<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549-1004
                                    FORM 10-K
(Mark One)
[x]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                   For the fiscal year ended December 31, 1999
                                       or
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

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

<TABLE>
<S>                                              <C>
                   Delaware                                  86-0485884
----------------------------------------------   ------------------------------------
(State or other jurisdiction of Incorporation)   (IRS employer identification number)
</TABLE>

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

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

Common Stock, $.001 par value                             Nasdaq National Market

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days.

                                   Yes x No __

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

The aggregate market value of Common Stock held by non-affiliates of the
Registrant was approximately $135,701,691 based on the closing sale price as
reported by the Nasdaq National Market on March 20, 2000.

The number of shares outstanding of each of the Registrant's classes of Common
Stock, as of March 20, 2000 was 8,672,125 shares of Common Stock ($.001 par
value).

                       DOCUMENTS INCORPORATED BY REFERENCE

Materials from the Registrant's Proxy Statement relating to its 2000 Annual
Meeting of Shareholders (the "Proxy Statement") have been incorporated by
reference into Part III, Items 10, 11, 12 and 13.
<PAGE>   2
                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                                        <C>
FORWARD-LOOKING STATEMENTS..............................................................................    2

PART I..................................................................................................    3
ITEM 1    BUSINESS......................................................................................    3
ITEM 2    PROPERTIES....................................................................................   14
ITEM 3    LEGAL PROCEEDINGS.............................................................................   14
ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................   15

PART II.................................................................................................   16
ITEM 5    MARKET FOR THE COMPANY'S COMMON EQUITY SECURITIES AND RELATED SHAREHOLDER
          MATTERS.......................................................................................   16
ITEM 6    SELECTED CONSOLIDATED FINANCIAL DATA..........................................................   18
ITEM 7    MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
          OPERATIONS....................................................................................   19
    Item 7A     Quantitative and Qualitative Disclosures About Market Risk..............................   28
ITEM 8    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................   28
ITEM 9    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
          DISCLOSURE....................................................................................   48

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

PART IV.................................................................................................   49
ITEM 14   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..............................   49
</TABLE>


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FORWARD-LOOKING STATEMENTS:

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

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


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                                     PART I


ITEM 1.  BUSINESS

INTRODUCTION

         Microtest, Inc. is a Delaware corporation founded in 1984. We are a
leading producer of network test and measurement products and network storage
and application servers. Our two product families, Network Test and Measurement
(NTM) and Network Appliance and Storage (NAS), include products for computerized
networks from local area networks (LANs) to intranets and the Internet.

         Our NTM line of handheld network certification and troubleshooting
tools are used in the installation and operation of networks. The NTM product
range has devices for testing fiber optic and copper networks, as well as,
active operational LANs. Our handheld scanners quickly:

         -        test networks to industry standards,
         -        certify whether network cabling will support proposed network
                  infrastructure,
         -        monitor network activity and utilization,
         -        pinpoint cabling problems, and
         -        provide documentation of network infrastructure.

         Our NTM products cost effectively increase network productivity and
reliability by reducing network downtime.

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

         Our OMNIFiber product was introduced during August 1999 and is capable
of testing both multi-mode and single mode fiber optic cable. We believe that
the OMNIFiber is positioned to address the growing demand for certifying premise
fiber optic networks. During October 1999, we introduced SimpliFiber, a line of
entry level fiber optic LED and laser light sources with a matched power loss
meter.

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

         We introduced a Linux-based server appliance called the FileZerver
during March 2000. This product is targeted at workgroup and departmental users
of network attached storage devices and provides users with storage, file
sharing, retrieval and file management capabilities. We have also announced the


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development of the LinuxZerver, a product similar to the FileZerver, but
targeted to Original Equipment Manufacturers (OEMs) and integrators that may
want to customize the software capabilities of a server appliance. We added the
DiscZerver to our NAS product line during June 1998. DiscZerver is a high
performance workgroup and department optical CD/DVD server appliance employing
unique CD/DVD image caching technology that increases network access performance
while reducing network access costs for shared CD/DVD applications. These
servers join our WebZerver(TM) workgroup intranet appliance in extending our
line of network attached storage devices and appliances.

INDUSTRY BACKGROUND

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

         Each year, there are new standards, new protocols, faster data
requirements, enhanced operating systems, better data storage options, new
peripheral hardware, more advanced topologies and signaling options, and
additional cabling options. In particular, 1999 saw significant progress towards
new standards for Category 5E and Category 6 cabling. Support of these standards
requires higher bandwidth (250 MHz), higher dynamic range and new measurements
(return loss, power sum near end crosstalk ("NEXT"), equal level far end
crosstalk and power sum equal level far end crosstalk). Furthermore, Gigabit
Ethernet cabling standards require test capabilities that are not yet available
in the vast majority of existing field test equipment. Many premise network
installations now include at least some percentage of fiber optic cabling.
Verifying these fiber networks within the same testing context as the copper
structured wiring is important to installer productivity. Many networks
incorporate a variety of different technologies and it is this trend toward
complexity that is creating demand for products that manage network assets. Many
of these standards are in development and it is uncertain when each will become
finalized.

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

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


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MARKET FOR THE COMPANY'S PRODUCTS

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

         Telco technicians, low-voltage contractors and electrical contractors
are joining datacom installers in the installation of premise-based computer
networks. These new classes of prospects may expand our NTM market.

         NAS Products. Our NAS products address the challenges associated with
managing devices and sharing large amounts of information within workgroups. The
market for NAS products include devices with both hard disk storage and optical
storage capabilities. Our newer NAS product offerings are offered to
integrators, Value Added Resellers ("VARs") and OEMs. Optical NAS products
appeal to network administrators, librarians and information resource
professionals in all kinds of organizations. Law firms, educational
institutions, libraries and research facilities are some of the target markets
for our NAS line. Our products can be sold as a solution to network storage
challenges or as an appliance engine that these customers can customize in order
to address specific network appliance solutions. Our NAS products may be
appealing to hard disk manufacturers as a means to bundle their storage devices
with our product to create an additional sales opportunity for them.

COMPANY STRATEGY

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

         We provide a variety of easy-to-use hand held products and network
attachable hardware and software products, all designed to address complex
network management problems. Our strategy is to provide NTM product offerings
that address expected future demand for test, measurement and diagnostic devices
associated with the utilization and growth of premise and campus computer
networks. These networks will be comprised of the emerging Category 5E, Category
6 and Category 7 UTP copper cabling as well as single mode and multi-mode fiber
optic cabling and wireless systems. We also expect to position ourselves to
address the growing future market for in-home computer networks. Our NAS
strategy is to design, market and sell network server appliance products that
provide users with easy-to-operate, scalable, reliable and cost effective
solutions.

         The NAS market is divided into several segments that spans a wide range
of capabilities and prices. The enterprise NAS market is a high-end market
segment generally served by companies significantly larger than we are. In prior
years, we offered an optical NAS device directed at this segment. During 1999,
we refocused our strategy and discontinued our high-end enterprise CD-ROM
enterprise systems business. We are currently focused on the workgroup and
departmental NAS market segment for our server appliance products. Our offerings
to this segment will primarily be our hard drive FileZerver and LinuxZerver
products. We believe that our product cost, reliability, scalability and ease of
use are appealing to this segment. Also, we believe that accelerating demands
for electronic data storage


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as a result of increased Internet usage, increased usage of applications such as
data warehousing and data mining and emerging applications associated with voice
and video uses are driving additional need for network-centric storage devices.
Several industry publications are predicting substantial growth in the NAS hard
drive market over the next several years.

PRODUCTS

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

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

         -        International Standards Organization ("ISO"),
         -        Comite European de Normalisation Electrotechnique ("CENELEC"),
         -        Telecommunications Industry Association ("TIA"), and
         -        Electronics Industry Association ("EIA").

         Our test and measurement products utilize a variety of technologies,
including Time Domain Reflectometry, Digital Signal Processing, proprietary
ASICs that we have developed and RF signaling technology. These technologies and
our experience and know-how is incorporated into intuitive, easy-to-use,
hand-held instruments that allow cabling and network professionals to use these
powerful technological tools with little or no training.

         Our handheld cable test devices quickly:

         -        verify installed structured wiring,
         -        pinpoint connector or patch cord problems,
         -        certify whether network cabling will support a proposed
                  network signaling system, and
         -        monitor and diagnose network activity.

         Our NTM products operate across multiple fiber optic and copper cable
types and computer networking systems and cost effectively increase network
productivity and reliability by reducing network downtime. Sales of NTM products
accounted for 69%, 64% and 56% of our total revenues in 1999, 1998 and 1997,
respectively.

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

<TABLE>
<CAPTION>
         Fiber Optic Cable                Copper Cable                      Network
          Testing Devices             Certification Devices           Diagnostic Devices
          ---------------             ---------------------         ----------------------
<S>                                   <C>                           <C>
        -  OMNIFiber(TM)              - OMNIScanner2(TM)            - MICROSCANNER(TM)
        -  CertiFiber(TM)             - OMNIScanner(TM)             - COMPAS Internet (TM)
        -  SimpliFiber(TM)            - PentaScanner(TM)350         - COMPAS NT(TM)
                                      - PentaScanner+(TM)           - COMPAS Netware(TM)
</TABLE>


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FIBER OPTIC TESTING DEVICES --

         OMNIFIBER was introduced during August 1999 and transforms our copper
cable testing devices into a fiber optic tool for testing and certification of
multimode and single-mode fiber premise networks. OMNIFiber measures optical
loss, delay, and length over two fibers simultaneously and compares the results
against the selected LAN standard for instant pass/fail analysis, using a "one
button" autotest feature. OMNIFiber can store up to 1,000 autotests. Saved
results can be uploaded to a PC using our software in order to create reports
and manage accumulated data.

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

         SIMPLIFIBER was also introduced during 1999. It is an affordably priced
optical source and power meter kit designed to measure the loss of multimode and
single-mode fiber optic cables. It is designed for simple connection to networks
and the wavelength of the source and meter units are automatically synchronized.
SimpliFiber has storage and upload features similar to our other fiber optic
test devices.

COPPER CABLE CERTIFICATION DEVICES --

         OMNISCANNER2 AND OMNISCANNER are capable of certifying all cabling
classes from Category 3 through Category 6 and testing Category 7 cable up to
300 MHz, an industry first. The OMNIScanners are the only field testers capable
of making accurate measurements on Category 7 cabling. OMNIScanner2 was
introduced during 1999 and is a second generation advanced cabling certification
instrument. It includes productivity and usage advancements over the OMNIScanner
while maintaining OMNIScanner's full digital vector measurement system, which
delivers industry leading accuracy and dynamic range. The OMNIScanner2 supports
removable mass storage flash cards for storing thousands of custom
configurations and autotest results.

