PHOTON DYNAMICS INC, S-4, 1999-10-04

PHOTON DYNAMICS INC
S-4, 1999-10-04
SPECIAL INDUSTRY MACHINERY, NEC

Previous: FIRST TRUST COMBINED SERIES 262, 497J, 1999-10-04

Next: UNITED SHIPPING & TECHNOLOGY INC, SC 13G, 1999-10-04

<PAGE>

As filed with the Securities and Exchange Commission on October 4, 1999
Registration No. 0-27234
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
PHOTON DYNAMICS, INC.
(Exact name of registrant as specified in its charter)
----------------
California 3559 94-3007502
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
6325 San Ignacio Avenue
San Jose, California 95119-1202
(408) 226-9900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
VINCENT SOLLITTO
Chief Executive Officer
Photon Dynamics, Inc.
6325 San Ignacio Avenue
San Jose, California 95119-1202
(408) 226-9900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
ALAN C. MENDELSON, ESQ.
MATTHEW W. SONSINI, ESQ.
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
(650) 843-5000
----------------
Approximate date of proposed sale to the public: As soon as practicable
following the effectiveness of this Registration Statement and the effective
time of the proposed merger of Merger Sub Acquisition Corp. ("Merger Sub") with
and into CR Technology, Inc. ("CRT"), as described in the Agreement and Plan of
Merger and Reorganization, dated as of August 10, 1999, attached as Appendix A
to the Proxy Statement/Prospectus forming a part of this Registration
Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(a) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.

CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Securities to be Amount to be Offering Price Offering Registration
Registered Registered(1)(2) Per share(3) Price(3) Fee
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, $0.01 par value per 1,960,000
share.......................... shares $20.06 $39,317,600 $10,931(4)
- -----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Represents the number of shares of common stock of the Registrant which may
be issued to the former shareholders of CRT pursuant to the merger
described herein.
(2) The provisions of Rule 416 under the Securities Act of 1933, as amended,
shall apply to this registration statement and the number of shares
registered on this registration statement automatically shall increase or
decrease as a result of any future stock split, stock dividend, reverse
stock split, reclassification, recapitalization or other similar
transaction.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) of the Securities Act of 1933 based upon the
average of the high and low prices of the Registrant's Common Stock as
reported the Nasdaq National Market on September 28, 1999.
(4) $9,212 of which was paid previously in connection with the Registrants'
filing of the Preliminary Proxy Statement pursuant to Section 14(a) of the
Securities Exchange Act of 1934 as filed with the Commission on September
15, 1999.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PHOTON DYNAMICS, INC.
6325 San Ignacio Avenue
San Jose, California 95119

Dear Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders of
Photon Dynamics, Inc. to be held at 6325 San Ignacio Avenue, San Jose,
California 95119 on , November , 1999 at 10:00 a.m. local time.

As you may be aware, Photon Dynamics, Inc. and CR Technology, Inc., a
California corporation, have entered into an agreement and plan of merger and
reorganization providing for the acquisition of CRT by PDI. At the annual
meeting, you will be asked to consider and vote upon, among other things, a
proposal to approve the issuance of shares of common stock of PDI to CRT
shareholders pursuant to the merger agreement. Upon consummation of the merger,
CRT will become a wholly-owned subsidiary of PDI and each outstanding share of
CRT common stock and Series A preferred stock will be converted into the right
to receive 1.2033 shares of PDI common stock. In addition, the holders of CRT
Series A preferred stock will receive an aggregate of 125,490 shares of PDI
common stock, which is equal to their liquidation preference under CRT's
articles of incorporation. The merger is described more fully in the
accompanying Proxy Statement/Prospectus.

After careful consideration, the Board of Directors of PDI has unanimously
approved the merger agreement and the merger as in the best interests of PDI
and its shareholders. The PDI Board of Directors unanimously recommends that
you vote in favor of the issuance of shares of PDI common stock pursuant to the
merger agreement.

The other matters expected to be acted upon at the annual meeting are
described in detail in the following Notice of Annual Meeting of Shareholders
and Proxy Statement.

It is important that you use this opportunity to take part in the affairs of
the Company by voting on the business to come before the meeting. WHETHER OR
NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT
YOUR SHARES MAY BE REPRESENTED AT THE MEETING. Returning the Proxy does not
deprive you of your right to attend the meeting and to vote your shares in
person.

We look forward to seeing you at the meeting.

Sincerely,

/s/ Vincent Sollitto
_____________________________________
Chief Executive Officer
<PAGE>

PHOTON DYNAMICS, INC.
6325 San Ignacio Avenue
San Jose, California 95119

----------------

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER , 1999

----------------

To The Shareholders Of Photon Dynamics, Inc.:

Notice Is Hereby Given that an annual meeting of shareholders of Photon
Dynamics, Inc., a California corporation, will be held on November , 1999 at
10:00 a.m. local time at PDI's principal executive offices, 6325 San Ignacio
Avenue, San Jose, California 95119 to consider and vote upon the following
purposes:

1. To approve the issuance of shares of common stock of PDI, pursuant to
the Agreement and Plan of Merger and Reorganization by and among PDI, CR
Technology, Inc., a California corporation, and Pharaoh Acquisition
Corp., a California corporation and wholly-owned subsidiary of PDI. Upon
consummation of the merger, CRT will become a wholly-owned subsidiary of
PDI. A copy of the reorganization agreement is attached as Appendix A to
the Proxy Statement/Prospectus accompanying this notice.

2. To elect directors to serve for the ensuing year and until their
successors are elected.

3. To approve PDI's 1995 Stock Option Plan, as amended, to increase the
aggregate number of shares of Common Stock authorized for issuance under
such plan by 230,000 shares.

4. To approve PDI's 1995 Employee Stock Purchase Plan, as amended, to
increase the aggregate number of shares of common stock authorized for
issuance under such plan by 150,000 shares.

5. To ratify the selection of Ernst & Young LLP as independent auditors of
PDI for its fiscal year ending September 30, 2000.

6. To transact such other business as may properly come before this annual
meeting or any adjournment or postponement thereof.

The foregoing items of the proposed merger and other business are more fully
described in the accompanying Proxy Statement/Prospectus.

The Board of Directors has fixed the close of business on October , 1999,
as the record date for the determination of shareholders entitled to notice of
and to vote at this annual meeting and at any adjournment or postponement
thereof.

By Order of the Board of Directors

/s/ RICHARD DISSLY
_____________________________________
Richard Dissly
Chief Financial Officer

San Jose, California
October , 1999

All shareholders are cordially invited to attend the meeting in person.
Whether or not you expect to attend the meeting, we urge you to complete, date,
sign and return the enclosed proxy as promptly as possible in order to ensure
your representation at the meeting.
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this proxy statement/prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This proxy +
+statement/prospectus is not an offer to sell these securities and is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion Dated October , 1999

PHOTON DYNAMICS, INC.
PROXY STATEMENT FOR ANNUAL MEETING
OF SHAREHOLDERS TO BE HELD ON
NOVEMBER , 1999

-----------

PROSPECTUS

-----------

This proxy statement/prospectus is solicited on behalf of the board of
directors of Photon Dynamics, Inc., a California corporation, for use at the
annual meeting of shareholders to be held on November , 1999, at 10:00 a.m.
local time or at any adjournment or postponement thereof, for the purposes set
forth herein and in the accompanying Notice of Annual Meeting.

The boards of directors of Photon Dynamics, Inc. and CR Technology, Inc. have
agreed to merge these two companies. If the merger is completed, CRT will
become a wholly-owned subsidiary of PDI. The shares of PDI common stock issued
to CRT shareholders will represent approximately 20% of the outstanding PDI
common stock after the merger.

In the merger, CRT shareholders will have the right to receive 1.2033 shares
of PDI common stock for each share of CRT common stock and Series A preferred
stock they own. In addition, the holders of CRT Series A preferred stock will
receive an aggregate of 125,490 shares of PDI common stock, which is equal to
their liquidation preference under CRT's articles of incorporation. In lieu of
receiving PDI common stock, CRT shareholders have dissenters' rights. CRT
shareholders who properly demand these rights will receive cash for the fair
value of the CRT common stock and Series A preferred stock that they held prior
to the merger. The fair value would be determined by a court or by agreement
between CRT and its shareholders who exercise their dissenters' rights.

PDI shareholders will vote on the matters described in this document at the
annual meeting of shareholders on the date described below. At the PDI annual
meeting, you will be asked to approve the issuance of shares of PDI common
stock in the merger. The merger cannot be completed unless the holders of PDI
common stock and the holders of CRT common stock and Series A preferred stock
approve the matters described in this document. The board of directors of each
of these two companies has unanimously approved the merger and recommends that
its respective shareholders approve the matters described in this document.
Your vote is very important.

Whether or not you plan to attend the annual meeting, please take the time to
vote by completing and mailing the enclosed proxy card to us. If you sign, date
and mail your proxy card without indicating how you want to vote, your proxy
will count as a vote in favor of the merger. You may vote at the annual meeting
if you own shares as of the close of business on October , 1999. The annual
meeting will be held on November , 1999, 10:00 a.m. local time at our
executive offices at 6325 San Ignacio Avenue, San Jose, California 95119.

This Proxy Statement/Prospectus provides you with detailed information about
the proposed merger. Please see "Where You Can Find More Information" for
additional information about PDI and CRT.

We strongly urge you to read and consider carefully this proxy
statement/prospectus in its entirety, including the matters referred to under
"Risk Factors".

/s/ Vincent Sollitto
___________________________________________________
Vincent Sollitto
Chief Executive Officer
Photon Dynamics, Inc.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this proxy statement/prospectus. Any representation to
the contrary is a criminal offense.

We are first mailing this proxy statement/prospectus dated October , 1999
and the forms of proxy on or about October , 1999.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION....................................... 1

SUMMARY................................................................... 2
The Companies........................................................... 2
Our Reasons for the Merger.............................................. 3
Vote Required........................................................... 3
Share Ownership of Management and Certain Holders....................... 3
Interests of Certain Persons in the Merger.............................. 4
Conditions to the Merger................................................ 4
Indemnification By CRT Shareholders..................................... 5
Escrow Fund............................................................. 5
Termination of the Merger Agreement..................................... 6
Affiliate Agreements.................................................... 6
Tax Consequences........................................................ 7
Regulatory Approvals.................................................... 7
Rights of Dissenting Shareholders....................................... 8
Forward-Looking Statements May Prove Inaccurate......................... 8
Markets and Market Prices............................................... 8

PDI'S SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION.............. 9

CRT'S SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION.............. 10

UNAUDITED SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION..... 11

COMPARATIVE PER SHARE DATA (UNAUDITED).................................... 12

RISK FACTORS.............................................................. 14
Risks Relating to The Merger............................................ 14
Risks Relating to The Business of PDI................................... 14
Risks Relating to The Business of CRT................................... 20

THE PDI ANNUAL MEETING.................................................... 26
Purpose of the PDI Annual Meeting....................................... 26
Date, Time and Place of Meeting......................................... 26
Voting Rights and Outstanding Shares.................................... 26
Voting Proxies.......................................................... 27
Revocability of Proxies................................................. 27
Vote Required........................................................... 27
Solicitation and Expenses............................................... 27
Shareholder Proposals................................................... 28
Availability of Accountants............................................. 28

THE CRT SPECIAL MEETING................................................... 28
Purpose of CRT Special Meeting.......................................... 28
Date, Time and Place of Meeting......................................... 28
Voting Rights and Outstanding Shares.................................... 28
Vote Required........................................................... 28

COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND POLICY............... 29
</TABLE>

i
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C>
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS............................ 30
Background of the Merger................................................. 30
Our Reasons For the Merger............................................... 31
PDI's Reasons For the Merger............................................. 31
CRT's Reasons For the Merger............................................. 32
Interests of Certain Persons in the Merger............................... 33
Shareholder Agreements................................................... 34
Affiliate Agreements..................................................... 34
Material Federal Income Tax Consequences................................. 35
Anticipated Accounting Treatment......................................... 37
Regulatory Matters....................................................... 37
Rights of Dissenting Shareholders of CRT................................. 38
Rights of Dissenting Shareholders of PDI................................. 39
Resale of PDI Common Stock............................................... 39

THE MERGER AGREEMENT....................................................... 40
General.................................................................. 40
Merger Consideration..................................................... 40
Escrow of PDI Shares..................................................... 41
Indemnification.......................................................... 41
Stock Options and Warrants............................................... 42
Stock Ownership Following the Merger..................................... 42
Conversion of Shares; Procedures for Exchange of Certificates............ 42
Effect on Certificates................................................... 43
Corporate Matters........................................................ 43
Conditions to the Merger................................................. 43
Representations and Warranties........................................... 45
Covenants................................................................ 46
Termination.............................................................. 49
Expenses and Termination Fees............................................ 49

INFORMATION RELATING TO PDI................................................ 50
Overview................................................................. 50
Industry Background...................................................... 50
Overview of Flat Panel Display Market.................................... 50
The AMLCD Flat Panel Display Manufacturing Process....................... 51
Current Yield and Cost Problems Experienced by FPD Manufacturers......... 51
Products................................................................. 52
Array Test Systems (Test Systems)........................................ 52
Flat Panel Inspection Systems (FIS or Inspection Systems)................ 52
Array Repair System (Repair System)...................................... 52
Intellectual Property.................................................... 53
Research And Development................................................. 53
Customers, Sales and Service............................................. 54
Manufacturing and Suppliers.............................................. 54
Backlog.................................................................. 55
Competition.............................................................. 55
Employees................................................................ 56
Facilites................................................................ 56
</TABLE>

ii
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C>
PDI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 57
Overview............................................................... 57
Comparison Of Nine Months Ended June 30, 1999 And 1998................. 57
Results of Operations.................................................. 57
Comparison Of The Years Ended September 30, 1998 And 1997.............. 59
Results of Operations.................................................. 59
Liquidity and Capital Resources........................................ 61
Year 2000 Computer System Compliance................................... 62

PDI MANAGEMENT AFTER THE MERGER.......................................... 63
Executive Officers And Directors....................................... 63
Board Committees And Meetings.......................................... 64
Board Composition...................................................... 65
Director Compensation.................................................. 65
Compensation Of Executive Officers..................................... 66
Summary Compensation Table............................................. 66
Stock Option Grants And Exercises...................................... 67
Option Grants in Last Fiscal Year...................................... 67
Aggregated Option Exercises in Last Fiscal Year........................ 67
Employment Agreements.................................................. 68
Limitation of Liability and Indemnification Matters.................... 68
Certain Transactions of PDI............................................ 68

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF PDI.... 70

INFORMATION RELATING TO CRT.............................................. 72

BUSINESS OF CRT.......................................................... 72
Industry Background.................................................... 72
Market Overview........................................................ 72
Market Segmentation.................................................... 73
Semiconductor Market................................................... 73
Printed Circuit Board Market........................................... 73
Electronic Products Manufacturers...................................... 74
Other Markets.......................................................... 75
Products............................................................... 75
Automated Optical Inspection Systems................................... 75
CRX Real-time X-ray Inspection Systems................................. 75
Patents and Proprietary Rights......................................... 76
Research and Development............................................... 77
Customers, Sales and Service........................................... 77
Manufacturing and Suppliers............................................ 78
Backlog................................................................ 78
Competition............................................................ 79
Governmental Regulation................................................ 79
Facilities............................................................. 80
Employees.............................................................. 80

CRT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 81
Overview............................................................... 81
Comparison of the Six Months Ended June 30, 1998 to the Six Months
Ended June 30, 1997................................................... 82
</TABLE>

iii
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C>
Comparison of the Years Ended December 31, 1998 and 1997................ 82
Liquidity and Capital Resources......................................... 83
Year 2000 Computer System Compliance.................................... 83

CRT MANAGEMENT............................................................ 85
Executive Officer and Director.......................................... 85
Board Meetings.......................................................... 85
Director Compensation................................................... 85
Compensation of Executive Officer....................................... 85

STOCK OPTION GRANTS AND EXERCISES......................................... 86

EMPLOYMENT AGREEMENTS..................................................... 87
Limitation of Liability and Indemnification Matters..................... 87

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CRT..... 88

COMPARISON OF CAPITAL STOCK............................................... 90

COMPARISON OF SHAREHOLDERS' RIGHTS........................................ 91

OTHER INFORMATION FOR THE PDI ANNUAL MEETING.............................. 93
Election of Directors................................................... 93
Nominees................................................................ 93
Board Committees and Meetings........................................... 93
Approval of 1995 Stock Option Plan, as Amended.......................... 94
General................................................................. 94
Purpose................................................................. 94
Administration.......................................................... 95
Shares Subject to the Option Plan....................................... 95
Eligibility............................................................. 95
Terms of Discretionary Options.......................................... 95
Terms of Non-Discretionary Options...................................... 96
Effect of Certain Corporate Events...................................... 97
Amendment of Plan and Grants............................................ 97
Termination of Plan..................................................... 97
Federal Income Tax Information.......................................... 97
Approval of 1995 Employee Stock Purchase Plan, as Amended............... 98
Purpose................................................................. 99
Administration.......................................................... 99
Purchase Periods........................................................ 99
Shares Subject to the Plan.............................................. 100
Eligibility............................................................. 100
Terms of Rights......................................................... 100
Duration, Amendment and Termination..................................... 101
Effect of Certain Corporate Events...................................... 101
Federal Income Tax Information.......................................... 102
Ratification of Selection of Independent Auditors....................... 102
PDI Shareholder Proposals............................................... 103

EXPERTS................................................................... 103

LEGAL MATTERS............................................................. 103

INDEX TO PDI AND CRT FINANCIAL STATEMENTS................................. F-1
</TABLE>

iv
<PAGE>

<TABLE>
<CAPTION>
Page
-----
<S> <C>
Appendix A--Agreement and Plan of Merger and Reorganization............... A-1
Appendix B-1--Form of PDI Affiliate Agreement............................. B-1
Appendix B-2--Form of CRT Affiliate Agreement............................. B-2-1
Appendix C--Escrow Agreement.............................................. C-1
Appendix D--Form of Non-Competition Agreement............................. D-1
Appendix E--California Corporations Code Dissenters' Rights............... E-1
</TABLE>

v
<PAGE>

WHERE YOU CAN FIND MORE INFORMATION

Photon Dynamics, Inc. is a California corporation. PDI's principal executive
offices are located at 6325 San Ignacio Avenue, San Jose, California 95119, and
its telephone number is (408) 226-9900.

PDI files annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission, or the SEC. You may
inspect and copy such material at the public reference facilities maintained by
the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as at the SEC's regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New
York 10048. You may also obtain copies of such material from the SEC at
prescribed rates by writing to the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549.

Please call the SEC at 1-800-SEC-0330 for more information on the public
reference rooms. You can also find our SEC filings at the SEC's website at
www.sec.gov.

PDI is not incorporating any documents by reference.

The PDI common stock is quoted on the Nasdaq National Market. The trading
symbol for PDI is "PHTN." You may inspect reports and other information
concerning PDI at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.

CR Technology, Inc. is a California corporation. CRT's principal executive
offices are located at 125B Columbia, Aliso Viejo, California 92656-1458, and
its telephone number is (949) 448-0443.

CRT was incorporated in California in 1983. CRT is not subject to the
information reporting requirements of the Securities Exchange Act of 1934, as
amended, and accordingly does not file reports, proxy statements or other
information with the SEC.

You should rely only on the information provided or incorporated by
reference in this proxy statement/prospectus. We have authorized no one to
provide you with different information. You should not assume that the
information in this proxy statement/prospectus is accurate as of any date other
than the date on the front of the document.

1
<PAGE>

SUMMARY

This summary highlights selected information found in greater detail
elsewhere in this document. This summary does not contain all of the
information that is important to you. We urge you to read the entire document
(including the appendices) before you decide how to vote. The merger agreement
is attached as Appendix A to this document. We encourage you to read the merger
agreement which is the legal document governing the merger.

The Companies

Photon Dynamics, Inc.

Photon Dynamics, Inc. is a leading worldwide supplier of array test,
inspection and repair systems for the flat panel display, or FPD, industry.
PDI's systems are used:

. to control, monitor and refine the manufacturing process to increase the
yield of FPDs,

. to reduce materials loss,

. to transition new FPD designs from research and development to
commercial production, and

. to assist in the rapid start-up of new FPD manufacturing facilities.

While certain aspects of the manufacturing processes for FPDs are similar to
manufacturing processes for semiconductor devices, materials costs represent a
substantially higher percentage of the cost of an FPD as compared with
semiconductor devices. As a result, it is critical for FPD manufacturers to
identify defects early in the manufacturing process either to avoid investment
of further materials cost or to repair the defect before further manufacturing
steps make it less accessible. PDI's systems are used by manufacturers of
active matrix liquid crystal displays, or AMLCDs, and other advanced FPDs to
array test, inspect and repair high resolution FPDs.

PDI was incorporated in California on May 12, 1986. For more information,
see "Information Relating to PDI."

CR Technology, Inc.

CR Technology, Inc. is a worldwide supplier of X-ray and automated visual
inspection systems for the electronics and semiconductor industries. CRT's
products utilize proprietary X-ray and other machine vision technologies to
enable electronics and semiconductor manufacturers to analyze and report on
product quality at critical steps in the manufacturing process. CRT
manufactures and distributes products for both off-line inspection purposes and
for automated monitoring of process-induced defects in printed circuit boards,
semiconductors and other electronics. CRT's products include manual and
automated real-time X-ray systems that inspect and verify the assembly of
internal semiconductor features and "hidden" printed circuit board features and
optical inspection systems to monitor the assembly of printed circuit boards.
CRT believes that a common trend driving the need for automated visual
inspection systems in both the semiconductor and printed circuit board
manufacturing industries is the increasing density and complexity of advanced
electronics designs, which cannot be adequately inspected by human observation.

CRT was incorporated in California in 1983. For more information, see
"Information Relating to CRT."

2
<PAGE>

Our Reasons for the Merger

The boards of directors of PDI and CRT believe that the proposed merger will
afford to each company the complementary strengths of the two individual
companies, will provide the combined company with several potential benefits
and may enable the combined company to address emerging strategic opportunities
in the flat panel and semiconductor packaging and inspection markets quickly
and effectively.

