------     -------
Income (loss) from operations ...........    (2,490)          72      (10,646)        (392)      6,778
Interest and other income, net...........       324          120          762        1,232         743
                                           --------     --------     --------     --------     -------
Income (loss) before income taxes .......    (2,166)         192       (9,884)         840       7,521
Income taxes (benefit) ..................    (1,258)        (131)       1,711         (305)      2,231
                                           --------     --------     --------     --------     -------
Net income (loss) .......................  $   (908)    $    323     $(11,595)    $  1,145     $ 5,290
                                           ========     ========     ========     ========     =======
Diluted earnings (loss) per share .......  $   (.11)    $    .04     $  (1.43)    $    .13     $   .64
                                           ========     ========     ========     ========     =======
Net income (loss) excluding purchased
in-process research and development .....  $   (908)    $    323     $  4,102     $  6,531     $ 5,290
                                           ========     ========     ========     ========     =======
Diluted earnings (loss) per share
excluding purchased in-process research
and development(1) ......................  $   (.11)    $    .04     $    .51     $    .77     $   .64
                                           ========     ========     ========     ========     =======
Weighted average common and equivalent
shares outstanding ......................     8,099        8,249        8,104        8,534       8,269
                                           ========     ========     ========     ========     =======
BALANCE SHEET DATA:
Working capital .........................  $ 22,028     $ 25,641     $ 26,583     $ 39,128     $36,635
Total assets ............................    39,350       42,805       43,313       50,158      47,642
Shareholders' equity ....................    30,292       32,094       31,672       43,027      40,579
</TABLE>

(1)  Includes   $15,697  and  $8,776  of  purchased   in-process   research  and
     development in 1996 and 1995, respectively.

                                       18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS

INTRODUCTION

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

     In 1998,  the Company  recorded net revenue of $41.7 million and a net loss
of $908,000, or $.11 per share, as compared to net revenues of $49.6 million and
net  income of  $323,000,  or $.04 per  share,  in 1997.  International  revenue
accounted for 32%, 28% and 29% of the Company's net revenue in 1998,  1997,  and
1996,  respectively.  In  aggregate  dollars,  international  revenue  decreased
$300,000 to $13.4 million from $13.7 million in 1997. The decrease is due to the
tightening of the European economy and weak sales to the Asia Pacific region.

     In the fourth  quarter of 1998,  the Company  made a number of  significant
adjustments,  including  the  following:  $370,000 was reserved for  anticipated
sales  returns,  $200,000  was reserved  for  obsolete  inventory,  $200,000 was
written-off  for  evaluation  units not expected to be  recovered,  $800,000 was
written-off  for  prepaid  royalties  for  software  products  that are  rapidly
reaching  obsolescence,  and $430,000 was recorded in executive search and other
professional fees.

     The Company restated its quarterly  results for the first three quarters of
1998 to correct errors  identified  during the 1998 year-end  audit.  The errors
were  primarily  attributable  to system  changes  and  turnover  in the finance
department that occurred during the first half of 1998. The corrections  related
primarily  to the  provision  for sales  returns,  software  capitalization  and
amortization and inter-company account transactions.

     The Company has made  significant  changes to its  executive  management to
address  the issues that led to the need for the  restatement  of  earnings.  In
January  1999,  the Board hired an  experienced  President  and Chief  Executive
Officer and charged him with  instituting  all  required  changes in  accounting
management,  staff,  systems,  controls and policies. In March 1999, the Company
hired a new Chief Financial  Officer of proven abilities to direct and implement
this program. In addition,  the President and Chief Executive Officer is looking
to  strengthen  senior  management,  generally,  and is reviewing  the Company's
strategic direction.

                                       19
<PAGE>
RESULTS OF OPERATIONS

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

       DECEMBER 31,                         1998        1997     1996
       ------------                         ----        ----     ----
       Net revenue                          100%        100%      100%
                                           ----        ----      ----
       Gross margin                          57          59        59
                                           ----        ----      ----
       Operating expenses:
         Selling and marketing               30          33        28
         Research and development            19          17        13
         General and administrative          13          10         8
         Purchased in-process research
          and development                    --          --        31
                                           ----        ----      ----
       Income (loss) from operations         (6)         --       (21)
                                           ----        ----      ----
       Net income (loss)                    (2%)          1%      (23%)
                                           ====        ====      ====

      REVENUE.  Net revenue decreased $7.9 million,  or 16%, to $41.7 million in
1998 from $49.6  million in 1997.  The decrease was  primarily  attributable  to
intensified competition and the Company's decision in the second quarter of 1998
to withdraw  from the lower margin tower  business.  The lower than  anticipated
revenue from new higher margin  DiscPort2,  DiscPort VT and DiscZerver  products
were  unable to offset the lower  margin  tower  revenues.  In the first half of
1998,  the  Company  also  experienced  a general  weakness in sales to the Asia
Pacific region.

      Net revenue decreased $800,000, or 2%, to $49.6 million in 1997 from $50.4
million in 1996.  This  decrease was a result of market  softness in the network
connectivity products industry,  intensified  competition and a softening of the
European economy in 1997.

      International sales were $13.4 million, $13.7 million and $14.8 million in
1998,  1997  and  1996,  or  32%,  28%  and  29% of net  revenue,  respectively.
International sales continued to decrease in 1998, in both absolute dollars, and
as a  percentage  of net  revenue  primarily  due to the  weakening  of the Asia
Pacific economy.

         GROSS PROFIT.  Gross profit decreased $5.6 million, or 19%, to $23.7 in
1998 from $29.3 in 1997.  Gross margin as a percentage of net revenue  decreased
from 59.1% in 1997 to 57.1% in 1998.  The  decrease in gross profit was a result
of the decrease in revenue, and a change in the product mix.

         Gross  profit  decreased  $700,000,  or 2%, to $29.3 in 1997 from $30.0
million in 1996. Gross margin as a percentage of net revenue  remained  constant
at 59.1%.  The  decrease  in absolute  dollars  was a result of the  decrease in
revenue,  and a change in the product mix. This decrease was partially offset by
higher software content in several of its products.

         SALES  AND  MARKETING.  Sales and  marketing  expenses  decreased  $3.6
million,  or 22%,  to $12.7  million  in 1998 from $16.3  million  in 1997.  The
decreases  are  primarily  due to  synergies  created  from the  integration  of
Logicraft Information Systems, now doing business as Microtest Enterprise Group.
Logicraft  was  acquired  during the fourth  quarter of 1996,  and was not fully
integrated  into Microtest  until the third quarter of 1997. The  integration of
Logicraft into Microtest included a significant reduction in staffing during the
first and second quarters of 1997. In addition,  new cost control  measures were
implemented during the second half of 1997, which benefited 1998.

                                       20
<PAGE>
         Sales and marketing expenses  increased $2.0 million,  or 13%, to $16.3
million in 1997 from $14.3  million in 1996.  The increase was due largely to an
increase in employees and other costs attributable to the Logicraft  acquisition
made during the fourth quarter of 1996,  increased  commissions paid as a result
of the manufacturers'  representative  program, that was introduced in mid-1996,
and severance costs  associated  with  restructuring  of the Company's  European
operations and sales force.

         RESEARCH AND DEVELOPMENT.  Research and development  expenses decreased
$300,000, or 4%, to $7.9 million in 1998 from $8.2 million in 1997. The decrease
resulted primarily from the capitalization of software  development costs during
1998 for new products.  The Company  capitalized  approximately  $1.0 million of
software  development  costs  in  1998.  The  software  development  costs  were
partially  offset by the fourth  quarter  1998  write-off of $800,000 in prepaid
royalties  for software  products  that are rapidly  reaching  obsolescence.  In
addition,  there was a 12% decrease in the number of Logicraft employees in 1998
compared to 1997 after the  complete  integration  of  Logicraft,  as  discussed
above.

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

         The Company capitalized approximately $1.1 million $770,000 and $90,000
in 1998,  1997 and 1996,  respectively,  of software  development  costs for new
products for which technological  feasibility has been determined, in accordance
with Statement of Financial  Accounting  Standards  ("SFAS") No. 86, "ACCOUNTING
FOR THE COSTS OF COMPUTER  SOFTWARE TO BE SOLD,  LEASED OR OTHERWISE  MARKETED."
These  costs  will be  amortized  over the life of the  associated  products  of
approximately  two to  three  years  as a  charge  to  cost  of  revenue.  These
amortization  charges will result in lowering the Company's net income in future
periods.

         GENERAL  AND  ADMINISTRATIVE.   General  and  administrative   expenses
increased  $800,000,  or 17%, to $5.6 million in 1998 from $4.8 million in 1997.
The increase was a result of an increase in professional fees and allowances for
doubtful accounts over the prior year as well as a restructuring of the European
operations in 1998. In addition,  during the fourth quarter of 1998, the Company
incurred  charges of  approximately  $430,000  relating  to a legal  settlement,
additional professional fees, and the search and hiring of its new President and
Chief Executive Officer.