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

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

         PENTASCANNER+, with 2-Way Injector+, has been our most popular cable
verification system and is capable of verifying cable links to 100 MHz
performance specifications. PentaScanner+ offers professional cable installers,
service providers and network administrators an easy-to-use, hand-held solution
for installing, managing and troubleshooting Category 5 and ISO Class D cabling
systems. The


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2-Way Injector+ is an accessory to the PentaScanner+ that measures Near-End
Crosstalk ("NEXT") and Attenuation-to-Crosstalk Ratio (ACR) from both ends of
the installed network cable link which saves installation test time. This
product enables cable installers to purchase a hand-held tool that provides
cable-testing accuracy indistinguishable from a network analyzer.

NETWORK DIAGNOSTIC DEVICES --

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

         COMPAS products are computer network troubleshooting devices designed
for IT administrators, network technicians and third-party service providers who
are tasked with solving common, everyday problems on Ethernet networks. COMPAS
combines the best features of cable testers, protocol analyzers, network
diagnostic utilities and asynchronous data communications testers into a
hand-held, portable tool. Users select the network problem from a simple menu
and COMPAS performs a series of tests designed to identify the cause of the
problem. Our COMPAS product line consists of the following products:

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

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

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

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

         Most of our NAS products utilize a Linux-based operating system. Linux
is an open-source operating system known for its reliability, performance,
scalability, customizability and low memory requirements. Workgroups now require
instant access to mission critical information, reference information, research
data and even multimedia files. NAS products enable network users to access and
share information, such as customer databases, legal briefs, medical records,
library reference volumes, research data, photo images and even sound bytes
across a network.


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         Our NAS products include:

         -        FileZerver(TM),
         -        LinuxZerver(TM),
         -        WebZerver(TM),
         -        DiscZerver(TM), and
         -        DiscZerverVT(TM).


         FILEZERVER is a hard disk network attached storage appliance introduced
during March 2000. Our FileZerver is an intelligent platform storage solution
for web-extracted information, collaboration and other storage needs. The
product has been designed for easy setup and ease of use. FileZerver was
engineered to expand as user needs for additional capacity arise. The product is
scaleable to over one terabyte of storage capacity. The FileZerver has built-in
data protection, with an auto tape backup feature and RAID 0 (striping), RAID 1
(mirroring), and RAID 5 (distributed data and parity) capabilities. FileZerver
can communicate with a variety of network protocols, including:

         -        SMB over TCP/IP ( Microsoft),
         -        NCP over IPX (NetWare),
         -        NCP over IP (NetWare 5),
         -        AFP (Mac - Apple),
         -        NFS (UNIX), and
         -        HTTP (Internet).

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

         WEBZERVER is a thin server application appliance introduced during
1997. This product enables users to implement intranet workgroup sites across
organizations and is intended to facilitate collaborative document sharing, data
archiving and E-mail storage and retrieval.

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

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

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

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


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SALES, DISTRIBUTION AND CUSTOMERS

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

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

         -        ads in trade magazines,
         -        regular mailings of product, promotional and technical
                  materials,
         -        participation in industry trade shows,
         -        incentive programs for distributors and VAR sales personnel,
         -        cooperative marketing programs,
         -        seminars and training, and
         -        customer promotions.

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

         North American sales accounted for approximately 61%, 68% and 72% of
total revenue for the years ended December 31, 1999, 1998 and 1997,
respectively. Our United States distributors include national distributors,
cable and wire distributors and catalog merchandisers.

         In 1998, we signed an agreement with Progressive Electronics of Tempe,
Arizona whereby Progressive Electronics would become an OEM supplier of the
Microtest MICROSCANNER. We consider OEM suppliers excellent distribution
vehicles for both our NTM and NAS products and will seek similar opportunities
in the future.

         We have developed relationships with distributors throughout Europe.
Our European distributors are supported through offices located in the United
Kingdom and Germany. Our Pacific Rim customers are supported through our
Singapore office and our Beijing, China office (opened in March 2000). We have
also developed relationships with distributors located in Canada, Mexico and
Central and South America. International sales are primarily denominated in
United States dollars. Revenues outside of North America accounted for 39%, 32%
and 28% of total revenues in 1999, 1998 and 1997, respectively.

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

         -        local area network ("LAN") management personnel,
         -        LAN installers,
         -        system integrators,
         -        field service personnel,
         -        resellers, and
         -        technical end users with departmental applications.

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


                                       10
<PAGE>   12
         The primary target market for our NAS products include:

         -        system integrators,
         -        VARs,
         -        distributors, and
         -        OEMs.

         Major customers each accounting for more than 10% of total revenue in
either 1999, 1998 or 1997 were Tech Data Corporation, Ingram Micro Inc., and
Graybar Electric Company, Inc. We maintain a customer support organization in
both North America and Europe to answer customer questions concerning the use of
our products.


PRODUCT DEVELOPMENT

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

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

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

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

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

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

         -        Building Industry Consulting Services International ("BICSI"),
                  and

         -        Storage Network Industry Association ("SNIA").

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

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

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


                                       11
<PAGE>   13
ACQUISITIONS

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

         -        difficulties in assimilation and integration of the acquired
                  company,
         -        diversion of management's attention,
         -        incompatibility of acquired systems, and
         -        loss of customers, key employees and suppliers of the acquired
                  company.

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

MANUFACTURING

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

         During 1998, we expanded our warehousing operation in the United
Kingdom to better service the European market. We maintain authorized customer
service centers in Phoenix, Arizona, the United Kingdom and Japan. We also have
established contract service centers in other locations. Our engineering
personnel must certify all service centers.

ISO 9001 COMPLIANCE

         As part of our commitment to customer satisfaction and continuous
improvement, we formally implemented a quality management system during October
1997. During 1998, our quality management system was certified by an accredited
independent auditor to be in compliance with ISO 9001 standards. These standards
provide for the control and improvement of development, operational and business
processes. We are required to demonstrate continued compliance by collection and
review of objective evidence thereof and by subjection to routine independent
audits.

SUPPLIES

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


                                       12
<PAGE>   14
BACKLOG

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

COMPETITION

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

         Our products compete with products offered by the following companies:

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

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

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

PROPRIETARY RIGHTS

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


                                       13
<PAGE>   15
<TABLE>
<CAPTION>
     Network Test and Measurement                  Network Appliance and Storage
     ----------------------------                  -----------------------------
<S>                                      <C>
         -  OMNIScanner(TM)              -  FileZerver (TM)
         -  PentaScanner(R)              -  LinuxZerver (TM)
         -  CertiFiber(TM)               -  WebZerver (TM)
         -  OmniFiber(TM)                -  DiscZerver(TM)
         -  SimpliFiber(TM)              -  FastCD(TM) (a disk-caching technology)
         -  PairScanner(R)               -  DiscPort(R)
         -  COMPAS(R)                    -  AutoShare(TM) (a disk management utility software)
</TABLE>

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

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

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

EMPLOYEES

         At March 22, 2000, we had 188 full-time employees, comprised of 71
employees in sales, marketing and customer support, 29 manufacturing employees,
60 employees performing research and development activities and 28
administrative employees. Many of our employees are highly skilled in certain
disciplines. Our continued growth and success will depend, in part, on our
ability to retain management and key employees and, where appropriate, hire new
employees. We have never had a work stoppage. No employees are represented by a
labor organization. We consider our relations with employees to be good.

ITEM 2.  PROPERTIES

         Our principal corporate offices and research and development facilities
are located in a 49,000 square foot facility in Phoenix, Arizona. The lease for
this facility began October 1992 and continues until September 2000. Our monthly
rental payments for this facility are approximately $75,000. We believe that
this facility is adequate to meet our needs. We also lease sales and support
facilities in Illinois, Singapore, Germany and the United Kingdom. Our facility
in Germany also includes research and development activities.

ITEM 3.  LEGAL PROCEEDINGS

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


                                       14
<PAGE>   16
         We, Richard G. Meise, former Chief Executive Officer, Charles Mihaylo,
former Chief Operating Officer and John O'Block, former Chief Financial Officer
have been named as defendants in two purported class action lawsuits: Great Neck
Capital Appreciation Investment Partnership, L.P., et. al. v. Microtest, Inc.,
et. al., CIV 99-0438 PHX EHC filed on March 8, 1999, in United States District
Court for the District of Arizona and Banks v. Microtest, Inc., et. al., CIV
99-672 PHX EHC filed on April 7, 1999 in United States District Court for the
District of Arizona. The two lawsuits contain substantially the same allegations
and were brought on behalf of a class of persons who purchased our common stock
between April 14, 1998 and March 2, 1999. The complaints allege claims under
Section 10(b) and SEC Rule 10b-5 of the Securities and Exchange Act of 1934. The
claims further allege that we made misrepresentations or omissions concerning
our financial statements and public disclosures that artificially inflated the
price of our common stock. The plaintiffs seek an unspecified amount of actual
damages, attorney's fees and costs. On November 29, 1999, a motion to dismiss
the lawsuit was filed. On January 10, 2000, the Court heard arguments on the
motion to dismiss. This motion is currently pending. We intend to defend the
actions vigorously. We are unable to predict the ultimate outcome of this
litigation. If the lawsuits were ultimately determined adversely to us, it could
have a material effect on our results of operations and financial condition.

         The Securities and Exchange Commission ("SEC") is engaged in an
investigation relating primarily to our accounting matters. They have requested
and received documents from us and taken testimony from certain former
employees. The SEC has not indicated whether they intend to formally expand the
scope of the investigation, or take any other measures. They have not, to date,
asserted any specific claims, or remedy. We are unable to predict the effect, if
any, of this inquiry.

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

         Not applicable.


                                       15
<PAGE>   17
                                     PART II

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

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

<TABLE>
<CAPTION>
                                                            High               Low
                                                            ----               ---
<S>                                                       <C>               <C>
         YEAR ENDED DECEMBER 31, 1998
             First quarter                                $   6.63          $  4.63
             Second quarter                                   5.63             4.50
             Third quarter                                    5.50             3.22
             Fourth quarter                                   3.75             2.34

         YEAR ENDED DECEMBER 31, 1999
             First quarter                                    4.13             2.13
             Second quarter                                   3.00             2.00
             Third quarter                                    5.75             2.25
             Fourth quarter                                  13.00             3.13

         YEAR ENDED DECEMBER 31, 2000
             First quarter (through March 20, 2000)          19.75             7.25
</TABLE>

         On March 20, 2000, the closing price of our common stock was $15.875
per share and there were approximately 177 holders of record of our common
stock.

