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

                                    FORM 10-K/A

(Mark One)

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

                                       or

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


         For the transition period from ________________ to __________________

                         Commission File Number 0-20666


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

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

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

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

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




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

Common Stock, $.001 par value                             Nasdaq National Market
                                                                               1
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         -----------------------------------------------------------------------
         OF OPERATIONS.
         --------------

Introduction

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

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

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

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

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

                                                  
                                                       
Revenues - Product sales decreased 4%                    [GRAPHIC OMITTED]      
from 1995 to 1996. This is mainly due to            Bar Graph showing revenue   
increased competition in the Category 5             as  $26.5   million   for   
cable testing market and a softening of             1992,  $22.1  million for   
the European economy in 1996. Product sales         1993,  $39.6  million for   
increased from 1994 to 1995 primarily due           1994,  $52.5  million for   
to the increased demand in the domestic and         1995  and  $50.4  million   
international marketplaces for DiscPort products.   for 1996.                   
                                                    
         International sales were $14.8 million, $19.1 million and $13.4 million
in 1996,  1995 and 1994,  or 29%, 36% and 34% of total  revenues,  respectively.
International  sales  decreased in both absolute  dollars and as a percentage of
total revenue during 1996 primarily due to the above mentioned  weakening in the
European economy in 1996. International sales increased in both absolute dollars
and as a percentage of total revenue during 1995 due to an increased  demand for
the Company's DiscPort products in its international markets.
                                                                              25
<PAGE>
   [GRAPH OMITTED]                      Gross Profit -Gross profit decreased 2%
Bar Graph showing Gross                 in 1996.  This  decrease  is due to the
Profit for 1992 of $16.2                decrease   in   revenue   during   1996
million, 1993 of $12.5                  partially offset by the introduction of
million, 1994 of 23.0                   a     manufacturers'     representative
million, 1995 of $30.6                  program.   Discounts  to  many  of  the
million, and 1996 of                    Company's  distributors were lowered as
$30.0 million                           a result of this program.  Gross profit
                                        increased   33%  in  1995  due  to  the
                                        corresponding  33%  increase  in  total
                                        revenues  during the same time  period.
                                        Gross profit as a  percentage  of total
                                        revenues may fluctuate on a quarterly  
basis due to a variety of factors,  including  changes in product  and  customer
mixes,  the  introduction  of new products by the Company or its competitors and
other competitive factors, such as pricing pressures.



Sales & Marketing Expenses- Sales and
marketing expenses increased in both
absolute dollars and as a percentage
of total revenues from 1995 to 1996.
The increase is largely due to the                [GRAPH OMITTED]              
implementation of the above mentioned   Bar Graph  showing  sales and marketing
manufacturers' representative           expenses of $6.2 million in 1992,  $7.7
compensation program, as well as the    million in 1993,  $8.7 million in 1994,
addition of personnel to bolster the    $12.6   million  in  1995,   and  $14.3
Company's sales force. Sales and        million in 1996.                       
marketing expenses increased in both    
absolute dollars and as a percentage
of revenue from 1994 to 1995.
Increased advertising and promotional
expenses, commissions and sales,
marketing and support personnel were
the main contributors to the increase
during this period.
                                                                              26
<PAGE>
       [GRAPHIC OMITTED]                Research & Development  Expenses - 1996
Bar Graph showing research and          research   and   development   expenses
development expenses of $3.4 million    increased in absolute  dollars and as a
in 1992, $4.7 million in 1993, $4.1     percentage   of   total   revenues   as
million in 1994, $5.9 million in        compared   to   1995    research    and
1995, and $6.4 million in 1996.         development  expenses  primarily due to
                                        an increase in the number of prototypes
                                        developed  in 1996 as compared to 1995.
                                        Research   and   development   expenses 
                                        increased in both absolute  dollars and 
                                        as a percentage of revenue from 1994 to 
                                        1995. This increase is due primarily to 
                                        an increase in personnel  stemming from 
                                        the  acquisition  of  OMI  and  use  of 
                                        outside services.                       
                                         
                                         
                                         
General & Administrative Expenses- General and administrative expenses increased
during 1996 in both  absolute  dollars and as a  percentage  of revenues  mainly
because of an increase in expenses related to the settlement of a lawsuit during
the first quarter of 1996, as well as the legal
costs associated with the defense of two
shareholder lawsuits filed during the   
last half of 1996. General and                     [GRAPHIC OMMITED]           
administrative expenses increased in    Bar   Graph    showing    general   and
absolute dollars but decreased as a     adminstrative  expenses of $1.5 million
percentage of total revenues from       in 1992,  $2.7  million  in 1993,  $3.4
1994 to 1995. The increase in           million in 1994,  $3.7 million in 1995,
absolute dollars was due primarily to   and $4.2 million in 1996               
increased legal and consulting fees     
as well as increased headcount and
administrative costs associated with
OMI. The decrease in general and
administrative expenses as a
percentage of total revenues was due
to the higher sales volumes in 1995
compared with 1994.
                                                                              27
<PAGE>
       [GRAPHIC OMITTED]                Interest  -  The   Company's   interest
Bar Graph showing interest income of    income  decreased  from  1995  to  1996
$243,000 in 1992, $729,000 in 1993,     primarily  due  to  a  reallocation  of
$743,000 in 1994, $1,232,000 in 1995,   investments  in   anticipation  of  the
and $762,000 in 1996.                   Company's  acquisition   activities  in
                                        1996. The Company  invests the majority
                                        of its excess  cash in  municipal  bond 
                                        funds with  maturities  ranging  from 7 
                                        days to 3 months.                       
                                         