         General and administrative expenses increased $600,000, or 14%, to $4.8
million in 1997 from $4.2  million  in 1996.  The  increase  was a result of the
additional   personnel  and  other  administrative  costs  attributable  to  the
Logicraft acquisition during the fourth quarter of 1996, legal expenses incurred
to defend the Company against  class-action  lawsuits that were dismissed during
the second  quarter of 1997,  and an  increase  in the  allowance  for  doubtful
accounts of approximately $310,000.

         INTEREST AND OTHER INCOME.  Interest and other income,  net,  increased
$204,000 from  $120,000 in 1997 to $324,000 in 1998.  The increase was primarily
attributable to the Company consolidating their various investment accounts with
lower interest rates in 1997 into one investment  account with a higher interest
rate in 1998. In addition,  the Company had higher average cash balances in 1998
when  compared  to  1997.  The  average  cash  balance  for  1998  and  1997 was
approximately $12.7 million and $8.0 million, respectively.

                                       21
<PAGE>
         Interest and other income  decreased  $642,000 to $120,000 in 1997 from
$762,000 in 1996. The decrease in interest and other income was  attributable to
a higher  average cash balance  during 1996 when  compared to 1997.  The average
cash  balances  for 1997 and 1996  were  approximately  $8.0  million  and $21.0
million, respectively. The decrease in the average cash balance of $13.0 million
is the result of $12.5 million in cash paid for the acquisition of Logicraft.  A
loss of $200,000 was also included in other income related to the disposition of
certain fixed assets during 1997.

         EFFECTIVE TAX RATE. The Company's effective income tax rate varies from
the statutory rate primarily because of research and development  credits earned
as well as tax benefits earned from the Company's Foreign Sales Corporation.

         NET INCOME  (LOSS).  Net income (loss)  decreased $1.2 million to a net
loss of $908,000 in 1998 from net income of $323,000 in 1997.  The  decrease was
primarily attributable to a charge of approximately $800,000 taken in the fourth
quarter of 1998, to write-off prepaid royalties that the Company  determined had
become  impaired.  In addition,  the Company  recorded  charges of approximately
$200,000  to  write-off  evaluation  units not  expected  to be  recovered,  and
$430,000  of  charges  in  the  fourth  quarter  of  1998  relating  to a  legal
settlement, professional fees and executive search fees.

         Net income  increased  $11.9  million to net income of $323,000 in 1997
from  a  net  loss  of  $11.6  million  in  1996.  The  increase  was  primarily
attributable to a charge for purchased in-process research and development costs
in the  fourth  quarter of 1996 of $15.7 to record  the  Logicraft  acquisition.
Technological feasibility had not been established and no alternative future use
existed for certain  products  acquired.  The expense  recorded  for  in-process
research and development  costs was based on an allocation of the purchase price
to fair  values  of assets  and  liabilities  acquired.  The  allocation  of the
purchase  price to  purchased  research  and  development  costs was based on an
independent  appraisal of the fair value of complete and  in-process  technology
acquired.  Excluding the $15.7 million research and development  charge in 1996,
net income decreased to $323,000 in 1997 from $4.1 million in 1996. The decrease
was a result of the decrease in revenue,  increase in operating expenses,  and a
decrease in investment and other income.

         FUTURE RESULTS.  The Company's future operating results may be affected
by a number of factors,  including general economic  conditions in the Company's
markets,  the Company's  ability to develop,  manufacture  and sell its products
profitably, the strength of the Company's distribution channels,  competition in
general, and competitive pricing in particular.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its  operations  primarily  through  operating
cash flows.  At December 31, 1998, the Company had cash and cash  equivalents of
$9.6  million.  This  represents  a $1.9  million  decrease in cash  equivalents
compared to December 31, 1997,  due primarily to the timing of the collection of
accounts receivable,  the payment of accounts payable and lower revenues in 1998
compared to 1997.

         During the second quarter of 1997,  the Company  obtained a $10 million
unsecured  revolving  credit  facility  with a bank that is utilized for general
corporate and working capital purposes.  The credit facility carries an interest
rate equal to the bank's  "Reference  Rate"  defined as the rate of  interest in
effect for such day as publicly  announced  from time to time by the bank as its
reference  rate or the Offshore Rate plus 1.50.  Major  convenants of the credit
facility include:  (1) the Company, on a consolidated basis, not incurring a net
and operating loss in two consecutive  quarters,  (2) the Company  maintaining a

                                       22
<PAGE>
modified  quick  ratio of no less  than  1.50,  (3) the  Company  maintaining  a
tangible  net worth of no less than 90% of the  Company's  tangible net worth at
December 31, 1996, and (4) the Company not  permitting its total  liabilities to
exceed .75 times  tangible net worth.  At December 31, 1998, the Company was not
in compliance with the covenants that address  quarterly losses and tangible net
worth  requirements.  The  Company  and the bank are  currently  negotiating  an
amendment to the credit  facility that will extend the  expiration  date to June
30, 1999. No amounts were outstanding  under this credit facility as of December
31, 1998.

         During the year ended December 31, 1998, the Company generated $746,000
of cash from  operating  activities,  a decrease of $2.7 million from 1997 and a
decrease of $6.2 million from 1996.  The decrease in cash flows from  operations
was  primarily  due  to  decreased   profitability,   and  changes  in  accounts
receivable, accounts payable and accrued liabilities.

         Purchases  of  property  and  equipment  for  1998  were  approximately
$700,000.  During 1998, the Company purchased upgrades for computer hardware and
software,   leasehold  improvements,   tooling,  equipment,  and  furniture  and
fixtures.  The Company's  capital  expenditure  budget for 1999 is approximately
$1.5  million,  which  includes  purchases  for  software,  hardware,  leasehold
improvements,  and other  equipment.  Management  believes  that cash flows from
operations  and current cash  balances will be sufficient to meet the cash needs
of the Company in the foreseeable future.

INFLATION

     Inflation has not been a significant factor in the Company's  operations to
date.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

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

     FLUCTUATIONS IN QUARTERLY  OPERATING  RESULTS.  The Company's  revenues may
vary  significantly  from  quarter  to  quarter  due to a  variety  of  factors,
including changes in the Company's product and customer mix, the introduction of
new products by the Company or its  competitors,  and other  factors,  including
pricing pressures and economic conditions in the United States,  Europe and Asia
Pacific.  The Company operates with relatively  little backlog and substantially
all of its net revenue in each  quarter  results  from  orders  received in that
quarter. In addition, the Company incurs significant operating start-up expenses
in  anticipation  of future  revenue.  If  near-term  demand  for the  Company's
products weakens or if orders are not shipped in any quarter as anticipated, the
Company's  results of operations  for that quarter could be adversely  affected.
Sales of  products  through  distributors  and VARs  and  unanticipated  product
returns may exceed the Company's  allowances for future  returns.  The Company's
operating  results  will  also be  affected  by the  economic  condition  of the
computer industry,  which has from time to time experienced cyclical,  depressed
business conditions, often in connection with or in anticipation of a decline in
general economic conditions.  Due to all of the foregoing factors, the Company's
revenues or  operating  results may in one or more future  quarters be below the
expectations of stock market analysts and investors. In such event, the price of
the  Company's  common stock would  likely  decline,  and such decline  could be
substantial.

     DEPENDENCE ON THIRD-PARTY  DISTRIBUTORS.  The Company derives substantially
all of its product sales  through  distributors  and VARs.  Two of the Company's
distributors  accounted  for 21% of the Company's  revenue in 1998.  The loss of
certain  distributors  or VARs  would  have a  material  adverse  affect  on the

                                       23
<PAGE>
Company's   business  and   operating   results.   The   Company's   contractual
relationships  with its  distributors  and VARs are  generally  cancelable  upon
notice to the Company.  Certain of the Company's  distributors and VARs also act
as  distributors  for competitors of the Company and could devote greater effort
and  resources  to  marketing  competitive  products.  In  addition,   effective
distributors  and VARs must devote  significant  technical,  marketing and sales
resources to an  often-lengthy  sales cycle.  There can be no assurance that the
Company's  current  distributors  and VARs will continue to market the Company's
products  effectively or that economic or industry conditions will not adversely
affect such distributors and VARs. The Company's operating results could also be
materially adversely affected by changes in distributors'  inventory strategies,
which could  occur  rapidly  and, in many cases,  may not be related to end user
demand.  New products may require  different  marketing,  sales and distribution
strategies  than  those  for the  Company's  current  products.  There can be no
assurance  that the  Company's  distributors  and VARs will choose or be able to
effectively  market  these new  products or to continue to market the  Company's
existing  products.  A  failure  of  the  Company's  distributors  and  VARs  to
successfully  market the Company's products would have a material adverse affect
on the Company's business and results of operations.

     DEPENDENCE ON  THIRD-PARTY  SUPPLIERS.  The Company is dependent on a small
number of  third-party  vendors for the  manufacturing  of all of the  Company's
products.  The Company also is  dependent  on a small  number of  suppliers  for
certain  key  components  used  in  its  products,   including   CD-ROM  drives,
microprocessors,  integrated  circuits and power modules.  The Company purchases
these components  pursuant to purchase orders placed from time to time, does not
carry  significant  inventories of these  components and has no long-term supply
arrangements.  The loss of any of the Company's third-party manufacturers or key
suppliers  could have a material  adverse  affect upon the  Company's  business,
financial  condition and operating  results.  Although the Company believes that
alternative  sources of product  manufacturing and components could be arranged,
the  process of  qualifying  new  suppliers  could be  lengthy.  There can be no
assurance  that any  additional  source  would be  available to the Company on a
timely basis or at a cost acceptable to the Company. Any disruption or reduction
in the future  supply of any key  components  currently  obtained  from  limited
sources  could  have  a  material  adverse  affect  on the  Company's  business,
financial condition and operating results.