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

FACTORS THAT MAY AFFECT FUTURE STOCK PERFORMANCE

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

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

         -        announcements of developments related to our business,
         -        announcements by competitors,
         -        quarterly fluctuations in our financial results,
         -        conditions in the network attached storage industry,
         -        conditions in the network test and measurement industry,
         -        changes in local and global economies,
         -        changes in analysts' estimates of our financial performance,
                  and
         -        other events or factors.

         In addition, in recent years the overall stock market, and the market
for small capitalization technology stocks in particular, has experienced
extreme fluctuations, which have often been unrelated to


                                       16
<PAGE>   18
the operational performance of affected companies. Such fluctuations could have
a material adverse effect on the market price of our common stock.

         IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US. Our Certificate of
Incorporation and Bylaws empower our board of directors, without approval of our
shareholders, to issue shares of preferred stock, to fix the rights and
preferences, and divide our board of directors into three classes. These
provisions, as well as other provisions in such documents, could have the effect
of deterring unsolicited takeovers or delaying or preventing changes in control
or of our management, including transactions in which shareholders might
otherwise receive a premium for their shares over the current market prices.


                                       17
<PAGE>   19
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

         The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and related Notes and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The consolidated balance sheets as of
December 31, 1999 and 1998, and the consolidated statements of operations for
each of the three years in the period ended December 31, 1999, and the
independent auditors' report thereon, are included in Item 8 of this Form 10-K.

<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                               1999         1998         1997         1996         1995
                                                             --------     --------     --------     --------     --------
                                                                       (in thousands, except per share amounts)
<S>                                                          <C>          <C>          <C>          <C>          <C>
STATEMENT OF INCOME DATA:
Net revenue                                                  $ 42,759     $ 41,650     $ 49,592     $ 50,442     $ 52,537
Cost of revenue (1)                                            20,020       17,903       20,266       20,452       21,961
                                                             -------------------------------------------------------------
Gross Profit                                                   22,739       23,747       29,326       29,990       30,576
Operating expenses (2)                                         27,172       26,237       29,254       40,636       30,968
                                                             -------------------------------------------------------------
Income (loss) from operations                                  (4,433)      (2,490)          72      (10,646)        (392)
Other income (expense), net                                       215          324          120          762        1,232
                                                             -------------------------------------------------------------
Income (loss) before income taxes                              (4,218)      (2,166)         192       (9,884)         840
Income tax (provision) benefit                                   (103)       1,258          131       (1,711)         305
Cumulative effect of change in accounting principle (3)          (117)
                                                             -------------------------------------------------------------
Net income (loss)                                            $ (4,438)    $   (908)    $    323     $(11,595)    $  1,145
                                                             =============================================================

EARNINGS PER SHARE: (4)
Income (loss) before change in accounting principle          $  (0.54)    $  (0.11)    $   0.04     $  (1.43)    $   0.13
Cumulative effect of change in accounting principle             (0.01)
                                                             -------------------------------------------------------------
                                                             $  (0.55)    $  (0.11)    $   0.04     $  (1.43)    $   0.13
                                                             =============================================================

Weighted average common and equivalent shares outstanding       8,078        8,099        8,249        8,104        8,534
                                                             =============================================================

BALANCE SHEET DATA:
Working capital                                              $ 20,916     $ 22,028     $ 25,641     $ 26,583     $ 39,128
Total assets                                                   34,056       39,350       42,805       43,313       50,158
Shareholders' equity                                           27,460       30,292       32,094       31,672       43,027
</TABLE>

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

(2)      Includes $1,120,000 special charge related to product discontinuance
         and facility closure in the year ended December 31, 1999. Also,
         includes charge for write-off of purchased in-process research and
         development of $15,697,000 and $8,776,000 in the years ended December
         31, 1996 and 1995, respectively.

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

(4)      Basic and diluted earnings per share were the same for all years
         presented.


                                       18
<PAGE>   20
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

INTRODUCTION

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

         We incurred a net loss of $4.4 million, or $0.55 per share, for the
year ended December 31, 1999. This compares to a net loss of $0.9 million, or
$0.11 per share, for the year ended December 31, 1998. During 1999, we expanded
our NTM product offerings with several fiber optic cable testing devices and
expanded our NAS product offerings with the development of Linux-based network
server appliances. We also expanded our sales efforts with a new office in
Singapore and additional sales resources in our Latin America region.

         Our operating results for the year ended December 31, 1999 were
negatively impacted by the closure of our Nashua, New Hampshire operation during
the second fiscal quarter. We refocused our NAS strategy from products for the
enterprise market segment to products designed for the workgroup market segment.
Accordingly, we discontinued our design, marketing and sales of enterprise NAS
products. These events resulted in a $1.9 million charge to earnings during the
year ended December 31, 1999, consisting of $0.8 million related to the
write-down of related product inventories and $1.1 million for employee
severance and benefits, future lease payments, the write-off of certain fixed
assets and capitalized software and an increase in the allowance for evaluation
units. Amounts related to the write-down of inventories have been reflected as
an increase to cost of revenue in the accompanying consolidated statements of
operations. We also experienced significant changes in our executive management
team in response to the issues that led to our need to restate our 1998
quarterly earnings. We hired a new President and Chief Executive Officer in
January 1999 and a new Chief Financial Officer in March 1999.

         International revenue accounted for 39%, 32% and 28% of the Company's
net revenue for the years ended December 31, 1999, 1998 and 1997, respectively.
International revenue increased $3.4 million to $16.8 million in 1999 from $13.4
million in 1998. This increase is primarily the result of investments to
increase our international infrastructure to manage our offshore distribution.


                                       19
<PAGE>   21
\RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
DECEMBER 31,                         1999           1998          1997
======================================================================
<S>                                  <C>            <C>           <C>
 Net revenue                         100%           100%          100%
----------------------------------------------------------------------
 Gross margin                         53             57            59
----------------------------------------------------------------------
 Operating expenses:
   Sales and marketing                30             30            33
   Research and development           17             19            17
   General and administrative         14             13            10
   Special charge                      4             --            --
----------------------------------------------------------------------
 Income (loss) from operations       (10)            (6)           --
----------------------------------------------------------------------
 Net income (loss)                   (10%)           (2%)           1%
======================================================================
</TABLE>

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

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

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

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

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

         RESEARCH AND DEVELOPMENT. Research and development expenses decreased
$0.5 million, or 6.3%, from $7.9 million for the year ended December 31, 1998 to
$7.4 million for the year ended December 31, 1999. This decrease was primarily
caused by lower salary expense incurred after the


                                       20
<PAGE>   22
discontinuance of NAS enterprise product development activities as a result of
our exiting the NAS enterprise product line. This decrease was offset by a
reduction in the amount of software development costs that were capitalized in
1999. Beginning July 1999, we changed our development process, and believe that
new product development is essentially completed concurrently with the
establishment of technological feasibility. Software costs are currently
expensed as received. Software development costs of approximately $0.2 million
were capitalized through the first two fiscal quarters of the year ended
December 31, 1999 compared with capitalized software development costs of
approximately $1.0 million for the year ended December 31, 1998.

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

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

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

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

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

         NET INCOME (LOSS). Net loss increased $3.5 million, from net loss of
$0.9 million in the year ended December 31, 1998, to a net loss of $4.4 million
in the year ended December 31, 1999. The increased loss was primarily
attributable to the $1.9 million special charge relating to our exit from the
NAS enterprise systems business and related closure of our Nashua, New Hampshire
facility, the decrease in the income tax benefit of $1.4 million and the $.1
million write-off of previously capitalized international product translation
costs.

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

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998

         REVENUE. Net revenue decreased $7.9 million, or 15.9%, from $49.6
million for the year ended December 31, 1997 to $41.7 million for the year ended
December 31, 1998. This decrease was primarily


                                       21
<PAGE>   23
attributable to intensified competition and our decision in the second quarter
of 1998 to withdraw from the lower margin tower business. The lower than
anticipated revenue from new higher margin DiscPort2, DiscPort VT and DiscZerver
products were unable to offset the loss of the lower margin tower revenues.
During the first half of 1998, we also experienced a general weakness in sales
to the Asia Pacific region.

         International revenues decreased $0.3 million, or 2.2%, from $13.7
million for the year ended December 31, 1997 to $13.4 million for the year ended
December 31, 1998, and increased from 28% of net revenue during 1997 to 32% of
net revenue during 1998. International sales revenue decreased in 1998 primarily
due to the weakening of the Asia Pacific economy.

         GROSS PROFIT. Gross profit decreased $5.6 million, or 19.1%, from $29.3
million for the year ended December 31, 1997 to $23.7 million for the year ended
December 31, 1998. Gross margin decreased from 59.1% for the year ended December
31, 1997 to 57.1% for the year ended December 31, 1998. The decrease in gross
profit was a result of the decrease in revenue, and a change in the product mix.

         SALES AND MARKETING. Sales and marketing expenses decreased $3.6
million, or 22.1%, from $16.3 million for the year ended December 31, 1997 to
$12.7 million for the year ended December 31, 1998. This decrease was primarily
due to synergies created from the integration of Logicraft Information Systems
("Logicraft"), as Microtest Enterprise Group. Logicraft was acquired during the
fourth quarter of fiscal 1996, and was not fully integrated until the third
quarter of fiscal 1997. The integration of Logicraft included a significant
reduction in staffing during the first and second quarters of fiscal 1997. In
addition, cost control measures were implemented during the second half of
fiscal 1997, which benefited operating results in the year ended December 31,
1998.

         RESEARCH AND DEVELOPMENT. Research and development expenses decreased
$0.3 million, or 3.7%, from $8.2 million for the year ended December 31, 1997 to
$7.9 million for the year ended December 31, 1998. The decrease resulted
primarily from the capitalization of software development costs during the year
ended December 31, 1998 for new products. We capitalized approximately $1.0
million of software development costs in the year ended December 31, 1998. The
capitalization of software development costs was partially offset by the fourth
quarter 1998 write-off of $0.8 million of prepaid royalties for software
products that were reaching obsolescence. In addition, there was a 12% decrease
in the number of Logicraft employees in 1998 compared to 1997 after the complete
integration of Logicraft, as discussed above.

         GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $0.8 million, or 16.7%, from $4.8 million in the year ended December
31, 1997 to $5.6 million in the year ended December 31, 1998. This increase was
a result of an increase in professional fees as well as a restructuring of the
European operations during the year ended December 31, 1998. In addition, during
the fourth quarter of 1998, we incurred charges of approximately $0.4 million
relating to a legal settlement, additional professional fees, and the search and
hiring of our new President and Chief Executive Officer.