In particular, the boards of directors of PDI and CRT believe that the
potential benefits of the merger include the following:

. Improved utilization of the sales and service channels necessary to
participate in global business

. Commonality of image processing platforms, algorithms, intellectual
property and software

. Economies of scale in procurement and supplier management

. Broader customer relationships and access to strategic accounts

. Greater career opportunities for employees which may improve retention

. Reduction in the level of general and administrative expenses necessary
to support the anticipated growth of each company

PDI and CRT have each identified additional reasons for the merger, as
discussed below. It should be noted, however, that the potential benefits of
the merger may not be realized. See "Risk Factors."

Vote Required

At the close of business on October , 1999, the record date for the PDI
annual meeting, shares of PDI common stock were outstanding and entitled to
vote at the PDI annual meeting. A majority of shares of PDI common stock
present in person or represented by proxy and entitled to vote at the PDI
annual meeting must vote to approve the issuance of shares of PDI common stock
in the merger.

At the close of business on October , 1999, the record date for the CRT
shareholder meeting, shares of CRT common stock and shares of Series A
preferred stock were outstanding and entitled to vote at the CRT special
meeting. A majority of the shares of CRT common stock and a majority of the
shares of CRT Series A preferred stock entitled to vote at the CRT special
meeting must vote to approve and adopt the merger agreement and approve the
merger. If less than all of the outstanding shares of CRT Series A preferred
stock or less than 90% of the outstanding shares of CRT common stock approve
the merger, however, PDI is not obligated to consummate the merger.

Share Ownership of Management and Certain Holders

As of the PDI record date, the directors and executive officers of PDI, as a
group, beneficially owned approximately shares of PDI common stock.

As of the CRT record date, the directors and executive officers of CRT, as a
group, beneficially owned approximately shares of CRT common stock.
Shareholders of CRT, who together hold approximately 81% of the CRT common
stock and 100% of the Series A preferred stock outstanding as of the record
date have entered into shareholder agreements with PDI under which these
shareholders have agreed to vote in favor of the merger and the merger
agreement. The affirmative vote of the shares of the CRT common stock and
Series A preferred stock held by these shareholders will be sufficient to
approve and adopt the merger

3
<PAGE>

agreement and to approve the merger. For more information on these agreements,
see "Approval of the Merger and Related Transactions--Shareholder Agreements."

Interests of Certain Persons in the Merger

CRT's shareholders should note that members of CRT's management and the CRT
board of directors have interests in the merger as employees and/or directors
that are different from, or in addition to, your interest as a shareholder. If
the merger is completed, certain indemnification arrangements for persons
serving as directors and officers of CRT at the time of the merger will be
continued for at least six years after the merger is consummated. For more
information, see "Approval of the Merger and Related Transactions--Interests of
Certain Persons in the Merger."

Conditions to the Merger

PDI will complete the merger only if a number of conditions are either
satisfied or waived by PDI, some of which include:

. The representations and warranties of CRT made in the merger agreement,
subject to materiality limitations, are accurate

. CRT performs covenants and obligations contained in the merger agreement

. Holders of 90% of CRT"s common stock and 100% of CRT"s Series A
preferred stock approve the merger agreement and merger

. The PDI shareholders approve the issuance of PDI common stock in the
merger

. PDI receives required consents, agreements, certificates, letters and
legal opinions

. The independent auditors of PDI and CRT deliver letters stating that the
merger will qualify for pooling of interests accounting treatment

. PDI's legal counsel delivers a legal opinion that the merger will be
treated as a tax-free reorganization for federal income tax purposes

. PDI receives written resignations of all officers and directors of CRT
as of the consummation of the merger

. There is no material adverse change to the business, financial
condition, operations or financial performance of CRT

. The PDI common stock to be issued in the merger is authorized for
listing on the Nasdaq National Market

. There are no restraining orders, injunctions and other orders preventing
the consummation of the merger, any legal requirement that makes the
merger illegal, or other litigation or administrative actions or
proceedings

. Neither Richard Amtower nor more than three other exempt employees of
CRT as of August 10, 1999, other than probationary employees or
employees terminated for cause, shall have ceased to be employed by CRT
or expressed an intention to Richard Amtower to terminate their
employment with CRT

CRT will complete the merger only if a number of conditions are satisfied or
waived by CRT, some of which include:

. The representations and warranties of PDI made in the merger agreement,
subject to materiality limitations, are accurate

4
<PAGE>

. PDI performs the covenants and obligations contained in the merger
agreement

. The CRT shareholders approve the merger agreement and merger

. The PDI shareholders approve the issuance of PDI common stock in the
merger

. CRT"s legal counsel delivers a legal opinion that the merger will be
treated as a tax-free reorganization for federal income tax purposes

. CRT receives required consents, certificates, letters and legal opinions

. There is no material adverse change in the business of PDI which shall
have directly caused the closing sale price of PDI common stock on the
trading day immediately prior to the PDI annual meeting to be less than
six dollars ($6.00)

. The PDI common stock to be issued in the merger is authorized for
listing on the Nasdaq National Market

. There are no restraining orders, injunctions and other orders preventing
the consummation of the merger or any legal requirement that makes the
merger illegal

For more information on the conditions to the merger, see "The Merger
Agreement--Conditions to the Merger."

Indemnification by CRT Shareholders

. any inaccuracy in or breach of any representation or warranty made by
CRT

. any breach of any covenant or obligation of CRT

. any legal proceedings relating to any inaccuracy or breach referred to
above

. potential liabilities relating to alleged infringement of patents

No indemnification payment shall be required to be made until the total of
all damages that have been suffered or incurred by PDI exceeds $400,000 in the
aggregate, at which point PDI is entitled to be indemnified for the entire
amount of such damages up to the value of the shares held in the escrow fund.
The damages will be payable with that number of shares held in the escrow fund
equal to the dollar amount of the indemnification obligation divided by the
average of the closing sale prices of a share of PDI common stock as reported
on the Nasdaq National Market for each of the ten consecution trading days
immediately preceding the closing of the merger.

Escrow Fund

Under the terms of an escrow agreement to be entered into among CRT, PDI,
U.S. Bank Corporation Trust Services, as escrow agent, and each of the CRT
shareholders (by approving the merger and later by signing the

5
<PAGE>

letter of transmittal) in the form attached hereto as Appendix C, a portion of
the PDI common stock to be issued to the CRT shareholders in connection with
the merger will be held in escrow for the indemnification for any damages to
PDI. The escrow fund will be the sole source for indemnification for damages
incurred by PDI. The escrow fund will consist of 10% of the shares to be issued
in the merger. Any funds remaining in the escrow fund less amounts payable
subject to a claim made by PDI not yet resolved shall be distributed to CRT
shareholders by the earlier of (1) the first anniversary of the closing date
and (2) the date of the first audit report of the combined company.

Termination of the Merger Agreement

The Board of Directors of both companies can jointly agree to terminate the
merger agreement at any time prior to the closing without completing the
merger. Either company can terminate the merger agreement if:

1. the merger is not completed by December 31, 1999; or

2. that company reasonably determines that the timely satisfaction of any
of its conditions to closing has become impossible other than as a
result of any failure on the part of that company to comply with or
perform any of its covenants or obligations.

For more information on termination of the, see "The Merger Agreement--
Termination."

Affiliate Agreements

CRT has delivered to PDI executed affiliate agreements with individuals and
entities that may be deemed affiliates of CRT. These agreements restrict the
sale, transfer or other disposition of the PDI common stock received by each
CRT affiliate in the merger unless:

. the sale, transfer or other disposition is made in conformity with the
volume and other requirements of Rule 145 under the Securities Act, as
evidenced by a broker's letter and a representation letter executed by
the CRT affiliate (satisfactory in form and content to PDI), each
stating that such requirements have been met,

. legal counsel reasonably satisfactory to PDI shall have advised PDI in a
written opinion letter (reasonably satisfactory in form and content to
PDI), upon which PDI may rely, that such sale, transfer or other
disposition will be exempt from registration under the Securities Act,

. such sale, transfer or other disposition is effected pursuant to an
effective registration statement under the Securities Act, or

. an authorized representative of the SEC shall have rendered written
advice to such CRT affiliate to the effect that the SEC would take no
action, or that the staff of the SEC would not recommend that the SEC
take action, with respect to such proposed sale, transfer or other
disposition, and a copy of such written advice and all other related
communications with the SEC shall have been delivered to PDI.

In addition, so as to help ensure that the merger will be treated as a
pooling of interests for accounting and financial reporting purposes, the CRT
affiliate agreements provide that during the period from the date thirty days
prior to the date of consummation of the merger through the date on which PDI
publicly announces financial results covering at least thirty days of combined
operations of PDI and CRT, no CRT affiliate shall subject to certain
exceptions, sell, exchange, transfer, pledge, distribute or otherwise dispose
of or grant any option, establish any "short" or put-equivalent position with
respect to or enter into any similar transaction (through derivative's or
otherwise) intended or having the effect, directly or indirectly, to reduce
such CRT

6
<PAGE>

affiliate's risk relative to :

. any CRT common stock (except relating to the merger); or

. any PDI common stock received in the merger or upon the exercise of
stock options assumed by PDI in the merger.

PDI has delivered to CRT executed affiliate agreements with individuals and
entities that may be deemed affiliates of PDI under the securities laws. Under
the agreements, these individuals and entities have agreed that, during the
period commencing thirty days prior to closing and continuing until the earlier
of (i) PDI's public announcement of financial results covering at least thirty
days of combined operations of PDI and CRT or (ii) the reorganization agreement
is terminated in accordance with its terms, such PDI affiliate shall not,
subject to certain exceptions, sell, exchange, transfer, pledge, distribute or
otherwise dispose of or grant any option, establish any "short" or put-
equivalent position with respect to or enter into any similar transaction
(through derivative's or otherwise) intended or having the effect, directly or
indirectly, to reduce such PDI affiliate's risk relative to any PDI common
stock. Provided certain conditions are met, the PDI affiliate agreements
provide for certain exceptions to the foregoing restrictions on transfer
relating to:

. certain de minimis transfers

. transfers in payment of the exercise price of options to purchase PDI
common stock

. charitable donations

. transfers to trusts established for the benefit of members of such PDI
affiliate's family or gifts to members of such PDI affiliate's family

Tax Consequences

In general, except for any cash payment received by the holders of CRT
capital stock, the merger has been structured to qualify as a tax-free
transaction under the Internal Revenue Code. The obligations of PDI and CRT to
consummate the merger are conditioned on receipt by PDI and CRT of opinions
from their legal counsel that, assuming the factual representations and
assumptions as set forth in the opinions are true, the merger qualifies as a
tax-free transaction. See "Approval of the Merger and Related Transactions--
Material Federal Income Tax Consequences."

Regulatory Approvals

We are not required to notify the Federal Trade Commission or the Antitrust
Division of the United States Department of Justice before we can complete the
merger. However, the FTC or the Antitrust Division has the authority to
challenge the merger on antitrust grounds before or after the merger is
completed. For more information, see "Approval of the Merger and Related
Transactions--Regulatory Matters."

7
<PAGE>

Rights of Dissenting Shareholders

Pursuant to the California Corporations Code, or the CCC, holders of shares
of CRT capital stock may exercise dissenters' rights in the proposed merger
under the provisions of the CCC. Holders of PDI common stock will not have
dissenters' rights in connection with the merger. See "Approval of the Merger
and Related Transactions--Rights of Dissenting Shareholders."

Forward-Looking Statements May Prove Inaccurate

PDI and CRT have each made forward-looking statement in this document that
are subject to risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of operations of PDI,
CRT or the combined company. Also, when we use such words as "believes,"
"expects," "anticipates" or similar expressions, we are making forward-looking
statements. You should note that the merger and an investment in securities of
PDI involve certain risks and uncertainties that could affect the future
financial results of PDI. Some of these risks include: risks related to the
integration of PDI and CRT, risks associated with a fixed exchange ratio, risks
relating to the respective businesses of PDI and CRT and other risks and
uncertainties discussed under "Risk Factors" and elsewhere in this document.
For more information on these risks, see "Risk Factors."

Markets and Market Prices

PDI's common stock is traded on the Nasdaq National Market under the symbol
"PHTN." The following table sets forth the closing price per share of PDI
common stock as reported on the Nasdaq National Market and the equivalent per
share price, as explained below, of CRT common stock on August 9, 1999, the
last day of trading before the day the merger was announced, and on October ,
1999.

<TABLE>
<CAPTION>
PDI
Common Equivalent
Stock Per CRT Per
Share Price Share Price(1)
----------- --------------
<S> <C> <C>
August 9, 1999....................................... $13.31 $16.02
October [ ], 1999.................................... [ ] [ ]
</TABLE>
- --------
(1) The equivalent CRT price represents the price of one share of PDI Common
Stock multiplied by 1.2033. The equivalent CRT per share price does not
include the CRT Series A preferred liquidation preference of 125,490 shares
of PDI common stock.

The actual prices of PDI common stock prior to or at the time the merger is
consummated cannot be guaranteed or predicted.

8
<PAGE>

PHOTON DYNAMICS, INC.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following selected historical consolidated financial information of PDI
as of September 30, 1998 and 1997 and for the years ended September 30, 1998
and 1997, has been derived from and should be read in conjunction with the
audited consolidated financial statements of PDI and related notes thereto
included elsewhere in this proxy statement/prospectus. The selected historical
consolidated financial information of PDI as of September 30, 1996, 1995 and
1994 and for the years ended September 30, 1996, 1995 and 1994 have been
derived from the audited consolidated financial statements of PDI which are not
included in this proxy statement/prospectus. The selected financial information
of PDI as of June 30, 1999 and for each of the nine month periods ended June
30, 1999 and 1998 have been derived from and should be read in conjunction with
the unaudited consolidated financial statements included elsewhere in this
proxy statement/prospectus, which have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of PDI's financial position and results of
operations for and as of the end of such periods. The results of operations for
the nine months ended June 30, 1999 and 1998 are not necessarily indicative of
the results to be expected for the full year or any future periods.

<TABLE>
<CAPTION>
Nine Months
Ended
June 30, Years Ended September 30,
---------------- -----------------------------------------
1999 1998 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- ------- -------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA
Revenue................. $20,699 $18,362 $22,420 $24,507 $24,763 $18,447 $10,587
Gross margin............ 8,372 8,259 9,361 10,718 11,507 6,756 3,902
Operating income
(loss)................. (488) 143 (1,589) (2,695) 563 710 (2,048)
Net income (loss)....... (470) 317 (1,465) (2,481) 854 377 (2,105)

Basic net income (loss)
per share(1)........... ($0.06) $ 0.04 $ (0.20) $ (0.35) $ 0.13 $ 0.08
Diluted net income
(loss) per share (pro
forma for 1995)(1)..... ($0.06) $ 0.04 $ (0.20) $ (0.35) $ 0.12 $ 0.08
Shares used in
computing:
Basic net income (loss)
per share(1)........... 7,495 7,214 7,231 7,049 6,548 4,448
Diluted net income
(loss) per share(1).... 7,495 7,513 7,231 7,049 7,294 5,016

CONSOLIDATED BALANCE
SHEET DATA
Working capital......... $14,948 $14,090 $14,769 $17,290 $ 709 $ 408
Total assets............ 23,382 21,033 23,203 24,958 10,519 6,567
Total shareholders'
equity................. 16,750 16,489 17,762 19,770 1,857 1,435
</TABLE>
- --------
(1) Earnings per share for all periods prior to fiscal 1998 have been restated
to conform to the requirements of SFAS No. 128, "Earnings Per Share."

9
<PAGE>

CR TECHNOLOGY, INC.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following selected historical consolidated financial information of CRT
as of December 31, 1998 and 1997 and for each of the years ended December 31,
1998 and 1997 has been derived from and should be read in conjunction with the
audited consolidated financial statements of CRT and related notes thereto
included elsewhere in this proxy statement/prospectus. The selected historical
consolidated financial information of CRT as of December 31, 1996, 1995 and
1994 and for the years ended December 31, 1996, 1995 and 1994 have been derived
from and should be read in conjunction with the audited consolidated financial
statements of CRT which are not included in this proxy statement/Prospectus.
The selected financial information of CRT as of June 30, 1998 and for each of
the six month periods ended June 30, 1998 and 1997 have been derived from and
should be read in conjunction with the unaudited consolidated financial
statements included elsewhere in this proxy statement/prospectus, which have
been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of CRT's financial position and results of operations for such
periods. The results of operations for the six months ended June 30, 1999 and
1998 are not necessarily indicative of the results to be expected for the full
year or any future periods.

<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
----------------- ----------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- ------ ------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenue.................. $ 7,408 $ 4,115 $8,550 $5,708 $3,625 $3,170 $1,863
Gross margin............. 3,559 1,918 3,730 2,530 1,848 1,564 890
Operating income......... 1,027 207 186 431 341 463 241
Net income............... 954 181 258 599 391 267 201

Basic net income per
share................... $ 1.17 $ 0.23 $ 0.32 $ 0.78 $ 0.53 $ 0.36
Diluted net income per
share................... $ 0.66 $ 0.13 $ 0.18 $ 0.43 $ 0.27 $ 0.28
Shares used in computing:
Basic net income per
share................... 813 794 808 770 737 737
Diluted net income per
share................... 1,454 1,435 1,449 1,404 1,451 951

CONSOLIDATED BALANCE
SHEET DATA
Working capital.......... $ 3,914 $2,910 $2,474 $1,929 $ 752 $ 261
Total assets............. 7,108 4,158 4,122 2,772 1,792 1,240
Total shareholders'
equity.................. 4,032 3,079 2,806 2,212 878 612
</TABLE>

10
<PAGE>

PHOTON DYNAMICS, INC. AND CR TECHNOLOGY, INC.

UNAUDITED SELECTED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION

The unaudited selected pro forma combined condensed financial information
set forth below gives effect to the merger as a pooling of interests, assuming
that 1.2033 shares of PDI common stock is issued in exchange for each share of
CRT common and Series A preferred stock plus 125,490 shares of PDI issued as a
liquidation preference to CRT preferred shareholders. PDI has a fiscal year
ending on September 30 and CRT has a fiscal year ending on December 31. If the
Acquisition is consummated, the fiscal year of CRT will be conformed to that of
PDI commencing with the fiscal year ending September 30, 2000. Accordingly, the
unaudited pro forma combined statement of operations data combine PDI's
historical results for the fiscal years ended September 30, 1998 and 1997 and
the nine months ended June 30, 1999 and 1998 with the CRT historical results
for the years ended December 31, 1998 and 1997 and the nine months ended June
30, 1999 and September 30, 1998, respectively, giving effect to the Acquisition
as if it had occurred at the beginning of the earliest period presented. This
data should be read in conjunction with the selected historical consolidated
financial information, the unaudited pro forma combined condensed financial
statements and the separate historical consolidated financial statements of PDI
and CRT and the notes thereto included elsewhere in this proxy
statement/prospectus. The unaudited pro forma combined condensed financial
statements, presented for illustrative purposes only, are not necessarily
indicative of the operating results or financial position that would have been
achieved had the merger been consummated at the beginning of the earliest
period presented and should not be construed as representative of future
operations.

The unaudited pro forma combined balance sheet data combine PDI's
consolidated balance sheet as of June 30, 1999, September 30, 1998 and 1997
with the CRT consolidated balance sheet as of June 30, 1999, December 31, 1998
and 1997 giving effect to the Acquisition as if it had occurred at the
beginning of the earliest period presented.

<TABLE>
<CAPTION>
Nine Months Ended Years Ended
June 30, September 30,
--------------------------------------
1999 1998 1998 1997
---------------------------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA
Revenue............................... $ 30,530 $ 24,489 $ 30,970 $ 30,215
Gross margin.......................... 12,925 10,995 13,091 13,249
Operating income (loss)............... 548 320 (1,403) (2,264)
Net income (loss)..................... 581 478 (1,207) (1,882)

Basic net income (loss) per share..... $ 0.06 $ 0.05 $ (0.14) $ (0.22)
Diluted net income (loss) per share... $ 0.06 $ 0.05 $ (0.14) $ (0.22)
Shares used in computing:
Basic net income (loss) per share..... 9,200 8,902 8,930 8,702
Diluted net income (loss) per share... 9,779 9,370 8,930 8,702

CONSOLIDATED BALANCE SHEET DATA
Working capital....................... $ 17,862 $ 16,000 $ 16,243
Total assets.......................... 30,490 25,191 27,325
Total shareholders' equity............ 19,782 19,568 20,568
</TABLE>

11
<PAGE>

COMPARATIVE PER SHARE DATA (UNAUDITED)

The following table sets forth certain historical per share data of PDI and
CRT and combined per share data on an unaudited pro forma basis after giving
effect to the merger as a pooling of interests at the exchange ratio. This data
should be read in conjunction with the selected historical consolidated
financial information and the unaudited selected pro forma combined condensed
financial information of PDI and CRT and notes thereto, included elsewhere in
this proxy statement/prospectus. The unaudited pro forma combined per share
data are not necessarily indicative of the operating results or financial
position that would have occurred if the merger had been consummated at the
beginning of the periods presented, nor is it necessarily indicative of future
operating results or financial position.

<TABLE>
<CAPTION>
Nine Months Ended Year Ended
June 30, September 30,
---------------------- --------------
1999 1998 1998 1997
-------- ------------- ------ ------
<S> <C> <C> <C> <C>
Historical PDI:
Net income (loss) per basic share... $(0.06) $0.04 $(0.20) $(0.35)
Net income (loss) per diluted
share.............................. $(0.06) $0.04 $(0.20) $(0.35)

<CAPTION>
Year Ended
Nine Months Ended December 31,
---------------------- --------------
June 30, September 30,
1999 1998 1998 1997
-------- ------------- ------ ------
<S> <C> <C> <C> <C>
Historical CRT:
Net income (loss) per basic share... $ 1.29 $0.20 $ 0.32 $ 0.78
Net income (loss) per diluted
share.............................. $ 0.72 $0.11 $ 0.18 $ 0.43

<CAPTION>
Nine Months Ended Year Ended
June 30, September 30,
---------------------- --------------
1999 1998 1998 1997
-------- ------------- ------ ------
<S> <C> <C> <C> <C>
Pro Forma Combined Net Income(1):
Per PDI share--Basic................ $ 0.06 $0.05 $(0.14) $(0.22)
Per PDI share--Diluted.............. $ 0.06 $0.05 $(0.14) $(0.22)
Equivalent per CRT share--Basic(3).. $ 0.07 $0.06 $(0.17) $(0.26)
Equivalent per CRT share--
Diluted(3)......................... $ 0.07 $0.06 $(0.17) $(0.26)
</TABLE>

<TABLE>
<CAPTION>
As of June 30,
1999
--------------
<S> <C>
Book value per share(2):
Historical PDI................................................ $2.17
Historical CRT................................................ $2.80
Pro forma combined per PDI share(1)........................... $2.10
Equivalent pro forma combined per CRT share(3)................ $2.53
</TABLE>
- --------
(1) PDI and CRT estimate they will incur direct transaction costs of
approximately $1.0 million associated with the merger, which will be
charged to operations upon consummation of the merger. The pro forma
combined book value per share data gives effect to the estimated direct
transaction costs as if such costs had been incurred as of the respective
balance sheet date. The pro forma combined book value per share data does
not include additional costs, which costs are not currently estimable,
expected to be incurred relating to integrating the companies. The direct
transaction costs are not included in the pro forma combined net income per
share data. See "Unaudited Pro Forma Combined Condensed Financial
Statements" and accompanying notes thereto.