                                         
                                         
        [GRAPHIC OMITTED]               Effective  Tax  Rate  -  Excluding  the
Bar Graph showing the effective tax     effects  of   purchased   research  and
rate excluding tax benefit related to   development,  the Company experienced a
purchased R & D of 38% for 1992, 41%    decrease  in its  effective  income tax
for 1993, 30% for 1994, 32% for 1995,   rate  during  1996.  The  decrease  was
and 29% for 1996.                       mainly due to the  recognition of R & D
                                        tax   credits   earned  in  1996.   The
                                        Company's   1995   effective  tax  rate
                                        includes a tax benefit of $3.4  million
                                        related  to   purchased   research  and
                                        development.  Excluding  the effects of
                                        purchased research and development, the 
                                        Company's effective tax rate was 32% in 
                                        1995. This represents                   
an increase from 30% in 1994. The increase was primarily due to the  realization
of net operating loss carryforwards  during 1994 for which a valuation allowance
had previously been established.

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



   
        [GRAPHIC OMITTED]                          [GRAPHIC OMITTED]
Bar Graph  showing net  income/(loss)   Bar  Graph  showing  net  income/(loss)
of  $7.1  million  for  1992,  $(2.5)   excluding     restructuring    charges,
million  for 1993,  $5.3  million for   purchased  R & D, other  unusual  items
1994,   $1.1  million  for  1995  and   and  income from sale of  technology of
$(11.6) million for 1996.               $3.3 million for 1992,  $(1.1)  million
                                        for 1993,  $5.3 million for 1994,  $6.5
                                        million for 1995 and $4.1 for 1996.     
    
                                         
                                         
                                         
Liquidity and Capital Resources

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

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

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

               Inflation

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

Factors That May Affect Future Results and Financial Condition

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

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

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

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

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

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

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

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

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

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

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

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

                                                                              34
<PAGE>
MICROTEST, INC. AND SUBSIDIARIES

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


Board of Directors of
Microtest, Inc.
Phoenix, Arizona

We have audited the accompanying  consolidated balance sheets of Microtest, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the related  consolidated
statements of  operations,  stockholders'  equity and cash flows for each of the
three years in the period ended December 31, 1996.  These  financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects, the financial position of Microtest, Inc. and subsidiaries at
December 31, 1995 and 1996,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1996,  in
conformity with generally accepted accounting principles.



DELOITTE & TOUCHE LLP
Phoenix, Arizona

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

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

          Total current assets                                              46,259      38,224

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

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

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

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


LIABILITIES AND STOCKHOLDERS' EQUITY

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

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

COMMITMENTS AND CONTINGENCIES (Note 6)

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

<PAGE>
MICROTEST, INC. AND SUBSIDIARIES

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

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

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

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

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

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

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

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

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

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

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


1.    BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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

      The following are the significant accounting policies of the Company:

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

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

                                                                     Useful Life

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

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

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

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

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

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

      i.  Use  of  Estimates  -  The  preparation  of  financial  statements  in
          conformity with generally accepted accounting  principles  necessarily
          requires  management to make estimates and assumptions that affect the
          reported   amounts  of  assets  and   liabilities  and  disclosure  of
          contingent  assets  and  liabilities  at the  date  of  the  financial
          statements  and the reported  amounts of revenues and expenses  during
          the  reporting   period.   Actual  results  could  differ  from  these
          estimates.

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

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

2.    INVENTORIES

      Inventories consisted of the following at December 31:

                                                              1995       1996
                                                          (Amounts in Thousands)

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

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


                                                             1995       1996
                                                          (Amounts in Thousands)

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


      Intangibles consisted of the following at December 31:


                                                             1995       1996
                                                          (Amounts in Thousands)

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

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


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

4.    INCOME TAXES

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


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

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

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

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


                                                          1995       1996
                                                      (Amounts in Thousands)

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

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

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

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

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


5.    ACQUISITIONS

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

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

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

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

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

     Net revenues                           $ 67,796                    $ 64,747
                                            ========                    ========
     Net (loss)                             $ (1,445)                   $    171
                                            ========                    ========
     Net (loss) per common share            $   (.16)                   $    .02
                                            ========                    ========
    