         OTHER INCOME (EXPENSE). Other income, net, increased $0.2 million, from
$0.1 million in the year ended December 31, 1997 to $0.3 million in the year
ended December 31, 1998. This increase was primarily attributable to the
consolidation of our various investment accounts with lower interest rates in
1997 into one investment account with higher interest rates in 1998. In
addition, we had higher average cash balances in 1998 compared to 1997. The
average cash balances for the years ended December 31, 1998 and 1997, were
approximately $12.7 million and $8.0 million, respectively.

         EFFECTIVE TAX RATE. Our effective income tax rate varies from the
statutory tax rate primarily because of research and development credits earned
as well as tax benefits earned by our Foreign Sales Corporation.


                                       22
<PAGE>   24
         NET INCOME (LOSS). Net income (loss) decreased $1.2 million, from net
income of $0.3 million in the year ended December 31, 1997, to a net loss of
$0.9 million in the year ended December 31, 1998. The decrease was primarily
attributable to a charge of approximately $0.8 million reflected in the year
ended December 31, 1998, to write-off prepaid royalties that were determined to
have become impaired. In addition, we recorded charges of approximately $0.2
million to write-off the cost of evaluation units not expected to be recovered,
and $0.4 million relating to a legal settlement, professional fees and executive
search fees incurred in the fourth quarter of the year ended December 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

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

         At December 31, 1999 we held cash and cash equivalents of $10.4
million, compared to cash and cash equivalents of $9.6 million at December 31,
1998. During the year ended December 31, 1999, cash flows provided by operations
was $0.1 million, resulting primarily from net loss of $4.4 million and
decreases in accounts payable and accrued liabilities of $1.6 million offset by
non-cash depreciation and amortization expense of $2.4 million, reduction in
accounts and tax receivables of $0.7 million, reduction in inventories of $2.3
million and decrease in prepaid expenses of $0.8 million. Cash flows provided by
operations were $0.7 million for the year ended December 31, 1998.

         Cash flows used in investing activities was $0.9 million for the year
ended December 31, 1999, including capital expenditures of $0.8 million. We
acquired computer hardware and software, furniture and fixtures and other
equipment during the year ended December 31, 1999. Our capital expenditure
budget for 2000 is approximately $0.8 million, which primarily includes expected
purchases of computer software and hardware, and other equipment.

         Cash flows provided by financing activities was $1.6 million for the
year ended December 31, 1999, primarily because of the exercise of common stock
options and issuance of common stock in connection with our employee stock
purchase plan.

         We expect that our existing working capital, together with cash flows
from operations will be sufficient to meet our operating and capital needs for
existing operations for the twelve months subsequent to December 31, 1999. We
intend to finance our future growth through the use of cash from operations,
potential credit facilities received from lenders, and the issuance of common
stock. We may seek to raise additional capital through public or private equity,
or debt financing. The availability of capital sources will depend upon
prevailing market conditions, interest rates, our financial condition and the
market price of our common stock.

INFLATION

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

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

         Our future operating results and financial condition are dependent on
our ability to successfully develop, manufacture, and market technologically
innovative products in order to meet dynamic customer demand patterns. Inherent
in this process is a number of factors that we must successfully manage in order
to achieve favorable future operating results and financial condition. Potential
risks and


                                       23
<PAGE>   25
uncertainties that could affect our future operating results and financial
condition include, without limitation, the factors discussed below.

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

         WE DEPEND UPON THIRD-PARTY DISTRIBUTORS. We derive substantially all of
our product sales through distributors and VARs. One of our distributors
accounted for 12% of our revenue in 1999. The loss of certain distributors or
VARs would have a material adverse effect on our business and operating results.
Our contractual relationships with distributors and VARs are generally
cancelable upon reasonable notice to us. Certain of our distributors and VARs
also act as distributors for our competitors 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 our current
distributors and VARs will continue to market our products effectively or that
economic or industry conditions will not adversely affect such distributors and
VARs. Our 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 our
current products. There can be no assurance that our distributors and VARs will
choose or be able to effectively market these new products or to continue to
market our existing products. A failure of our distributors and VARs to
successfully market our products would have a material adverse effect on our
business and results of operations.

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


                                       24
<PAGE>   26
         OUR PRODUCTS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGES AND HAVE THE
POTENTIAL FOR PRODUCT DEFECTS. The market for our products is characterized by:

         -        rapid technological advances and changes,
         -        evolving industry standards in computer hardware and software
                  technology,
         -        changes in customer requirements, and
         -        ongoing new product introductions and enhancements.

         Our future success will depend upon our ability to continue to enhance
our current product line and to continue to develop and introduce new products
that keep pace with competitive product introductions and technological
developments, satisfy diverse and evolving customer requirements or otherwise
achieve market acceptance. There can be no assurance that we will be successful
in continuing to develop and market, in a timely and cost effective manner, new
products or product enhancements that respond to technological advances by
others or that these products will achieve market acceptance. Companies in the
industry have, in the past, experienced delays in the development, introduction
and marketing of new and enhanced products. There can be no assurance that we
will not experience similar delays in the future. Our failure to anticipate or
respond adequately to changes in technology and customer preferences, or any
significant delays in product development or introduction, would have a material
adverse effect upon our business, financial condition and results of operations.

         Due to their complexity and sophistication, our products, from time to
time, may contain defects or "bugs" which can be difficult to correct. As we
continue to develop and enhance our products, there can be no assurance that we
will be able to identify and correct defects in such a manner that will permit
the timely introduction of such products. Despite extensive testing, we have,
from time to time, discovered defects only after products have been commercially
released. Product defects may:

         -        cause delays in product introductions and shipments,
         -        cause loss of or delays in market acceptance,
         -        result in increased costs,
         -        cause a product recall,
         -        require design modifications, or
         -        impair customer satisfaction.

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

         Over the past three years, storage drive technology has advanced
significantly. The pace of new drive introductions has also increased. We may
find ourselves with an inventory of obsolete drives. Our contracts with
distributors sometimes provide for product returns or price protection credits,
based on current inventory levels of current and obsolete products under certain
limited circumstances. We estimate and accrue an allowance for such occurrences;
nevertheless actual inventory writedowns, product returns or price protection
credits may exceed our estimates. Any of the foregoing events could have a
material adverse effect on our business, financial condition and results of
operations.

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

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


                                       25
<PAGE>   27
         -        Datacom - Textron,
         -        Fluke Corporation (division of Danaher Corporation),
         -        Scope Communications (division of Agilent, Inc.), and
         -        Wavetek Wandel & Goltermann.

         Our current competitors in the network storage market include:

         -        Axis Corporation,
         -        Hewlett-Packard Co.,
         -        Maxtor Corporation,
         -        Network Storage Solutions,
         -        Quantum Corporation, and
         -        Western Digital Corporation.

         Our competitors include large domestic and international companies,
many of which have significantly greater financial, technical, manufacturing,
marketing, sales and distribution resources than us. Our current or potential
competitors may develop products comparable or superior to those that we have
developed or adapt more quickly to new or emerging technologies, evolving
industry trends, or changing customer requirements. We may not have the
financial resources, technical expertise, marketing, sales, distribution,
customer service and technical support capabilities to compete successfully.

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

         -        rapid technological advances,
         -        evolving standards in computer hardware and software
                  technology,
         -        changes in customer requirements, and
         -        frequent new product introductions and enhancements.

         Any decrease in sales of the Company's OMNIScanner, PentaScanner or
Zerver products as a result of the foregoing, or other factors, would have a
material adverse effect on our business, financial condition and operating
results.

         WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. Sales outside
of North America accounted for 39%, 32% and 28% of total revenue in 1999, 1998
and 1997, respectively. An important element of our strategy is to expand
international operations. We may be unable to successfully localize, market,
sell and deliver products internationally. Our inability to successfully expand
international operations in a timely and/or cost effective manner could have a
material adverse effect on our business, financial condition and results of
operations. We seek to mitigate our direct exposure to exchange rate fluctuation
by selling primarily in United States currency. However, our business and
results of operations could be materially adversely affected by our inability to
manage risks inherent in conducting business internationally, including:


                                       26
<PAGE>   28
         -        fluctuations in currency exchange rates,
         -        restrictions on the repatriation of funds,
         -        overlap of tax structures and imposition of new taxes,
         -        inflationary conditions,
         -        political and economic instability, including economic
                  recessions,
         -        difficulties in staffing and managing international
                  operations,
         -        problems in the timely, or ultimate collection of accounts
                  receivable,
         -        seasonal reductions in business activity during the summer
                  months in Europe and certain other parts of the world, and
         -        tariffs, duties and other trade barriers.

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

         In addition, we, together with several former officers, have been named
as defendants in two purported class action lawsuits filed in United States
District Court for the District of Arizona. These complaints contain
substantially the same allegations and were brought on behalf of purchasers of
our stock between April 14, 1998 and March 2, 1999. The complaints allege claims
under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 of
the Securities and Exchange Act of 1934. We intend to defend the actions
vigorously. We are unable to predict the ultimate outcome of this litigation.

         WE DEPEND ON OUR MANAGEMENT AND OTHER KEY PERSONNEL; WE HAVE RISKS
ASSOCIATED WITH GROWTH. Due to the specialized nature of our business, our
future success is highly dependent upon the continued services of key
engineering personnel and executive officers and upon our ability to attract and
retain qualified engineering, sales and marketing, management and manufacturing
personnel. Competition for such personnel is intense. There can be no assurance
that we will be successful in attracting or retaining qualified personnel. The
loss of any key personnel or our inability to attract and retain qualified
employees could have a material adverse effect on our business, financial
condition and results of operations. To manage our growth, we must continue to
implement and improve our operations, financial and management information
systems and expand, train and manage our workforce. We believe that our success
requires substantial capital in order to maintain the flexibility to take
advantage of opportunities as they may arise. We may, from time to time, as
market and business conditions warrant, invest in or acquire complementary
businesses, products, or technologies. Internally generated cash, marketable
securities, debt or the issuance of additional stock may be used to fund
acquisitions or investments. The sale of additional equity could result in
dilution of the equity ownership of our shareholders. Our failure to effectively
manage growth could have a material adverse effect on our business, financial
conditional and results of operations.

         WE DEPEND ON PROPRIETARY RIGHTS TO PROTECT OUR TECHNOLOGY. Our success
depends in part upon protecting our proprietary technology. We rely upon a
combination of intellectual property laws, nondisclosure agreements and other
protective measures to protect our proprietary information. There can be no
assurance, however, that these steps will be adequate to deter misappropriation
or independent third-party development of our technology or that our
intellectual property rights can be successfully defended if challenged. In
addition, the laws of certain foreign countries do not protect certain
intellectual property rights to the same extent as the laws of the United
States. Given the rapid development of technology, there can be no assurance
that certain aspects of our 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 acceptable terms.