     RAPID TECHNOLOGICAL  CHANGE;  POTENTIAL FOR PRODUCT DEFECTS. The market for
the  Company's  products  is  characterized  by  rapid  technological  advances,
evolving  industry  standards  in computer  hardware  and  software  technology,
changes in customer  requirements  and  frequent new product  introductions  and
enhancements.  The  Company's  future  success  will  depend on its  ability  to
continue  to enhance  its  current  product  line and to continue to develop and
introduce new products that keep pace with competitive product introductions and
technological  developments,  satisfy diverse and evolving customer requirements
or otherwise  achieve  market  acceptance.  There can be no  assurance  that the
Company will be successful in continuing to develop and market,  in a timely and
cost  effective  manner,  new products or product  enhancements  that respond to
technological  advances by others or that these  products  will  achieve  market
acceptance.  In  addition,   companies  in  the  industry  have,  in  the  past,
experienced  delays in the  development,  introduction  and marketing of new and
enhanced  products  and  there can be no  assurance  that the  Company  will not
experience  delays in the future.  Any failure by the Company to  anticipate  or
respond  adequately to changes in technology  and customer  preferences,  or any
significant delays in product development or introduction, would have a material
adverse  affect on the Company's  business,  financial  condition and results of
operations.

     Due to their complexity and sophistication,  the Company's  products,  from
time to time,  may contain  defects or "bugs" which can be difficult to correct.
Moreover,  as the Company  continues to develop and enhance its products,  there
can be no  assurance  that the  Company  will be able to  identify  and  correct
defects  in such a manner  that will  permit  the  timely  introduction  of such
products. Furthermore,  despite extensive testing, the Company has, from time to
time,  discovered  defects  only  after  its  products  have  been  commercially

                                       24
<PAGE>
released.  There can be no assurance that product  defects will not cause delays
in  product  introductions  and  shipments,  cause  loss of or  delays in market
acceptance,  result in increased costs,  require design  modifications or impair
customer  satisfaction.  Any such event could have a material  adverse affect on
the Company's business, financial condition and results of operations.

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

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

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

     INTERNATIONAL OPERATIONS. Sales outside of North America accounted for 32%,
28% and 29% of the Company's  revenue in 1998, 1997 and 1996,  respectively.  An
important  element of the  Company's  strategy  is to expand  its  international
operations.  There can be no assurance that the Company will be able to continue
to successfully localize, market, sell and deliver products internationally. The
inability of the Company to successfully expand its international  operations in
a timely and cost effective  manner could have a material  adverse affect on the
Company's business, financial condition and results of operations. The Company's

                                       25
<PAGE>
business and results of  operations  could be materially  adversely  affected by
risks  inherent  in  conducting  business  internationally,  such as  changes in
currency  exchange rates,  longer payment  cycles,  difficulties in staffing and
managing international  operations,  problems in collecting accounts receivable,
seasonal  reductions in business activity during the summer months in Europe and
certain other parts of the world and tariffs,  duties and other trade  barriers.
The Company seeks to mitigate its direct  exposure to exchange rate  fluctuation
by selling only in United States currency.

     LITIGATION.  From time to time the  Company is  involved  in various  legal
proceedings  incidental  to its business.  Management  does not believe that any
current legal  proceedings  will have a material adverse affect on the financial
condition or operating results of the Company, but there can be no assurances in
this  regard.  On March 8, 1999,  a  purported  class  action  lawsuit was filed
against  Microtest,  Inc.  and  certain  former  officers  in the United  States
District  Court for the  District  of Arizona.  The suit  claims that  Microtest
violated  Section 10(b) of the Securities  Exchange Act of 1934 by making public
misrepresentations or failing to disclose material facts regarding its financial
results.  The suit was filed as a class  action on behalf of all  purchasers  of
Microtest stock between April 14, 1998 and March 2, 1999.  Microtest  intends to
vigorously  defend  the suit.  The  eventual  outcome  of this  claim  cannot be
predicted with any degree of legal certainty.

         The  Securities  and  Exchange  Commission  ("SEC")  is  engaged  in an
investigation  relating primarily to accounting matters of the Company.  The SEC
has not, to date,  asserted  any  specific  claim or remedy with  respect to the
Company.

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

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

                                       26
<PAGE>
     YEAR 2000 ISSUES.  Like many other  organizations,  the year 2000  computer
issue  creates  risks for the Company.  Many  computer  systems were  originally
designed to  recognize  calendar  years by their last two  digits.  Calculations
performed using these truncated fields would not work properly with dates during
or after the year 2000.  To address  these year 2000  issues,  the  Company  has
initiated a comprehensive assessment and remediation program to resolve any year
2000 issues with  respect to its  information  technology  ("IT")  systems,  its
non-IT  systems,  products and the systems of third  parties with which it has a
material  relationship.  The Company  estimates that as of March 1, 1999, it has
completed  approximately  90% of the effort it believes  necessary or prudent to
adequately address potential year 2000 issues they have identified.

     The IT systems  section of its year 2000 program  focuses on the  Company's
computer  hardware and software.  The Company has completed the assessment phase
of its program. The Company's current IT systems which were determined not to be
compliant  have  entered the  remediation  phase  during  which the Company will
either replace or otherwise  remedy such systems.  The remediation  phase for IT
systems is expected to be completed by June 30, 1999.  Some minor systems may be
converted later in 1999.

     The non-IT systems section  includes the hardware,  software and associated
embedded  computer  technologies  that are used to operate  Company  facilities,
equipment and other activities that are not related to IT systems. The Company's
building  management  has provided  the Company with a complete  list of vendors
indicating compliance. The current telephone system will be compliant by the end
of the first  quarter of 1999.  Long  distance and local  telephone  service are
compliant.

     The Company's current products and all planned future releases,  with minor
exceptions, are year 2000 compliant.  Registered customers have been notified of
non-compliant products and any available upgrade. This information was also made
available on the Company's Web site as of June 1998.

     The  Company  is  in  the   process  of   identifying,   prioritizing   and
communicating with critical  suppliers,  distributors and customers to determine
the extent to which the Company  may be  vulnerable  in the event those  parties
fail to properly  identify and remedy  their own year 2000  issues.  The Company
believes that non-compliant systems related to the Company's top suppliers would
present the greatest risk to the Company. Questionnaires have been sent to those
suppliers and they have stated that they are  compliant or expect  compliance by
the end of 1999.  The  Company  intends to monitor  the  progress  made by these
critical  third  parties and  formulate  appropriate  contingency  and  business
continuation plans as needed.

     The Company currently believes that the worst case scenario with respect to
the year 2000 issue is the failure of a supplier,  including utility  suppliers,
to become year 2000 compliant,  which could result in the temporary interruption
of  the  supply  of  necessary  products  or  services.  This  could  result  in
interruptions  in production for a period of time, which in turn could result in
potential  lost sales and profits.  In addition,  marketing  and  administrative
expense  could  increase  if  automated  functions  would  need to be  performed
manually.

                                       27
<PAGE>
     The  total  cost of the  Company's  year 2000  Plan is not  expected  to be
material to the Company's financial  condition.  The estimated total cost of the
Plan should not exceed  $750,000  and is being  funded  through  operating  cash
flows. To date, the Company has incurred  capital  expenditures of approximately
$350,000  related  to this  project.  None of the  Company's  other  information
technology   projects  have  been  delayed  or  deferred  as  a  result  of  the
implementation  of the year 2000  Compliance  Plan.  The Company does not expect
that the incremental  costs of this project will have a material  adverse affect
on the Company's  consolidated  financial statements or results of operations in
any future periods.

     The costs of the year  2000  project  and the  dates on which  the  Company
believes it will complete the year 2000  modifications  and testing are based on
management's best estimates.  These were derived utilizing numerous  assumptions
regarding  future  events,  including  the  continued  availability  of  certain
resources,  third-party modification plans and other factors. However, there can
be no guarantee  that these  estimates will be achieved and actual results could
differ  materially  from those currently  anticipated.  Examples of factors that
might  cause such  material  differences  include,  but are not  limited to, the
availability  and cost of personnel  trained in this area, the ability to locate
and correct all  relevant  computer  codes and embedded  technology  and similar
uncertainties.  In  addition,  there can be no  guarantee  that the  systems  or
products of other entities will be converted on a timely basis,  or that failure
to convert by another  company,  or a conversion that is  incompatible  with the
Company's systems, would not have a material adverse affect on the Company.