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

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


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


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

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

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

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

7.    EMPLOYEE BENEFIT PLANS

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

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

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

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

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


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




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



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

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

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

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

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


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

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

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



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

8.    EXPORT SALES

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

9.    OTHER

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


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


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

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

<PAGE>
10.   UNAUDITED QUARTERLY FINANCIAL INFORMATION



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

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



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

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



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

   
      Quarterly results for 1996 vary from the previously  published results due
      to changes to recording  sales under the  Company's  direct end user sales
      program during the second,  third and fourth quarters of 1996.  Previously
      published  Quarterly  Reports on Form 10-Q were changed by reducing second
      quarter  total  revenues,  cost of sales and services,  gross profit,  net
      income  and net  income  per  common  and  equivalent  share by  $654,000,
      $163,000,  $491,000,  $334,000 and $.04,  respectively  and third  quarter
      total revenues,  costs of sales and services, gross profit, net income and
      net  income  per  common  and  equivalent  share  by  $871,000,  $218,000,
      $653,000,  $444,000  and $0.05, respectively.  As a result of  changes  to
      second and third quarter, fourth quarter total revenues, cost of sales and
      services,  gross  profit,  and net income were  increased  by  $1,525,000,
      $381,000, $1,144,000 and $778,000, respectively, which reduced the loss by
      $.10 per share.
    

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

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

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

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

                                    PART III

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

             INFORMATION CONCERNING DIRECTORS, NOMINEES AND OFFICERS

   
         Information  concerning  the names,  ages,  terms,  positions  with the
Company and business  experience of the Company's  directors,  director nominees
and executive officers as of April 30, 1997 is set forth below.
    
<TABLE>
<CAPTION>
                                                                                                          Term 
                                                                                                          ----
Name                                    Age      Position                                                Expires
----                                    ---      --------                                                -------
<S>                                     <C>      <C>                                                       <C> 
William C. Turner(2)                    67       Director                                                  1997

Dianne C. Walker (1)(2)                 40       Director                                                  1997

Richard G. Meise                        61       Chairman of the Board, Chief                              1998
                                                 Executive Officer and President

Steven G. Mihaylo (1)(2)                53       Director                                                  1998

Roger C. Ferguson (1)                   53       Director                                                  1999

Rebecca S. Barker                       38       Vice President of Communications                          ---
                                                 and Customer Service

Richard R. Douglas                      65       Vice President of Operations,                             ---
                                                 Chief Financial Officer, Treasurer
                                                 and Secretary

Christopher C. Hudson                   47       Vice President of Network                                 ---
                                                 Management Products

Robert M. Tanner                        59       Vice President of Worldwide                               ---
                                                 Field Operations
</TABLE>
---------------------
(1)      Member of the Compensation Committee.
(2)      Member of the Audit Committee.
                                       52
<PAGE>
         William  C.  Turner  has  served as a  director  of the  Company  since
February 1995. Mr. Turner has been the Chairman of the Board and Chief Executive
Officer of Argyle Atlantic Corporation, an international business and investment
consulting  firm,  since 1977.  Since 1985, Mr. Turner has served as Chairman of
the International  Advisory Council for Avon products,  a publicly-held  company
that manufactures  cosmetics and related products. Mr. Turner has also served as
a director of Goodyear Tire and Rubber  Company,  a  publicly-held  company that
manufactures  tires  and  related  products,  since  1978,  and  a  director  of
Rural/Metro  Corporation,   a  publicly-held  company  that  provides  emergency
transport services, since 1993.

         Dianne C. Walker has served as a consultant on electric  utility merger
and acquisitions to various investment banking firms, including Bear Stearns and
Kidder Peabody, since 1990. From January 1983 to October 1989, Ms. Walker served
as an  assistant  Vice  President of Pacific  Telecom,  Inc.'s  Venture  Capital
Portfolio.  Pacific Telecom is an independent telephone company and a subsidiary
of PacifiCorp  where Ms. Walker served as a Director of Mergers and Acquisitions
from May 1987 to October 1989. Ms. Walker currently is on the Board of Directors
of Comdial  Corporation,  a publicly-held  company that  manufactures  telephone
equipment,  as well as Catalina Marketing Corporation,  a publicly-held point of
sale promotions  firm. In addition,  Ms. Walker serves on the Board of Directors
of  Satellite  Technology   Management   Wireless,   a  publicly-held   wireless
communications  service company and equipment  manufacturer,  and Arizona Public
Service, a utility company.

         Richard G. Meise has been the President,  Chief Executive Officer and a
director of the Company since  September  1993. In March 1997, he was elected to
serve as the Chairman of the Board. Mr. Meise served as the Company's  Executive
Vice President from June 1993 until  September  1993. From February 1991 to June
1993, Mr. Meise was the President and Chief Executive Officer of Fluent, Inc., a
digital video network  manufacturer.  From 1989 to 1991, Mr. Meise served as the
President and Chief Executive Officer of Alloy Computer Products, Inc., a PC and
software  products  company.  Mr. Meise was the  President  and Chief  Operating
Officer of Banyan  Systems,  Inc., a  publicly-held  manufacturer  of networking
software, from 1986 to 1989.