                                       27
<PAGE>   29
YEAR 2000 ISSUES

         Many currently installed computer systems and software products were
coded to accept only two-digit year entries in the date code field.
Consequently, subsequent to December 31, 1999, many of these systems became
subject to failure or malfunction. We did not experience any significant Year
2000 disruptions or issues as a result of the change in years from 1999 to 2000.
Although we are not aware of any material Year 2000 issues at this time, Year
2000 problems may occur or be made known to us in the future. Our current
products and all planned future releases are all believed to be Year 2000
compliant. We do not anticipate any significant additional expenditure for Year
2000 compliance.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Consolidated balance sheets, as of December 31, 1999 and 1998, and
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999, together with the
related notes and the report of Deloitte & Touche LLP, independent auditors, are
set forth on the following pages. Other required financial information is set
forth herein, as more fully described in Item 14 hereof.


                                       28
<PAGE>   30
                          INDEPENDENT AUDITORS' REPORT



Board of Directors of
Microtest, Inc.
Phoenix, Arizona

We have audited the accompanying consolidated balance sheets of Microtest, Inc.
and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles in the United Sates of America.

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





DELOITTE & TOUCHE LLP




Phoenix, Arizona
January 27, 2000


                                       29
<PAGE>   31
                        MICROTEST, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1999 AND 1998
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                1999         1998
                                                                              --------     --------
<S>                                                                           <C>          <C>
                                                     ASSETS
CURRENT ASSETS:                                                               $ 10,431     $  9,618
    Cash and cash equivalents                                                      293        1,124
    Restricted investments
    Accounts receivable, net of allowances for doubtful accounts of $171
        and $637, and sales returns of $422 and $1,392, respectively             7,828        8,171
    Inventories, net                                                             4,289        6,572
    Prepaid expenses                                                               864        1,148
    Income taxes receivable                                                      2,777        2,897
    Deferred income taxes                                                        1,030        1,556
                                                                              --------     --------
                  Total current assets                                          27,512       31,086
                                                                              --------     --------

PROPERTY AND EQUIPMENT, NET                                                      2,238        3,101
                                                                              --------     --------

OTHER ASSETS:
    Capitalized software, net of accumulated amortization of $1,510
        and $706, respectively                                                   1,260        1,894
    Deferred income taxes                                                        1,783        1,519
    Other                                                                        1,263        1,750
                                                                              --------     --------
                  Total other assets                                             4,306        5,163
                                                                              --------     --------
                                                                              $ 34,056     $ 39,350
                                                                              ========     ========


                                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Accounts payable                                                          $  2,939     $  4,152
    Accrued liabilities                                                          2,204        2,922
    Accrued payroll and benefits                                                 1,160          860
    Accrued deferred compensation                                                  293        1,124
                                                                              --------     --------
                  Total current liabilities                                      6,596        9,058
                                                                              --------     --------

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

STOCKHOLDERS' EQUITY:
    Common stock, $.001 par value, 15,000,000 shares
        authorized; 8,555,137 shares and 8,253,585 shares outstanding,
        respectively                                                                 9            8
    Additional paid-in capital                                                  34,521       32,916
    Accumulated deficit                                                         (5,852)      (1,414)
                                                                              --------     --------
                                                                                28,678       31,510
    Less: treasury stock, at cost, 232,520 shares                               (1,218)      (1,218)
                                                                              --------     --------
                  Total stockholders' equity                                    27,460       30,292
                                                                              --------     --------
                                                                              $ 34,056     $ 39,350
                                                                              ========     ========
</TABLE>

              The accompanying notes are an integral part of these
                          consolidated balance sheets.


                                       30
<PAGE>   32
                        MICROTEST, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                    1999         1998         1997
                                                                  --------     --------     --------
<S>                                                               <C>          <C>          <C>
NET REVENUE                                                       $ 42,759     $ 41,650     $ 49,592
COST OF REVENUE                                                     20,020       17,903       20,266
                                                                  --------     --------     --------
                  Gross profit                                      22,739       23,747       29,326
                                                                  --------     --------     --------

OPERATING EXPENSES
Sales and marketing                                                 12,791       12,720       16,253
Research and development                                             7,432        7,912        8,212
General and administrative                                           5,829        5,605        4,789
Special charge                                                       1,120           --           --
                                                                  --------     --------     --------

                  Total operating expenses                          27,172       26,237       29,254
                                                                  --------     --------     --------

INCOME (LOSS) FROM OPERATIONS                                       (4,433)      (2,490)          72
                                                                  --------     --------     --------

OTHER INCOME (EXPENSE):
Interest expense                                                       (37)         (46)         (54)
Interest income                                                        262          393          317
Other                                                                  (10)         (23)        (143)
                                                                  --------     --------     --------

                  Total other income                                   215          324          120
                                                                  --------     --------     --------

INCOME (LOSS) BEFORE INCOME TAXES                                   (4,218)      (2,166)         192

INCOME TAX (PROVISION) BENEFIT                                        (103)       1,258          131
                                                                  --------     --------     --------

INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
    ACCOUNTING PRINCIPLE                                            (4,321)        (908)         323

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

NET INCOME (LOSS)                                                 $ (4,438)    $   (908)    $    323
                                                                  ========     ========     ========

EARNINGS (LOSS) PER SHARE:
Income (loss) before change in accounting principle               $   (.54)    $   (.11)    $    .04
Cumulative effect of change in accounting principle                   (.01)          --           --
                                                                  --------     --------     --------
Net income (loss)                                                 $   (.55)    $   (.11)    $    .04
                                                                  ========     ========     ========


Weighted average common shares outstanding - basic                   8,078        8,099        8,139
                                                                  ========     ========     ========

Weighted average common equivalent
shares outstanding - diluted                                         8,078        8,099        8,249
                                                                  ========     ========     ========
</TABLE>

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


                                       31
<PAGE>   33
                        MICROTEST, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                  YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
                                 (in thousands)

<TABLE>
<CAPTION>
                                                     Common              Treasury
                                                      Stock               Stock           Additional                     Total
                                                 ---------------    ------------------      Paid-in    Accumulated   Stockholders'
                                                 Shares   Amount    Shares     Amount       Capital      Deficit        Equity
                                                 -----    ------    ------     -------    ----------   -----------   -------------
<S>                                              <C>      <C>       <C>        <C>        <C>          <C>           <C>
 BALANCE, December 31, 1996                      8,159    $    8        28     $  (444)    $  32,593     $  (485)      $ 31,672
   Net income                                       --        --        --          --            --         323            323
   Issuance of common stock upon
     exercise of stock options                       1        --        --           8             2          (5)             5
   Disqualifying disposition of stock options       --        --        --          --            --           1              1
   Issuance of common stock under
     employee stock purchase plan                   33        --       (11)        102           115         (20)           197
   Purchase of treasury stock                       --        --        17        (104)           --          --           (104)
                                                 -----    ------    ------     -------     ---------     -------       --------
 BALANCE, December 31, 1997                      8,193         8        34        (438)       32,710        (186)        32,094
   Net loss                                         --        --        --          --            --        (908)          (908)
   Issuance of common stock upon
     exercise of stock options                      15        --        --          --            29          --             29
   Issuance of common stock under
     employee stock purchase plan                   46        --       (34)        438           177        (320)           295
   Purchase of treasury stock                       --        --       233      (1,218)           --          --         (1,218)
                                                 -----    ------    ------     -------     ---------     -------       --------
 BALANCE, December 31, 1998                      8,254         8       233      (1,218)       32,916      (1,414)        30,292
   Net loss                                         --        --        --          --            --      (4,438)        (4,438)
   Issuance of common stock upon
      exercise of stock options                    218         1        --          --         1,425          --          1,426
   Issuance of common stock under
     employee stock purchase plan                   83        --        --          --           180          --            180
                                                 -----    ------    ------     -------     ---------     -------       --------
 BALANCE, December 31, 1999                      8,555    $    9       233     $(1,218)    $  34,521     $(5,852)      $ 27,460
                                                 =====    ======    ======     =======     =========     =======       ========
</TABLE>

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


                                       32
<PAGE>   34
                        MICROTEST, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                    1999         1998         1997
                                                                  --------     --------     --------
<S>                                                               <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                             $ (4,438)    $   (908)    $    323
        Adjustments to reconcile net income (loss) to net cash
           provided by operating activities-
    Depreciation and amortization                                    2,417        1,599        1,887
    Change in accounts receivable allowances                        (1,436)          64          310
    Deferred income taxes                                              262         (726)       1,387
    Decrease in accounts receivable                                  1,779        3,848        5,151
    (Increase) decrease in inventories                               2,283         (648)        (264)
    (Increase) decrease in prepaid expenses and other assets           771           68       (1,568)
    (Increase) decrease in income taxes receivable                     120         (639)      (1,967)
    Decrease in accounts payable and accrued liabilities            (1,931)      (1,755)      (1,733)
    Increase (decrease) in accrued payroll and benefits                300         (157)         (62)
                                                                  --------     --------     --------

    Net cash provided by operating activities                          127          746        3,464
                                                                  --------     --------     --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                              (750)        (733)      (1,526)
    Capitalized software                                              (170)      (1,048)        (772)
                                                                  --------     --------     --------

    Net cash used in investing activities                             (920)      (1,781)      (2,298)
                                                                  --------     --------     --------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from sale of common stock                               1,606          324          203
    Purchase of treasury stock                                          --       (1,218)        (104)
                                                                  --------     --------     --------

    Net cash provided by (used in) financing activities              1,606         (894)          99
                                                                  --------     --------     --------

NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS                                                       813       (1,929)       1,265

CASH AND CASH EQUIVALENTS, beginning of year                         9,618       11,547       10,282
                                                                  --------     --------     --------

CASH AND CASH EQUIVALENTS, end of year                            $ 10,431     $  9,618     $ 11,547
                                                                  ========     ========     ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
    INFORMATION:

    Cash paid for income taxes                                    $    139     $     65     $    219
                                                                  ========     ========     ========

    Cash paid for interest                                        $     37     $      9     $     55
                                                                  ========     ========     ========
</TABLE>

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


                                       33
<PAGE>   35
                        MICROTEST, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)      SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

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

CASH EQUIVALENTS AND RESTRICTED INVESTMENTS

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

INVENTORIES

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

PROPERTY AND EQUIPMENT

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

CAPITALIZED SOFTWARE DEVELOPMENT COSTS

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

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

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


                                       34
<PAGE>   36
REVENUE RECOGNITION

         The Company generally recognizes revenue from product sales upon
shipment. Sales to distributors in the United States, Canada and Europe account
for the majority of the Company's net sales. The Company has established a
program, which, under specified conditions, enables distributors and resellers
to return products to the Company for credit against additional purchases, or in
the event the Company reduces its selling prices, to receive credits for the
reduction in selling price. The amount of potential product returns, including
returns under the Company's warranty program, and credits for selling price
reductions, is estimated and provided for at the time of sale.