     The Company presently believes it has an effective Compliance Plan in place
to  anticipate  and  resolve  potential  year 2000  issues  in a timely  manner.
Concurrent  with the  remediation  of the  Company's  systems and  evaluation of
third-party systems, the Company is developing contingency plans to mitigate the
risks that could occur in the event of disruption due to non-compliant  systems.
Contingency  plans may include  looking for  alternative  suppliers,  increasing
inventory  levels  or  other  actions  deemed  prudent.   It  is  expected  that
assessment,  remediation  and contingency  planning  activities will be on-going
throughout 1999 with the goal of appropriately  resolving all material  internal
systems and third-party  issues.  Estimated costs associated with developing and
implementing contingency measures are not currently estimable.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Consolidated balance sheets of the Company as of December 31, 1998 and 1997
and consolidated  statements of operations,  stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998, 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.

                                       28
<PAGE>



INDEPENDENT AUDITORS' REPORT



Board of Directors of
Microtest, Inc.
Phoenix, Arizona

We have audited the accompanying  consolidated balance sheets of Microtest, Inc.
and  subsidiaries  (the  "Company")  as of December  31, 1998 and 1997,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended  December 31, 1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility is to express an opinion on the financial statements.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial  position of the Company at December 31, 1998
and 1997,  and the results of its  operations and its cash flows for each of the
three years in the period ended  December 31, 1998 in conformity  with generally
accepted accounting principles.


DELOITTE & TOUCHE LLP

Phoenix, Arizona
March 25, 1999

                                       29
<PAGE>
                        MICROTEST, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1998 AND 1997
                      (in thousands, except share amounts)

                                                             1998        1997
                                                           --------    --------
                                     ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                $  9,618    $ 11,547
  Restricted investments                                      1,124         865
  Accounts receivable, net of allowances
   for doubtful accounts of $637 and $892,
   and sales returns of $1,392 and $1,073                     8,171      12,083
  Inventories                                                 6,572       5,924
  Prepaid expenses                                            1,148       1,459
  Income taxes receivable                                     2,897       2,258
  Deferred income taxes                                       1,556       2,216
                                                           --------    --------
       Total current assets                                  31,086      36,352
                                                           --------    --------

PROPERTY AND EQUIPMENT, NET                                   3,101       3,543
                                                           --------    --------
OTHER ASSETS:
  Capitalized software, net of accumulated
   amortization of $706 and $282                              1,894       1,270
  Deferred income taxes                                       1,519         133
  Other                                                       1,750       1,507
                                                           --------    --------
       Total other assets                                     5,163       2,910
                                                           --------    --------
                                                           $ 39,350    $ 42,805
                                                           ========    ========
                    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                         $  4,152    $  4,699
  Accrued liabilities                                         2,922       4,130
  Accrued payroll and employee benefits                         860       1,017
  Accrued deferred compensation                               1,124         865
                                                           --------    --------
       Total current liabilities                              9,058      10,711
                                                           --------    --------
COMMITMENTS AND CONTINGENCIES (Notes 5, 8, and 9)

STOCKHOLDERS' EQUITY:
  Common stock, $.001 par value, 15,000,000
   shares authorized; 8,253,585 shares and
   8,193,320 shares issued and outstanding                        8           8
  Additional paid-in capital                                 32,916      32,710
  Accumulated deficit                                        (1,414)       (186)
                                                           --------    --------
                                                             31,510      32,532
Less treasury stock, at cost, 232,520
  shares and 34,196 shares                                   (1,218)       (438)
                                                           --------    --------
  Total stockholders' equity                                 30,292      32,094
                                                           --------    --------
                                                           $ 39,350    $ 42,805
                                                           ========    ========

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

                                       30
<PAGE>
                        MICROTEST, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                    (in thousands, except per share amounts)


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

NET REVENUE                                    $ 41,650    $ 49,592    $ 50,442

COST OF REVENUE                                  17,903      20,266      20,452
                                               --------    --------    --------
     Gross profit                                23,747      29,326      29,990
                                               --------    --------    --------
OPERATING EXPENSES:
  Sales and marketing                            12,720      16,253      14,334
  Research and development                        7,912       8,212       6,414
  General and administrative                      5,605       4,789       4,191
  Purchased research and development                 --          --      15,697
                                               --------    --------    --------
     Total operating expenses                    26,237      29,254      40,636
                                               --------    --------    --------

INCOME (LOSS) FROM OPERATIONS                    (2,490)         72     (10,646)
                                               --------    --------    --------
OTHER INCOME (EXPENSE):
  Interest expense                                  (46)        (54)         (1)
  Interest income                                   393         317         769
  Other                                             (23)       (143)         (6)
                                               --------    --------    --------
     Total other income, net                        324         120         762
                                               --------    --------    --------

INCOME (LOSS) BEFORE INCOME TAXES                (2,166)        192      (9,884)

INCOME TAXES (BENEFIT)                           (1,258)       (131)      1,711
                                               --------    --------    --------
NET INCOME (LOSS)                              $   (908)   $    323    $(11,595)
                                               ========    ========    ========
BASIC EARNINGS PER SHARE:
  Net income (loss)                            $   (.11)   $    .04    $  (1.43)
                                               ========    ========    ========
  Weighted average common shares outstanding      8,099       8,139       8,104
                                               ========    ========    ========
DILUTED EARNINGS PER SHARE:
  Net income (loss)                            $   (.11)   $    .04    $  (1.43)
                                               ========    ========    ========
  Weighted average common equivalent
  shares outstanding                              8,099       8,249       8,104
                                               ========    ========    ========

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

                                       31
<PAGE>
                        MICROTEST, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (in thousands)
<TABLE>
<CAPTION>
                                   Common Stock      Treasury Stock    Additional                 Total
                                  --------------   ----------------     Paid-in   Accumulated  Stockholders'
                                  Shares  Amount   Shares    Amount     Capital     Deficit       Equity
                                  ------  ------   ------    ------     -------     -------       ------
<S>                             <C>       <C>      <C>    <C>         <C>        <C>           <C>
BALANCE, December 31, 1995        8,159     $8       64     $  (982)    $32,546    $ 11,455      $ 43,027
 Net loss                            --     --       --          --          --     (11,595)      (11,595)
 Issuance of common stock upon
 exercise of stock options           --     --      (27)        394           4        (279)          119
 Disqualifying disposition of
  stock options                      --     --       --          --          43          --            43
 Issuance of common stock under
 employee stock purchase plan        --     --      (20)        254          --         (66)          188
 Purchase of treasury stock          --     --       11        (110)         --          --          (110)
                                  -----   ----     ----     -------     -------    --------      --------

BALANCE, December 31, 1996        8,159      8       28        (444)     32,593        (485)       31,672
 Net income                          --     --       --          --          --         323           323
 Issuance of common stock upon
 exercise of stock options            1     --       --           8           2          (5)            5
 Disqualifying disposition of
  stock options                      --     --       --          --          --           1             1
 Issuance of common stock under
 employee stock purchase plan        33     --      (11)        102         115         (20)          197
 Purchase of treasury stock          --     --       17        (104)         --          --          (104)
                                  -----   ----     ----     -------     -------    --------      --------

BALANCE, December 31, 1997        8,193      8       34        (438)     32,710        (186)       32,094
 Net loss                            --     --       --          --          --        (908)         (908)
 Issuance of common stock upon
 exercise of stock options           15     --       --          --          29          --            29
 Issuance of common stock under             --
 employee stock purchase plan        46             (34)        438         177        (320)          295
 Purchase of treasury stock          --     --      233      (1,218)         --          --        (1,218)
                                   -----   ----    ----     -------     -------    --------      --------

BALANCE, December 31, 1998        8,254   $  8      233     $(1,218)    $32,916    $ (1,414)     $ 30,292
                                  =====   ====     ====     =======     =======    ========      ========
</TABLE>

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

                                       32
<PAGE>
                        MICROTEST, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (in thousands)

                                                     1998      1997      1996
                                                   --------  --------  --------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                $  (908)  $   323   $(11,595)
  Adjustments to reconcile net loss to net
    cash provided by operating activities--
  Depreciation and amortization                      1,599     1,887      1,460
  Change in accounts receivable allowance               64       310         61
  Purchased research and development                    --        --     15,697
  Deferred income taxes                               (726)    1,387       (833)
  (Increase) decrease in accounts receivable         3,848     5,151       (321)
  (Increase) decrease in inventories                  (648)     (264)       907
  (Increase) decrease in prepaid expenses
    and other assets                                    68   (1,568)       270
  (Increase) decrease in income taxes receivable      (639)   (1,967)     1,852
  Increase (decrease) accounts payable and
    accrued liabilities                             (1,755)   (1,733)      (750)
  Increase (decrease) in accrued payroll
    and employee benefits                             (157)      (62)       197
                                                   -------   -------   --------

     Net cash provided by operating activities         746     3,464      6,945
                                                   -------   -------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                  (733)   (1,526)    (1,056)
  Capitalized software                              (1,048)     (772)       (90)
  Purchase of business                                  --        --    (15,621)
                                                   -------   -------   --------

     Net cash used in investing activities          (1,781)   (2,298)   (16,767)
                                                   -------   -------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock                     324       203        307
Purchase of treasury stock                          (1,218)     (104)      (110)
                                                   -------   -------   --------
     Net cash provided by (used in) financing
       activities                                     (894)       99        197
                                                   -------   -------   --------
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                  (1,929)    1,265     (9,625)

CASH AND CASH EQUIVALENTS, beginning of year        11,547    10,282     19,907
                                                   -------   -------   --------

CASH AND CASH EQUIVALENTS, end of year             $ 9,618   $11,547   $ 10,282
                                                   =======   =======   ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
  Cash paid for income taxes                       $    65   $   219   $    750
                                                   =======   =======   ========

  Cash paid for interest                           $     9   $    55   $      1
                                                   =======   =======   ========

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

                                       33
<PAGE>
                        MICROTEST, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        (in thousands, except percentages, shares and per share amounts)


(1) SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

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

CASH EQUIVALENTS AND RESTRICTED INVESTMENTS

The Company considers all short-term  investments with a maturity at the date of
purchase of three months or less to be cash equivalents.  Restricted investments
are equity  securities and other investments that are restricted for the payment
of deferred compensation to former officers of the Company, in February 1999 and
December 2000.