         Steven G. Mihaylo has served as a director of the Company  since August
1994. Since 1969, he has been the Chief Executive Officer of Inter-Tel,  Inc., a
publicly-held company that designs, manufactures and services digital and analog
telephone  systems and voice  processing  systems,  and provides  long  distance
services.  Mr.  Mihaylo  has also  served as a director  of  MicroAge,  Inc.,  a
publicly-held  company  that  markets  and  distributes  information  technology
products and services, since 1988.

         Roger C.  Ferguson  has  served  as a  director  of the  Company  since
September  1993.  He served as  Chairman  of the Board  from March 1994 to March
1997. Mr.  Ferguson has been the Chief Executive  Officer of Datatools,  Inc., a
software tools manufacturer, since August 1993. From December 1987 to June 1993,
Mr. Ferguson was the Chief Operating Officer of Network General, a publicly-held
company that manufactures diagnostic products for local area networks.
                                       53
<PAGE>
         Rebecca  S.  Barker  has  served as the  Company's  Vice  President  of
Communications  and  Customer  Service  since  January  1995.  She served as the
Company's  Director of Customer  Service from July 1993 to December  1994.  From
November 1991 to July 1993, she served in various  management  positions  within
the  Company.  From  January  1985 to November  1991,  Ms.  Barker was a Product
Manager at Integris, an integration subsidiary of Bull Information Systems.

         Richard R. Douglas has served as the Company's  Vice  President,  Chief
Financial  Officer,  and  Secretary  since  December  1993 and has announced his
intent to retire  effective  October  1,  1997.  He served as  President  of The
Douglas Group, a consulting firm, from July 1989 to October 1993. From June 1985
to May 1989,  Mr.  Douglas was the Corporate  Senior Vice President of Marketing
and  Service  for  Storage  Technology  Corp.,  a  publicly-held   company  that
manufactures  peripheral storage devices.  From 1960 to 1985, Mr. Douglas served
in various executive positions for Honeywell, Inc., a publicly-held company that
manufactures automation, avionics, and related products.

         Christopher  C. Hudson has served as the  Company's  Vice  President of
Network  Management  Products  since July 1993.  From May 1986 to July 1993, Mr.
Hudson was the Vice President of GN Navtel, Inc., a Canadian communications test
equipment designer and manufacturer.

         Robert  M.  Tanner  has  served  as the  Company's  Vice  President  of
Worldwide Field Operations since May 1994. From February 1992 to April 1994, Mr.
Tanner was the Vice  President  of U.S.  Sales for Data General  Corporation,  a
publicly-held  company  that  manufactures  computers  and  computer  peripheral
equipment.  From February 1988 to October 1991, he was the Senior Vice President
of Worldwide Field Operations of Sequent Computer Systems, Inc., a publicly-held
computer manufacturer.

                      COMPLIANCE WITH SECTION 16(a) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  the
Company's  officers  and  directors,  and  persons  who own  more  than 10% of a
registered  class  of the  Company's  equity  securities,  to  file  reports  of
ownership and changes in ownership with the  Securities and Exchange  Commission
("SEC").  Officers,  directors and greater than 10% shareholders are required by
SEC  regulation  to furnish the Company  with copies of all Section  16(a) forms
they file.

         Based solely upon a review of the copies of such forms furnished to the
Company, or written  representations that no Forms 5 were required,  the Company
believes  that,  with the  exception  of  filings  detailed  below,  during  the
Company's preceding fiscal year all Section 16(a) filing requirements applicable
to its officers,  directors and greater than 10% beneficial owners were complied
with except (i) Hightech  Investments Limited Partnership filed two late Forms 4
with respect to the sale of 150,000  shares of stock in April 1996, and the sale
of 50,000  shares of stock in June 1996;  (ii) Teresa Poppen filed a late Form 4
with  respect  to the sale of 9,666  shares  of stock in June  1996;  and  (iii)
Rebecca  Barker filed a late Form 3 with respect to her election as an executive
officer of the Company in January 1996.
                                       54
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
         -----------------------
   
                              DIRECTOR COMPENSATION

         During  1996,  the Company  paid each  non-employee  director an $8,000
annual  retainer  for  their  service  as a Board  member  plus a $2,000  annual
retainer for each  committee  membership.  In addition,  non-employee  directors
receive  $1,500  per  Board  meeting  attended,  $1,000  per  committee  meeting
attended, and $750 per telephonic Board or committee meeting attended.

         On April 13, 1995, William C. Turner was granted a non-qualified option
covering  15,000  shares of the Company's  common stock at an exercise  price of
$21.25 in exchange for his services as a consultant  to the Company.  On January
26, 1996, Mr. Turner  accepted the Company's  offer to cancel the original grant
in light of the significant  decrease in the price of the Company's common stock
and to replace it with a non-qualifed  option  covering 5,558 shares at the then
fair market  value of $7.875 per share.  Under this  option,  555 shares  vested
immediately,  1,667 vest six months  after the date of grant,  1,667 vest twelve
months after the date of grant,  and the remaining  1,669 vest  eighteen  months
after the date of grant.