         Sales to Graybar Electric Company, Inc., accounted for 12% and 11% of
net revenue for the years ended December 31, 1999 and 1997, respectively. Sales
to Ingram Micro, Inc. ("Ingram") and Tech Data Corporation accounted for 11% and
10% of net revenue for the year ended December 31, 1998, respectively. During
the year ended December 31, 1997, sales to Ingram accounted for 13% of net
revenue.

RESEARCH AND DEVELOPMENT

         Expenses that can be clearly identified as research and development are
charged to research and development expense as incurred. Costs that relate to
prototype and experimental models that are sold to customers are charged to cost
of revenue. Development costs of new software products and the cost of
enhancements to existing software products are expensed as incurred.

EARNINGS PER SHARE

         In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." The statement modifies the calculation of primary and fully diluted
earnings per share (EPS) as previously required and replaces them with basic and
diluted EPS. Basic EPS is computed on the weighted average number of shares of
common stock outstanding during each period. Diluted EPS is computed on the
weighted average number of shares of common stock outstanding plus the effect of
stock options, if dilutive, calculated using the treasury stock method.

Basic and diluted EPS were the same for all periods presented. Stock options
were considered anti-dilutive for the years ended December 31, 1999 and 1998,
thus weighted average common shares outstanding were the same for both basic and
diluted EPS. The dilutive effect of stock options resulted in approximately
110,000 additional weighted average common stock equivalent shares outstanding
for the year ended December 31, 1997.

USE OF ESTIMATES

         In the preparation of financial statements in conformity with generally
accepted accounting principles management has made estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Because the
Company sells a significant portion of its products through distributors and
value added resellers, it is difficult for the Company to monitor end user
demand for its products on a current basis. Initial stocking orders may not be
indicative of long-term end user demand. The Company's customers typically are
allowed by contract to return products, subject to certain limitations, without
charge or penalty. Significant estimates included in the Company's financial
statements include the allowance for doubtful accounts, allowance for sales
returns, allowance for inventory valuation, and deferred tax valuation
allowance.


                                       35
<PAGE>   37
FAIR VALUE OF FINANCIAL INSTRUMENTS

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

PRODUCT CONCENTRATION

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

CHANGE IN ACCOUNTING PRINCIPLE

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

COMPREHENSIVE INCOME

         Effective in 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
displaying comprehensive income, and its components in a full set of
general-purpose financial statements. The adoption of this pronouncement had an
insignificant effect on the Company's financial statements.

NEW ACCOUNTING PRONOUNCEMENTS

         The FASB recently issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an enterprise
recognize all derivatives as either assets or liabilities in the statement of
financial position, and measure those instruments at fair value. The statement,
as amended, is effective for the Company's year ending December 31, 2001. The
Company has not completed the process of evaluating the impact that will result
from adopting SFAS No. 133. The Company is therefore unable to disclose the
impact that adopting SFAS No. 133 will have on its financial position and
results of operations when such statement is adopted.


                                       36
<PAGE>   38
(2)      INVENTORIES:

         Inventories consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                          1999       1998
                                                         -------    -------
                                                           (in thousands)
<S>                                                      <C>         <C>
Raw materials                                            $ 1,154     $ 1,946
Work-in-progress                                              99         100
Finished goods                                             3,738       5,200
                                                         -------     -------
                                                           4,991       7,246
Less:  Allowance for excess and obsolete inventory          (702)       (674)
                                                         -------     -------

                                                         $ 4,289     $ 6,572
                                                         =======     =======
</TABLE>

(3)      PROPERTY AND EQUIPMENT:

         Property and equipment consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                           1999         1998
                                                         --------     --------
                                                             (in thousands)
<S>                                                      <C>          <C>
Equipment                                                $  9,136     $  8,782
Furniture and fixtures                                      1,128        1,054
Leasehold improvements                                        665          640
                                                         --------     --------
                                                           10,929       10,476
Less:  Accumulated depreciation                            (8,691)      (7,375)
                                                         --------     --------

                                                         $  2,238     $  3,101
                                                         ========     ========
</TABLE>

(4)      LEASES:

         The Company leases various facilities and equipment under
non-cancelable operating lease agreements. Rental expense charged to operations
under operating leases totaled approximately $1,625,000, $1,262,000 and
$1,051,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Future minimum lease obligations under non-cancelable operating leases for each
of the years ended December 31 are as follows:

<TABLE>
                                                                  (in thousands)
<S>                                                               <C>
        2000                                                               $ 749
        2001                                                                  59
        2002                                                                  34
        2003                                                                  10
        2004                                                                   7
                                                                         --------

                                                                           $ 859
                                                                         ========
</TABLE>

         The Company has a capital lease obligation aggregating approximately
$34,000, with approximately $24,000 due in the year ended December 31, 2000, and
approximately $10,000 due in the year ended December 31, 2001.


                                       37
<PAGE>   39
         (5)      INCOME TAXES:

         The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred income taxes are provided for
differences between results of operations for financial reporting purposes and
income tax purposes.

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

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

<TABLE>
<CAPTION>
                                                   1999        1998        1997
                                                   -----     -------     -------
                                                         (in thousands)
<S>                                                <C>       <C>         <C>
Current (benefit) provision:
  Federal                                          $(225)    $  (697)    $(1,427)
  State                                              (37)        (24)        (91)
  Foreign                                            103         189          --
                                                   -----     -------     -------
Total current (benefit) provision                   (159)       (532)     (1,518)
Deferred (benefit) provision                         262        (726)      1,387
                                                   -----     -------     -------

Total income taxes (benefit) provision             $ 103     $(1,258)    $  (131)
                                                   =====     =======     =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                      1999        1998       1997
                                                    -------     -------     -----
                                                             (in thousands)
<S>                                                 <C>         <C>         <C>
 Computed "expected" tax (benefit) provision        $(1,474)    $  (702)    $  65
 Tax credits                                           (167)       (248)     (217)
 Tax exempt interest income                             (16)        (24)      (24)
 Foreign sales corporation benefit                       --        (206)       --
 State taxes, net                                        --         (97)        3
 Valuation allowance                                  1,720          --        --
 Other, net                                              40          19        42
                                                    -------     -------     -----

 Total income tax (benefit) provision               $   103     $(1,258)    $(131)
                                                    =======     =======     =====
</TABLE>


                                       38
<PAGE>   40
The components of deferred income taxes at December 31 are as follows:

<TABLE>
<CAPTION>
                                                                 1999        1998
                                                                -------     -------
                                                                   (in thousands)
<S>                                                             <C>         <C>
         Nondeductible accruals and reserves                    $   896     $ 1,358
         Inventory costs capitalized for income tax purposes        134         198
                                                                -------     -------

                Total current deferred income taxes               1,030       1,556
                                                                -------     -------

         Excess of tax over book depreciation                      (164)       (202)
         Net operating loss carryforwards                         4,433       2,025
         Tax credit carryforwards                                   732         880
         Other                                                     (174)        140
                                                                -------     -------
                Total noncurrent deferred income taxes            4,827       2,843

                Less: valuation allowance                        (3,044)     (1,324)
                                                                -------     -------

                Net noncurrent deferred income taxes              1,783       1,519
                                                                -------     -------

                Total deferred income taxes                     $ 2,813     $ 3,075
                                                                =======     =======
</TABLE>

         At December 31, 1999, the Company has net operating loss carryforwards
of $9,186,000 and $16,365,000 for federal and state income tax reporting
purposes, respectively. The federal net operating losses expire in the years
2001 through 2019 if not utilized prior to that time. The state net operating
losses expire over various years depending on the various state laws. The
Company also has general business and alternative minimum tax credit
carryforwards of approximately $707,000 and $25,000, respectively. The general
business credit carryforwards expire in various amounts in the years 2011
through 2019 if not utilized prior to that time. The alternative minimum tax
credit may be carried forward indefinitely.

         Federal and state net operating losses of $3,335,000 and $3,762,000,
respectively, relate to the acquisition of Logicraft, Inc. Limitations imposed
by Section 382 of the Internal Revenue Code, as amended, impose restrictions on
the Company's ability to utilize the net operating loss of Logicraft. Due to
restrictions on the availability of the Logicraft net operating losses to offset
the Company's income, a valuation allowance has been established for the entire
federal and state tax benefit. The valuation allowance reduces deferred tax
assets to an amount that represents the Company's best estimate of the amount of
deferred tax assets that, more likely than not, will be realized.

(6)      COMMITMENTS AND CONTINGENCIES:

LITIGATION

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

         On March 8, 1999 and April 7, 1999, the Company was named as a
defendant in two purported class action lawsuits filed in the United States
District Court for the District of Arizona. The two lawsuits contain
substantially the same allegations and were brought on behalf of a class of
persons who purchased our common stock between April 14, 1998 and March 2, 1999.
The complaints allege claims under Section 10(b) and SEC Rule 10b-5 of the
Securities and Exchange Act of 1934. The claims further allege that the Company
made misrepresentations or omissions concerning its financial statements that
artificially inflated the price of the Company's common stock. On November 29,
1999, a motion to dismiss the lawsuit was filed. On January 10, 2000, the Court
heard arguments on the motion to dismiss. This motion is currently


                                       39
<PAGE>   41
pending. The Company intends to vigorously defend the complaints. The Company is
unable to predict the ultimate outcome of this litigation. If the lawsuits were
ultimately determined adversely to the Company, it could have a material effect
on our results of operations and financial condition.

         The Securities and Exchange Commission ("SEC") is engaged in an
investigation relating primarily to accounting matters of the Company. The SEC
has requested and received documents from the Company and taken testimony from
certain former employees. The SEC has not indicated whether they intend to
formally expand the scope of the investigation, or take any other measures. They
have not, to date, asserted any specific claims, or remedy. The Company is
unable to predict the effect, if any, of this inquiry.

PURCHASE COMMITMENTS

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


(7)      EMPLOYEE BENEFIT PLANS:

EMPLOYEE STOCK PURCHASE PLAN

         The Company has an Employee Stock Purchase Plan (the "ESPP") through
which eligible employees may purchase shares of the Company's common stock at
semi-annual intervals, through periodic payroll deductions. The ESPP is a
qualified employee benefit plan under section 423 of the Internal Revenue Code.
The Company has reserved 400,000 shares of stock for issuance under the ESPP.
The purchase price per share is 85% of the lower of the fair market value of the
common stock at the beginning or at the end of each offering period, as defined.
During the years ended December 31, 1999, 1998 and 1997, 83,778, 80,189 and
43,891 shares of common stock were purchased at weighted average prices per
share of $2.15, $3.73 and $4.48, respectively. At December 31, 1999, 111,321
shares of common stock were available for issuance under the ESPP.