INVENTORIES

Inventories  are  stated at the  lower of cost or  market.  Cost is  principally
determined using the first-in, first-out method.

PROPERTY AND EQUIPMENT

Property  and  equipment  are  stated  at cost.  Depreciation  of  property  and
equipment is provided over the estimated useful lives of the assets ranging from
three to seven years using the straight-line method.  Leasehold improvements are
amortized using the straight-line method over the shorter of the remaining lease
term or the estimated useful life of the  improvements.  Depreciation for income
tax purposes is computed using accelerated methods.  Maintenance and repairs are
charged to expense as incurred.

CAPITALIZED SOFTWARE DEVELOPMENT COSTS

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) are capitalized and amortized over the expected number of
units to be sold, or three years, whichever method is faster.

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

The Company reviews its long-lived assets and certain  identifiable  intangibles
for impairment  whenever  events or changes in  circumstances  indicate that the
carrying  amount  of the  asset  may  not be  recoverable.  If such  assets  are
considered  to be impaired,  the  impairment to be recognized is measured by the
amount by which the carrying  amount of the assets exceeds the fair market value
of the  assets.  Assets  to be  disposed  of are  reported  at the  lower of the
carrying amount or fair value less costs to sell.

                                       34
<PAGE>
REVENUE RECOGNITION

The Company generally recognizes revenue from product sales upon shipment. Sales
to distributors in the United States, Canada and Europe account for the majority
of the Company's net sales. The Company has established a program,  which, under
specified  conditions,  enables distributors and resellers to return products to
the Company for credit against additional purchases, or in the event the Company
reduces its selling  prices,  to receive  credits for the  reduction  in selling
price.  The amount of potential  product  returns,  including  returns under the
Company's  warranty  program,  and  credits  for selling  price  reductions,  is
estimated and provided for in the period of sale. During 1996, the Company had a
direct sales  program  under which the Company  recognized  revenue from product
sales to direct  end users  upon  customer  commitment  and  shipment.  Customer
commitment  means  receipt  by the  Company of a valid  purchase  order from the
customer.

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  of new  software  products and  enhancements  to existing
software products are expensed as incurred until  technological  feasibility has
been established. After technological feasibility is established, any additional
costs are capitalized.

INCOME TAXES

The Company  accounts for income taxes under the asset and  liability  approach.
Deferred  tax assets  and  liabilities  are  recorded  based on the  differences
between the financial  statement and tax bases of assets and liabilities and the
tax rates in effect when these differences are expected to reverse.  The Company
has not provided for foreign  withholding taxes or U.S. deferred income taxes on
accumulated  undistributed  earnings of foreign  subsidiaries.  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.

EARNINGS PER SHARE

Basic earnings per share is computed on the weighted average number of shares of
common  stock  outstanding  during each  period.  Diluted  earnings per share is
computed on the weighted  average  number of shares of common stock  outstanding
plus the dilutive  effect of stock options  calculated  using the treasury stock
method.  Potential dilutive securities are not considered if the result would be
antidilutive.

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets  and  liabilities  at the date of the  financial  statements.
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

                                       35
<PAGE>
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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents approximates fair value because
their  maturity is generally  less than three  months.  The  carrying  amount of
accounts receivable,  accounts payable and accrued liabilities approximates fair
value  since  they  are  expected  to be  collected  or paid  within  90 days of
year-end.

PRODUCT CONCENTRATION

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

STOCK-BASED COMPENSATION

The Company has adopted the disclosure  only  provisions of issued  Statement of
Financial  Accounting  Standards  ("SFAS") No. 123,  "ACCOUNTING FOR STOCK-BASED
COMPENSATION."  In accordance  with the  provisions of SFAS No. 123, the Company
applies Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES"  and related  interpretations  in accounting  for its  stock-based
plans.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
130, "REPORTING  COMPREHENSIVE INCOME," which is effective in 1998. 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  had an insignificant  effect on the Company's  financial
statements.

In 1998,  the Company  adopted SFAS No. 131,  "DISCLOSURE  ABOUT  SEGMENTS OF AN
ENTERPRISE AND RELATED  INFORMATION,"  which  establishes  standards for the way
public business enterprises report information about operating segments. It also
establishes  standards  for related  disclosures  about  product  and  services,
geographic areas, and major customers (see Notes 10, 11 and 12).

In June  1998,  the  FASB  issued  SFAS  No.  133,  "ACCOUNTING  FOR  DERIVATIVE
INSTRUMENTS  AND HEDGING  ACTIVITIES."  SFAS No. 133 requires that an enterprise
recognize all  derivatives  as either assets or  liabilities in the statement of
financial  position,  and measure those instruments at fair value. The statement
is effective for the Company's  year ending  December 31, 2000.  The Company has
not  completed  the  process of  evaluating  the impact  that will  result  from
adopting  SFAS No. 133. The Company is  therefore  unable to disclose the impact
that adopting  SFAS No. 133 will have on its  financial  position and results of
operations when such statement is adopted.

                                       36
<PAGE>
RECLASSIFICATIONS

Certain  reclassifications  have  been  made to the 1997  and 1996  consolidated
financial statements to conform to the 1998 presentation.

(2) ACQUISITIONS:

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

The  accompanying  consolidated  statements of operations  reflect the operating
results of Logicraft  since the  effective  date of the  acquisition.  Pro forma
unaudited  consolidated  operating  results of the Company and Logicraft for the
year ended  December 31,  1996,  assuming  the  acquisition  had been made as of
January 1, 1996 is summarized below:

                                                             1996
                                                            -------
         Net revenue                                        $64,747
                                                            =======
         Net income                                         $   171
                                                            =======
         Net income per common share                        $   .02
                                                            =======

These pro forma  results have been  prepared for  comparative  purposes only and
include certain  adjustments  such as the decrease in interest income imputed on
the consideration for the acquisition,  and the increase in amortization expense
associated with the  capitalization of certain  acquisition costs. The pro forma
results exclude the expenses related to the purchase of in-process  research and
development in 1996.  The pro forma  financial  information  is not  necessarily
indicative  of the  results  of  operations  as they  would  have  been  had the
transactions been affected on the assumed dates.

(3) INVENTORIES:

Inventories at December 31, consisted of the following:

                                                           1998          1997
                                                          ------        ------
         Raw materials                                    $1,946        $1,367
         Work-in-progress                                    100           155
         Finished goods                                    5,200         5,096
                                                          ------        ------
                                                           7,246         6,618
         Less allowances for inventory valuation            (674)         (694)
                                                          ------        ------
                                                          $6,572        $5,924
                                                          ======        ======

                                       37
<PAGE>
(4) PROPERTY AND EQUIPMENT:

Property and equipment at December 31, consisted of the following:

                                                            1998          1997
                                                          --------      -------
         Equipment                                        $  8,782      $ 8,181
         Furniture and fixtures                              1,054        1,020
         Leasehold improvements                                640          542
                                                          --------      -------
                                                            10,476        9,743
         Less accumulated depreciation and amortization     (7,375)      (6,200)
                                                          --------      -------
                                                          $  3,101      $ 3,543
                                                          ========      =======
(5) LEASES:

The Company leases office space and other  equipment under capital and operating
leases that expire at various  dates  through  2002.  The future  minimum  lease
commitments under these leases are payable as follows:

          Year Ending                                     Capital      Operating
          December 31,                                    Leases         Leases
          ------------                                    ------         ------
              1999                                         $  32         $1,318
              2000                                            32          1,004
              2001                                            14            181
              2002                                            --              6
                                                           -----         ------
   Total minimum lease obligations                         $  78         $2,509
                                                           =====         ======

Rental expense under operating leases totaled  approximately  $1,262, $1,051 and
$982 for 1998, 1997 and 1996, respectively.

(6) INCOME TAXES:

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

                                            1998          1997          1996
                                           -------       -------       -------
      Current (benefit) expense:
         Federal                           $  (697)      $(1,427)      $ 2,326
         State                                 (24)          (91)          149
         Foreign                               189            --            69
                                           -------       -------       -------
      Total current (benefit) expense         (532)       (1,518)        2,544
      Deferred (benefit) expense              (726)        1,387          (833)
                                           -------       -------       -------
      Total income taxes (benefit)         $(1,258)      $  (131)      $ 1,711
                                           =======       =======       =======

                                       38
<PAGE>
The Company's  current income tax liability was reduced and  additional  paid-in
capital  increased  approximately  $-0-, $1 and $43 during 1998,  1997 and 1996,
respectively,  resulting  from  disqualifying  dispositions  of incentive  stock
options.