12
<PAGE>

(2) The historical book value per share is computed by dividing shareholders'
equity by the number of shares of common stock outstanding and CRT Common
Stock issuable upon conversion of the CRT Preferred Stock at the end of
each period plus 125,490 shares of PDI issued as a liquidation preference
to CRT preferred shareholders. The pro forma combined book value per share
is computed by dividing pro forma stockholders' equity by the pro forma
number of shares of common stock outstanding as of June 30, 1999.
(3) The CRT equivalent pro forma combined net income per share amounts and book
value per share amounts are calculated by multiplying the PDI combined pro
forma net income per share amounts and book value per share amounts by the
exchange ratio.

13
<PAGE>

RISK FACTORS

This proxy statement/prospectus contains forward-looking statements that
involve known and unknown risks and uncertainties. The actual results of the
combined company may differ materially from those anticipated in these forward-
looking statements. You should carefully consider the risks described below and
elsewhere in this document in making an investment decision. Keep in mind that
the risks described below are not the only risks facing PDI, CRT or the
combined company.

Risks Relating to The Merger

Integrating the Business of PDI and CRT will be Complex, Time-Consuming and
Expensive, and the Companies may not Successfully Integrate their Businesses,
which would Harm the Operations of the Combined Company.

Integrating PDI and CRT will be a complex and time-consuming and expensive
process. Before the merger, PDI and CRT operated independently, each with its
own business, culture, clients, employees and systems. After the merger, PDI
and CRT must operate as a combined organization, utilizing common information
and communication systems, operating procedures, financial controls and human
resource practices, including benefit, training and professional development
programs. There may be substantial difficulties, costs and delays involved in
integrating PDI and CRT. These include:

. diversion of management resources from the business of the combined
company

. potential incompatibility of business cultures

. perceived adverse change in client service standards, business focus,
billing practices, or service offerings available to clients

. perceived uncertainty in career opportunities, benefits and the long-
term value of stock options available to employees

. costs and delays in implementing common systems and procedures

. potential inefficiencies in delivering services to the clients of the
combined company

. merger related costs to be expensed in PDI in the quarter in which the
merger is consummated.

Any one or all of these factors may cause increased operating costs, lower
than anticipated financial performance or the loss of customers and employees.
Many of these factors are outside the control of either company.

The Rights of CRT Shareholders Will Change after the Merger.

Following the merger, CRT shareholders will become shareholders of PDI.
There are important differences between the rights of PDI shareholders and CRT
shareholders. For a description of these differences, please see "Comparison of
Shareholder Rights."

Risks Relating to The Business of PDI

The Operating Results of PDI are Volatile and Difficult to Predict

PDI has experienced and expects to continue to experience significant
fluctuations in its quarterly results of operations. PDI derives most of its
revenue from the sale of a relatively small number of systems, which typically
range in price from $0.4 million to $1.5 million. As a result, the timing of
the sale of a single system could have a significant impact on PDI's quarterly
revenue and results of operations. For example, PDI may

14
<PAGE>

experience unanticipated shipment reschedulings, cancellations by customers or
unexpected manufacturing difficulties, which may cause revenue for that
quarter to fall below expectations. This would adversely affect PDI's results
of operations for that quarter. PDI's backlog at the beginning of each quarter
is not necessarily indicative of actual sales for any succeeding period.
Orders may be delayed or cancelled with limited or no penalty. PDI's sales
often reflect orders shipped in the same quarter they are received. Many
factors may influence PDI's results of operations in a particular quarter.
These include:

. volume, mix and timing of the receipt of orders from major customers

. competitive pricing pressures

. costs of components and subsystems

. PDI's ability to design, manufacture and introduce new products on a
cost-effective and timely basis

. the delay between the incurrence of expenses to further develop
marketing and service capabilities and realization of benefits from such
improved capabilities

. fluctuations in foreign exchange rates

. the introduction and announcement of new products by PDI's competitors

. changing conditions in the flat panel display, or FPD, market worldwide

In particular, due to substantial differences in gross margin for PDI's
products, changes in the product volume and product mix could result in
substantial fluctuations in PDI's gross margin. Furthermore, PDI believes that
the economic conditions in Asia could have a negative impact on PDI's results
of operations. If the Asia currencies fall or remain at current levels against
the U.S. Dollar, PDI could experience lower average sales prices for its
products or PDI's customers may fail to place new orders for PDI's equipment.
Accordingly, PDI's results of operations are subject to significant quarterly
variation.

The Future Performance of PDI Depends in Part on Future Growth in the
Japanese, Taiwanese and Korean Markets

PDI's sales to Japan, Taiwan and Korea may be adversely affected by the
overall health of these economies, including the effects of currency exchange
rate fluctuations on the global competitiveness of Japanese, Taiwanese and
Korean FPD manufacturers. A downturn in economic conditions in Asia could
result in PDI's customers failing to place new orders for PDI's equipment.
Similarily, the failure of the Japanese, Taiwanese and Korean FPD markets to
grow as anticipated would harm PDI's business.

PDI's International Operations Create Specialized Risks that can Negatively
Affect its Business

Approximately 96% and 95% of PDI's total revenue for fiscal 1998 and the
first nine months of fiscal 1999 was attributable to sales outside the United
States. Furthermore, most of the major FPD manufacturers and many of PDI's
principal customers are located in Asia. PDI expects that international sales
and in particular sales to Asia will continue to represent a significant
portion of its total sales. Sales to customers outside the U.S. are subject to
a number of specialized risks. These risks include:

. governmental controls

. unavailable or limited effective copyright and trade secret protection

. the need to comply with a wide variety of foreign and U.S. export laws

. the need to comply with technical standards established by foreign
regulatory bodies

. political and economic instability

. trade restrictions

15
<PAGE>

. changes in tariffs and taxes

. longer payment cycles typically associated with international sales

. the greater difficulty of administering business overseas

. general economic conditions

Although substantially all of PDI's direct international sales are
denominated in U.S. dollars, both direct sales by PDI and sales through
Ishikawajima-Harima Heavy Industries Co., Ltd., or IHI, may be affected by
changes in demand resulting from fluctuations in interest and currency exchange
rates. If PDI's sales are denominated in foreign currency, its revenue and
results of operations may be directly affected by fluctuations in foreign
currency exchange rates.

A Few Customers have Accounted for a Significant Percentage of PDI's Revenues

The flat panel display industry is extremely concentrated. Although PDI's
largest customers have changed from year to year, direct sales to PDI's top
four end user customers in fiscal 1997, 1998 and fiscal 1999, accounted for
approximately 83%, 92%, and 73% of its total revenue. PDI currently has no
long-term purchase commitments with its customers and sales are generally made
through purchase orders. Orders are subject to delay or cancellation with
limited or no penalty to the customer. A reduction, delay, or cancellation of
orders from one or more of its significant customers, or the loss of one or
more customers, could adversely affect PDI's business.

Downturns or Slowdown in the Flat Panel Display Industry may Lower PDI's
Revenues

PDI's business depends in large part upon the capital equipment expenditures
of flat panel display manufacturers, which in turn depend on the current and
anticipated market demand for FPDs and products utilizing FPDs. The FPD
industry may become highly cyclical and experience periodic downturns or
slowdowns in growth. This would reduce capital equipment expenditures by FPD
manufacturers and, in turn, adversely affect PDI's operations. In addition,
PDI's must continually investment in engineering, research and development and
marketing required to penetrate targeted foreign markets and maintain extensive
worldwide customer service and support capabilities. These requirements may
limit its ability to reduce expenses during downturns or slowdowns in growth in
the FPD industry, which would adversely affect PDI's operating margins.

If PDI does not Compete Effectively in the Flat Panel Display Industry, then
it will Lose Market Share and its Business will be Harmed

The Flat Panel Display equipment industry is highly competitive. PDI faces
substantial competition from established companies, many of which are larger
companies, have greater financial, engineering and manufacturing resources than
PDI and have larger service organizations and long-standing customer
relationships with major FPD manufacturers. These companies include
International Business Machines/Micronics Japan Corporation, NTN, Minato, Hoya,
Advantest and Otsuka.

In particular, the future performance of PDI will depend upon its ability to
continue to compete successfully in the Japanese, Taiwanese and Korean markets,
the three largest markets for FPD array test, inspection and repair equipment.
PDI's ability to compete in such markets in the future depends in part on the
following factors:

. continuing free trade between Korea, Japan, Taiwan and the U.S.

. continuing ability of PDI to develop products in a timely manner that
meet the technical requirements of its Japanese, Taiwanese and Korean
customers

. continuing ability of PDI to maintain satisfactory relationships with
leading companies in the Japanese, Taiwanese and Korean FPD industry

16
<PAGE>

PDI believes that many Japanese, Taiwanese and Korean companies with which
it competes may have a competitive advantage in Japan, Taiwan and Korea
because of the preference of some customers for local equipment suppliers who
have longer standing or closer business relationships with these customers.

PDI expects it may face additional competition from new entrants into the
FPD equipment industry and from competitors utilizing new technologies. PDI's
competitors can be expected to continue to improve the design and performance
of their products and to introduce new products with competitive
price/performance characteristics. In addition, PDI's customers may choose to
develop proprietary technology and FPD equipment, which may obviate or lessen
their need to purchase PDI's products. PDI's customers may also use multiple
technologies and solutions, including competitors' products, to replicate the
functionality of PDI's systems. Competitive pressures may necessitate price
reductions, which could harm PDI's results of operations. PDI may not have
sufficient resources to continue to make investments in research and
development. Even if sufficient funds are available, PDI may not be able to
make the technological advances necessary to maintain competitive advantages.

PDI Depends on Its Relationship with IHI to Market Its Products in Asia and
Elsewhere

PDI has granted to IHI exclusive manufacturing and sales rights to its
array test systems developed prior to June 1997 in Japan, Korea and a number
of other Asian counties, Saudi Arabia, Australia, New Zealand, India and Sri
Lanka. Under the terms of this relationship, PDI reserves the rights to
manufacture some critical components and to sell the components to IHI for
inclusion in array test systems to be sold by IHI in its territory. In fiscal
1998 and fiscal 1999, approximately 45% and 14% of PDI's revenues were derived
from sales to IHI. To date, IHI has allowed PDI to manufacture all array test
systems sold by IHI in the IHI territory. If IHI decides to exercise its
contractual rights to manufacture and sell PDI's systems in its territories,
such action could reduce revenue of PDI attributable to these IHI manufactured
array test systems and may adversely affect PDI's results of operations. Given
the concentration of flat panel display manufacturers in IHI's territories,
PDI is highly dependent on the success of its relationship with IHI to market
and sell its array test systems in these markets. If IHI decides to reduce its
internal budgets, staffing levels, research and development funding or other
allocations of its resources for the development, manufacture, sale and
support of array test systems in Japan, PDI's inability to compete in this
market may harm PDI's results of operations.

PDI May Be Unable to Develop and Introduce New Products or Enhancements to
Its Existing Products and Processes in a Timely Manner that Satisfy Customer
Needs, Achieve Market Acceptance or Address Technological Changes in the Flat
Panel Display Industry

The market for PDI's products is characterized by rapidly changing
technologies and frequent new product introductions. PDI believes that its
future success will depend in part upon its ability to continue to enhance its
existing products and to develop and manufacture new products. PDI may not be
successful in introducing, marketing or managing the manufacturing of its new
or recently introduced products. Furthermore, PDI may not be able to develop
and introduce new products or enhancements to its existing products and
processes in a timely manner which satisfy customer needs, achieve market
acceptance or address technological changes in the FPD industry. The failure
to develop products and introduce them successfully and in a timely manner
could compromise PDI's competitive position. PDI has experienced delays in the
development of performance specifications required by new and existing
customers in the past, and could experience such delays in the future.
Development efforts related to other performance parameters may not be
successful. PDI believes that future orders of array test systems will depend
in part on its ability to achieve requested performance parameters. In order
to develop new products successfully, PDI depends on close relationships with
its customers. If products have performance, reliability or quality problems
or shortcomings, then PDI may experience:

. reduced orders

. higher manufacturing costs

. delays in collecting accounts receivable

. additional warranty and service expenses

17
<PAGE>

In addition, future sales of PDI's products will depend in part on the
acceptance of PDI's array test or inspection technologies by a broader group of
customers. Such customers include additional international customers and FPD
manufacturers which currently do not perform the type of FPD array test or
inspection offered by PDI's products or which utilize differing technologies
for, or methods of, inspection. There is a large capital commitment involved in
the construction and operation of a flat panel display manufacturing facility.
As a result, the decision by an FPD manufacturer to purchase PDI's array test
or inspection systems involves a significant technological and financial
commitment as compared to current alternatives such as human inspection and
open/short array testers. If PDI is not successful in obtaining broader
acceptance of its technologies, then its business may be harmed.

Some Components and Subassemblies Included in PDI's Products Are Obtained from
a Single or Limited Group of Suppliers

Some of the components and subassemblies included in PDI's systems are
obtained from a single or a limited group of suppliers. For example, PDI has
obtained high-speed image processing systems, materials handling platforms and
ultra-high resolution cameras used in its products from single source
suppliers. PDI has not entered into any formal agreements with such suppliers,
other than long-term purchase orders and, in some cases, volume pricing
agreements. The partial or complete loss of such suppliers could:

. increase PDI's manufacturing costs or delay product shipments while PDI
qualifies a new supplier,

. require redesigning PDI's products, or

. potentially damage customer relationships.

Even if alternative suppliers are qualified, the components may be attained
at a significant increase in the price or on less favorable terms to PDI

An Industry Shift Away From AMLCD Technology Would Harm PDI's Results

Currently, the predominant technology used in the FPD industry is AMLCD
technology. PDI's revenue is derived primarily from sales of products related
to AMLCD technology used in a substantial portion of all FPDs. An industry
shift away from AMLCD technology or the emergence of new competing technologies
may reduce the demand for PDI's products and adversely affect PDI's business.

PDI May Be Unable to Protect Its Proprietary Information and Procedures

PDI's success and competitive position depend in part on its proprietary
technology. PDI relies on patent, trade secret, trademark and copyright law to
protect its intellectual property. Any patent owned or licensed by PDI may be
invalidated, circumvented, challenged or licensed to others. Furthermore, PDI's
pending or future patent applications may not be issued with the scope of the
claims sought by PDI, if at all. Even if issued, rights granted under these
patents, may not provide significant competitive advantages to PDI. Others may
also develop technologies that are similar or superior to PDI's technology,
duplicate PDI's technology or design around the patents owned by PDI. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. The steps PDI has taken may not prevent
misappropriation of its technology. In addition, litigation may be necessary in
the future to enforce PDI's patents and other intellectual property rights, to
protect PDI's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could adversely affect PDI's results of operations.

18
<PAGE>

parties may assert infringement claims, successful or otherwise, against PDI.
An adverse outcome in the defense of a patent suit could subject PDI to
significant liabilities to third parties, require disputed rights to be
licensed from third parties or require PDI to cease selling its products. Even
successful defenses of patent suits can be both costly and time-consuming and
adversely affect PDI's business.

The Inability to Attract or Loss of PDI's Key Employees Could Negatively
Affect PDI

The future success of PDI is dependent, in part, on its ability to retain
certain key personnel. PDI also needs to attract additional skilled personnel
in all areas of its business to continue to grow. There can be no assurance
that PDI will be able to retain its existing personnel or attract additional
qualified employees in the future. The loss of such persons could result in
disruption of PDI's business, stock price volatility and could adversely
affect PDI's results of operations. PDI has not entered into long term
contracts with any of its employees and does not maintain key employee life
insurance.

The Disruption or Failure of Computer Programs and Systems Due to Their
Inability to Process Date/Time Information between the Twentieth and Twenty-
First Century May Cause an Interruption in and Negatively Impact PDI's
Business

The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of PDI's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing the disruption of operations, including
among other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. In addition to PDI's
own systems PDI relies, directly and indirectly, on external systems of its
customers, creditors, financial organizations, utilities providers and
government entities, both domestic and international. Consequently, PDI could
be affected by disruptions in the operations of these third parties with which
PDI interacts.

PDI has established a task force to address internal and external Year 2000
issues. To date, PDI has made several modifications to its product software,
its enterprise software and its network software to ensure Year 2000
compliance. Although PDI believes that its products and internal systems are
currently Year 2000 compliant, third parties with which PDI interacts may not
be Year 2000 compliant. Failure of third party enterprises to achieve Year
2000 compliance could adversely affect PDI's business.

PDI continues to evaluate the estimated costs associated with the efforts
to prepare for Year 2000 based on actual experience. While the efforts will
involve additional costs, PDI believes, that it will be able to manage its
total Year 2000 transition without material adverse effect on its business
operations, products or financial prospects. As of September 30, 1999, PDI had
incurred approximately $35,000 in costs to achieve Year 2000 compliance. The
actual outcomes and results could be affected by many factors. These factors
include:

. continued availability of skilled personnel

. cost control

. the ability to locate and correct software code problems

. critical suppliers and subcontractors meeting their commitments to be
Year 2000 compliant

. timely actions by customers

PDI anticipates that it will remediate all Year 2000 risks and be able to
conduct normal operations without having to establish a Year 2000 contingency
plan. Accordingly, PDI does not have a contingency plan and does not intend to
establish one. Furthermore, PDI may not have foreseen and corrected all Year
2000 problems which may result in material disruption to its business.

19
<PAGE>

Earthquakes May Damage PDI's Facilities

PDI's corporate and manufacturing facilities are located near major
earthquake faults which have experienced earthquakes in the past. Although PDI
carries limited earthquake insurance, in the event of a major earthquake or
other disaster in or near the San Francisco Bay Area, PDI's facilities may
sustain significant damage and its operations could be negatively affected.

Safe Harbor Provisions of the Private Securities Litigation Reform Act Of 1995

Many of the statements made by or about PDI in this proxy
statement/prospectus are forward-looking statements. These forward-looking
statements include, but are not limited to, statements about PDI's industry,
plans, objectives, expectations, intentions and assumptions and other
statements that are not historical facts. When used in this proxy
statement/prospectus, the words "expect," "anticipate," "intend," "plan,"
"believe," "seek," "estimate" and similar expressions are generally intended to
identify forward-looking statements. Because these forward-looking statements
involve risks and uncertainties, including those described in this "Risks
Relating to the Business of PDI" section, actual results may differ materially
from those expressed or implied by these forward-looking statements. Market
data and other market and industry information presented in this proxy
statement/prospectus have been obtained from independent industry sources.
Although PDI believes these sources are reliable, PDI has not independently
verified any of such data or information.

Risks Relating to The Business of CRT

CRT's Expansion Plans May Adversely Affect Its Future Profitability

CRT intends to expand the products and services it offers and to expand its
operations and sales and marketing efforts. Such expansion will necessitate
increased expenditures by CRT, which will be funded out of cash flow from
operations. Expansion may not occur. If such expansion does occur, such
expansion may not result in increased revenues or profitability. If cash flow
from operations is insufficient to cover the increased costs resulting from
expansion, CRT may sustain losses.

Failure by CRT to Manage Its Growth Effectively Could Adversely Affect Its
Business

CRT's current expansion plans may place a significant strain on its
personnel and management resources and financial and management control
systems. Personnel, management resources and CRT's management and financial
control systems may not be adequate to address future expansion of CRT's
business and operations. Failure by CRT to maintain adequate personnel and
management resources or to upgrade its operating, management and financial
control systems or any difficulties encountered during such upgrades could
adversely affect CRT's business. The success of CRT's expansion plans will
depend in part on its ability to expand its personnel and management resources
and to improve its management and financial control systems. CRT may not be
successful in any of these regards.

CRT Is Subject to Risks as a Early Stage Company

Despite sixteen years of operational history, CRT's success is dependent on
the successful marketing of upgraded existing products and future products
resulting from on-going engineering and development activities. Accordingly,
CRT's operations are subject to many of the same risks inherent in the
development, manufacturing and commercialization phases of a technology-based
start-up business. This risks include:

. delays in obtaining governmental approvals

. unanticipated expenses

. complications frequently encountered during the early and subsequent
phases of product development and commercialization of technologies and
high technology products

. unsuccessful attempts to apply such technologies and products to
targeted markets

20
<PAGE>

CRT may not be successful in the development, manufacture or marketing of
any of its products or technologies.

CRT May Not Be Successful if Additional Funding Is Unavailable

If CRT's capital requirements or revenue vary materially from current plans
or if unforeseen circumstances occur, CRT may require additional financing.
Additional financing may not be available on a timely basis, in sufficient
amounts or on terms acceptable to CRT. Any debt financing or other financing of
securities senior to common stock will likely include financial and other
covenants that will restrict CRT's flexibility.

CRT's Business May Be Adversely Impacted by Rapid Technological Changes

CRT cannot predict the effect of technological changes on its business. The
market for CRT's products and services is characterized by rapidly evolving
technological change, frequent new product introductions and significant price
competition. Consequently, short product life cycles and frequent reductions in
unit selling prices due to competitive pressures over the life of a specific
product are common. CRT expects that new products and technologies will emerge
in the markets in which it competes. These new products and technologies may be
superior to CRT's products and technologies or these new products and
technologies may render CRT's products and technologies obsolete. CRT's future
success will depend on its ability to continue to develop, upgrade and
manufacture competitive products and achieve cost reductions for its existing
products in response to competitive pressures. Moreover, achieving advances in
technology will require additional investments in product design and
engineering. CRT may not have sufficient funds from operations or other funds
available to invest in product design and engineering.