STOCK OPTION PLANS

         The Company currently has six fixed stock option plans of which two are
still active: the 1989 Incentive Stock Option Plan ("1989 Incentive Plan"), the
1989 Non-Qualified Stock Option Plan ("1989 Non-Qualified Plan"), the 1995
Long-Term Incentive Plan ("LTIP"), the 1993 Non-Employee Directors Plan ("1993
Directors Plan"), the 1994 Annual Non-Employee Directors Plan ("1994 Annual
Plan"), and the 1998 Non-employee Directors Stock Option Plan (the "1998
Directors Plan"). The 1989 Incentive Plan permitted the granting of options to
employees and the 1989 Non-Qualified Plan permitted the granting of options to
employees, directors, and consultants to purchase the Company's common stock at
not less than the fair market value on the date of grant. Both of these plans
were cancelled upon adoption of the LTIP on May 10, 1995, although grants
outstanding at the time of cancellation were not affected.

         The LTIP permits the granting of incentive stock options, non-qualified
stock options and other stock-based awards to employees, officers, and
consultants to purchase the Company's common stock. The Company is authorized to
grant options to acquire up to 600,000 shares under the LTIP. The period during
which options granted under the above plans are exercisable is fixed by the
Board of Directors at the date of grant but is not to exceed ten years. The 1993
Directors Plan permitted a one-time grant of 10,000 options to purchase the
Company's common stock and the 1994 Annual Plan permits an annual grant of 5,000
options to purchase the Company's common stock to each non-employee director at
not less than the fair market value on the date of grant. Under the two
directors' plans, the Company was authorized to grant options to acquire up to
200,000 shares. Vesting of options granted under these two plans is defined by
the plan with a


                                       40
<PAGE>   42
term not to exceed five years. Upon adoption of the 1998 Directors Plan, the
1993 Directors Plan and the 1994 Annual Plan were terminated, although grants
outstanding at the time of cancellation were not affected.

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

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

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

<TABLE>
<CAPTION>
                                      Options Outstanding
                               ----------------------------------
                                               Weighted Average
                                 Shares         Exercise Price
                               ----------     -------------------
<S>                            <C>            <C>
 Balance, January 1, 1997       1,369,399        $     9.00
   Granted                        806,028              5.03
   Canceled                      (268,200)            10.40
   Exercised                       (1,224)             4.68
                               ----------        ----------

 Balance, December 31, 1997     1,906,003              6.97
   Granted                        314,350              4.66
   Canceled                      (410,369)             8.66
   Exercised                       (5,667)             5.05
                               ----------        ----------

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

 Balance, December 31, 1999     1,300,216        $     5.48
                               ==========        ==========
</TABLE>

         The weighted average fair value per share of options granted was $3.15,
$4.66 and $5.03 per share in 1999, 1998 and 1997, respectively.


                                       41
<PAGE>   43
         The following table summarizes information about the stock options
outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                        ----------------------------------------------      ----------------------------
                                        Weighted
                                        Average
                                        Remaining          Weighted                         Weighted
     Range of             Options      Contractual         Average            Options       Average
 Exercise Prices        Outstanding       Life          Exercise Price      Exercisable   Exercise Price
--------------------------------------------------------------------------------------------------------
<S>                     <C>            <C>              <C>                 <C>           <C>
$ 2.19     $ 3.00           430,000        8.9              $ 2.72              45,000       $ 2.63
$ 3.56     $ 5.25           440,916        6.2              $ 4.51             192,563       $ 4.81
$ 5.44     $ 8.00           250,225        6.5              $ 6.79             156,638       $ 6.95
$ 9.00     $12.25           135,525        5.6              $10.18              95,145       $10.05
$17.75     $24.25            43,550        4.0              $20.44              43,014       $20.45
--------------------------------------------------------------------------------------------------------
$ 2.19     $24.25         1,300,216        7.0              $ 5.48             532,360       $ 7.46
========================================================================================================
</TABLE>

ACCOUNTING FOR STOCK-BASED COMPENSATION

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

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

If the Company had accounted for its stock-based compensation plans using a fair
value based method of accounting, the Company's pro forma net loss and loss per
share for the years ended December 31, 1999, 1998 and 1997 would have been
reported as indicated below:

<TABLE>
<CAPTION>
                                      1999          1998         1997
                                    ---------    ----------   ---------
                                               (in thousands)
<S>                                 <C>          <C>          <C>
Net income (loss):
         As reported                 $(4,438)     $  (908)      $ 323
         Pro forma                    (4,971)      (2,036)       (666)
Diluted net income (loss) per
  common and equivalent share:
         As reported                ($   .55)    ($   .11)      $ .04
         Pro forma                      (.62)        (.25)       (.08)
</TABLE>


                                       42
<PAGE>   44
The fair value of options granted under the Company's fixed stock option plans
during 1999, 1998 and 1997 were estimated on the date of grant using the
Black-Scholes option-pricing model based on the following weighted averaged
assumptions:

<TABLE>
<CAPTION>
                             1999       1998       1997
                            ------     ------     ------
<S>                         <C>        <C>        <C>
Expected volatility          79.0%      77.0%      92.0%
Expected lives in years         5          5          5
Dividend yield                  0%         0%         0%
Risk-free interest rate       5.1%       5.5%       6.2%
</TABLE>

The fair value of purchase rights granted under the ESPP were estimated using
the Black-Scholes option-pricing model based on the following weighted average
assumptions:

<TABLE>
<CAPTION>
                             1999       1998       1997
                            ------     ------     ------
<S>                         <C>        <C>        <C>
Expected volatility          79.0%      77.0%      92.0%
Expected lives in years         1          1          1
Dividend yield                  0%         0%         0%
Risk-free interest rate       5.1%       5.5%       5.8%
</TABLE>

The pro forma effect of applying SFAS 123 for the years ended December 31, 1999,
1998 and 1997 are not likely to be representative of the effects on reported net
income and earning per share for future years, because options vest over several
years and additional awards are made each year.

401(k) PLAN

         The Company has a contributory retirement and profit-sharing plan (the
401(k) Plan) covering eligible employees meeting certain requirements. The plan
qualifies under Section 401(k) of the Internal Revenue Code, and allows
employees to contribute up to 15% of their compensation, subject to maximum
annual statutory limitations. The Company may make discretionary matching
contributions equal to a percentage of an employee's compensation contributed to
the 401(k) Plan for the year, or in a fixed dollar amount, as determined each
year by the Board of Directors. The Company's contribution to the 401(k) Plan
was approximately $102,000, $116,000 and $127,000 for the years ended December
31, 1999, 1998 and 1997, respectively.

STOCK REPURCHASE

         On April 14, 1998, the Company's Board of Directors authorized the
repurchase of up to 800,000 shares of its common stock, or approximately 10% of
all shares issued as of that date, for issuance under the Company's stock option
and purchase plans. The stock was purchased, from time to time, on the open
market as conditions permit. To date, the Company has repurchased 232,520 shares
at an average price of $5.24 per share. During the third quarter of 1998, the
Board of Directors discontinued the repurchase of the Company's common stock.

(8)      SPECIAL CHARGE:

         The Company recorded a total of $1,923,000 as a pre-tax charge to
earnings in the year ended December 31, 1999, in connection with its exit from
the NAS enterprise systems business, related closure of its Nashua, New
Hampshire facility and restructuring its management organization. The total
charge includes $803,000 for the write-down of discontinued product inventories
and $1,120,000 for employee severance and benefits, future lease payments,
write-off of certain fixed assets and capitalized software and additional
allowance for evaluation units. The total charge was reflected net of proceeds
of approximately


                                       43
<PAGE>   45
$200,000 received from the sale of NAS enterprise product maintenance contracts
and related customer database. In accordance with EITF 96-9, "Classification of
Inventory Markdowns and Other Costs Associated with a Restructuring", $803,000
has been reflected as additional cost of revenue, and $1,120,000 has been
reflected as an operating expense in the accompanying consolidated statements of
operations.

(9)      SEGMENT REPORTING:

         The Company has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial statements.
It also established standards for related disclosures about product and services
and geographic areas. Operating segments are defined as components of a
business, for which separate financial information is available, that management
regularly evaluates in deciding how to allocate resources and assess
performance.

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

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

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

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

         The Company does not measure assets or operating expenses separately
for the NAS and NTM business segments.


                                       44
<PAGE>   46
<TABLE>
<CAPTION>
                                          NAS           NTM       Total
                                        -------       -------    -------
                                                  (in thousands)
<S>              <C>                    <C>           <C>        <C>
Net revenue:
                 1999                   $13,368       $29,391    $42,759
                 1998                    14,854        26,796     41,650
                 1997                    22,384        27,208     49,592

Gross profit:
                 1999                     6,591 (1)    16,148     22,739 (1)
                 1998                     9,244        14,503     23,747
                 1997                    13,210        16,116     29,326
</TABLE>

<TABLE>
<CAPTION>
                                            1999           1998         1997
                                          --------       --------     --------
                                                      (in thousands)
<S>                                       <C>            <C>          <C>
 Gross profit for reportable segments     $ 22,739 (1)   $ 23,747     $ 29,326
 Unallocated amounts:
   Operating expenses                      (27,172)       (26,237)     (29,254)
   Net other income                            215            324          120
                                          --------       --------     --------
 Income (loss) before taxes               $ (4,218)      $ (2,166)    $    192
                                          =========      =========    ========

 Unallocated assets                       $ 34,056       $ 39,350     $ 42,805
                                          =========      =========    ========
</TABLE>

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

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

<TABLE>
<CAPTION>
                                            1999            1998        1997
                                          ---------      ---------    --------
                                                      (in thousands)
<S>                                       <C>            <C>          <C>
 North America                            $  25,981      $  28,294    $ 35,924
 International                               16,778         13,356      13,668
                                          ---------      ---------    --------

 Net revenues                             $  42,759      $  41,650    $ 49,592
                                          =========      =========    ========
</TABLE>


                                       45
<PAGE>   47
         (10)     SUPPLEMENTAL FINANCIAL INFORMATION:

A summary of additions and deductions related to the allowances for accounts
receivable and inventory for the years ended December 31, 1999, 1998 and 1997
follows:

<TABLE>
<CAPTION>
                                                     Beginning of                                 End of
                                                         Year       Additions     Deductions       Year
                                                     ------------   ---------     ----------      -------
<S>                                                  <C>            <C>           <C>             <C>
 ALLOWANCES FOR DOUBTFUL ACCOUNTS:

     Year ended December 31, 1999                      $   637       $   461       $  (927)       $   171
                                                       =======       =======       =======        =======
     Year ended December 31, 1998                      $   892       $   401       $  (656)       $   637
                                                       =======       =======       =======        =======
     Year ended December 31, 1997                      $   582       $   490       $  (180)       $   892
                                                       =======       =======       =======        =======

ALLOWANCES FOR SALES RETURNS:

     Year ended December 31, 1999                      $ 1,392       $ 2,029       $(2,999)       $   422
                                                       =======       =======       =======        =======
     Year ended December 31, 1998                      $ 1,073       $ 5,375       $(5,056)       $ 1,392
                                                       =======       =======       =======        =======
     Year ended December 31, 1997                      $ 3,030       $ 2,970       $(4,927)       $ 1,073
                                                       =======       =======       =======        =======

ALLOWANCES FOR EXCESS AND OBSOLETE INVENTORY:

     Year ended December 31, 1999                      $   674       $ 1,299       $(1,271)       $   702
                                                       =======       =======       =======        =======
     Year ended December 31, 1998                      $   694       $   672       $  (692)       $   674
                                                       =======       =======       =======        =======
     Year ended December 31, 1997                      $   540       $ 2,833       $(2,679)       $   694
                                                       =======       =======       =======        =======
</TABLE>


                                       46
<PAGE>   48
(11)     SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

         Selected unaudited quarterly financial data for the years ended
December 31, 1999 and 1998 is as follows:

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

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

<TABLE>
<CAPTION>
                                                        1998 Quarters
                               -----------------------------------------------------------------
                                First         Second         Third         Fourth         Total
                               -------      --------       --------      --------       --------
                                          (in thousands, except per share amounts)

<S>                            <C>          <C>            <C>           <C>            <C>
 Net revenue                   $ 9,716      $ 10,745       $ 10,111      $ 11,078       $ 41,650
 Cost of revenue                 3,791         4,448          4,156         5,508         17,903
 Gross profit                    5,925         6,297          5,955         5,570         23,747
 Total operating expenses        5,870         6,720          5,775         7,872         26,237
 Net income (loss)                  90          (242)           333        (1,089)          (908)
 EPS                            $ 0.01       $ (0.03)        $ 0.04       $ (0.13)       $ (0.11)
</TABLE>

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

         During the fourth quarter of the year ended December 31, 1998,
adjustments to reflect anticipated sales returns of an additional $370,000, an
additional reserve for obsolete inventory of $200,000, the write-off of $200,000
of evaluation units not expected to be recovered, the write-off of $800,000 of
prepaid royalties for software products that were rapidly reaching obsolescence,
and executive search and other professional fees of $430,000, were recorded.

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

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


                                       47
<PAGE>   49
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

                  None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         Information concerning continuing directors, nominees and executive
officers of the Company is set forth under the caption "Information Concerning
Directors, Nominees and Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Registrant's Proxy Statement relating to its 2000
Annual Meeting of Stockholders to be held May 30, 2000, which is incorporated by
reference into this Form 10-K Report.

ITEM 11. EXECUTIVE COMPENSATION

         Information responsive to this Item 11 is incorporated by reference to
the caption "Executive Compensation" and "Employment Agreements" in the Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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


                                       48
<PAGE>   50
                                     PART IV


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

(a)      FINANCIAL STATEMENTS AND SCHEDULE.

<TABLE>
<CAPTION>
                                                                                                          Page
                                                                                                         -------
<S>                      <C>                                                                             <C>
                  (i)    Financial Statements
                            (1) Independent Auditors' Report                                             Page 29

                            (2) Consolidated Financial Statements:
                            Balance Sheets - December 31, 1999 and 1998                                  Page 30
                            Statements of Operations - For the Years Ended December 31, 1999, 1998
                            and 1997                                                                     Page 31
                            Statements of  Changes in Stockholders' Equity - For the Years Ended
                            December 31, 1999, 1998 and 1997                                             Page 32
                            Statements of Cash Flows - For the Years Ended December 31, 1999, 1998
                            and 1997                                                                     Page 33
                            Notes to Consolidated Financial Statements - December 31, 1999, 1998
                            and 1997                                                                     Page 34

                  (ii)   Financial Statement Schedules

                  (iii)  See Item 14(c) below

                         Independent Auditors' Report                                                  Included in Auditors'
                                                                                                       Report at Page 29
</TABLE>

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

(b)      REPORTS OF FORM 8-K.

         The Company filed a Form 8-K on March 8, 1999 regarding a purported
class action lawsuit that was filed against the Company and certain former
officers in the United States District Court for the District of Arizona. The
suit claims that the Company violated Section 10(b) of the Securities Exchange
Act of 1934 by making public misrepresentations or failing to disclose material
facts regarding its financial results. The suit was filed as a class action on
behalf of all purchasers of Company stock between April 14, 1998 and March 2,
1999. The Company intends to vigorously defend these lawsuits.


                                       49
<PAGE>   51
(c)      EXHIBITS.

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

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

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

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

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

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

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

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

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

10.8             Form of Indemnity agreement between directors and certain former      Incorporated by reference to
                 officers of the Company, and the Company                              Exhibit 10.18 to Form S-1
                                                                                       #33-52264

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


                                       50
<PAGE>   52
<TABLE>
<S>              <C>                                                                   <C>
10.10            1994  Profit Sharing Plan                                             Incorporated by reference to
                                                                                       Exhibit 10.15 of Form 10-K
                                                                                       Report dated December 31, 1993

10.11            Long-Term Incentive Plan                                              Incorporated by reference to
                                                                                       Exhibit 10.16 of Form 190K
                                                                                       Report dated December 31, 1994

10.12            Deferred Compensation Plan                                            Incorporated by reference to
                                                                                       Exhibit 10.17 of Form 10-K
                                                                                       Report dated December 31, 1994

10.13            Agreement of Purchase and Sale of Stock between Logicraft             Incorporated by reference to
                 Information Systems, Inc. and the Company dated December 17, 1996     Exhibit 2 of Current Report
                                                                                       on Form 8-K dated December
                                                                                       17, 1996

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

10.15            Consulting Agreement of Richard G. Meise                              Incorporated by reference to
                                                                                       Exhibit 10.15 of Form 10-K
                                                                                       Report dated December 31, 1998

10.16            Severance Agreement of Charles V. Mihaylo                             Incorporated by reference to
                                                                                       Exhibit 10.16 of Form 10-K
                                                                                       Report dated December 31, 1998

10.17            Agreement with Tim C. Furst                                           Incorporated by reference to
                                                                                       Exhibit 10.17 of Form 10-K
                                                                                       Report dated December 31, 1998

21               Subsidiaries of the Registrant

23               Consent of Deloitte & Touche LLP

24.1             Power of Attorney of Dianne C. Walker

24.2             Power of Attorney of Roger C. Ferguson

24.3             Power of Attorney of Steven G. Mihaylo

24.4             Power of Attorney of William C. Turner

24.5             Power of Attorney of Kent C. Mueller

27               Financial Data Schedule
</TABLE>

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


                                       51
<PAGE>   53
                                   SIGNATURES

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

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

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

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

--------------------------------
Kent C. Mueller*                         Chairman of the Board                                       March 30, 2000

/s/  Vincent C. Hren
--------------------------------
Vincent C. Hren                          President and Chief Executive Officer                       March 30, 2000

/s/  William R. Crowell                  Vice President, Chief Financial Officer, Secretary and
--------------------------------         Treasurer (Principal Financial and Accounting Officer)      March 30, 2000
William R. Crowell


--------------------------------
Roger C. Ferguson*                       Director                                                    March 30, 2000


--------------------------------
Steven G. Mihaylo*                       Director                                                    March 30, 2000


--------------------------------
William C. Turner*                       Director                                                    March 30, 2000


--------------------------------
Dianne C. Walker*                        Director                                                    March 30, 2000


*By /s/  Vincent C. Hren
--------------------------------
    Vincent C. Hren
    Attorney-in-Fact                                                                                 March 30, 2000
</TABLE>


                                       52
<PAGE>   54
                                 EXHIBIT INDEX


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

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

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

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

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

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

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

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

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

10.8             Form of Indemnity agreement between directors and certain former      Incorporated by reference to
                 officers of the Company, and the Company                              Exhibit 10.18 to Form S-1
                                                                                       #33-52264

10.9             Agreement of Purchase and Sale of Stock between Optical Media         Incorporated by reference to
                 International and the Company dated June 6, 1995                      Exhibit 2 of Form 8-K Report
                                                                                       dated June 6, 1995
</TABLE>
<PAGE>   55
<TABLE>
<S>              <C>                                                                   <C>
10.10            1994  Profit Sharing Plan                                             Incorporated by reference to
                                                                                       Exhibit 10.15 of Form 10-K
                                                                                       Report dated December 31, 1993

10.11            Long-Term Incentive Plan                                              Incorporated by reference to
                                                                                       Exhibit 10.16 of Form 190K
                                                                                       Report dated December 31, 1994

10.12            Deferred Compensation Plan                                            Incorporated by reference to
                                                                                       Exhibit 10.17 of Form 10-K
                                                                                       Report dated December 31, 1994

10.13            Agreement of Purchase and Sale of Stock between Logicraft             Incorporated by reference to
                 Information Systems, Inc. and the Company dated December 17, 1996     Exhibit 2 of Current Report
                                                                                       on Form 8-K dated December
                                                                                       17, 1996

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

10.15            Consulting Agreement of Richard G. Meise                              Incorporated by reference to
                                                                                       Exhibit 10.15 of Form 10-K
                                                                                       Report dated December 31, 1998

10.16            Severance Agreement of Charles V. Mihaylo                             Incorporated by reference to
                                                                                       Exhibit 10.16 of Form 10-K
                                                                                       Report dated December 31, 1998

10.17            Agreement with Tim C. Furst                                           Incorporated by reference to
                                                                                       Exhibit 10.17 of Form 10-K
                                                                                       Report dated December 31, 1998

21               Subsidiaries of the Registrant

23               Consent of Deloitte & Touche LLP

24.1             Power of Attorney of Dianne C. Walker

24.2             Power of Attorney of Roger C. Ferguson

24.3             Power of Attorney of Steven G. Mihaylo

24.4             Power of Attorney of William C. Turner

24.5             Power of Attorney of Kent C. Mueller

27               Financial Data Schedule
</TABLE>