A  reconciliation  of the difference  between income taxes  (benefit) and income
taxes at the statutory U.S. federal income tax rate for the years ended December
31, is as follows:

                                                   1998       1997       1996
                                                   -----      -----      -----
      Computed "expected" tax (benefit) expense   $  (702)    $  65     $(3,361)
      Foreign sales corporation benefit              (206)       --          --
      Acquired research and development                --        --       5,337
      State taxes, net                                (97)        3          90
      Research and development credits               (248)     (217)       (111)
      Tax exempt interest income                      (24)      (24)       (261)
      Other, net                                       19        42          17
                                                  -------     -----     -------
      Total income tax (benefit) expense          $(1,258)    $(131)    $ 1,711
                                                  =======     =====     =======

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

                                                             1998        1997
                                                           -------     -------
      Nondeductible accruals and reserves                  $ 1,358     $ 1,593
      Inventory costs capitalized for income tax purposes      198         623
                                                           -------     -------
      Total current deferred income taxes                    1,556       2,216
                                                           -------     -------
      Excess of tax over book depreciation                    (202)       (322)
      Net operating loss carryforwards                       2,025       1,654
      Tax credit carryforwards                                 880          52
      Other                                                    140          43
                                                           -------     -------
      Total noncurrent deferred income taxes                 2,843       1,427
      Less: valuation allowance                             (1,324)     (1,294)
                                                           -------     -------
      Net noncurrent deferred income taxes                   1,519         133
                                                           -------     -------
      Total deferred income taxes                          $ 3,075     $ 2,349
                                                           =======     =======

At December 31, 1998, the Company has net operating loss carryforwards of $3,371
and $12,281 for federal and state income tax reporting  purposes,  respectively.
The federal net  operating  losses  expire in the years 2001 through 2010 if not
utilized prior to that time. The state net operating  losses expire over various
years  depending  on the various  state laws.  The Company also has foreign tax,
general business and alternative minimum tax credit  carryforwards of $36, $627,
and $216, respectively.  The foreign tax credit carryforward expires in the year
2003 and the general business credit  carryforwards expire in various amounts in
the  years  2011 - 2016 if not  utilized  prior to that  time.  The  alternative
minimum tax credit may be carried forward indefinitely.

                                       39
<PAGE>
The  federal  net  operating  loss of $3,371 and  $3,367 of state net  operating
losses relate to the  acquisition of Logicraft,  Inc. Due to restrictions on the
availability  of the  Logicraft  net  operating  losses to offset the  Company's
income,  a valuation  allowance has been  established for the entire federal and
state tax benefit.  The valuation  allowance  reduces  deferred tax assets to an
amount  that  represents  the  Company's  best  estimate  of the  amount of such
deferred tax assets that,  more likely than not,  will be realized.  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.

(7) FINANCING ARRANGEMENTS:

During the second quarter of 1997, the Company obtained a $10 million  unsecured
revolving credit facility with a bank,  which is utilized for general  corporate
and working  capital  purposes.  The Company pays interest at a referenced  rate
plus 1.5% and is required to pay a quarterly  fee for the unused  portion of the
credit  facility.  The credit  facility  includes  provisions  that  require the
Company to meet certain covenants.  At December 31, 1998, the Company was not in
compliance  with the convenants that address  quarterly  losses and tangible net
worth  requirements.  The  Company  and the bank are  currently  negotiating  an
amendment to the credit  facility that will extend the  expiration  date to June
30, 1999. No amounts were outstanding  under this credit facility as of December
31, 1998.

(8) COMMITMENTS AND CONTINGENCIES:

LITIGATION

The Company is involved in certain legal matters incidental to its business, the
outcome of which is currently  unknown.  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 and results of operations.

On March 8, 1999, a purported class action lawsuit was filed against  Microtest,
Inc. and certain  former  officers in the United States  District  Court for the
District of Arizona.  The suit claims that Microtest  violated  Section 10(b) of
the  Securities  Exchange  Act of 1934 by making  public  misrepresentations  or
failing to disclose material facts regarding its financial results. The suit was
filed as a class action on behalf of all  purchasers of Microtest  stock between
April 14, 1998 and March 2, 1999.  Microtest  intends to  vigorously  defend the
suit. The eventual  outcome of this claim cannot be predicted with any degree of
legal certainty.

The Securities and Exchange  Commission  ("SEC") is engaged in an  investigation
relating  primarily to  accounting  matters of the Company.  The SEC has not, to
date, asserted any specific claim or remedy with respect to the Company.

PURCHASE COMMITMENTS

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

                                       40
<PAGE>
(9) EMPLOYEE BENEFIT PLANS:

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.  In
addition,  on the  third  anniversary  and  each  successive  anniversary,  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 options grants 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.

                                       41
<PAGE>
A summary of combined stock option  activity with respect to the above plans for
the three-year period ended December 31, 1998 follows:

                                                      Options Outstanding
                                                --------------------------------
                                                                Weighted Average
                                                 Shares          Exercise Price
                                                 ------          --------------
        Balance, January 1, 1996                1,432,304            $12.43
          Granted                                 589,148              8.86
          Cancelled                              (625,486)            17.06
          Exercised                               (26,567)             4.74
                                                ---------            ------
        Balance, December 31, 1996              1,369,399              9.00
          Granted                                 806,028              5.03
          Cancelled                              (268,200)            10.40
          Exercised                                (1,224)             4.68
                                                ---------            ------
        Balance, December 31, 1997              1,906,003              6.97
          Granted                                 314,350              4.66
          Cancelled                              (410,369)             8.66
          Exercised                                (5,667)             5.05
                                                ---------            ------
        Balance, December 31, 1998              1,804,317            $ 6.18
                                                =========            ======

The weighted  average  fair value of options  outstanding  was $4.66,  $5.93 and
$4.20 per share in 1998, 1997 and 1996, respectively.

The following table summarizes  information about the stock options  outstanding
at December 31, 1998:
<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>
$ 2.78   $ 4.16     539,277           8.0           $ 3.78          108,665       $ 3.74
$ 4.63   $ 6.81     737,968           7.6           $ 5.23          317,818       $ 5.38
$ 7.75   $10.75     457,459           4.7           $ 8.71          367,474       $ 8.74
$12.25   $17.75      30,113           6.2           $14.81           23,613       $14.50
$18.50   $24.25      39,500           4.9           $20.72           37,048       $20.84

$ 2.78   $24.25   1,804,317           6.9           $ 6.18          854,618       $ 7.54
</TABLE>

The  Company  applies  Accounting  Principles  Board  Opinion No. 25 and related
interpretations  in  accounting  for its stock  option and  purchase  plans.  In
compliance  with SFAS No.  123,  the  Company  has  elected to provide pro forma
disclosure of its net income (loss).  Accordingly,  no compensation  expense has
been recognized for its fixed stock options plans and its stock purchase plan.

                                       42
<PAGE>
Had  compensation  expense for the Company's  stock option plans been determined
based on the fair value at the grant  dates for awards  under those  plans,  the
Company's  pro forma net  income  (loss) and  earnings  (loss) per share for the
years ended December 31, 1998, 1997 and 1996 would have been as indicated below:

                                              1998        1997        1996
                                              ----        ----        ----
         Net income (loss):
              As reported                   $  (908)     $ 323     $(11,595)
              Pro forma                      (2,036)      (666)     (13,577)

         Diluted net income (loss) per
          common and equivalent share:
              As reported                   $  (.11)     $ .04     $  (1.43)
              Pro forma                        (.25)      (.08)       (1.68)

The fair value of options  granted under the Company's  fixed stock option plans
during  1998,  1997 and 1996  were  estimated  on the  date of grant  using  the
Black-Scholes   option-pricing   model  with  the  following  weighted  averaged
assumptions used:

                                              1998        1997         1996
                                              ----        ----         ----
         Expected volatility                  77.0%       92.0%        75.0%
         Expected term                       5 years     5 years      4 years
         Dividend yield                          0%          0%           0%
         Risk-free interest rate               5.5%        6.2%         5.4%

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

                                               1998        1997         1996
                                               ----        ----         ----
         Expected volatility                   77.0%       92.0%        75.0%
         Expected term                        1 year      1 year       1 year
         Dividend yield                           0%          0%           0%
         Risk-free interest rate                5.5%        5.8%         5.1%

EMPLOYEE STOCK PURCHASE PLAN

On May 18,  1992,  the Company  adopted an  Employee  Stock  Purchase  Plan (the
"Purchase  Plan").  A total of 200,000  shares of common  stock are reserved for
issuance under the Purchase Plan. In March 1999, the Board of Directors approved
an  amendment  to the plan  that  would  increase  the  number  of  shares by an
additional  200,000.  This amendment is to be voted upon by the  shareholders of
the Company at the 1999 Annual  Meeting.  The  Purchase  Plan  permits  eligible
employees to purchase  common stock through  payroll  deductions,  which may not
exceed 10% of an employee's compensation, at 85% of the lower of the fair market
value  of the  common  stock  at the  beginning  or at the end of each  offering
period, as defined. During 1998, 80,189 shares of common stock were purchased at
a weighted average price per share of $3.73. In 1997 and 1996, 43,891 shares and
20,499  shares of common stock were  purchased at a weighted  average  price per
share of $4.48 and $9.04,  respectively.  At December 31, 1998,  2,299 shares of
common stock were available for issuance  under the plan.  The weighted  average
fair value of those purchase  rights  granted in 1998,  1997 and 1996 was $1.58,
$4.79 and, $8.29, respectively.