CRT May Not Be Successful If It Is Unable to Compete Effectively

The X-ray and automated visual inspection systems industries are highly
competitive. CRT expects new competitors to enter into its markets. Some or all
of CRT's current and future competitors have or may have significantly greater
financial, technical, manufacturing and marketing resources than CRT. CRT's
ability to compete in the market depends on a number of factors. These factors
include:

. the success and timing of product introductions by CRT and its
competitors

. price performance

. product distribution abilities

. customer support

. general economic conditions

CRT competes in the automated inspection system, image processing and real-
time imaging markets mainly on the basis of product performance and price. CRT
believes that price competition will increase in the future. A key marketing
strategy of CRT is to provide high quality products at a competitive price.
However, CRT's products may not continue to perform at levels expected by
customers or contain features desired by customers or be priced competitively.

Fluctuations in Quarterly Performance Could Adversely Affect CRT's Business

CRT's operating results can fluctuate significantly from quarter to quarter
depending on a number of factors. These factors include:

. the timing of product announcements and introductions by CRT and its
competitors

. market acceptance of new and upgraded products

. seasonality

21
<PAGE>

. distributor price protections

. costs of components and subsystems

. currency fluctuations

. changes in pricing policies and price reductions by CRT and its
competitors

. the timing of expenditures on staffing, advertising, promotions,
research, development and engineering

CRT expects to experience quarterly fluctuations in total revenues as well
as operating expenses due to future new product introductions and product
upgrades. In addition, CRT's component purchases, production and spending
levels are made based upon forecasted demand. Accordingly, any inaccuracy in
forecasting anticipated revenues and expenses could adversely affect CRT's
business.

Demand for CRT's products could be materially adversely affected by a slow
down in overall demand for such products as well. Furthermore, CRT recognizes
revenues from product sales at the time of shipment. The failure to receive
anticipated orders or to complete shipments in any quarter could have a
material adverse effect on CRT's results of operations for that quarter.
Quarterly results are not necessarily indicative of future performance for any
particular period and CRT may not experience revenue growth or profitability on
a quarterly or annual basis.

Failure to Retain or Attract Key Personnel Could Adversely Affect CRT

CRT's success and future performance depends in significant part upon the
continued service of its officers named in the "CRT Management" section and
other key technical, sales and management personnel. The loss of the services
of one or more of these officers or other key employees could adversely affect
CRT's business. CRT's future success also depends on its continuing ability to
attract and retain highly qualified technical, sales and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
CRT can retain its key employees or that it can attract, assimilate or retain
other highly qualified technical, sales and managerial personnel in the future.

CRT's Business May Be Adversely Affected If It Is Unable to Comply with
Governmental Regulations

Certain of CRT's products are subject to regulation by the United States
Food and Drug Administration, as well as the California Department of Public
Health and other agencies in each jurisdiction in which its products are sold
or used. Compliance with such regulations may be time-consuming and expensive
and may delay or even prevent sales in the United States or in particular
jurisdictions. Failure to comply with federal or state regulations or the
applicable regulations of any foreign jurisdiction in which CRT's products are
sold or used could adversely affect CRT's business.

Risks of International Sales May Adversely Affect CRT's Business

Although sales by CRT to jurisdictions outside the United States have not
been significant to date, CRT expects its international sales to increase in
the future and that sales outside the United States will fluctuate from quarter
to quarter and, eventually, account for a material portion of its future
revenues. Sales to customers outside the U.S. are subject to risks. These risks
include:

. the imposition of governmental controls

. the need to comply with a wide variety of foreign and U.S. export laws

. political and economic instability

. trade restrictions

22
<PAGE>

. changes in tariffs and taxes

. longer payment cycles typically associated with international sales

. the greater difficulty of administering business overseas as well as
general economic conditions

Although substantially all of CRT's international sales are denominated in
U.S. dollars, sales by CRT and sales through distributors may be affected by
changes in demand resulting from fluctuations in interest and currency exchange
rates. To the extent CRT's sales are denominated in foreign currency, CRT's
revenue may also be directly affected by fluctuations in foreign currency
exchange rates. Furthermore, although CRT endeavors to meet the technical
standards established by various regulatory bodies, CRT may not be able to
comply with the regulations of foreign regulatory bodies or changes in foreign
standards in the future. The inability of CRT to design products to comply with
foreign standards could have a material adverse effect on CRT. In addition, the
laws of certain foreign countries may not protect CRT's intellectual property
to the same extent as do the laws of the U.S.

CRT's Intellectual Property Protection May Be Inadequate or Ineffective

CRT's future success and competitive position are dependent in part upon its
proprietary technology, and CRT relies on patent, trade secret, trademark and
copyright law and non-disclosure agreements to protect its intellectual
property. Any intellectual property or proprietary technology owned or licensed
by CRT could be invalidated, circumvented, challenged or licensed to others.
CRT's intellectual property rights may not provide competitive advantages to
CRT and CRT's pending or future patent applications may not be issued with the
scope of the claims sought by CRT, if at all. Furthermore, others may develop
technologies that are similar or superior to CRT's technology, duplicate CRT's
technology or design around the proprietary technology owned by CRT. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. CRT may not be able to prevent
misappropriation of its technology. In addition, litigation may be necessary in
the future to

. enforce CRT's intellectual property rights

. protect CRT's trade secrets

. determine the validity and scope of the proprietary rights of others

. defend against claims of infringement or invalidity

Such litigation could result in substantial costs and diversion of resources

Competitors in both the U.S. and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with CRT's
ability to manufacture and sell its products. CRT has not conducted an
independent review of patents issued to third parties or of any other
intellectual property rights of any third parties. Third parties may assert
infringement claims against CRT or that such claims will not be successful.
Even successful defenses of intellectual property infringement suits are both
costly and time-consuming. An adverse outcome in the defense of an intellectual
property infringement suit could subject CRT to significant liabilities to
third parties, require disputed rights to be licensed from third parties or
require CRT to cease selling its products.

CRT's Dependency on Single Sources of Supply May Adversely Affect Its Business
and Operations

Certain components used in CRT's products are available only from single
sources. Although CRT generally buys components under purchase orders and does
not have long-term agreements with its suppliers, CRT relies on its exclusive
suppliers to continue to satisfy its component requirements. Although alternate

23
<PAGE>

suppliers are believed to be available for components, for some components the
process of qualifying replacement components and suppliers, replacing tooling
or ordering and receiving replacement components from a new vendor could take
six months or more. If the supply of components for CRT's products were
interrupted for any reason, CRT may not be able to establish alternative
sources of supply and integrate replacement components into its products
without substantial disruption to CRT's business and operations. In addition,
any significant increase in component prices or a decrease in component
availability could have a material adverse effect on CRT's business, financial
condition and results of operations.

CRT's Reliance on Indirect Distribution Channels May Adversely Affect Its
Business and Operations

CRT markets and sells its products domestically and internationally
primarily through specialty distributors, dealers, original equipment
manufacturers and value added resellers. CRT's sales are currently principally
made through distributors, and CRT intends to continue to sell its products
through distributors. These distributors could reduce or discontinue sales of
CRT's products, which could adversely affect CRT's business. These independent
distributors will devote the resources necessary to provide effective sales
and marketing support to CRT. In addition, CRT is dependent upon the continued
viability and financial resources of these distributors, many of which are
small organizations with limited working capital. These distributors in turn
are substantially dependent on general economic conditions and other factors
affecting the market for the products they sell, including CRT's products. CRT
believes that its future growth and success will continue to depend in large
part upon these indirect distribution channels. If some or all of its
distributors were to experience financial difficulties, or otherwise become
unable to or unwilling to promote and sell CRT's products, CRT's business,
could be harmed. In addition, actual returns may not exceed recorded
allowances resulting in an adverse effect on CRT's results of operations.

CRT's Financial Condition and Results of Operations May Be Adversely Affected
by Warranty Claims

CRT provides a one-year limited product warranty on its products. In
addition, for certain custom-designed systems, CRT contracts to meet certain
performance specifications for a specific application. CRT may not incur
substantially warranty claim expenses in the future with respect to existing,
upgraded or new products, or with respect to its obligations to meet custom
performance standards and specifications.

CRT's Business May Be Adversely Affected if Its Computer Systems or the
Computer Systems of Its Suppliers Are Not Year 2000 Compliant

The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of CRT's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing the disruption of operations, including
among other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. In addition to CRT's
own systems CRT relies, directly and indirectly, on external systems of its
customers, vendors, creditors, financial organizations, utilities providers
and government entities, both domestic and international. Consequently, CRT
could be affected by disruptions in the operations of third parties with which
CRT interacts.

CRT is in the process of addressing internal and external year 2000 issues
and has established a task force with this responsibility. To date, CRT has
made several modifications to its product software, its enterprise software
and its network software to ensure Year 2000 compliance. Although CRT believes
that its products and internal systems are currently Year 2000 compliant. The
third parties with which CRT interacts may or may not be Year 2000 compliant.
Failure of third party enterprises to achieve Year 2000 compliance could harm
CRT's business. CRT continues to evaluate the estimated costs associated with
the efforts to prepare for Year 2000 based on actual experience. While the
efforts will involve additional costs, CRT believes, based on available
information, that it will be able to manage its total Year 2000 transition
without any material harm to CRT's business. The actual outcomes and results
could be affected by future factors including, but not limited

24
<PAGE>

to, the continued availability of skilled personnel, cost control, the ability
to locate and correct software code problems, critical suppliers and
subcontractors meeting their commitments to be Year 2000 compliant, and timely
actions by customers. CRT anticipates that it will remediate all Year 2000
risks and be able to conduct normal operations without having to establish a
Year 2000 contingency plan. Accordingly, CRT does not have a contingency plan
and does not intend to establish one.

Earthquakes May Damage CRT's Facilities

CRT's corporate and manufacturing facilities are located near major
earthquake faults which have experienced earthquakes in the past. Although CRT
carries limited earthquake insurance, in the event of a major earthquake or
other disaster in or near the greater Southern California area, CRT's
facilities may sustain significant damage and its operations could be
negatively affected.

Forward-Looking Statements By CRT Involve Risks and Uncertainties

Many of the statements made by or about CRT in this proxy
statement/prospectus are forward-looking statements. These forward-looking
statements include, but are not limited to, statements about CRT's industry,
plans, objectives, expectations, intentions and assumptions and other
statements that are not historical facts. When used in this proxy
statement/prospectus, the words "expect," "anticipate," "intend," "plan,"
"believe," "seek," "estimate" and similar expressions are generally intended to
identify forward-looking statements. Because these forward-looking statements
involve risks and uncertainties, including those described in this "Risks
Relating to the Business of CRT" section, actual results may differ materially
from those expressed or implied by these forward-looking statements. Market
data and other market and industry information presented in this proxy
statement/prospectus have been obtained from independent industry sources.
Although CRT believes these sources are reliable, CRT has not independently
verified any of such data or information.

25
<PAGE>

THE PDI ANNUAL MEETING

Purpose of the PDI Annual Meeting

The purpose of the PDI annual meeting is to consider and vote upon the
following matters:

1. To approve the issuance of shares of common stock of PDI pursuant to the
Agreement and Plan of Merger and Reorganization by and among PDI, CR
Technology, Inc. and Pharaoh Acquisition Corp., a California corporation
and wholly-owned subsidiary of PDI. Upon consummation of the merger, CRT
will become a wholly-owned subsidiary of PDI. A copy of the merger
agreement is attached as Appendix A to the proxy statement/prospectus
accompanying this notice.

2. To elect directors to serve for the ensuing year and until their
successors are elected.

3. To approve PDI's 1995 Stock Option Plan, as amended, to increase the
aggregate number of shares of common stock authorized for issuance under
such plan by 230,000 shares.

4. To approve PDI's 1995 Employee Stock Purchase Plan, as amended, to
increase the aggregate number of shares of common stock authorized for
issuance under such plan by 150,000 shares.

5. To ratify the selection of Ernst & Young LLP as independent auditors of
PDI for its fiscal year ending September 30, 2000.

PDI common shareholders may also consider and vote upon such other matters
as may be properly brought before the PDI annual meeting or any postponements
or adjournments thereof.

Date, Time and Place of Meeting

The PDI annual meeting will be held on November , 1999 at PDI's principal
offices, located at 6325 San Ignacio Avenue, San Jose, California 95119 at
10:00 a.m. local time.

Voting Rights and Outstanding Shares

Only holders of record of PDI common stock at the close of business on
October , 1999 will be entitled to notice of and to vote at the PDI annual
meeting. At the close of business on the record date there were shares of
PDI common stock outstanding and entitled to vote. Except for the shareholders
identified herein under "Information Relating to PDI--Security Ownership of
Certain Beneficial Owners and Management of PDI," as of the record date, to the
knowledge of PDI, no other person beneficially owned more than 5% of the
outstanding PDI common stock.

Each holder of record of PDI common stock on the record date will be
entitled to one vote for each share held on all matters to be voted upon at the
PDI annual meeting. With respect to the election of directors, shareholders may
exercise cumulative voting rights. Under cumulative voting, each holder of
common stock will be entitled to six (6) votes for each share held. Each
shareholder may give one candidate, who has been nominated prior to voting, all
the votes such shareholder is entitled to cast or may distribute such votes
among as many such candidates as such shareholder chooses. However, no
shareholder will be entitled to cumulate votes unless the candidate's name has
been placed in nomination prior to the voting and at least one shareholder has
given notice at the meeting, prior to the voting, of his or her intention to
cumulate votes. Unless the proxyholders are otherwise instructed, shareholders,
by means of the accompanying proxy, will grant the proxyholders discretionary
authority to cumulate votes.

26
<PAGE>

All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions and broker non-votes are counted
towards a quorum but are not counted for any purpose in determining whether a
matter is approved.

Voting Proxies

The PDI proxy card accompanying this proxy statement/prospectus is being
solicited on behalf of the PDI board of directors for use at the PDI annual
meeting. Shareholders are requested to complete, date and sign the accompanying
proxy and promptly return it in the accompanying envelope or otherwise mail it
to PDI. All proxies that are properly executed and returned, and that are not
revoked, will be voted at the annual meeting in accordance with the
instructions indicated on the proxies or, if no direction is indicated, to
approve and adopt the merger agreement and other proposals as specified in the
Notice of Annual Meeting of shareholders.

Revocability of Proxies

Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of PDI at PDI's principal executive office, 6325 San Ignacio Avenue,
San Jose, California 95119, a written notice of revocation or a duly executed
proxy bearing a later date, or it may be revoked by attending the meeting and
voting in person. Attendance at the meeting will not, by itself, revoke a
proxy.

Vote Required

The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of PDI common stock entitled to vote at the
PDI annual meeting is necessary to constitute a quorum.

Approval of the proposal requires the affirmative vote of the holders of a
majority of the shares present in person or represented by proxy and entitled
to vote at the PDI annual meeting. All votes will be tabulated by the inspector
of election appointed for the meeting, who will separately tabulate affirmative
and negative votes, abstentions and broker non-votes. Abstentions will be
counted towards the tabulation of votes cast on proposals presented to the
shareholders and will have the same effect as negative votes on each proposal.
Broker non-votes are counted towards a quorum, but are not counted for any
purpose in determining whether a matter has been approved.

Solicitation and Expenses

This proxy statement/prospectus was mailed to all PDI shareholders of record
as of the record date and constitutes notice of the PDI annual meeting in
conformity with the requirements of the California Corporations Code.

Regardless of whether the merger is consummated, PDI and CRT will pay its
own costs and expenses incurred in connection with the reorganization agreement
and the transactions contemplated by the merger agreement, except that fees and
expenses (other than attorneys' fees) incurred in connection with the printing
and filing of the registration statement and this proxy statement/prospectus
will be paid by PDI.

Subject to the foregoing, the cost of the solicitation of proxies from
holders of PDI common stock and all related costs will be borne by PDI. In
addition, PDI may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
materials to such beneficial owners. Original solicitation of proxies by mail
may be supplemented by telephone, telegram or personal solicitation by
directors, officers or other regular employees of PDI. No additional
compensation will be paid to directors, officers or other regular employees for
such services.

27
<PAGE>

Shareholder Proposals

Proposals of shareholders that are intended to be presented at PDI's 2001
annual meeting of shareholders must be received by PDI not later than August
30, 2000 in order to be included in the proxy statement and proxy relating to
that annual meeting.

Availability of Accountants

A representative of Ernst & Young LLP is expected to be present at the
annual meeting. The representative will be available to respond to appropriate
questions, and will have the opportunity to make a statement.

THE CRT SPECIAL MEETING

Purpose of CRT Special Meeting

The purpose of the CRT special meeting of shareholders is to consider and
vote upon the approval and adoption of the merger agreement by and among PDI,
CRT and Pharaoh Acquisition Corp. and approval of the merger. CRT shareholders
may also consider and vote upon such other matters as may be properly brought
before the CRT special meeting or any postponements or adjournments thereof.
Under California law and CRT's charter documents, approval of the merger will
require the affirmative vote of a majority of the CRT common stock and a
majority of the CRT Series A preferred stock outstanding and entitled to vote
upon the merger. It is a condition to PDI's obligation to close the merger,
however, that 90% of the shares of CRT common stock and 100% of CRT Series A
preferred stock outstanding and entitled to vote upon the merger vote to
approve the proposal.

Date, Time and Place of Meeting

The CRT special meeting will be held on November , 1999 at CRT's principal
offices, located at 125B Columbia, Aliso Viejo, California 92625-1458.

Voting Rights and Outstanding Shares

Holders of CRT common stock represented in person or by proxy at the special
meeting will be entitled to vote at the CRT special meeting. As of October 1999
there were shares of CRT common stock and 500,000 shares of CRT preferred
stock outstanding. Except for the shareholders identified herein under
"Information Relating to CRT--Security Ownership of Certain Beneficial Owners
and Management of CRT," as of the record date, to the knowledge of CRT, no
other person beneficially owned more than 5% of the outstanding CRT common
stock.

All votes will be tabulated by the Secretary of CRT, acting as the inspector
of elections for the CRT special meeting, who will separately tabulate
affirmative and negative votes and abstentions.

Vote Required

The presence of the holders of a majority of the outstanding shares of CRT
common stock entitled to vote at the CRT special meeting is necessary to
constitute a quorum. Under California law and CRT's charter documents, approval
of the proposal requires the affirmative vote of a majority of the CRT common
stock and a majority of the CRT Series A preferred stock entitled to vote at
the CRT special meeting. It is a condition to PDI's obligation to close the
merger, however, that 90% of the shares of CRT common stock and 100% of CRT
Series A preferred stock outstanding and entitled to vote upon the merger vote
to approve the proposal.

28
<PAGE>

COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND POLICY

Since November 1995, PDI common stock has been quoted on the Nasdaq National
Market under the symbol "PHTN". The table below sets forth for the quarters
indicated, the reported high and low sale prices of PDI common stock as
reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
PDI
Common Stock
-------------
High Low
------ ------
<S> <C> <C>
1997 CALENDAR YEAR
First Quarter................................................ $ 8.63 $ 5.25
Second Quarter............................................... 9.25 6.00
Third Quarter................................................ 7.88 4.63
Fourth Quarter............................................... 8.63 6.75
1998 CALENDAR YEAR
First Quarter................................................ $ 7.13 $ 2.50
Second Quarter............................................... 3.69 2.56
Third Quarter................................................ 5.25 3.38
Fourth Quarter............................................... 3.50 2.13
1999 CALENDAR YEAR
First Quarter................................................ $ 5.63 $ 2.25
Second Quarter............................................... 8.25 4.13
Third Quarter................................................ 12.38 7.00
</TABLE>

As of the record date, there were approximately record holders of PDI
common stock. As of the record date, there were approximately record holders
of CRT common stock. As CRT is a privately held company, no public market
exists for CRT common stock. Neither PDI nor CRT has ever paid cash dividends
on their respective common stock. The policies of PDI and CRT are to retain
earnings, if any, for use in their respective businesses.

The following table sets forth the closing sales price per share of PDI
common stock as reported on the Nasdaq National Market and the historical and
equivalent per share price (as explained below) of CRT common stock on
August 9, 1999 the last trading day preceding the announcement of the merger,
and on October , 1999.

<TABLE>
<CAPTION>
PDI Common Stock Equivalent CRT
Purchase Price Per Share Price(1)
---------------- ------------------
<S> <C> <C>
August 9, 1999........................... $13.31 $16.02
October , 1999..........................
</TABLE>
- --------
(1) The equivalent CRT per share price represents the price of one share of PDI
common stock multiplied by 1.2033. The equivalent CRT per share price does
not include the CRT Series A preferred liquidation preference of 125,490
shares of PDI common stock.

These prices do not include retail markup, markdown or commissions. PDI
shareholders and CRT shareholders are urged to obtain current market quotations
for PDI common stock.

29
<PAGE>

APPROVAL OF THE MERGER AND RELATED TRANSACTIONS

Background of the Merger

Historically, PDI has derived the majority of its sales from Japan and
Korea, and little revenue was generated in North America or Europe. In 1998,
PDI experienced a significant downturn in its business due to the economic
crisis in Asia. After mounting a focused marketing activity to explore
potential business opportunities outside Asia, PDI determined that for the
foreseeable future, the flat panel display manufacturing industry would
continue to be dominated by Asian manufacturers. While PDI anticipated that a
recovery of the FPD industry would occur by the end of 1998, PDI decided that
dependence on Asian sales would expose PDI to business risks which were out of
its control. PDI further determined that if PDI was to diversify its geographic
revenue sources, it would be necessary to pursue opportunities in additional
markets. While PDI possessed intellectual property which was applicable to
other markets, PDI felt that an alliance with another company already
established in one or more of these markets was advisable.

In July 1998, the board of directors of PDI authorized management to
investigate potential opportunities in this area. Management focused on
companies that were engaged in application specific, machine vision markets and
which appeared to be synergistic with PDI, had significant non-Asian business
content, and would be receptive to an acquisition by PDI.

In December 1998, PDI was contacted by Sutro and Co., which had been
retained by CRT for the purposes of finding a buyer for CRT. While CRT had
experienced several years of revenue growth and profit, the CRT board of
directors determined that the sale of CRT was the best way to continue market
penetration of its products, finance growth and provide liquidity to its
shareholders. In January 1999, CRT and PDI signed a confidential non-disclosure
agreement and began due diligence and preliminary acquisition discussions.