         The Company also has adopted two stock option plans under which options
are granted to non-employee  directors.  Under the Non-Employee  Directors Stock
Option  Plan  adopted in 1993 (the "1993  Directors  Plan"),  each  non-employee
director is entitled to a one-time grant of 10,000 options upon his or her first
election as a director (or, for directors  then in office,  at the time the plan
was adopted).  One-fourth of the options vest  immediately  upon grant,  and the
remainder  vest in equal  increments  annually  over a  three-year  period.  The
following table sets forth the options  received by the  non-employee  directors
pursuant to the 1993 Directors Plan.

                  OPTION GRANTS PURSUANT TO 1993 DIRECTORS PLAN
<TABLE>
<CAPTION>
                                                          Number of Securities
                                Date of Grant           Underlying Stock Options                 Exercise Price
                                -------------           ------------------------                 --------------
<S>                                <C>                           <C>                                 <C>   
Roger C. Ferguson                  9/28/93                       10,000                              $ 5.50

Dianne C. Walker                   1/28/94                       10,000                              $ 9.75

Steven G. Mihaylo                  8/8/94                        10,000                              $12.25

William C. Turner                  2/1/95                        10,000                              $23.50
</TABLE>

         None of the non-employee  directors listed above exercised any of their
options under the 1993 Directors Plan during 1996.

         In January 1994, the Company adopted an Annual  Non-Employee  Directors
Stock  Option Plan (the "Annual  Directors  Plan").  Under the Annual  Directors
Plan,  each  non-employee  director is entitled to a grant of 5,000 options each
year at the end of the third  business  day  after  public  announcement  of the
Company's annual earnings.  The options vest six months and a day after the date
of  grant.   The  following  table  sets  forth  the  options  received  by  the
non-employee directors pursuant to the Annual Directors Plan.

                 OPTION GRANTS PURSUANT TO ANNUAL DIRECTORS PLAN
<TABLE>
<CAPTION>
                                                               Number of Securities
                                     Date of Grant           Underlying Stock Options    Exercise Price
                                     -------------           ------------------------    --------------
<S>                                     <C>                            <C>                      <C>
Roger C. Ferguson                       1/28/94                        5,000                     $9.7500
                                         2/7/95                        5,000                    $20.2500
                                        2/16/96                        5,000                     $7.7500
                                        2/14/97                        5,000                     $9.6875

Steven G. Mihaylo                        2/7/95                        5,000                    $20.2500
                                        2/16/96                        5,000                     $7.7500
                                        2/14/97                        5,000                     $9.6875

William C. Turner                        2/7/95                        5,000                    $20.2500
                                        2/16/96                        5,000                     $7.7500
                                        2/14/97                        5,000                     $9.6875

Dianne C. Walker                        1/28/94                        5,000                     $9.7500
                                         2/7/95                        5,000                    $20.2500
                                        2/16/96                        5,000                     $7.7500
                                        2/14/97                        5,000                     $9.6875
</TABLE>
         None of the non-employee  directors listed above exercised any of their
options under the 1993 Annual Directors Plan during 1996.
    

                             EXECUTIVE COMPENSATION

          The table  below  sets  forth  information  concerning  the annual and
long-term  compensation  for services in all  capacities  to the Company for the
fiscal years ended December 31, 1996,  1995 and 1994, of those persons who were,
at  December  31,  1996,  (i) the Chief  Executive  Officer,  and (ii) the other
executive  officers  of the  Company  whose  annual  salary  and bonus  exceeded
$100,000 (collectively, the "Named Officers").
                                       55
<PAGE>
                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                                        Long-Term
                                                       Annual Compensation                         Compensation Awards
                                             --------------------------------------------    ------------------------------
                                                                                             Securities
                                                                                             Underlying
             Name and                                                        Other Annual       Stock         All Other
        Principal Position            Year      Salary           Bonus       Compensation      Options      Compensation(1)
        ------------------            ----      ------           -----       ------------      -------      ---------------
<S>                                   <C>        <C>          <C>      <C>    <C>     <C>         <C>             <C>    
Richard G. Meise                      1996       $ 200,000    $ 83,750 (2)    $ 6,000 (3)         15,887          $69,963
President & Chief Executive           1995         200,000      83,750 (2)      6,000 (3)         35,810            2,310
Officer                               1994         149,874(4)  166,025 (2)      6,000 (3)             --            2,310

Rebecca M. Barker                     1996         $83,038              --             --         11,735          $28,693
Vice President of Communications &
Customer Service (5)

Richard R. Douglas                    1996       $ 150,000     $92,125 (2)             --          9,982          $ 1,817
Vice President of Operations, Chief   1995         150,000      92,125 (2)             --         22,500            2,250
Financial Officer, Treasurer, and     1994         110,000     121,500 (2)             --             --            1,650
Secretary

Christopher C. Hudson                 1996       $ 135,000              --             --          7,985          $39,262
Vice President of Research and        1995         135,000              --             --         18,000            2,025
Development                           1994         125,000         $60,000             --         45,000            1,875