                                       43
<PAGE>
401(k) PLAN

The Company maintains a contributory profit-sharing plan for the majority of its
employees meeting certain requirements.  The 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  limitations  prescribed by the
Internal  Revenue  Service.  The Company may, in its  discretion,  make matching
contributions equal to a percentage of an employee's compensation contributed to
the Plan for the year, or in a fixed dollar amount,  as determined  each year by
the Board of Directors. The Company's contribution to the Plan was approximately
$116, $127 and $117 during 1998, 1997 and 1996, respectively.

STOCK REPURCHASE

On April 14, 1998,  the Company's  Board of Directors  authorized the Company to
repurchase 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 stock was purchased,  from time to time, on the open market
as conditions permit. To date, the Company has repurchased  232,520 shares at an
average price of $5.24 per share. During the third quarter of 1998, the Board of
Directors discontinued the repurchase of the Company's common stock.

(10) SEGMENTS:

For organizational,  marketing and financial reporting purposes, the Company has
organized  into two  reportable  business  segments:  (1)  Network  Connectivity
Products ("NCP") and (2) Network Management Products ("NMP").  In addition,  the
NCP business  segment develops and sells CD-ROM  networking  systems and service
maintenance contracts in the United States and Germany.

The NCP business segment consists of products that address challenges associated
with managing  network  devices and sharing large amounts of information  within
workgroups or enterprises.  Network  administrators,  librarians and information
resource   professionals  in  organizations  such  as  law  firms,   educational
institutions,  libraries and research  facilities are some of the target markets
for Microtest's NCP line. The NCP line consists primarily of Zerver and DiscPort
products.

The NMP business segment consists of products that are used by service providers
and system  integrators to perform  critical cabling  certification  and network
diagnostics.  The  NMP  line  consists  of  cable  certification  tools  such as
OMNIScanner, PentaScanner and CertiFiber and network trouble shooting tools such
as MICROSCANNER and COMPAS.

Information  related to the  operations  of the  Company in  different  business
segments is set forth below.  The accounting  policies of the business  segments
are the same as those described in Significant Accounting Policies (see Note 1).

                                       44
<PAGE>
The Company does not measure assets or operating expenses separately for the NCP
and NMP business segments.

                                        NCP          NMP         TOTAL
                                        ---          ---         -----
         Net revenue:     1998        $14,854      $26,796      $41,650
                          1997         21,844       27,748       49,592
                          1996         20,996       29,446       50,442

         Gross profit:    1998          9,244       14,503       23,747
                          1997         13,219       16,107       29,326
                          1996         12,293       17,697       29,990


                                                 1998        1997        1996
                                               --------    --------    --------
         Gross profit for reportable segments  $ 23,747    $ 29,326    $ 29,990
         Unallocated amounts:
           Operating expenses                   (26,237)    (29,254)    (40,636)
           Net interest income                      324         120         762
                                               --------    --------    --------

         Income (loss) before taxes            $ (2,166)   $    192    $ (9,884)
                                               ========    ========    ========

         Unallocable assets                    $ 39,350    $ 42,805    $ 43,313
                                               ========    ========    ========

(11) MAJOR CUSTOMERS:

Major  customers  accounting for more than 10% of total revenues for 1998,  1997
and 1996 are summarized below. Percentage of revenue amounts is not presented if
less than 10% in any year.

        CUSTOMER                                  1998       1997      1996
        --------                                  ----       ----      ----
        Graybar Electric Company, Inc.             --        11%       11%
        Ingram Micro, Inc.                         11%       13%       18%
        Tech Data Corporation                      10%       --        --

(12) DOMESTIC AND INTERNATIONAL OPERATIONS:

The Company markets its products  domestically and  internationally  through its
own  direct  sales  organization  and  through  a  multiple  channel,  worldwide
distribution  network.  A summary of domestic and  international net revenues to
unaffiliated  customers  for the  three-year  period  ended  December  31, 1998,
follows:

                                                1998        1997        1996
                                               -------     -------     -------
         Domestic                              $28,294     $35,924     $35,659
         International                          13,356      13,668      14,783
                                               -------     -------     -------
             Net revenues                      $41,650     $49,592     $50,442
                                               =======     =======     =======

                                       45
<PAGE>
The Company did not have revenues or transfers  between  geographic areas during
1996 or 1997, but began shipping to a distribution  center in the United Kingdom
in July 1998.

(13) EARNINGS (LOSS) PER SHARE

The following  table sets forth the  computation of basic and diluted net income
(loss) per share:

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

      Net income                                $ (908)     $  323     $(11,595)
                                                ======      ======     ========
      Weighted average common shares
         outstanding                             8,099       8,139        8,104

      Dilutive effect of stock options              --         110           --
                                                ------      ------     --------
      Weighted average common and common
         equivalent shares outstanding           8,099       8,249        8,104
                                                ======      ======     ========

      Basic net income (loss) per share         $ (.11)     $  .04     $  (1.43)
                                                ======      ======     ========

      Diluted net income (loss) per share       $ (.11)     $  .04     $  (1.43)
                                                ======      ======     ========

(14) SUPPLEMENTAL FINANCIAL INFORMATION:

A summary of additions and  deductions  related to the  allowances  for accounts
receivable  and inventory for the years ended  December 31, 1998,  1997 and 1996
follows:

                                     Balance at                       Balance at
                                     Beginning                          End of
                                     of Period  Additions  Deductions   Period
                                     ---------  ---------  ----------   ------
    ALLOWANCES FOR DOUBTFUL ACCOUNTS:

    Year ended December 31, 1998       $  892     $  401    $  (656)     $  637
                                       ======     ======    =======      ======

    Year ended December 31, 1997       $  582     $  490    $  (180)     $  892
                                       ======     ======    =======      ======

    Year ended December 31, 1996       $  521     $  833    $  (772)     $  582
                                       ======     ======    =======      ======
    ALLOWANCES FOR SALES RETURNS:

    Year ended December 31, 1998       $1,073     $5,375    $(5,056)     $1,392
                                       ======     ======    =======      ======

    Year ended December 31, 1997       $3,030     $2,970    $(4,927)     $1,073
                                       ======     ======    =======      ======

    Year ended December 31, 1996       $  919     $8,390    $(6,279)     $3,030
                                       ======     ======    =======      ======

                                       46
<PAGE>
    ALLOWANCES FOR INVENTORY VALUATION:

    Year ended December 31, 1998       $694       $  672    $  (692)     $674
                                       ====       ======    =======      ====

    Year ended December 31, 1997       $540       $2,833    $(2,679)     $694
                                       ====       ======    =======      ====

    Year ended December 31, 1996       $717       $  453    $  (630)     $540
                                       ====       ======    =======      ====

(15) UNAUDITED QUARTERLY FINANCIAL INFORMATION:

The  following  table  presents  the  Company's  selected  unaudited   quarterly
operating  results for the eight  quarters ended December 31, 1998. In addition,
the table presents unaudited operating results for the first,  second, and third
quarters of 1998 as originally reported,  and as restated.  The Company restated
its  quarterly  results for the first three  quarters of 1998 to correct  errors
identified   during  the  1998  year-end   audit.   The  errors  were  primarily
attributable  to system  changes and  turnover in the  finance  department  that
occurred  during the first half of 1998. The  corrections  related  primarily to
various  adjustments  correcting  the  provision for sales  returns,  correcting
software capitalization and amortization and inter-company account transactions.

                                      1998 Quarters (as originally reported)
                                      --------------------------------------
                                        First        Second          Third
                                        -----        ------          -----
  Net revenue                          $9,716        $11,125        $10,111
  Cost of revenue                       3,774          4,452          4,090
  Gross profit                          5,942          6,673          6,021
  Total operating expenses              5,768          6,059          5,756
  Net income (loss)                       173            541            393
  Net income (loss) per common share   $  .02        $   .07        $   .05
<TABLE>
<CAPTION>
                                                    1998 Quarters (as restated)
                                       ------------------------------------------------------
                                        First       Second      Third      Fourth       Total
                                        -----       ------      -----      ------       -----
<S>                                    <C>         <C>         <C>         <C>         <C>
  Net revenue                          $ 9,716     $10,745     $10,111     $11,078     $41,650
  Cost of revenue                        3,791       4,448       4,156       5,508      17,903
  Gross profit                           5,925       6,297       5,955       5,570      23,747
  Total operating expenses               5,870       6,720       5,775       7,872      26,237
  Net income (loss)                         90        (242)        333      (1,089)       (908)
  Net income (loss) per common share   $   .01     $  (.03)    $   .04     $  (.13)    $  (.11)

                                                            1997 Quarters
                                       ------------------------------------------------------
                                        First       Second      Third      Fourth       Total
                                        -----       ------      -----      ------       -----
  Net revenue                          $11,113     $11,945     $12,391     $14,143     $49,592
  Cost of revenue                        4,347       5,004       5,335       5,580      20,266
  Gross profit                           6,766       6,941       7,056       8,563      29,326
  Total operating expense                8,297       6,864       6,520       7,573      29,254
  Net income (loss)                       (986)        132         332         845         323
  Net income (loss) per common share   $  (.12)    $   .02     $   .04     $   .10     $   .04
</TABLE>

In the fourth quarter of 1998,  significant  adjustments  included  increases of
$370 in  anticipated  sales returns,  $200 was reserved for obsolete  inventory,
$200 was written-off for evaluation units not expected to be recovered, $800 was
written-off  for  prepaid  royalties  for  software  products  that are  rapidly
reaching  obsolescence,  and $430 was  recorded  in  executive  search and other
professional fees.