At the February 2, 1999 board of directors meeting of PDI, the board
determined on a preliminary basis that CRT represented the most appealing
acquisition target because CRT:

. was in a fast growing market

. had sales mostly in North America but could utilize PDI's Asian sales
and service infrastructure

. was located in California, and

. offered products that PDI believed would eventually be required by its
customers.

The board authorized the creation of a due diligence team, consisting of
consultants, officers and one director of PDI.

The due diligence team performed a thorough analysis of CRT's market,
competition and products. Customers and channel partners were interviewed,
intellectual property issues were researched, financial information was
audited, and valuation and dilution calculations made. At the April 16, 1999
board of directors meeting of PDI, the board reviewed the results of this due
diligence investigation and determined that a merger with CRT would be in the
best interests of PDI and its shareholders provided that the merger could be
consummated on terms that were fair to PDI and its shareholders. Accordingly,
Vincent Sollitto, PDI's Chief Executive Officer, was authorized to continue
acquisition negotiations with CRT.

On June 10, 1999, the board reviewed the valuation of CRT conducted by an
outside firm based, in part, on the closing price of PDI's common stock as
reported on the Nasdaq National Market on June 3, 1999 and the dilutive effect
on PDI's earnings per share for the current and next year. Based on this
valuation and management's additional due diligence efforts, the board
preliminarily approved the purchase price of approximately two million PDI
newly created shares and authorized Mr. Sollitto to proceed with negotiations.

From May to August, 1999, members of management and representatives of PDI
and CRT continue their due diligence review and negotiated the terms of the
definitive agreement.

On August 5, 1999 the board of directors of PDI approved the definitive
agreement, which was signed by both parties on August 10, 1999.

30
<PAGE>

Our Reasons For the Merger

The potential benefits of the combined company include the following:

. Improved utilization of the sales and service channels necessary to
participate in global business

. Commonality of image processing platforms, algorithms, intellectual
property and software

. Economies of scale in procurement and supplier management

. Broader customer relationships and access to strategic accounts

. Greater career opportunities for employees which may improve retention

. Reduction in the level of general and administrative expenses necessary
to support the anticipated growth of each company

PDI and CRT have each identified additional reasons for the merger, as
discussed below. It should be noted, however, that the potential benefits of
the merger may not be realized. See "Risk Factors."

PDI's Reasons For the Merger

PDI's board of directors believes that the terms of the merger and the
merger agreement are in the best interests of PDI and its shareholders.
Accordingly, the PDI board has approved the merger and the merger agreement and
has recommended that the shareholders of PDI approve the issuance of PDI common
stock in connection with the merger.

In view of the complexity and variety of factors considered by the PDI
board, the following discussion of the factors considered by the PDI board is
not intended to be exhaustive but is intended to include the material factors
considered by the PDI board. Additionally, the PDI board did not consider it
practical to quantify or otherwise attempt to assign any relative or specific
weights to the specific factors considered, and individual directors may have
given differing weights to different factors. In reaching its determination to
recommend approval of the issuance of PDI common stock in connection with the
merger, the PDI board consulted with management of PDI, its legal counsel and
its other advisors, obtained an independent valuation of CRT, and considered a
number of factors, including the following:

. CRT's complementary product offerings in the semiconductor inspection
and printed circuit board packaging market

. CRT's ability to increase worldwide sales opportunities, particularly in
North America

. CRT's and PDI's commonality of skills and intellectual property as both
businesses are focused on image acquisition, processing and analysis

. CRT's ability to provide PDI with an opportunity to bring PDI technology
to the high-density packaging market

. CRT's ability to reduce the dependence of PDI on Asian customers

. CRT's ability to maintain PDI's growth rate

. CRT's ability to increase the utilization of the infrastructure
investment in sales and service in PDI's Asian region

. PDI's belief that its customers, FPD manufacturers, will migrate
substantial system semiconductor content onto the glass substrate on
which the display is made. This would allow PDI to extend its cost
reduction and yield and quality improvement products to its existing
customers

31
<PAGE>

In addition to the factors set forth above, in the course of its meeting
with CRT, the PDI board reviewed and considered a wide variety of information
relevant to the merger including:

. Information concerning PDI's and CRT's respective businesses, historical
financial performance and conditions, operations, products and services,
customers, competitive positions, prospects and management

. PDI management's view as to the financial condition, results of
operations and business and financial potential of PDI and CRT before
and after giving effect to the merger, based on management's due
diligence

. The consideration to be paid to the CRT shareholders in the merger and
the relationship between the market value of comparable merger
transactions

. The belief that the terms of the merger agreement, including the
parties' representations, warranties and covenants, and the conditions
to their respective obligations, are reasonable

. The potential impact of the merger on customers and employees of PDI and
CRT

. The likely reaction to the merger from the financial markets

. The financial valuation of CRT by an outside firm

The PDI Board also considered a number of risks in its deliberations
concerning the merger, including

. The potential disruption to the business of both companies following
announcement of the merger, including the effects of employee
uncertainty and the possibility that key customers may not approve of
the merger or may determine to terminate their relationship with the
combined company

. The dilutive effects of the issuance of shares in the merger and the
higher level of expenses that will be incurred by the combined company

. Additional potential problems and costs associated with the integration
of both companies into a single enterprise

. The possibility that the merger would not be consummated

. The significant transaction costs of the merger

. The other risks described under "Risk Factors" herein

After due consideration, the PDI board concluded that the benefits of the
transaction to PDI and its shareholders outweighed the risks associated with
the foregoing factors.

CRT's Reasons For the Merger

The CRT board of directors believes that the terms of the merger agreement
are in the best interests of CRT and its shareholders. Accordingly, the CRT
board of directors has approved the merger and the merger agreement and has
recommended the approval thereof by the shareholders of CRT.

In view of the number of factors considered in connection with its
evaluation of the merger, the CRT board of directors did not quantify or
otherwise attempt to assign relative weights to the separate factors considered
in reaching its determination. In reaching its determination to recommend
approval of the merger agreement, the CRT board of directors consulted with
management of CRT, as well as its legal counsel, and considered a number of
factors, including the following factors:

. Similar Technology. Both CRT and PDI are engaged in the business of
developing technologies and high technology products for acquiring
images and processing images which are used to evaluate and control
manufacturing processes. CRT's board of directors believes that the
strong technical capability at PDI will be a valuable and complementary
resource in future product development and in improving the competitive
position of CRT.

32
<PAGE>

. Access to Asian Markets. To date, CRT has invested insignificant effort
and resources toward expanding into the Asian market because of demands
placed on CRT by the growth of its business in North America. However,
CRT's board of directors believes that the Asian market is an important
opportunity for sales growth in the future for all of CRT's products.
CRT's board of directors believes that PDI's strong market presence in
Korea and Japan, in particular, and its presence in Taiwan will enable
CRT to exploit market opportunities in Asia without the investment of
additional significant effort and resources.

. Silicon Valley Office Location. Due to its location in Silicon Valley,
PDI provides an immediate resource for CRT to penetrate the vital
Silicon Valley market. CRT's board of directors believes that a local
presence in Silicon Valley is generally considered to be important by
local customers and anticipates opening a sales office for CRT at PDI's
headquarters in San Jose, California after the merger is completed.

. Organizational Strengths. CRT's board of directors believes that the
addition of PDI's employees and organizational structure to CRT's
organizational and administrative resources will better enable CRT to
implement its business strategy and its growth plans. In particular,
CRT's board of directors views the strength of PDI's administrative
resources as important assets which should bolster CRT's administrative
resources.

. Increased Customer Service and Support Capabilities. CRT's board of
directors believes that PDI's technical support capabilities are
competent to support CRT's products and technologies and the immediate
addition of the additional technical support personnel at PDI upon
completion of the merger is important to ensuring the satisfaction of
CRT"s customer base as CRT implements its growth plans.

. Market Credibility. CRT's board of directors believes that, as a result
of the merger, CRT will experience improved credibility with its
existing and potential customers as part of a larger, publicly traded
technology company based in Silicon Valley.

In considering the proposed merger, CRT's board of directors took into
account the quality of PDI's senior management and distribution contacts. It
also reviewed the complementary nature of the business of the two companies,
which have significant overlap and which present opportunities for expansion.
In that regard, CRT's board of directors, considered that the complementary
nature of the two companies' businesses creates significant opportunities for
development of the two companies on a combined basis.

CRT's board of directors also reviewed comparable companies to PDI within
the industry in considering the strategic and financial rationale for the
merger. In that regard, CRT's board of directors considered, among other
things, the relative financial positions of CRT and PDI and the potential
impacts of the merger on the financial position of the new combined company.
CRT's board of directors also considered the terms and conditions of the merger
agreement, including the number of shares of PDI common stock to be received by
holders of CRT stock.

Interests of Certain Persons in the Merger

Certain members of CRT's management and the CRT board may be deemed to have
certain interests in the merger that are in addition to their interests as
shareholders of CRT generally. Pursuant to the merger agreement, PDI has agreed
to extend offers of employment to all employees of CRT employed as of the
effective time of the merger. If the merger is completed, certain
indemnification arrangements for persons serving as directors and officers of
CRT at the time of the merger will be continued for at least six years after
the merger is consummated. In addition, upon the closing of the merger, PDI
intends to enter into an employment agreement with Richard Amtower, CRT's Chief
Executive Officer, which will extend severance and other benefits to Mr.
Amtower. The CRT board was aware of these interests and considered them, among
other matters, in approving the merger agreement and the transactions
contemplated thereby.

33
<PAGE>

Shareholder Agreements

Shareholders of CRT, who together hold approximately 81% of the CRT common
stock and 100% of the Series A preferred stock outstanding, have entered into
shareholder agreements with PDI. Under these agreements, these shareholders
have agreed to vote their shares of CRT capital stock in favor of the merger
and the merger agreement at the CRT special meeting. These shareholders have
also agreed to the following under the shareholder agreement:

. to appoint a shareholders' agent for purposes of the merger agreement

. to have 10% of the shares of PDI stock to be received by the shareholder
in the merger be placed into an escrow fund

. to receive a total of 125,490 sharer in liquidation preferences in
satisfaction of the Series A preferred stock liquidations preference
under the CRT articles of incoporation.

Affiliate Agreements

CRT Affiliate Agreements. Individuals and entities that may be deemed
affiliates of CRT have agreed not to effect any sale, transfer or other
disposition of the PDI common stock received by such CRT affiliate in the
merger unless:

. such sale, transfer or other disposition is made in conformity with the
volume and other requirements of Rule 145 under the Securities Act of
1933, as amended, as evidenced by a broker's letter and a representation
letter executed by the CRT affiliate (satisfactory in form and content
to PDI), each stating that such requirements have been met

. such sale, transfer or other disposition is effected pursuant to an
effective registration statement under the Securities Act or

. any CRT common stock (except relating to the merger); or

. any PDI common stock received in the merger or upon the exercise of
stock option assumed by PDI in the merger.

The form of the CRT affiliate agreement is attached to this proxy
statement/prospectus as Appendix B-2.

Photon Dynamics Affiliate Agreements. Individuals and entities that may be
deemed affiliates of PDI have agreed that, during the period contemplated by
the Commission's Staff Accounting Bulletin Number 65 until the earlier of (i)
PDI's public announcement of financial results covering at least thirty days of
combined operations of PDI and CRT or (ii) the reorganization agreement is
terminated in accordance with its terms, such PDI affiliate shall not, subject
to certain exceptions, sell, exchange, transfer, pledge, distribute or
otherwise dispose of or grant any option, establish any "short" or put-
equivalent position with respect to or enter into any similar transaction
(through derivative's or otherwise) intended or having the effect, directly or
indirectly, to

34
<PAGE>

reduce such PDI affiliate's risk relative to any PDI common stock. Provided
certain conditions are met, the PDI affiliate agreements provide for certain
exceptions to the foregoing restrictions on transfer relating to:

. certain de minimis transfers

. transfers in payment of the exercise price of options to purchase PDI
common stock

. charitable donations

. transfers to trusts established for the benefit of members of such PDI
affiliate's family or gifts to members of such PDI affiliate's family

The form of the PDI affiliate agreement is attached to the proxy
statement/prospectus as Appendix B-1.

Material Federal Income Tax Consequences

The following discussion summarizes the material federal income tax
considerations of the merger that are generally applicable to holders of CRT
common stock and CRT Series A preferred stock or, collectively, the CRT
capital stock. This discussion assumes that holders of CRT capital stock hold
such shares as capital assets. This discussion is based on currently existing
provisions of the Internal Revenue Code, existing and proposed Treasury
Regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences to PDI, CRT or the CRT
shareholders as described herein.

CRT shareholders should be aware that this discussion does not deal with
all U.S. federal income tax considerations that may be relevant to particular
CRT shareholders in light of their particular circumstances, such as
shareholders who are dealers in securities, banks, insurance companies or tax-
exempt organizations, who are subject to the alternative minimum tax
provisions of the Internal Revenue Code, who are non-United States persons,
who acquired their shares in connection with stock option or stock purchase
plans or in other compensatory transactions or who hold their shares as a
hedge or as part of a hedging, straddle, conversion or other risk reduction
transaction. In addition, the following discussion does not address the tax
consequences of the merger under foreign, state or local tax laws or the tax
consequences of transactions effectuated prior to or after the merger (whether
or not such transactions are in connection with the merger).

It is the opinion of Rutan & Tucker and Cooley Godward, collectively, the
"tax opinions", that the merger will constitute a reorganization pursuant to
Section 368(a) of the Internal Revenue Code. In addition, CRT's obligation to
consummate the merger is conditioned on the receipt by CRT of an opinion from
Rutan & Tucker and PDI's and Pharaoh's obligations to consummate the merger
are conditioned on their receipt of an opinion from Cooley Godward, confirming
that the merger will constitute a reorganization (collectively, the "closing
opinions"). Such conditions will not be waived without a resolicitation of
consent by the shareholders of CRT and PDI. Rutan & Tucker has advised CRT,
and Cooley Godward has advised PDI and Pharaoh, that they currently expect to
be able to deliver such closing opinions. See "The Merger Agreement--
Conditions to the Merger--PDI and Pharaoh" and "--CRT." The tax opinions and
closing opinions:

. Will not be binding on the IRS nor preclude the IRS from adopting a
contrary position;

. Will be based on the assumptions discussed below, as well as
representations received from CRT, PDI and Pharaoh;

. Will be based on the assumption that the merger will be consummated in
accordance with the terms of the merger agreement; and

. Will be subject to the limitations discussed below.

Neither CRT nor PDI had requested, or will request, a ruling from the IRS
with regard to any of the federal income tax consequences of the merger. The
tax opinions and closing opinions assume and are conditioned upon:

. The truth and accuracy of the statements, covenants, representations and
warranties contained in the merger agreement, in the representations
received from CRT, PDI and Pharaoh to support the tax opinions and
closing opinions (the "tax representations") and in all other
instruments and documents

35
<PAGE>

related to the formation, organization and operation of CRT, PDI and
Pharaoh examined by and relied upon by Rutan & Tucker and Cooley Godward
in connection with the merger;

. That original documents submitted to such counsel (including signatures
thereto) are authentic, documents submitted to such counsel as copies
conform to the original documents, and that all such documents have been
(or will be by the effective time) duly and validly executed and
delivered where due execution and delivery are a prerequisite to the
effectiveness thereof;

. That all covenants contained in the merger agreement (including exhibits
thereto) and in the tax representations are performed without waiver or
breach of any material provision thereof;

. That the merger will be reported by PDI and CRT on their respective
federal income tax returns in a manner consistent with the tax opinions
and the closing opinions; and

. That any representations or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.

Subject to the limitations and qualifications referred to herein and in the
tax opinions and closing opinions, it is the opinion of Rutan & Tucker and
Cooley Godward that as a result of the merger"s qualifying as a
reorganization, the following U.S. federal income tax consequences will
result:

. No gain or loss will be recognized for federal income tax purposes by
the holders of CRT capital stock upon the receipt of PDI common stock
solely in exchange for such CRT capital stock in the merger (except to
the extent, if any, of cash received in lieu of fractional shares);

. The aggregate tax basis of the PDI common stock so received by each CRT
shareholder in the merger (including any fractional share of PDI common
stock not actually received) will be the same as the aggregate tax basis
of CRT capital stock surrendered by such CRT shareholder in exchange
therefor;

. The holding period of PDI common stock so received by each CRT
shareholder in the merger will include the period for which CRT capital
stock surrendered in exchange therefor was considered to be held,
provided that CRT capital stock so surrendered is held as a capital
asset at the effective time;

. Cash payments received by holders of CRT capital stock in lieu of a
fractional share will be treated as if such fractional share of PDI
common stock had been issued in the merger and then redeemed by PDI. A
CRT shareholder receiving such cash will recognize gain or loss upon
such payment, measured by the difference (if any) between the amount of
cash received and the basis in such fractional share. The gain or loss
should be a capital gain or loss provided that each such fractional
share of CRT capital stock was held as a capital asset at the effective
time;

. A shareholder of CRT who properly exercises dissenters" rights under any
applicable law with respect to a share of CRT capital stock and receives
payments for such stock in cash should recognize a capital gain or loss (if
such stock was held as a capital asset at the effective time of the merger)
measured by the difference between the amount of cash received and the
shareholder's basis in such share, provided such payment is neither
essentially equivalent to a dividend within the meaning of Section 302 of
the Internal Revenue Code nor has the effect of a distribution of a
dividend within the meaning of Section 356(a)(2) of the Internal Revenue
Code (effectively, a "dividend equivalent transaction"). A sale of CRT
shares incident to an exercise of dissenters' rights will generally not be
a dividend equivalent transaction if, as a result of such exercise, the
dissenting shareholder owns no shares of PDI common stock (either actually
or constructively within the meaning of Section 318 of the Code)
immediately after the merger; and

. Neither PDI nor CRT will recognize a gain solely as a result of the
merger.

A successful IRS challenge to the reorganization status of the merger would
result in significant adverse tax consequences to the CRT shareholders. A CRT
shareholder would recognize gain or loss with respect to each share of CRT
capital stock surrendered equal to the difference between the shareholder's
basis in such share and the fair market value, as of the effective time, of
the PDI common stock received in exchange

36
<PAGE>

therefor. In such event, a shareholder's aggregate basis in the PDI common
stock so received would equal its fair market value, and the shareholder's
holding period for such stock would begin the day after the closing date.

Even if the merger qualifies as a reorganization, a recipient of PDI common
stock would recognize income to the extent that, for example, any such shares
were determined to have been received in exchange for services, to satisfy
obligations or in consideration for anything other than the CRT capital stock
surrendered. In addition, to the extent that a CRT shareholder were treated as
receiving (directly or indirectly) consideration other than PDI common stock in
exchange for such shareholder's CRT capital stock, gain, if any, would have to
be recognized.

Certain noncorporate CRT shareholders may be subject to backup withholding
at a rate of 31% on cash payments received in lieu of a fractional share
interest in PDI common stock. Backup withholding will not apply, however, to a
shareholder who furnishes a correct taxpayer identification number, or TIN, and
certifies that it is not subject to backup withholding on the substitute Form
W-9 included in the letter of transmittal, who provides a certificate of
foreign status on Form W-8, or who is otherwise exempt from backup withholding.
A shareholder who fails to provide the correct TIN on Form W-9 may be subject
to a $50 penalty imposed by the IRS.

The preceding discussion does not purport to be a complete analysis or
discussion of all potential tax effects relevant to the merger. Thus, holders
of CRT capital stock are urged to consult their own tax advisors as to the
specific tax consequences to them of the merger, including tax return reporting
requirements, the applicability and effect of federal, state, local and other
applicable tax laws and the effects of any proposed changes in the tax laws.

Each CRT shareholder will be required to retain records and file with such
shareholder's U.S. federal income tax return a statement setting forth certain
facts relating to the merger.

Anticipated Accounting Treatment

The merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting principles,
or GAAP. This accounting method would permit the recorded assets and
liabilities of CRT to be carried forward to the consolidated financial
statements of PDI at their recorded historical amounts. Consummation of the
merger is conditioned upon (i) the receipt by PDI of a letter from its
independent accountants dated as of the closing date to the effect that such
accountants concur with PDI management's conclusion that pooling of interests
accounting for the merger is appropriate, and (ii) receipt by CRT of a letter
from its independent accountants dated as of a date no earlier than the date
three days prior to the effective time to the effect that such accountants
concur with CRT management's conclusion that no conditions exist relating to
CRT that would preclude PDI from accounting for the merger as a pooling of
interests.

Regulatory Matters

Antitrust. The merger is not subject to the premerger notification
requirements of the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended or, the HSR Act. However, the FTC or the Antitrust Division of the
United States Department of Justice could take such action under the antitrust
laws as it deems necessary or desirable in the public interest, including
seeking to enjoin consummation of the merger or seeking to cause divestiture of
significant assets of PDI or CRT or their subsidiaries. There can be no
assurance that a challenge to the merger on antitrust ground will not be made,
or, if such challenge is made, of what the result would be. Consummation of the
merger is conditioned upon, among other things, the absence of any temporary
restraining order, preliminary or permanent injunction, or other order issued
by any federal or state court in the United States which prevents the
consummation of the merger.

Filing with the Secretary of State of California. Articles of Merger must be
filed with the Secretary of State of California.

37
<PAGE>

Governmental and Regulatory Approvals. Other than compliance with the
federal securities laws and applicable securities laws of the state of
California, PDI and CRT are aware of no governmental or regulatory approvals
required for consummation of the Merger.

Rights of Dissenting Shareholders of CRT

Pursuant to Chapter 13 of the California Corporations Code, or the CCC,
shareholders of CRT who do not vote in favor of the merger and who comply with
the requirements of the CCC will have a right to demand payment for, and
appraisal of the "fair value" of, their shares.

By virtue of Section 2115 of the CCC, if holders of CRT capital stock
exercise dissenters' rights in connection with the merger under Sections 1300-
1312 of the CCC, any shares of CRT capital stock as to which such dissenters'
rights are exercised will not be converted into the right to receive shares of
PDI common stock by virtue of the merger but instead will be converted into the
right to receive such consideration as may be determined to be due with respect
to such dissenting shares pursuant to the laws of the State of California. The
following summary of the provisions of Sections 1300-1312 of the CCC is not
intended to be a complete statement of such provisions and is qualified in its
entirety by reference to the full text of Sections 1300-1312 of the CCC, a copy
of which is attached hereto as Appendix E and is incorporated herein by
reference.