Robert M. Tanner                      1996       $ 125,000              --   $ 60,000 (6)          7,985         $ 42,247
Vice President of Worldwide           1995         125,000              --     58,910 (7)         18,000            1,621
Sales                                 1994          84,135(8)           --     60,717 (9)        100,000              505
</TABLE>
(1)  Detail of amounts reported in the "All Other Compensation"  column for 1996
     is provided in the table  below.  Split  dollar  insurance  represents  the
     present  value of the  interest  projected  to  accrue  for the  employee's
     benefit on the current year's insurance premium paid by the Company.  For a
     discussion of the Company's  Split-dollar insurance program, see the report
     of the Compensation Committee for 1996 set forth below.
<TABLE>
<CAPTION>
                   Item                           Mr. Meise      Ms. Barker    Mr. Douglas      Mr. Hudson      Mr. Tanner
<S>                                                <C>              <C>            <C>            <C>             <C>     
Company Contribution to Defined                      $2,375            $975         $1,817          $1,636            $755
Contribution Savings Plans
Split Dollar Insurance Premium Value               $ 67,588        $ 27,718             --        $ 37,626        $ 41,492
                                                   --------        --------             --        --------        --------
       Total All Other Compensation                $ 69,963         $28,693        $ 1,817        $ 39,262        $ 42,247
                                                   --------         -------        -------  -     --------        --------
</TABLE>
(2)  Represents  the portion of 1994 deferred  compensation  which vested during
     the  fiscal  year ended  December  31. For a  discussion  of the  Company's
     Deferred Compensation Program, see the report of the Compensation Committee
     for 1996 set forth below.
(3)  Represents a car allowance.
(4)  Excludes reimbursed moving expenses of $31,007.
(5)  Ms.  Barker was hired by the Company in November  1991 and later named Vice
     President of Communications and Customer Service.
(6)  Represents  sales  commission of $60,000 for the fiscal year ended December
     31, 1996.
(7)  Represents sales  commissions of $58,910 for the fiscal year ended December
     31, 1995.
(8)  Excludes reimbursed moving expenses of $27,586.
(9)  Represents sales  commissions of $60,717 for the fiscal year ended December
     31, 1994.
                                       56
<PAGE>
         The following table sets forth  information  with respect to the grants
of stock options pursuant to the Company's  Long-Term  Incentive Plan during the
fiscal year ended December 31, 1996, to the Named Officers.

                        OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                              Individual Grants
                     ------------------------------------------------------------------          Potential Realizable
                                                                                                   Value at Assumed
                                       % of Total                                                   Annual Rates of
                       Number of         Options          Exercise                                    Stock Price
                      Securities        Granted to        or Base                                  Appreciation for
                      Underlying        Employees          Price                                    Option Term(3)
                        Options         in Fiscal           (per          Expiration               ----------------
      Name           Granted(#)(1)         Year          share)(2)           Date              5%($)            10%($)
      ----           -------------         ----          ---------           ----              -----            ------
<S>                      <C>              <C>              <C>            <C>                   <C>             <C>     
Richard M. Meise         15,887 (4)       2.82%            $7.875          1/26/06              $78,681         $199,393

Rebecca M. Barker         1,996 (5)       0.35%            $7.875          1/26/06               $9,885          $25,051

Rebecca M. Barker         5,989 (6)       1.06%            $7.875          1/26/06              $29,661          $75,166

Rebecca M. Barker         3,750 (7)       0.67%            $9.625          12/23/06             $22,699          $57,524

Richard R. Douglas        9,982 (8)       1.77%            $7.875          1/26/06              $49,436         $125,281

Christopher C.            7,985 (9)       1.42%            $7.875          1/26/06              $39,546         $100,218
Hudson