                                       47
<PAGE>
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.

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 1999
Annual Meeting of Stockholders to be held May 24, 1999, which is incorporated by
reference  into this Form  10-K  Report.  With the  exception  of the  foregoing
information and other  information  specifically  incorporated by reference into
this Form 10-K Report,  the Registrant's Proxy Statement is not being filed as a
part hereof.

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information  concerning  the Common  Stock  beneficially  owned by each
director of the Company, by all officers and directors of the Company as a group
and by each shareholder  known by the Company to be the beneficial owner of more
than 5% of the outstanding  Common Stock is incorporated  herein by reference to
"Security  Ownership of Certain Beneficial Owners and Management" from the Proxy
Statement.

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.

                                       48
<PAGE>
                                     PART IV

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


          (a)  FINANCIAL STATEMENTS AND SCHEDULE.                       Page or
                                                                         Method
                                                                       of Filing
                                                                       ---------
          (i)  Financial Statements

               (1)  Independent Auditors' Report........................ Page 29

               (2)  Consolidated Financial Statements:

                    Balance Sheets - December 31, 1998 and 1997......... Page 30

                    Statements of Operations - For the Years
                    Ended December 31, 1998, 1997 and 1996.............. Page 31

                    Statements of Stockholders' Equity - For
                    the Years Ended December 31, 1998, 1997
                    and 1996............................................ Page 32

                    Statements of Cash Flows - For the Years
                    Ended December 31, 1998, 1997 and 1996.............. Page 33

                    Notes to Consolidated Financial Statements -
                    December 31, 1998, 1997 and 1996.................... Page 34

               (ii) Financial Statement Schedules

              (iii) See Item 14(c) below

                                                           Included in Auditors'
              Independent Auditors' Report................   Report at Page 29

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

          (b)  REPORTS OF FORM 8-K.

               During the last quarter of 1998, the Company filed
               no reports on Form 8-K.

                                       49
<PAGE>
          (c)  EXHIBITS.
<TABLE>
<CAPTION>
Exhibit                                                               Page or
Number           Description                                      Method of Filing
------           -----------                                      ----------------
<S>    <C>                                              <C>
3.1     Amended  and   Restated   Certificate   of       Incorporated    by   reference   to
        Incorporation  of the  Company,  dated May       Exhibit    3.1    to    Form    S-1
        19, 1992                                         Registration   Statement  #33-52264
                                                         ("Form S-1 #33-52264")

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

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

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

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

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

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

10.6    Non-Employee Directors Stock Option Plan         Incorporated    by   reference   to
                                                         Exhibit 4 to Form S-8 #33-67948

10.7    Annual Non-Employee Directors Stock Option       Incorporated    by   reference   to
        Plan                                             Exhibit 4 to Form S-8 #33-79070

10.8    Form  of   Indemnity   agreement   between       Incorporated    by   reference   to
        directors and certain  former  officers of       Exhibit 10.18 to Form S-1 #33-52264
        the Company, and the Company
</TABLE>
                                       50
<PAGE>
<TABLE>
<CAPTION>
<S>    <C>                                              <C>
10.9    Agreement  of  Purchase  and Sale of Stock       Incorporated    by   reference   to
        between  Optical Media  International  and       Exhibit 2 of Form 8-K Report  dated
        the Company dated June 6, 1995                   June 6, 1995

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

10.11   Long-Term Incentive Plan                         Incorporated    by   reference   to
                                                         Exhibit  10.16 of Form 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       Incorporated    by   reference   to
        between  Logicraft   Information  Systems,       Exhibit 2 of Current Report on Form
        Inc.  and the Company  dated  December 17,       8-K dated December 17, 1996
        1996

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

10.15   Consulting Agreement with Richard G. Meise       Filed herewith
10.16   Severance Agreement of Charles V. Mihaylo        Filed herewith
10.17   Agreement with Tim C. Furst                      Filed herewith
21      Subsidiaries of the Registrant                   Filed herewith
23      Consent of Deloitte & Touche LLP                 Filed herewith
24.1    Power of Attorney of Dianne C. Walker            Filed herewith
24.2    Power of Attorney of Roger C. Ferguson           Filed herewith
24.3    Power of Attorney of Steven G. Mihaylo           Filed herewith
24.4    Power of Attorney of William C. Turner           Filed herewith
24.5    Power of Attorney of Richard G. Meise            Filed herewith
24.6    Power of Attorney of Kent C. Mueller             Filed herewith
27      Financial Data Schedule                          Filed herewith
</TABLE>

        (d)     See Item 14 (a) (ii).

                                       51
<PAGE>
                                   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.

Name and Signature                       Title                       Date
------------------                       -----                       ----

---------------------------     Chairman of the Board             March 31, 1999
Kent C. Mueller*

/s/  Vincent C. Hren
---------------------------     President and Chief Executive     March 31, 1999
Vincent C. Hren                 Officer


/s/ Daniel J. Predovic          Vice President, Chief Financial   March 31, 1999
---------------------------     Officer, Secretary and Treasurer
Daniel J. Predovic              (Principal Financial and Accounting
                                Officer)

---------------------------
Roger C. Ferguson*              Director                          March 31, 1999

---------------------------
Richard G. Meise*               Director                          March 31, 1999

---------------------------
Steven G. Mihaylo*              Director                          March 31, 1999

---------------------------
William C. Turner*              Director                          March 31, 1999

---------------------------
Dianne C. Walker*               Director                          March 31, 1999


*By /s/  Vincent C. Hren
   ---------------------------                                    March 31, 1999
         Vincent C. Hren
         Attorney-in-Fact

                                       52
<PAGE>

BOARD OF DIRECTORS AND OFFICERS

BOARD OF DIRECTORS                            CORPORATE OFFICERS

KENT C. MUELLER                               VINCENT C. HREN
Chairman of the Board of Microtest, Inc.      President and Chief Executive
President and Chief Executive Officer,        Officer
Kent Mueller Ventures
                                              DANIEL J. PREDOVIC
VINCENT C. HREN                               Vice President, Chief Financial
President and Chief Executive Officer         Officer, Secretary and Treasurer
Microtest, Inc.
                                              DAVID R. COFFIN
STEVEN G. MIHAYLO                             Vice President, Research and
Chief Executive Officer and Secretary         Development
Inter-tel, Incorporated
                                              KLAUS M. ROMANEK
WILLIAM C. TURNER                             Vice President and Managing
Chairman                                      Director, European Operations
Argyle Atlantic Corporation

ROGER C. FERGUSON
Consultant

RICHARD G. MEISE
Consultant

DIANNE C. WALKER
Consultant

                                       53
<PAGE>
SHAREHOLDER INFORMATION

ANNUAL MEETING

The Microtest,  Inc. 1999 Annual Meeting of  Shareholders  will be held at 10:00
a.m. Mountain Standard Time on Monday,  May 24, 1999 at the Doubletree La Posada
Resort, 4949 East Lincoln Drive, Scottsdale, Arizona.

SHAREHOLDER INFORMATION

Microtest  common  stock trades on the NASDAQ  National  Market under the symbol
MTST.  Shareholders and prospective  investors are welcome to call, write or fax
with  questions or requests for  additional  information.  Copies of Microtest's
Report on Form-10K for the fiscal year ended  December  31, 1998 and  additional
copies of this  Annual  Report  may be  obtained  without  charge  by  directing
inquiries to:

         Microtest, Inc.
         Investor Relations
         4747 North 22nd Street
         Phoenix, Arizona 85016
         (602) 952-6400, Fax:  (602) 952-6604
         www.microtest.com

TRANSFER AGENT AND REGISTRAR

         American Stock Transfer & Trust Company
         40 Wall Street, 46th Floor
         New York, New York 10005

INDEPENDENT AUDITORS

         Deloitte & Touche LLP
         Phoenix, Arizona

INDEPENDENT COUNSEL

         Snell & Wilmer L.L.P.
         Phoenix, Arizona

CORPORATE HEADQUARTERS

         Microtest, Inc.
         4747 North 22nd Street
         Phoenix, Arizona 85016
         (602) 952-6400

BRANCH AND SUPPORT OFFICES

         Schaumburg, Illinois; Irvine, California; Nashua, New  Hampshire;
         Crawley, England; Gottingen, Germany; Munich, Germany