If the merger is approved by the required vote of CRT's shareholders, each
holder of shares of CRT capital stock who does not vote in favor of the merger
and who follows the procedures set forth in Sections 1300-1312 of the CCC will
be entitled to have shares of CRT capital stock purchased by CRT for cash at
their fair market value. The fair market value of shares of CRT capital stock
will be determined as of the day before the first announcement of the terms of
the proposed merger, excluding any appreciation or depreciation in consequence
of the proposed merger and therefore valuing the shares of CRT capital stock as
if the merger had not occurred.

Within ten days after approval of the merger by CRT's shareholders, CRT must
mail a notice of such approval to all shareholders who have not voted in favor
of the merger, together with a statement of the price determined by CRT to
represent the fair market value of the applicable dissenting shares, a brief
description of the procedures to be followed in order for the shareholder to
pursue dissenters' rights, and a copy of Sections 1300-1304 of the CCC. The
statement of price by CRT constitutes an offer by CRT to purchase all
dissenting shares at the stated amount.

A shareholder of CRT electing to exercise dissenters' rights must, within
thirty days after the date in which the approval notice is mailed to such
shareholder, mail or deliver the written demand to CRT stating that such holder
is demanding pursuant of his or her shares of CRT capital stock, stating the
number of shares which CRT must purchase, what the shareholder claims to be the
fair market value of such shares and enclosing the share certificates for
endorsement by CRT.

If CRT and the shareholder agree that the shares are dissenting shares and
agree upon the price of shares, CRT must pay the shareholder the agreed upon
price plus interest thereon at the legal rate from the date of the agreement on
dissenting shares within thirty days from the later of (i) the date of the
agreement on dissenting shares, or (ii) the date all contractual conditions to
the merger are satisfied.

If CRT denies that the shares are dissenting shares, or if CRT and the
shareholder fail to agree upon the fair market value of shares of capital
stock, then within six months after the date the approval notice was mailed to
shareholders, any shareholder who has made a valid written purchase demand and
who has not voted in favor of approval and adoption of the merger may file a
complaint in California superior court requesting a determination as to whether
the shares are dissenting shares or as to the fair market value of such
holder's shares of CRT capital stock, or both.

38
<PAGE>

Rights of Dissenting Shareholders of PDI

No PDI Appraisal Rights. Holders of PDI common stock are not entitled to any
appraisal rights under the California Corporations Code with respect to the
merger.

Resale of PDI Common Stock

PDI common stock issued in connection with the merger will be freely
transferable, except that shares issued to a CRT affiliate or who becomes an
affiliate of PDI are subject to certain restrictions on resale. An affiliate is
defined generally as including, without limitation, directors, certain
executive officers and certain other persons who control a company. Pursuant to
the terms of the merger agreement, CRT has delivered to PDI, CRT affiliate
agreements executed by the CRT affiliates that prohibit the sale, exchange,
transfer, pledging, distribution or other disposition of or granting of any
option, establishment of any "short" or put-equivalent position with respect to
or any similar transaction (through derivatives or otherwise) intended or
having the effect, directly or indirectly, to reduce such CRT affiliate's risk
relative to: (1) any CRT common stock (except pursuant to and upon consummation
of the merger); or (2) any PDI common stock received by such CRT affiliate in
the merger or upon exercise of options assumed by PDI in the merger, except
under certain circumstances, in order to comply with the requirements of
certain federal securities laws and to help ensure the merger is treated as a
pooling of interest for accounting and financial reporting purposes. See
"Approval of the Merger and Related Transactions--Affiliate Agreements."

Pursuant to the terms of the merger agreement, PDI affiliate have entered
into agreements that prohibit the sale, exchange, transfer, pledging,
distribution or other disposition of or granting of any option, establishment
of any "short" or put-equivalent position with respect to or any similar
transaction (through derivatives or otherwise) intended or having the effect,
directly or indirectly, to reduce such PDI affiliate's risk relative to: (1)
any PDI common stock (except pursuant to and upon consummation of the merger);
or (2) any PDI common stock received by such CRT affiliate in the merger or
upon exercise of options assumed by PDI in the merger, except under certain
circumstances, in order to comply with the requirements of certain federal
securities laws and to help ensure the merger is treated as a pooling of
interest for accounting and financial reporting purposes. See "Approval of the
Merger and Related Transactions--Affiliate Agreements."

39
<PAGE>

THE MERGER AGREEMENT

General

The following is a summary of the material provisions of the merger
agreement, a copy of which is attached as Appendix A to this proxy
statement/prospectus and is incorporated herein by reference. However, the
following is not a complete statement of all provisions of the merger agreement
and related agreements. Statements made in this proxy statement/prospectus with
respect to the terms of the merger agreement and such related agreements are
qualified in their respective entireties by reference to the more detailed
information set forth in the merger agreement and such related agreements.
Capitalized terms used in this summary but not defined in this proxy
statement/prospectus shall have the meanings ascribed to them in the merger
agreement.

The merger agreement provides for the merger of Pharaoh Acquisition Corp.
with and into CRT. As a result of the merger, Pharaoh will cease to exist, CRT
will become a wholly-owned subsidiary of P,DI and the former shareholders of
CRT will become shareholders of PDI. CRT, as the surviving corporation, will
retain all of its separate corporate existence, with all its purposes, objects,
rights, privileges, powers and franchises unaffected by the merger. Pharaoh has
been formed solely for the purpose of effecting the merger, and there will be
no other activity in Pharaoh. The closing time shall occur no later than the
second day after the satisfaction or waiver of all the conditions to closing
set forth in the merger agreement. The merger will become effective at the
effective time, which shall be upon the filing of an agreement of merger and
related certificates of approval together with a tax clearance certificate are
filed with the Secretary of State of the State of California. Such filings are
to be made simultaneously with or as promptly as practicable after the closing.
It is currently anticipated that the effective time will occur on or before
November , 1999. There can be no assurance, however, that the conditions to
the merger will be satisfied by such date, or at all, or that the merger
agreement will not be terminated. See "--Conditions to the Merger."

Merger Consideration

CRT Common Stock. At the effective time, each share of CRT common stock then
outstanding will be converted into the right to receive PDI common stock based
on the exchange ratio of 1.2033 to 1. The exchange ratio is obtained by
dividing (A) 1,960,000 minus the liquidation preference shares (as defined
below) by (B) the sum of (1) the number of outstanding shares of CRT common
stock immediately prior to the effective time (assuming that each outstanding
share of Series A preferred stock is converted into CRT common stock) and (2)
the number of shares of CRT common stock subject to options outstanding
pursuant to the CRT's stock option plans immediately prior to the effective
time.

The number of liquidation preference shares is based on the product of (1)
the number of shares of CRT Series A preferred stock outstanding immediately
prior to the effective time multiplied by (2) a fraction calculated by dividing
$3.36 by the average of the closing sale prices of a share of PDI common stock
as reported on the Nasdaq National Market for each of the ten consecutive
trading days immediately preceding the effective date of the merger agreement.
The number of liquidation preference shares is 125,490.

CRT Preferred Stock. At the effective time, each share of CRT Series A
preferred stock then outstanding will be converted into the right to receive
1.2033 shares of PDI common stock. In addition, at the effective time of the
merger, the holders of shares of CRT Series A preferred stock then outstanding
will also receive the liquidation preference shares.

No Fractional Shares. No fractional shares of PDI common stock will be
issued in connection with the merger, and no certificates for any such
fractional shares will be issued. In lieu of such fractional shares, any holder
of CRT common stock (after aggregating all fractional shares of PDI common
stock issuable to such shareholder) will, upon surrender of such shareholder's
stock certificate(s) representing CRT common stock to the transfer agent and
registrar for PDI common stock and exchange agent for purposes of the merger
(the "exchange agent"), be paid in cash the dollar amount (rounded to the
nearest whole cent), without interest, determined by multiplying such fraction
by the average of the closing prices of a share of PDI common stock on the
Nasdaq National Market for the ten trading days immediately preceding the
closing date.

40
<PAGE>

Escrow of PDI Shares

PDI will establish and maintain an escrow comprised of ten percent (10%) of
the shares of PDI common stock to be issued in the merger. These escrow shares
will be deposited into escrow to secure the indemnification obligations set
forth in the merger agreement. The escrow shares will be released to the former
shareholders of CRT on a pro rata basis one year after the effective time of
the merger or the date of the first audit report of the combined company
whichever is earlier. Unless an indemnification claim has been made prior to
that time, in which case escrow shares may be retained pending resolution of
such claim.

It is a condition to closing that the parties enter into an escrow agreement
substantially in the form attached as Appendix C to the merger agreement with
U.S. Bank Corporation Trust Services or another bank acting as escrow agent
acceptable to PDI and CRT. Pursuant to the escrow agreement, the former CRT
shareholders shall vote the escrow shares in escrow and any distributions of
cash, securities or other property in respect of any escrow shares shall be
delivered to the former CRT shareholders on a pro rata basis.

Indemnification

The representations and warranties made by CRT in the merger shall expire on
the first anniversary of the closing date unless a claim for recovery based on
an alleged inaccuracy or breach of any of CRT's representations or warranties
is made prior to the earlier of (1) the first anniversary of the closing date
or (2) the date of the first audit report of the combined company, in which
case such representation or warranty shall survive until such time as such
claim is fully and finally resolved. The CRT shareholders shall hold harmless
and indemnify PDI against and shall compensate and reimburse PDI for any
damages which are suffered or incurred or to which it has become subject and
which arise or result from or are connected with (A) any inaccuracy in or
breach of any representation or warranty made by CRT, (B) any breach of any
covenant or obligation of CRT, (C) any legal proceedings relating to any
inaccuracy or breach referred to in (A) or (B) above, or (D) certain potential
liabilities relating to alleged infringement of patents. No indemnification
payment shall be required to be made until the total of all damages that have
been suffered or incurred by PDI exceed $400,000 in the aggregate at which
point PDI is entitled to be indemnified for the entire amount of such damages.

In the event the merger is approved, effective upon the vote of the
shareholders CRT to this effect and without the further act of any shareholder,
Ronald Hall will be appointed as the shareholder representative, initial agent
and attorney-in-fact for each former shareholder of CRT. The shareholder
representative will be authorized to act for and on behalf of the former
shareholders of CRT, to, among other things, give and receive notices and
communications and authorize delivery to PDI of escrow shares in satisfaction
of claims for indemnification, to object to such deliveries, to agree to,
negotiate, enter into settlements and compromises of, and demand arbitration
and comply with orders of courts with respect to, such claims. Decisions, acts,
consents or instructions of the shareholder representative will constitute
decisions of all of the shareholders of CRT receiving shares of PDI common
stock in the merger and will be final, binding and conclusive upon each of such
shareholders.

Defense of Third Party Claims. In the event of the assertion or commencement
of a claim or legal proceeding with respect to which PDI may be held harmless
and indemnified pursuant to the indemnification provisions of the merger
agreement and the escrow agreement, PDI will proceed with the defense of the
claim or legal proceeding on its own, employing legal counsel reasonably
acceptable to the escrow agreement. All reasonable expenses relating to the
defense of such claim or legal proceeding will be borne and paid out of the
escrow shares.

Disputed Amounts and Fees and Expenses Relating to the Escrow. If PDI
determines in good faith that there is or has been an inaccuracy or breach by
CRT that is indemnifiable pursuant to the merger agreement and escrow
agreement, then PDI may deliver a claim notice to the shareholder
representative and the escrow agent setting forth the claim. The shareholder
representative must respond to the notice within thirty (30) days

41
<PAGE>

after disputing the claim or the shareholder representative will be deemed to
have given instructions that shares of PDI common stock having a value equal to
the entire claim amount are to be released to PDI from the escrow. The
shareholder representative may deliver a notice disputing any or all amounts of
any claim made by PDI . Escrow shares representing the disputed amounts will be
held in escrow pending resolution of the dispute, while escrow shares
representing any undisputed portions of any claim made against the escrow will
be released to PDI. Disputes shall be settled by delivery of a notice to the
escrow agent executed by PDI and the shareholder representative as to the
release of escrow shares, or by delivery of a final and non-appealable judgment
of a court instructing the escrow agent as to the release of escrow shares.
Failure of the shareholder representative to respond to a claim for
indemnification by PDI within thirty (30) days after delivery of a claim notice
by PDI would be deemed to be an instruction that escrow shares should be
released from the escrow to PDI in satisfaction of such claim.

Stock Options and Warrants

Stock Options. At the effective time, all outstanding options with respect
to CRT common stock under CRT's option plans (collectively, "CRT options")
shall be converted into and become rights with respect to PDI common stock, and
PDI shall assume each such option in accordance with the terms (as in effect as
of the date of the merger agreement) of the stock option plan under which it
was issued and the stock option agreement by which it is evidenced. From and
after the effective time,

. Each CRT option assumed by PDI may be exercised solely for shares of PDI
common stock

. The number of shares of PDI common stock subject to each such CRT option
shall be equal to the number of shares of CRT common stock subject to
such CRT option immediately prior to the effective time multiplied by
the exchange ratio, rounding down to the nearest whole share (with cash,
less the applicable exercise price, being payable for any fraction of a
share)

. The per share exercise price under each such CRT option shall be
adjusted by dividing the per share exercise price under such CRT option
by the exchange ratio and rounding up to the nearest cent

. Any restriction on the exercise of any such CRT option shall continue in
full force and effect and the term, exercisability, vesting schedule and
other provisions of such CRT option shall otherwise remain unchanged

Stock Ownership Following the Merger

Based upon the number of shares of CRT common stock issued and outstanding
as of the CRT record date, an aggregate of approximately shares of PDI
common stock will be issued to security holders of CRT. Based upon the number
of shares of PDI common stock issued and outstanding as of the PDI record date
(assuming no exercise of outstanding options, warrants or other rights to
purchase PDI common stock), the former holders of CRT common stock and
preferred stock would hold and have voting power with respect to approximately
20% of PDI total issued and outstanding shares after consummation of the
merger.

Conversion of Shares; Procedures for Exchange of Certificates

As soon as practicable after the effective time, the exchange agent will
mail to the registered holders of CRT common stock (i) a letter of transmittal
and (ii) instructions for the use in effecting the surrender of valid
certificates representing shares of CRT common stock in exchange for
certificates representing PDI common stock. Upon surrender of an CRT stock
certificate to the exchange agent for exchange, together with a duly executed
letter of transmittal and such other documents as may reasonably be required by
the exchange agent or PDI, the holder of such CRT stock certificate shall be
entitled to receive in exchange therefor a certificate representing the whole
number of shares of PDI common stock that such shareholder has the right to
receive. No fractional shares of PDI common stock will be issued in connection
with the merger, and no certificates for any such fractional shares will be
issued. See "--Merger Consideration--No Fractional Shares."

42
<PAGE>

If any CRT stock certificate has been lost, stolen or destroyed, PDI may
require the owner of such lost, stolen or destroyed CRT stock certificate to
provide an appropriate affidavit and to deliver a bond as indemnity against any
claim that may be made against the exchange agent, PDI or CRT with respect to
such CRT stock certificate. CRT shareholders should not surrender their CRT
stock certificates for exchange until they receive a letter of transmittal from
the exchange agent.

Effect on Certificates

At the effective time, (1) all shares of CRT common stock outstanding
immediately prior to the effective time will automatically be canceled and
retired and will cease to exist, and all holders of certificates representing
shares of CRT common stock that were outstanding immediately prior to the
effective time will cease to have any rights as shareholders of CRT, and (2)
the stock transfer books of CRT will be closed with respect to all shares of
CRT common stock outstanding immediately prior to the effective time. No
further transfer of any such shares of CRT common stock will be made on such
stock transfer books after the effective time. If, after the effective time, a
CRT stock certificate is presented to the exchange agent (or to CRT or PDI),
such CRT stock certificate will be canceled and will be exchanged as provided
above under the caption "--Conversion of Shares; Procedure for Exchange of
Certificates" and "--Merger Consideration."

Corporate Matters

As of the effective time, the articles of incorporation of the surviving
corporation will be amended and restated to conform to the certificate of
incorporation of Pharaoh as in effect immediately prior to the effective time
with the exception that the name of the surviving corporation shall be CR
Technology, Inc. and the bylaws of the surviving corporation will be amended
and restated to conform to the bylaws of Pharaoh as in effect immediately prior
to the effective time. Immediately after the effective time, the directors and
officers of the surviving corporation shall be Vincent Sollitto, Richard Dissly
and Richard Amtower.

Conditions to the Merger

PDI and Pharaoh. The obligations of PDI and Pharaoh to effect the merger and
otherwise consummate the transactions contemplated by the reorganization
agreement are subject to the satisfaction, at or prior to the closing, of
conditions, among others, to the following general effect:

. The representations and warranties of CRT contained in the merger
agreement shall be accurate in all material respects (without giving
effect to any material adverse effect or other materiality
qualifications on the representations and warranties) as of the date of
the merger agreement and as of the closing date as if made on and as of
the closing date

. Each covenant or obligation that CRT is required to comply with or to
perform at or prior to the closing shall have been complied with and
performed in all respects

. The merger agreement and the merger shall have been duly approved by the
holders of 90% of the CRT common stock and 100% of the CRT preferred
stock, and the issuance of PDI common stock in the merger shall have
been duly approved by the necessary vote of the PDI shareholders.

. All consents required to be obtained in connection with the merger and
the other transactions contemplated by the merger agreement shall have
been obtained and shall be in full force and effect

. PDI and Pharaoh shall have received the following agreements and
documents, each of which shall be in full force and effect: (A) a
noncompetition agreement from Richard Amtower in the form attached
hereto as Appendix D; (B) a general release from the shareholders of CRT
who have entered into a shareholder agreement with PDI; (C) a statement
from CRT conforming to the requirements of Section 1.897-2(h)(2) of the
Treasury Regulations; (D) a legal opinion from Rutan & Tucker LLP; (E) a
legal opinion of Cooley Godward, dated as of the closing date and
addressed to

43
<PAGE>

PDI, to the effect that the merger will constitute a reorganization
within the meaning of Section 368 of the Code; (F) a letter from Ernst &
Young LLP, dated as of the closing date confirming that PDI may account
for the merger as a pooling of interests; (G) a letter from Cacciamatta
Accountancy Corporation, dated as of the closing date confirming that no
transaction entered into by CRT, and no other fact or circumstance
relating to CRT, will prevent PDI from accounting for the merger as a
pooling of interests; (H) a certificate executed on behalf of CRT by its
chief executive officer confirming that the conditions set forth above
have been duly satisfied; and (I) the written resignations of all
officers and directors of CRT as of the effective time

. The registration statement shall have become effective in accordance
with the provisions of the Securities Act, and no stop order shall have
been issued by the Commission with respect to the registration statement

. There shall have been no material adverse change in the business,
financial condition, operations or financial performance of CRT since
the date of the merger agreement

. CRT shall have filed with the IRS a notification required under Sections
1.897-2(h)(1)(i) and 1.897-2(h)(2) of the United States Treasury
Regulations

. The shares of PDI common stock to be issued in the merger shall have
been authorized for listing on Nasdaq, subject to notice of issuance

. No temporary restraining order, preliminary or permanent injunction or
other order preventing the consummation of the merger shall have been
issued by any court of competent jurisdiction and remain in effect, and
there shall not be any legal requirement that makes consummation of the
merger illegal

. No person shall have commenced or threatened to commence any legal
proceeding challenging or seeking the recovery of a material amount of
damages in connection with the merger or seeking to prohibit or limit
the exercise by PDI of any material right pertaining to its ownership of
stock of the surviving corporation

. Neither Richard Amtower nor more than three other exempt employees of
CRT as of August 10, 1999 other than probationary employees or employees
terminated for cause shall have ceased to be employed by CRT or
expressed an intention to Richard Amtower to terminate their employment
with CRT

. CRT shall have provided PDI with evidence, reasonably satisfactory to
PDI, as to the termination of its 401(k) plan

CRT. The obligations of CRT to effect the merger and otherwise consummate
the transactions contemplated by the merger agreement are subject to the
satisfaction, at or prior to the closing, of conditions, among others, to the
following general effect:

. The representations and warranties of PDI and Pharaoh contained in the
merger agreement shall be accurate in all material respects (without
giving effect to any material adverse effect or other materiality
qualifications on the representations and warranties) as of the date of
the merger agreement and as of the closing date as if made on and as of
the closing date

. All of the covenants and obligations that PDI and Pharaoh are required
to comply with or to perform at or prior to the closing shall have been
complied with and performed in all respects

. CRT shall have received the following agreements and documents: (A) a
legal opinion of Cooley Godward LLP; (B) a legal opinion of Rutan &
Tucker, dated as of the closing date and addressed to CRT, to the effect
that the merger will constitute a reorganization within the meaning of
Section 368 of the Internal Revenue Code; and (C) a certificate executed
on behalf of PDI by an executive officer of PDI, confirming that
conditions set forth above have been satisfied

44
<PAGE>

. The merger agreement and the merger shall have been duly approved by the
holders of a 90% of the CRT common stock and 100% the holders of CRT
preferred stock, and the issuance of PDI common stock in the merger
shall have duly approved by the necessary vote of the PDI shareholders

. There shall have been no material adverse change in the business of PDI
since the date of the reorganization agreement which shall have directly
caused the closing sale price of PDI common stock on the trading day
immediately preceding the PDI annual meeting to be less than six
dollars.