Robert M. Tanner          7,985 (9)       1.42%            $7.875          1/26/06              $39,546         $100,218
</TABLE>
(1)  On October 10, 1995, the Company  granted options with an exercise price of
     $17.75,  the fair market  value on the date of grant.  On January 26, 1996,
     the Company gave optionees the  opportunity to cancel the October 10, 1995,
     grants in light of the  significant  decrease in the price of the Company's
     common  stock and to exchange  them for options  granted  January 26, 1996,
     reducing the number of shares of the Company's common stock subject to each
     option in direct proportion to the reduction in the exercise price.
(2)  All options were granted at the fair market value (the closing price of the
     common stock on the Nasdaq National Market,  as reported in the Wall Street
     Journal)  on the date of grant.  The  exercise  price  and tax  withholding
     obligations  related to exercise  may be paid by delivery of already  owned
     shares  or  by  offset  of  the  underlying  shares,   subject  to  certain
     conditions.
(3)  Gains are  reported  net of the option  exercise  price,  but before  taxes
     associated with exercise.  These amounts represent certain assumed rates of
     appreciation. Actual gains, if any, on stock option exercises are dependent
     on the  future  performance  of the  common  stock,  overall  stock  market
     conditions,  as well as the optionholder's continued employment through the
     vesting period.  The amounts reflected in this table may not necessarily be
     achieved.
(4)  Non-qualified  stock options granted on January 26, 1996,  which vest 1,588
     immediately  and the remainder in 2,859 share  increments  over a five-year
     period beginning January 26, 1997.
(5)  Incentive  stock  options  granted  on  January  26,  1996,  which vest 199
     immediately  and the  remainder  in 359 share  increments  over a five-year
     period beginning January 26, 1997.
(6)  Non-qualified  stock  options  granted on January 26, 1996,  which vest 598
     immediately  and the remainder in 1,078 share  increments  over a five-year
     period beginning January 26, 1997.
(7)  Non-qualified stock options granted on December 23, 1996, which vest in 750
     share increments over a five-year period beginning December 26, 1997.
(8)  Non-qualified  stock  options  granted on January 26, 1996,  which vest 998
     immediately  and the remainder in 1,796 share  increments  over a five-year
     period beginning January 26, 1997.
(9)  Non-qualified  stock  options  granted on January 26, 1996,  which vest 798
     immediately  and the remainder in 1,437 share  increments  over a five-year
     period beginning January 26, 1997.
                                       57
<PAGE>
                   The following  table sets forth  information  with respect to
the  exercise  and value of stock  options  granted  pursuant  to the  Company's
Incentive  Stock Option  Plan,  Non-Qualified  Stock  Option Plan and  Long-Term
Incentive  Plan,  during the fiscal year ended  December 31, 1996,  to the Named
Officers.

               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                      OPTION VALUE AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
                                                                             Number of                   Value of Unexercised 
                                                                       Securities Underlying                  In-the-Money    
                                                                        Unexercised Options                Options at Fiscal  
                                  Shares                               at Fiscal Year End (#)              Year End ($) (2)   
                               Acquired on        Value                ----------------------              ----------------   
         Name                  Exercise (#)   Realized ($)(1)      Exercisable     Unexercisable      Exercisable  Unexercisable
         ----                 -------------   ---------------     ------------     -------------      -----------  -------------
<S>                             <C>               <C>                  <C>               <C>             <C>            <C>     
Richard G. Meise                  0               $ ----               131,589           64,298          $587,980       $251,809

Rebecca S. Barker               500               $2,975                   799           10,936            $1,498        $13,943

Richard R. Douglas                0               $ ----                76,499           42,483          $169,748        $89,468

Christopher C.                    0               $ ----                22,799           18,186           $97,748        $61,599
Hudson

Robert M. Tanner                  0               $ ----                25,799           57,186            $7,748        $25,974
</TABLE>
(1)  Represents  the selling price of the  underlying  securities on the date of
     exercise  minus the  exercise  price of the  options.  
(2)  Represents the difference between the closing price of the Company's common
     stock on December 31, 1996 and the exercise price of the options.


                              EMPLOYMENT AGREEMENTS

         The Company's  employment  agreements with Richard G. Meise and Richard
R. Douglas expired on December 31, 1996. Accordingly, the Company currently does
not have employment agreements with any of its executive officers.

         Richard R. Douglas has  announced  his  intention  to retire  effective
October 1, 1997.  The  Company  has agreed to  continue  his full  salary  until
December 31, 1997,  and Mr. Douglas will continue as a consultant to the Company
for a period of nine months  following the date of his retirement.  In addition,
the Company has agreed to accelerate  the vesting of all unvested  stock options
to vest at the end of 1997 and provide nine months  following Mr.  Douglas' last
day as a consultant to exercise outstanding options.
                                       58
<PAGE>

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

                 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                                 AND MANAGEMENT

         The  following  table sets forth,  as of May 12,  1997,  the number and
percentage  of  outstanding  shares of common stock  beneficially  owned by each
person known by the Company to  beneficially  own more than 5% of such stock and
by each director and Named Officer of the Company and by all directors and Named
Officers of the Company as a group.

        Name and Address of                  Shares
        Beneficial Owner (1)            Beneficially Owned       Percent Owned
        --------------------            ------------------       -------------

High Tech Investments Limited
  Partnership (2)                                 546,782             6.7%

Richard G. Meise (3)                              209,856             2.6%

Richard R. Douglas (4)                            114,597             1.4%

Robert M. Tanner (5)                               56,402              *

Christopher C. Hudson (6)                          43,653              *

William C. Turner (7)                              21,390              *

Dianne C. Walker (8)                               20,000              *

Roger C. Ferguson (9)                              19,500              *

Steven G. Mihaylo (10)                             17,500              *

Rebecca S. Barker (11)                             13,786              *

All directors and Named Officers
  as a group (10 persons) (12)                    516,684             6.4%
---------------------------
*        Represents less than 1% of the Company's outstanding common stock.