. The shares of PDI common stock to be issued in the merger shall have
been authorized for listing on Nasdaq, subject to notice of issuance

Representations and Warranties

The merger agreement contains certain representations and warranties,
including, without limitation, representations and warranties by CRT as to:

. Due organization, subsidiaries and ultimate parent entity

. The articles of incorporation and the bylaws of CRT

. Capitalization

. Financial statements

. Absence of certain changes

. Title to assets

. Receivables

. Equipment and leaseholds

. Proprietary assets

. Contracts

. Liabilities

. Compliance with legal requirements

. Governmental authorizations

. Tax matters

. Employee and labor matters and benefit plans

. Environmental matters

. Insurance

. Transactions with related parties

. Legal proceedings and orders

. The authority and binding nature of the merger agreement

45
<PAGE>

. Non-contravention and consents

. Disclosure

. Brokers, finders and investment bankers and their fees or commissions

The merger agreement contains further representations and warranties by PDI
and Pharaoh as to:

. Due organization, standing and power to conduct business

. Filings with the SEC and financial statements

. Authority and binding nature of the merger agreement

. Valid issuance of the PDI common stock to be issued pursuant to the
merger

. Disclosure

Covenants

Access and Investigation. The merger agreement requires that during the
period from August 10, 1999 through the effective time (the "pre-closing
period"), CRT shall:

. Provide PDI and PDI"s representatives with reasonable access to the
acquired corporations" representatives, personnel and assets and to all
existing books, records, tax returns, work papers and other documents
and information relating to CRT

. Provide PDI and PDI"s representatives with such copies of the existing
books, records, tax returns, work papers and other documents and
information relating to the acquired corporations, and with such
additional financial, operating and other data and information regarding
the acquired corporations, as PDI may reasonably request

The merger agreement also requires that during the same period, PDI shall,
to the extent the information listed below is not publicly available:

. Provide a single executive officer of CRT and a single member of CRT"s
legal representatives with reasonable access to PDI"s representatives,
personnel and assets and to all existing books, records, tax returns,
work papers and other documents and information relating to PDI

. Provide CRT and CRT"s representatives with copies of such existing
books, records, tax returns, work papers and other documents and
information relating to PDI with such additional financial, operating
and other data and information regarding PDI as CRT may reasonable
request

Conduct of CRT"s Business. The merger agreement requires that during the
pre-closing period, CRT shall

. Conduct its business and operations in the ordinary course and in
substantially the same manner as such business and operation have been
conducted prior the date of the merger agreement

. Use commercially reasonable efforts to preserve intact its current
business organization, keep available the services of its current
officers and employees and maintain its relations and goodwill with all
suppliers, customers, landlords, creditors, employees and other persons
having business relationships with CRT

. Keep in full force all of its insurance policies

During the pre-closing period, CRT shall not (without the prior written
consent of PDI):

. Declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of its capital stock, or
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities

46
<PAGE>

. Sell, issue, grant or authorize the issuance or grant of (A) any capital
stock or other security, (B) any option, call, warrant or right to
acquire any capital stock or other security, or (C) any instrument
convertible into or exchangeable for any capital stock or other security
(except that CRT may issue (1) CRT common stock upon the valid exercise
of CRT options or CRT warrants outstanding as of the date of the merger
agreement, (2) shares of CRT common stock upon the conversion of shares
of Series A Preferred Stock and (3) grant stock to employees in
accordance with past practices, provided that CRT has obtained PDI's
written consent with respect to each proposed optionee and the number,
exercise price, vesting schedule and other terms of each proposed option
grant)

. Amend or waive any of its rights under, or accelerate the vesting under,
any provision of any of CRT"s stock option plans, any provision of any
agreement evidencing any outstanding stock option or any restricted
stock purchase agreement

. Amend or permit the adoption of any amendment to the CRT articles of
incorporation or the CRT bylaws or other charter or organizational
documents, or, subject to the other terms of the merger agreement,
effect or become a party to any merger, consolidation, share exchange,
business combination, recapitalization, reclassification of shares,
stock split, reverse stock split or similar transaction

. Form any subsidiary or acquire any equity interest or other interest in
any other entity

. Make any capital expenditure (except that the acquired corporations may
make capital expenditures that, when added to all other capital
expenditures made on behalf of the acquired corporations during the pre-
closing period, do not exceed $30,000 per fiscal quarter)

. Enter into or become bound by, or permit any of the assets owned or used
by CRT to become bound by, certain material contracts, or amend or
prematurely terminate, or waive or exercise any material right or remedy
under, certain material contracts except for the sale and lease of
inventory in the ordinary course of business

. (A) Acquire, lease or license any right or other asset from any other
person; (B) sell or otherwise dispose of, or lease or license, any right
or other asset to any other person, except for the sale and lease of
inventory in the ordinary course of business and consistent with past
practices, or waive or relinquish any material right, except for assets
acquired, leased, licensed or disposed of by CRT pursuant to contracts
other than certain material contracts

. (A) lend money to any person (except that CRT may make routine travel
and other expense advances to employees in the ordinary course of
business and may, consistent with its past practices, allow employees to
acquire CRT common stock in exchange for promissory notes upon exercise
of options to purchase CRT common stock; or (B) incur or guarantee any
indebtedness for borrowed money (except that CRT may make routine
borrowings in the ordinary course of business under its line of credit
with Pacific Century Bank, which line of credit may be extended and
increased to an aggregate total line of credit up to $1,500,000)

. Except as contemplated by the merger agreement, establish, adopt or
amend any employee benefit plan, pay any bonus or make any profit-
sharing payment, cash incentive payment or similar payment to, or
increase the amount of the wages, salary, commissions, fringe benefits
or other compensation or remuneration payable to, any of its directors,
officers or employees or hire any new employee whose aggregate annual
compensation is expected to exceed $80,000

. Change any of its methods of accounting or accounting practices in any
respect

. Make any election with respect to taxes

. Commence or settle any material legal proceeding

. Agree or commit to take any of the actions described above

47
<PAGE>

During the pre-closing period, each of PDI and CRT shall promptly notify the
other in writing of:

. The discovery of any event, condition, fact or circumstance that
occurred or existed on or prior to the date of the merger agreement and
that caused or constitutes a material inaccuracy in any representation
or warranty made by it

. Any event, condition, fact or circumstance that occurs, arises or exists
after the date of the merger agreement and that would cause or
constitute a material inaccuracy in any representation or warranty made
by it in the merger agreement if (A) such representation or warranty had
been made as of the time of the occurrence, existence or discovery of
such event, condition, fact or circumstance, or (B) such event,
condition, fact or circumstance had occurred, arisen or existed on or
prior to the date of the merger agreement

. Any material breach of any of its covenants or obligations

. Any event, condition, fact or circumstance that would make the timely
satisfaction of any of the conditions to closing impossible or unlikely

If any event, condition, fact or circumstance that is required to be
disclosed by CRT to PDI requires any change in the CRT disclosure schedule, or
if any such event, condition, fact or circumstance would require such a change
assuming the CRT disclosure schedule were dated as of the date of the
occurrence, existence or discovery of such event, condition, fact or
circumstance, then CRT shall promptly deliver to PDI an update to the CRT
disclosure schedule specifying such change. No such update shall be deemed to
supplement or amend CRT disclosure schedule for the purpose of (i) determining
the accuracy of any of the representations and warranties made by CRT in the
merger agreement, or (ii) determining whether any of the conditions to PDI's
and Pharaoh's obligation to close has been satisfied.

Non-Solicitation. Pursuant to the merger agreement, CRT has agreed that it
will not, directly or indirectly:

. Solicit or encourage the initiation of any inquiry, proposal or offer
from any person relating to a possible acquisition transaction

. Participate in any discussion or negotiations or enter into any
agreement with, or provide any non-public information to any person
relating to or in connection with a possible acquisition transaction

. Consider, entertain or accept any proposal or offer from any person
relating to a possible acquisition transaction

An "acquisition transaction" is any transaction involving: (1) the sale,
license, disposition or acquisition or all or substantially all of CRT's
business or assets (2) the issuance, disposition or acquisition of (A) any
capital stock or other equity security of CRT (other than common stock issued
to employees of CRT upon exercise of CRT options, conversion of Series A
preferred stock or otherwise), in routine transactions in accordance with CRT's
latest practices, (B) any option, call, warrant or right (whether or not
immediately exercisable) to acquire any capital stock or other equity security
of CRT (other than stock options granted to employees of CRT in routine
transactions in accordance with CRT's past practices), or (C) any security,
instrument or obligation that is or may become convertible into or exchangeable
for any capital stock or other equity security of the Company; or (3) any
merger, consolidation, business combination, reorganization or similar
transaction involving CRT.

Meetings of Shareholders. Pursuant to the merger agreement, CRT will take
all action necessary in accordance with applicable law to convene and hold the
CRT special meeting to vote upon the approval of the merger agreement and the
merger. Pursuant to the merger agreement, PDI will take all action necessary to
call, give notice of, convene and hold the PDI annual meeting to vote upon the
issuance of PDI common stock in the merger.

48
<PAGE>

Conditions Relating to Stock Options and Warrants. For a description of the
treatment of stock options to purchase CRT common stock, see the caption above
entitled "--Stock Options."

Form S-8. Pursuant to the merger agreement, PDI has agreed to file a
registration statement on Form S-8 for the shares of PDI common stock issuable
with respect to assumed CRT options within 60 days after the effective time.

Accounting Treatment; Tax Free Reorganization. CRT and PDI has agreed (1)
not to take any action during the pre-closing period that would adversely
affect the ability of PDI to account for the merger as a pooling of interests,
(2) to use all reasonable efforts to attempt to ensure that none of its
affiliates (as that term is used in Rule 145 promulgated under the Securities
Act) takes any action that could adversely affect the ability of PDI to account
for the merger as a pooling of interests and (3) not to take any action either
prior to or after the effective time that would reasonably be expected to cause
the merger to fail to qualify as a reorganization.

Indemnification and Insurance. Pursuant to the merger agreement, all rights
to indemnification existing in favor of the persons serving as directors or
officers of CRT as of the date of the merger agreement for acts and omissions
occurring prior to the effective time, as provided in the CRT bylaws and as
provided in any indemnification agreements between CRT and said officers and
directors shall survive the merger and shall be observed by PDI and the
surviving corporation for a period of not less than six years from the
effective time.

Certain Other Covenants. The merger agreement contains certain other
covenants including covenants relating to: (i) preparation and filing of the
registration statement; (ii) public announcements; (iv) tax qualification and
opinion back-up certificates; (v) noncompetition agreements and general
releases; (vi) listing of the PDI common stock to be issued pursuant to the
merger on Nasdaq; (vii) FIRPTA; (viii) PDI extending offers of employment to
all CRT employees employed as of the closing.

Termination

1. the merger is not complete by December 31, 1999; or

2. that company reasonably determines that the timely satisfaction of
any of its conditions to closing has become impossible other than as a
result of any failure on the part of that company to comply with or perform
any of its covenants or obligations.

Expenses and Termination Fees

Pursuant to the merger agreement, all fees and expenses incurred in
connection with the merger agreement and the transactions contemplated by the
merger agreement shall be paid by the party incurring such expenses, whether or
not the merger is consummated; provided, however, that if the fees, costs and
expenses incurred by or for the benefit of CRT exceed $100,000, the excess
shall be deducted from the escrow fund.

49
<PAGE>

INFORMATION RELATING TO PDI

Overview

Photon Dynamics, Inc. is a leading worldwide supplier of array test,
inspection and repair systems for the flat panel display, or FPD, industry.
PDI's systems are used to control, monitor and refine the manufacturing process
to increase the yield of FPDs, to reduce materials loss, to transition new FPD
designs from research and development to commercial production and to assist in
the rapid start-up of new FPD manufacturing facilities. While certain aspects
of the manufacturing processes for FPDs are similar to manufacturing processes
for semiconductor devices, materials costs represent a substantially higher
percentage of the cost of an FPD as compared with semiconductor devices. As a
result, the need for array test and inspection of FPDs goes beyond the need to
improve yields as FPD manufacturers seek to identify defects early in the
manufacturing process either to avoid investment of further materials cost or
to repair the defect before further manufacturing steps make it less
accessible. PDI believes that more of its systems have been used by
manufacturers of active matrix liquid crystal displays, or AMLCDs, and other
advanced FPDs to array test, inspect and repair high resolution FPDs than any
other currently available system. PDI believes that the experience it has
acquired from the wide use of its systems has enabled it to become a leading
technical innovator of array test, inspection and repair equipment for advanced
FPD manufacturers. PDI offers a suite of products to inspect almost all current
types of commercially produced FPDs and to address all key areas of AMLCD test,
inspection and repair throughout all major stages of the manufacturing life
cycle, from research and development through commercial production.

. PDI's array test products include test systems that locate, count and
characterize electrical array faults, contamination and other defects on
partially completed flat panel display substrates.

. PDI's inspection products perform flat panel cell and module inspection to
detect and locate optical defects in FPDs.

. PDI's repair product performs array laser cut and weld repair functions
based upon information generated by its array test product.

All of PDI's product lines interface with one another through software
systems used to store data and generate reports and other information used by
FPD manufacturers to increase their yields. PDI's products incorporate
proprietary technologies that enable FPD manufacturers to obtain information
critical to yield improvement and management of manufacturing processes that
had not previously been readily available to FPD manufacturers. PDI's
proprietary Voltage Imaging(TM) and N-Aliasing(TM) technologies, in conjunction
with its proprietary software programs, permit non-contact, full
characterization and image evaluation of almost all commercially produced FPD
displays, regardless of panel size or the FPD technology employed. All of PDI's
product lines are currently being used with video graphics array (VGA), super
video graphics array (SVGA), extended graphics array (XGA) and super extended
graphics array (SXGA) displays and are designed for use with next generation
ultra extended graphics array (UXGA) displays.

Industry Background

Overview of Flat Panel Display Market. The market for FPDs has grown
significantly in recent years as the result of the increasing popularity of
portable computers and other electronic devices that display textual or
graphical information. The weight and thin form factor of FPDs enable new
display applications not supported by the predominant monitor technology,
cathode ray tubes, or CRTs. Laptop and notebook computers, personal digital
assistants, portable video games, digital phones and a variety of devices for
the automotive, technical, medical and military markets are examples of
electronic products in markets that cannot be served by CRT technology.

50
<PAGE>

Different applications for FPDs have varying cost, size and performance
requirements, and alternative FPD technologies have been developed to address
these different applications. Different types of FPDs that are currently being
produced to address certain segments in the broader FPD market include liquid
crystal, or LCD, plasma, electroluminescent , field emissive displays, organic
light emitting diode, digital micro-mirror devices and mini and micro displays
utilizing liquid crystal on silicon. Currently the most common type of FPD is
the LCD, which first emerged in the form of watch and calculator displays in
the 1970s. The most advanced form of LCD available today is the thin-film
transistor, or TFT, AMLCD, which utilizes three individual emissive transistors
at each pixel. This enables the AMLCD both to produce full color images and to
operate at much faster refresh rates than earlier passive monochrome LCDs. The
color capability, resolution, speed and picture quality of AMLCDs currently
make these displays a preferred choice for high performance portable computers,
multimedia and other applications requiring the display of video and graphics.
The trend toward higher resolution video and graphic displays has been
reflected in the evolution from VGA displays (640 x 480 lines of resolution) to
SVGA displays (800 x 600 lines of resolution) to XGA displays (1,024 x 768
lines of resolution) which in turn are being replaced by next-generation SXGA
displays (1,280 x 1,024 lines of resolution) and soon UXGA displays (1,600 x
1,200 lines of resolution). To achieve higher resolution display capability and
enhanced picture quality, the number of pixels integrated in AMLCDs has
increased, which in turn increases the complexity of the manufacturing process.

The AMLCD Flat Panel Display Manufacturing Process. The manufacture of
AMLCDs is an extremely complex process, which is developed and refined for
different panel sizes and resolutions through research and development, pre-
production prototyping and commercial production. Manufacturing an AMLCD
involves a series of three principal steps. The first step is to build an array
of thin-film transistors on a glass substrate through a process which is
essentially the same as that used to create electronic circuitry on a
semiconductor device. In a high-quality color AMLCD, each pixel, the smallest
addressable dot on the display, is represented by three transistors, one for
each of the primary colors, i.e., red, green and blue. The next step involves
attaching a color filter to the transistor-embedded substrate and injecting
liquid crystal material between the color filter and the transistor array. The
color filter enables the display to attain color capability by selectively
filtering out the light emissions from each multi-color pixel array to produce
the desired color mix in the displayed image. At this second step, the "cell"
for each pixel is created through the combination of transistors and a color
filter. The last step in the process is to package the display and attach the
electronics that will interpret and convert the electronic signals directed by
the computer or other electronic system to the AMLCD and cause it to display
the desired text, graphics and video images. This step also involves sealing
the FPD and installing the electronics that connect the FPD to other electronic
devices like a computer.

Current Yield and Cost Problems Experienced by FPD Manufacturers. While
there are many similarities between the techniques used to manufacture
semiconductor devices and FPDs such as AMLCDs, the manufacture of FPDs is
different in a number of ways that expose the FPD manufacturer to potentially
greater risk from yield loss throughout the manufacturing process. The cost
structure for the manufacture of FPDs is very different from semiconductor
devices in that materials costs represent a much larger percentage of the total
product cost to the FPD manufacturer. Second, the manufacture of FPDs combines
both electrical manufacturing techniques as well as a number of complex non-
electrical manufacturing steps, such as the manufacture and alignment of the
color filter at exacting physical tolerances. Third, because of the visual
function performed by FPDs, an FPD must satisfy visual criteria and have
consistent resolution, color and quality to be acceptable to the end user. Some
types of visual deficiencies, such as variations in screen brightness or color
or blurred resolution, are unrelated to electrical defects and can cause
substantial yield losses. These defects cannot be detected by traditional
automated semiconductor array test equipment. Due to these factors, the AMLCD
industry continues to experience substantial yield losses and to incur
significant materials costs in the manufacture of FPDs.

The ability of FPD manufacturers to improve yields of AMLCDs and other FPDs
depends in large part on their ability to test and inspect displays during the
manufacturing process and to use test and inspection data to refine the
manufacturing process. Through inspection, the FPD manufacturer seeks to
identify defects at an

51
<PAGE>

early stage in the process to repair and save the product or to avoid adding
more cost to a defective product. PDI estimates that 80% of the overall cost of
manufacturing a typical full color AMLCD is incurred in later stage
manufacturing steps after the primary transistor array has been developed on
the glass substrate. PDI believes that material costs can be reduced through
in-process testing if yield defects in the manufacturing process can be
properly detected at earlier stages. In addition, systematized inspection
provides qualitative feedback to the FPD manufacturer and enables it to address
yield problems and enhance the manufacturing process. Because of this critical
role of yield in reducing FPD manufacturing costs, the FPD industry is now
generally recognizing the need for automated FPD array test, inspection and
repair equipment and seeking yield-enhancing solutions at all stages of the FPD
manufacturing process. PDI believes that this need has become much more acute
recently as AMLCDs have become increasingly more complex and the market has
evolved from existing standard displays to the higher resolution displays.

Products

Photon Dynamics offers a suite of products to inspect almost all
commercially produced FPDs. All of PDI's systems use similar software based
controls, processing and graphical user interfaces. Products can be networked
together so that FPD defect data can be stored, analyzed and used throughout
the manufacturing process. All of PDI's systems are capable of providing fully
automated functionality through robotics purchased from third party vendors.

Array Test Systems. PDI's array test systems use PDI's proprietary Voltage
Imaging(TM) technology to detect, locate, quantify and characterize electrical
contamination and other defects in AMLCD arrays after the completion of the
first major step of production, the construction of the transistor array on the
glass substrate. The systems incorporate a computer workstation and proprietary
image processing software to display pixel images and information which not
only allows manufacturers to determine whether individual pixels or lines of
pixels are functional, but also allows them to find more subtle defects such as
individual pixel voltage variations early in the production process. In
addition, these systems generate point and line defect data files specifying
the exact location of each defect, which data can then be used for statistical
process control or downloaded to PDI's repair systems to effect repairs. The
systems also perform key procedures involved in the array testing process,
including running test sequences and loading, unloading and sorting substrates.
The array test systems can be adapted to test different panel sizes in less
than three hours, as compared with systems using probe card technology, which
PDI estimates can require up to sixteen hours. The currently available
ArrayChecker system is an enhanced version of earlier array test systems that
uses optimized processing software, graphical user interface and materials
transport features. These features have been designed to enable the
ArrayChecker system to achieve throughput rates that are similar to
conventional probe card based systems while providing the same functionality,
flexibility and cost-efficient features of the earlier array test systems.

Flat Panel Inspection Systems. PDI's Flat Panel Inspection (FIS) systems use
PDI's proprietary N-Aliasing(TM) technology to inspect almost any type and size
of commercially available FPD panel for optical defects after the completion of
the cell stage of production. FIS systems are also designed to perform
inspection after final module assembly of FPD panels. The systems use a single
high-resolution camera and workstation operating PDI's N-Aliasing(TM) software
to quantitatively measure critical optical qualities such as contrast,
luminance and color balance and to precisely locate blemish, line, cluster and
individual pixel defects. Test data generated by the systems is displayed on a
video monitor to permit immediate visual interpretation and can be stored or
sent to a repair system to effect repairs. Inspection systems comprise a family
of products that offer different levels of resolution, functionality and
flexibility to suit customers' needs. Currently available systems include,
PanelMaster 300, SpotLite, Muralook, and MicroMaster. The systems are available
either as stand-alone units or as modular systems designed to be integrated
with manufacturers' material handling equipment.

Array Repair System. PDI's repair systems use a laser to repair defects in
AMLCD and passive LCD panels. These repair systems can use defect files
downloaded from PDI's array test or inspection systems to automatically locate
the defects in the panel so that the operator can decide whether or not to
repair them. This capability saves operator time searching for the defects
among the hundreds of thousands of pixels on a display.

52
<PAGE>

Intellectual Property

PDI has been issued thirty-four active U.S. patents with respect to its FPD
array test, inspection and repair technologies and has some U.S. and foreign
applications pending. PDI has a number of U.S. patents related to its Voltage
Imaging(TM) technology and has applied for U.S., Japanese and Korean patents
related to this technology as well as its repair and inspection technology. No
patents are scheduled to expire before 2008, subject to payment of applicable
maintenance fees. In addition, Photon Dynamics and IHI have jointly filed
patent applications in Japan relating to some aspects of the array test
systems.

PDI frequently reviews its inventions and attempts to determine which
inventions will provide substantial differentiation between PDI's products and
those of its competitors. In certain cases, PDI may also choose to keep an
invention or a process as a trade secret. Trade secrets are routinely employed
in PDI's manufacturing processes. PDI has entered into non-disclosure
agreements to protect its proprietary technology with its employees and
consultants and in some instances with its suppliers, its customers and IHI.
Because of rapid technological developments in the electronics and FPD
industries and the broad and rapidly developing patent coverage in such
industries, the patent position of any manufacturer, including PDI, is subject
to uncertainties and may involve complex legal and factual issues.
Consequently, although PDI holds certain patents and is currently processing
additional patent applications, there can be no assurance that patents will
issue from any pending applications. Furthermore claims allowed by any existing
or future patents issued to PDI may be challenged, invalidated, or
circumvented, and any rights granted thereunder may not provide adequate
protection to PDI. Others may develop technologies that are similar or superior
to PDI's technology, duplicate PDI's technology or design around the patents
owned by PDI. In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries.