(1)  To the Company's knowledge, the persons named in the table have sole voting
     and sole investment  power with respect to all shares of common stock shown
     as beneficially  owned by them,  subject to community  property laws, where
     applicable,  and the information contained in the footnotes hereunder.  The
     address of Ms. Walker,  Ms. Barker and Messrs.  Meise,  Ferguson,  Mihaylo,
     Turner, Douglas, Hudson and Tanner is c/o Microtest,  Inc., 4747 North 22nd
     Street, Phoenix, Arizona 85016.
                                       59
<PAGE>
(2)  Represents shares held by High Tech Investments Limited Partnership,  as to
     which David  Bolles may be deemed to be the  beneficial  owner by virtue of
     his status as general partner of the partnership. Mr. Bolles is the founder
     and the former Chairman of the Board of the Company.
(3)  Represents 184,448 shares issuable upon exercise of options that either are
     exercisable  immediately  or within 60 days and 25,804  shares  held by Mr.
     Meise.  Does not include  11,439  shares  issuable  upon  exercise of other
     options.  Mr.  Meise is the  Chairman  of the  Board,  President  and Chief
     Executive Officer of the Company.
(4)  Represents 111,795 shares issuable upon exercise of options that either are
     exercisable  immediately  or within 60 days and  2,802  shares  held by Mr.
     Douglas.  Does not include  7,187 shares  issuable  upon  exercise of other
     options.  Mr.  Douglas  is the  Vice  President  of  Operations  and  Chief
     Financial Officer.
(5)  Represents  56,402 shares issuable upon exercise of options that either are
     exercisable  immediately or within 60 days.  Does not include 26,583 shares
     issuable upon exercise of other  options.  Mr. Tanner is the Vice President
     of Worldwide Field Operations.
(6)  Represents  43,486 shares issuable upon exercise of options that either are
     exercisable  immediately  or  within  60 days  and 167  shares  held by Mr.
     Hudson.  Does not include  32,499  shares  issuable  upon exercise of other
     options. Mr. Hudson is the Vice President of Network Management Products.
(7)  Represents  21,390 shares issuable upon exercise of options that either are
     exercisable  immediately  or within 60 days.  Does not include 9,168 shares
     issuable  upon exercise of other  options.  Mr. Turner is a director of the
     Company.
(8)  Represents  20,000 shares issuable upon exercise of options that either are
     exercisable  immediately  or within 60 days.  Does not include 5,000 shares
     issuable  upon exercise of other  options.  Ms. Walker is a director of the
     Company.
(9)  Represents  19,500 shares issuable upon exercise of options that either are
     exercisable  immediately  or within 60 days.  Does not include 5,000 shares
     issuable upon exercise of other options.  Mr. Ferguson is a director of the
     Company.
(10) Represents  17,500 shares issuable upon exercise of options that either are
     exercisable  immediately  or within 60 days.  Does not include 7,500 shares
     issuable upon exercise of other  options.  Mr. Mihaylo is a director of the
     Company.
(11) Represents  13,286 shares issuable upon exercise of options that either are
     exercisable  immediately  or  within  60 days  and 500  shares  held by Ms.
     Barker.  Does not include  17,849  shares  issuable  upon exercise of other
     options.  Ms. Barker is the Vice President of  Communications  and Customer
     Service.
(12) Includes all shares included in notes (3) through (11) above.

                                       60
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
         -----------------------------------------------

                     CERTAIN TRANSACTIONS AND RELATIONSHIPS

         The  Company  believes  all  transactions  it  has  entered  into  with
affiliates are at arm's length and on terms equivalent or similar to terms under
which the Company would conduct business with unaffiliated third parties.


                                     PART IV


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

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

                  (ii)     Financial Statements Schedules.

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

         (b)      Reports on Form 8-K.

                  On December 30, 1996,  the Company  filed a Current  Report on
                  Form 8-K dated December 17, 1996,  disclosing its  acquisition
                  of Logicraft  Information Systems, Inc. The required financial
                  statements  relating to the acquisition were filed on March 3,
                  1997.
                                       61
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934,  the Company has duly caused this report on Form 10-K/A to
be signed on its behalf by the undersigned, thereunto duly authorized, this 16th
day of June, 1997.

                                        MICROTEST, INC.

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


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report on Form 10-K/A has been signed  below by the  following  persons on
behalf of the Company and in the capacities and on the date indicated.


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


                           Chief Executive Officer, President &    June 16, 1997
/s/ Richard G. Meise       Chairman of the Board (Principal 
-----------------------    Executive Officer)
Richard G. Meise
Roger C. Ferguson

                           V.P. & Chief Financial Officer          June 16, 1997
        *                  (Principal Financial and Accounting
-----------------------    Officer)
Richard R. Douglas

        *                  Director                                June 16, 1997
-----------------------  
Roger C. Ferguson

        *                  Director                                June 16, 1997
-----------------------  
Steven G. Mihaylo

        *                  Director                                June 16, 1997
-----------------------  
William C. Turner

        *                  Director                                June 16, 1997
-----------------------  
Dianne C. Walker




* By /s/ Richard G. Meise
     ----------------------
     Richard G. Meise
     Attorney-in-Fact
                                      62