In addition, litigation may be necessary in the future to enforce PDI's
patents and other intellectual property rights, to protect PDI's trade secrets,
to determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a
material adverse effect on PDI's results of operations or financial condition.
Moreover, PDI may be required to participate in interference proceedings to
determine the priority of inventions, which also could result in substantial
cost to PDI.

Research And Development

The market for FPD array test, inspection and repair systems is
characterized by rapid and continuous technological development and product
innovation. PDI believes that continued and timely development of new products
and enhancements to existing products is necessary to maintain its competitive
position. Accordingly, PDI devotes a significant portion of its personnel and
financial resources to research and development programs and seeks to maintain
close relationships with customers to remain responsive to their product needs.
PDI's current research and development efforts are directed to increasing the
performance of its flat panel inspection and array test systems and expanding
the application of its inspection systems for use in other related markets.
Because the software incorporated by PDI into its products represents a
significant portion of the value added by these products, almost one-half of
PDI's research and development personnel are focused on software development.

PDI's research and development expenses were $5.9 million and $7.8 million
in fiscal 1998 and fiscal 1997, or 26% and 32% of revenue. Research and
development expenses consist primarily of salaries, project materials and other
costs associated with PDI's ongoing efforts to improve and enhance PDI's
products.

PDI has obtained substantial development funding from IHI with respect to
PDI's array test systems. IHI has provided funding for initial feasibility
studies and development of the first prototypes of array test systems, and
since 1990 IHI has provided to PDI in excess of $8 million in research and
development funding with respect to the array test systems. In exchange for
this funding IHI has been granted certain licenses and joint ownership rights
to the developed technology.

53
<PAGE>

PDI has entered into contracts with the U.S. government and private
companies, including IHI, to develop products, which PDI is then able to sell
with certain restrictions. PDI generally owns all of the intellectual property
developed under these contracts. However PDI has licensed certain rights to its
array test technology to the U.S. government which may transfer its license to
a third party for use in products sold to U.S. customers in the event PDI
becomes unable to deliver array test systems to U.S. customers.

Customers, Sales and Service

PDI sells its products to leading FPD manufacturers. Sales to LG
Electronics, Inc., represented 27% and 26% of revenue in fiscal 1998 and fiscal
1997. Overall, PDI's top four customers contributed 92% of revenue in fiscal
1998, as compared to 83% of revenue in fiscal 1997. International sales
accounted for 96% and 98% of revenue in fiscal 1998 and 1997.

Photon's revenue is obtained primarily from flat panel display manufacturers
and to a lesser extent, through IHI, a value added resellers in Japan and a
sales representative in Taiwan. During fiscal 1997, PDI entered into a
memorandum of understanding with IHI, expanding the number of product lines
sold and serviced in Japan by IHI from one to three. In the quarter ended June
30, 1997, PDI shipped its first inspection and repair systems to IHI. During
fiscal 1998, PDI continued to work under the provisions of the memorandum of
understanding with IHI. Sales to IHI were $10.1 million in fiscal 1998 as
compared to $6.4 million in fiscal 1997. A final agreement with IHI may not be
negotiated on a timely basis or on terms favorable to PDI.

In the U.S., PDI maintains its sales and service office at its headquarters
in San Jose, California. In Asia, PDI has subsidiaries in Tokyo, Japan and
Seoul, Korea that provide direct sales, marketing and service support. In
Japan, PDI's products are also serviced by IHI.

PDI generally sells its products on net 30-day terms to its customers, with
a small portion held back until final acceptance. However, a substantial
portion of its customers, primarily foreign, remit payments on significantly
longer terms. PDI generally warrants its products for a period of one year from
final acceptance by customers. Installation is generally included in the price
of the product. PDI's field service providers provide customers with repair and
maintenance services. Customers may enter into repair and maintenance service
contracts covering PDI's products. PDI provides customer training for a fee to
enable its customers to perform routine service and provides telephone
consultation services generally free of charge. PDI does not consider its
business to be seasonal in nature, but it may become cyclical with respect to
the capital equipment procurement practices of major FPD manufacturers.

Manufacturing and Suppliers

PDI's principal manufacturing activities take place in San Jose, California
and consist primarily of final assembling and testing of and subassemblies
which are acquired from third party vendors. Some of the components and
subassemblies included in PDI's systems are obtained from a single source or a
limited group of suppliers. For example, PDI has obtained all of the high-speed
image processing systems, materials handling platforms and ultra-high
resolution cameras used in its products from single source suppliers. PDI has
not entered into any formal agreements with such suppliers, other than long-
term purchase orders and, in some cases, volume pricing agreements. The partial
or complete loss of such suppliers could:

. increase PDI's manufacturing costs

. delay product shipments while PDI qualifies a new supplier

. require redesigning PDI's products and could therefore have an adverse
effect on PDI's results of operations and damage customer relationships

Further, a significant increase in the price of one or more of the
components supplied by these suppliers could increase PDI cost of goods sold
and reduce its profit margins.

54
<PAGE>

PDI schedules production based upon customer purchase orders and anticipated
orders during the planning cycle. PDI generally expects to be able to accept a
customer order, build the required machinery and ship to the customer within
sixteen weeks. Quality control is maintained through incoming inspection of
components, in-process inspection during equipment assembly and final
inspection and operation of all manufactured equipment prior to shipment. PDI
works in close collaboration with its employees, customers and suppliers and
trains all of its employees in basic quality. Although PDI conducts final
testing of its systems and assembles some components under limited clean room
conditions, most manufacturing occurs in standard manufacturing space.

PDI has granted certain exclusive rights to IHI to manufacture array test
systems developed prior to June 1997 for Japan, Korea and the rest of the IHI
Territory. Under the terms of PDI's agreements with IHI, PDI retains the right
to manufacture certain critical components for the array test systems and to
sell these components to IHI at prices that are established annually, and IHI
has the right to manufacture and assemble the balance of the array test systems
to be sold in its territories. To date, IHI has allowed PDI to manufacture all
array test systems for IHI, which has acted as a value added reseller in Japan
and performed customization of the array test systems for the Japanese market
and its individual customers in that market. To the extent IHI determines in
the future to exercise fully its contractual right to manufacture and sell
these systems for the IHI territory, such action would reduce revenue of PDI
attributable to these IHI manufactured array test systems.

Backlog

As of June 30, 1999, PDI's backlog was approximately $17.0 million as
compared to approximately $4.2 million as of June 30, 1998. In addition,
approximately 82% of PDI's backlog at fiscal 1998 year-end was comprised of
orders from one customer. PDI's backlog consists of those customer orders for
which it has accepted purchase orders and assigned shipment dates within the
next twelve months. All orders are subject to delay or cancellation with
limited or no penalty to the customer. Because of possible changes in product
delivery schedules and cancellation of product orders, because orders received
by PDI in any particular quarter may vary significantly and because PDI's sales
will often reflect orders shipped in the same quarter they are received, PDI's
backlog may vary significantly and at any particular date is not necessarily
indicative of actual sales for any succeeding period.

Competition

The FPD equipment industry is highly competitive. PDI faces substantial
competition from established companies, many of which are larger companies,
have greater financial, engineering and manufacturing resources than PDI and
have larger service organizations and long-standing customer relationships with
major FPD manufacturers. Furthermore, in the event that PDI is unsuccessful in
negotiating a new agreement with IHI, IHI may compete with PDI selling PDI's
array test systems in Japan, Korea and the rest of IHI's territory. Sales to
IHI were $10.1 million in fiscal 1998 and $6.4 million in fiscal 1997. PDI also
expects it may face additional competition from new entrants into the FPD
equipment industry and from competitors utilizing new technologies. PDI's
competitors can be expected to continue to improve the design and performance
of their products and to introduce new products with competitive
price/performance characteristics. In addition, PDI's customers may choose to
develop proprietary technology and FPD equipment, which may obviate or lessen
their need to purchase PDI's products. PDI's customers may also use multiple
technologies and solutions, including competitors' products, to replicate the
functionality of PDI's systems. Competitive pressures may necessitate price
reductions, which could adversely affect PDI's results of operations. Although
PDI believes that it has certain technological and other advantages over its
competitors, realizing and maintaining such advantages will require a continued
high level of investment by PDI in engineering, research and development,
marketing and customer service and support. PDI may not have sufficient
resources to continue to make such investments. Even if sufficient funds are
available, PDI may not be able to make the technological advances necessary to
maintain such competitive advantages.

55
<PAGE>

Employees

As of June 30, 1999, PDI employed 103 persons. Many of PDI's employees are
highly skilled, and PDI's success will depend in part upon its ability to
retain such employees and attract new qualified employees, who are in great
demand. PDI has never had a work stoppage or strike, and no employees are
represented by a labor union or covered by a collective bargaining agreement.
PDI considers its employee relations to be good.

Facilities

The Company's corporate headquarters, located in San Jose, California,
consists of a 50,000 square foot facility. The lease expires in 2002. PDI also
leases office space for its sales and service operations in Seoul, Korea and
Tokyo, Japan.

56
<PAGE>

PDI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The statements contained in this proxy statement/prospectus are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding PDI's expectations, hopes, intentions, or
strategies regarding the future. All forward looking statements included in
this document are based on information available to PDI on the date hereof, and
PDI assumes no obligation to update any such forward looking statements. It is
important to note that PDI's actual results could differ materially from those
in such forward looking statements. You should consult the risk factors listed
under "Risks Relating to the Business of PDI" and elsewhere in this proxy
statement/prospectus.

The following discussion should be read in conjunction with PDI's condensed
consolidated financial statements and notes thereto.

OVERVIEW

Photon Dynamics, Inc. develops, manufactures and markets on a worldwide
basis a suite of products to inspect virtually all types of flat panel
displays, or FPDs, and to address key areas of active matrix liquid crystal
display, or AMLCD, test, inspection and repair throughout all major stages of
the manufacturing life cycle, from research and development through commercial
production.

PDI's revenue is obtained primarily through sales to FPD manufacturers and,
to a lesser extent, value-added resellers in Japan. PDI's primary value added
reseller in Japan is IHI, with which PDI does not have a long-term agreement.
During fiscal 1997, PDI expanded the scope of the Company's existing
arrangement with IHI, increasing the number of product lines sold and serviced
by IHI from one to three. In the quarter ended June 30, 1997, PDI shipped its
first inspection and repair systems to IHI.

PDI derives substantially all of its revenue from international sales in
Asia, primarily Japan, Taiwan and Korea, where the majority of volume flat
panel production currently resides. At present, substantially all worldwide
sales are made in U.S. dollars, whether direct or to value added resellers.
PDI's revenue is derived primarily from the sale of products.

Comparison Of Nine Months Ended June 30, 1999 And 1998

Results of Operations

Revenue. Revenue for the third quarter of fiscal 1999 increased 67% to $9.4
million from $5.6 million in the third quarter of fiscal 1998. Revenue for the
first nine months of fiscal 1999 increased 13% to $20.7 million from $18.4
million in the comparable period of fiscal 1998. This increase in revenue for
the third quarter of fiscal 1999 over fiscal 1998 was due to a significant
increase in customer orders, particularly in Taiwan, which reflects growth in
the FPD industry. This growth is driven primarily by the strong demand for
desktop monitors followed by notebook displays and large screen televisions.
The third quarter of fiscal 1998 saw a decrease in capital spending by FPD
manufacturers located in Asia as a result of the adverse economic conditions
experienced by the region at that time. As of June 30, 1999, backlog was
approximately $17.0 million compared to $4.2 million at June 30, 1998.

Non-product revenue consisted of a non-recurring $500,000 fee paid by a
Japanese company for development work transferred to it by PDI during the first
nine months of fiscal 1999.

5Gross Margin. Gross margin as a percent of revenue was 44% and 40% for the
three and nine month periods ended June 30, 1999, respectively, compared to 46%
and 45% for the three and nine month periods ended June 30, 1998, respectively.
The decrease in gross margin for the first nine months of fiscal 1999 as

57
<PAGE>

compared to the comparable period in fiscal 1998 was due to PDI's efforts to
expand its customer base in Taiwan as well as the shipment of several system
upgrade orders in the second quarter of fiscal 1999. These system upgrade
orders had gross margins lower than typical shipments sold by PDI. Overall
gross margins will fluctuate on a quarterly basis due to PDI's production
volume and product mix, among other factors.

Research and Development. Research and development spending was $1.4 million
in the third quarter of fiscal 1999 and the third quarter of fiscal 1998, or
15% and 25% of revenue, respectively. Research and development expenses for the
first nine months of fiscal 1999 were $3.7 million, or 18% of revenue, compared
to $4.7 million, or 26% of revenue, in the comparable period in fiscal 1998.
The decrease in spending for the first nine months of fiscal 1999 as compared
to the comparable period of fiscal 1998 was primarily due to decreased spending
in the areas of outside consultants and prototype materials. In the first nine
months of fiscal 1998, PDI was working on a number of product enhancements that
it believed would improve its ability to sell into volume production
environments. Because this work is now complete, PDI reduced its spending on
outside consultants and prototype materials during the first nine months of
fiscal 1999 as compared to the comparable period of fiscal 1998. PDI expects
that its investment in research and development will increase incrementally
over fiscal 2000 as a result of new product development projects.

Selling, General and Administrative. Selling, general and administrative
expenses in the third quarter of fiscal 1999 increased to $1.7 million, or 18%
of revenue, from $1.2 million, or 22% of revenue, in the third quarter of
fiscal 1998. Selling, general and administrative expenses for the first nine
months of fiscal 1999 were $5.1 million, or 25% of revenue, an increase from
$3.7 million, or 20% of revenue, in the comparable period of fiscal 1998. In
the first nine months of fiscal 1998, PDI collected some older extended
receivables that had previously been reserved. Without this cash collection,
total selling, general and administrative costs for the first nine months of
fiscal 1998 would have been $4.0 million. The increase in these expenses for
the first nine months of fiscal 1999 from the comparable period of fiscal 1998
was due to higher commission and other selling expenses related to increases in
orders and revenue. Expenses related to business development activities have
also contributed to the increase in these expenses. Selling, general and
administrative expenses may increase in absolute dollar amounts in fiscal 1999
and in future periods depending on factors such as the level of PDI's revenue
and operating expenses. Selling expenses may also fluctuate based on PDI's
product and territorial sales mix, which have different sales channels and
associated cost structures.

Asset Recovery Related to Product Line Disposal. During the quarter ended
December 31, 1997, the Company received a payment of $350,000 in settlement of
a dispute related to the cancellation of its Defect Monitoring Tool ("DMT")
product line. In September 1996, PDI ceased operations of its DMT product line.
The DMT product group worked exclusively on a single customer project not in
the FPD market. As a result of the cancellation of this project, PDI expensed
the associated inventory and assets of this product line which were not
transferred to other products.

Interest Income. Interest income for the three and nine month periods ended
June 30, 1999 were $39,000 and $162,000, respectively, as compared to $46,000
and $184,000, respectively, for the three and nine month periods ended June 30,
1998. The decreases resulted from a slight decrease in interest rates in fiscal
1999 as compared to fiscal 1998.

Interest Expense and Other. Interest expense and other consists of interest
expense, foreign exchange gains and losses, and other miscellaneous income and
expenses.

Provision for Income Tax. The provision for income taxes for the three and
nine month periods ended June 30, 1999 was related to taxes at PDI's foreign
subsidiaries. There were no U.S. taxes during this period due to PDI's net
operating loss for the nine months ended June 30, 1999.

58
<PAGE>

Comparison Of The Years Ended September 30, 1998 And 1997.

Results of Operations

The following table sets forth certain operating data as a percentage of
total revenue:

<TABLE>
<CAPTION>
Years Ended
September 30,
---------------
1998 1997
------ -------
<S> <C> <C>
Revenue:
Product sales............................................. 100.0% 94.5%
Non-product............................................... 0.0 5.5
------ -------
100.0 100.0
------ -------
Cost of revenue:
Product sales............................................. 58.2 56.3
Non-product............................................... 0.0 0.0
------ -------
58.2 56.3
------ -------
Gross margin................................................ 41.8 43.7
------ -------
Operating expenses:
Research and development.................................. 26.4 31.7
Selling, general and administrative....................... 24.0 23.0
Asset recovery related to product line disposal........... (1.6) 0.0
------ -------
Total operating expenses................................ 48.8 54.7
------ -------
Operating loss.............................................. (7.0) (11.0)
Other income, net........................................... 1.0 1.0
------ -------
Loss before provision for income taxes...................... (6.0) (10.0)
Provision for income taxes.................................. 0.5 0.1
------ -------
Net loss.................................................... (6.5)% (10.1)%
====== =======
</TABLE>

Revenue. Revenue decreased 9% from $24.5 million in fiscal 1997 to $22.4
million in fiscal 1998. Revenue from product sales decreased by $0.7 million
from $23.1 million to $22.4 million over the same period. This decrease in
revenue in fiscal 1998 was due to an overall slowdown in FPD capital equipment
purchases in Asia in conjunction with the financial difficulties in Korea and
Japan, known as the "Asian Crisis." Additionally, in 1998 PDI's revenues on
sales to Japan were lower than expected because of contractual price reductions
based on currency exchange rates throughout the year. In the future, PDI does
not expect to enter into any such agreements.

International sales accounted for $21.4 million and $24.0 million of revenue
in fiscal 1998 and 1997, respectively. Sales to Japan increased to $10.2
million in fiscal 1998 from $7.2 million in fiscal 1997, while sales in Korea
decreased to $10.3 million in fiscal 1998 from $14.7 million in fiscal 1997. In
fiscal 1998, sales to companies based in Korea represented 46% of total annual
revenue, as compared to 60% in fiscal 1997.

PDI introduced several new products at the end of fiscal 1997 and during
fiscal 1998, including the ArrayChecker, SpotLite, Muralook and MicroMaster.
Although PDI's new products have significant improvements in throughput and
testing specifications over the last generation of products and customer
satisfaction with PDI's new products has been high, PDI has experienced a
reduction in orders for these new products due to turmoil in the economies of
the Asian countries where the majority of PDI's customers are located. Because
PDI derives substantially all of its revenue from the sale of a relatively
small number of systems, which typically range in price from $0.4 million to
$1.5 million, the timing of the sale of a single system could have and has had
a significant impact on PDI's revenue in any particular period.

59
<PAGE>

Non-product revenue in fiscal 1997 consisted of a non recurring $1 million
initial fee paid by a Korean company for the rights to be the exclusive value
added reseller of PDI's FIS Flex-P product in Korea.

Gross Margin. Overall gross margin as a percent of revenue decreased to
41.8% in fiscal 1998, from 43.7% in 1997. The gross margin for product sales
increased to 41.8% in fiscal 1998, from 40.5% in fiscal 1997. Unlike 1997, PDI
had no high margin non-product revenue during fiscal 1998. This accounts for
the overall decrease in gross margins. Additionally, product gross margins will
fluctuate on a quarterly basis as PDI's product mix changes. Although product
gross margins in 1998 were slightly higher than in 1997, they were below PDI's
expectations due to production inefficiencies associated with PDI's current low
revenue levels and continued investment by PDI in worldwide customer service,
especially in Korea. Additionally, PDI earned lower margins on systems sold to
its partner in Japan, IHI. Sales to IHI typically have a lower gross margin as
IHI is responsible for certain sales and support costs in Japan.

At the end of fiscal 1998, PDI planned a reduction in force that consisted
mainly of manufacturing personnel and decreased overall headcount by 5%. PDI
executed this plan in early fiscal 1999. PDI also plans to initiate engineering
programs to decrease the cost of its products during fiscal 1999.

Research and Development. PDI decreased its research and development
expenses to $5.9 million in fiscal 1998, or 26.4% of revenue, from $7.8 million
in fiscal 1997, or 31.7% of revenue. The decrease of research and development
spending in fiscal 1998 reflects the completion of the engineering projects
related to the development of PDI's ArrayChecker system in fiscal 1997,
including a decrease in spending on prototype materials and outside
consultants. The decrease also reflects PDI's efforts to control discretionary
spending in response to the financial uncertainties in Asia during fiscal 1998.
PDI does not expect that product development expenses will decline in absolute
dollar amounts during fiscal 1999.

Selling, General and Administrative. Selling, general and administrative
expenses decreased to $5.4 million, or 24% of revenue, in fiscal 1998 from $5.6
million, or 23% of revenue, in fiscal 1997. Selling expenses fluctuate based on
PDI's product and territory sales mix, which have different sales channels and
associated cost structures. In fiscal 1998, PDI entered into an agreement with
a new sales representative in Taiwan. Selling, general and administrative
expenses may increase in absolute dollar amounts in fiscal 1999 and in future
periods depending on various factors, including the level of PDI's revenue and
other operations.

Asset Recovery Related to Product Line Disposal. During the quarter ended
December 31, 1997, PDI received a payment of $350,000 in settlement of a
dispute related to the cancellation of its Defect Monitoring Tool ("DMT")
product line. In September 1996, PDI ceased operations of its DMT product line.
The DMT product group worked exclusively on a single customer project not in
the FPD market. As a result of the cancellation of this project, PDI disposed
of the associated inventory and assets of this product line which were not
transferred to other products.

Interest Income and Expense. Interest income in fiscal 1998 decreased to
$245,000 from $348,000 in fiscal 1997 as a result of reduced average cash and
investment balances throughout the fiscal year. Interest expense and other
consists of interest expense and foreign exchange gains and losses.

Provision for Income Taxes. The provision for income taxes in fiscal 1998
was related to taxes by PDI's foreign subsidiary in Korea. U.S. taxes were
minimal in fiscal 1998 and 1997 as a result of PDI's net operating losses. As
of September 30, 1998 PDI had available federal and state net operating loss
carryforwards of approximately $14.3 million and $0.7 million, respectively.
PDI also had federal and state research and development tax credit
carryforwards of approximately $1.2 million and $0.7 million, respectively. The
net operating loss and credit carryforwards will expire at various times
beginning in 1999 through 2013 if not utilized. As of September 30, 1998, PDI
had deferred tax assets of approximately $9.9 million, for which no benefit has
been recorded on PDI's financial statements, and which consist primarily of net
operating loss and research and development tax credit carryforwards. These
deferred tax assets will be recognized in future periods as taxable income is
realized and consistent profits are reported.

60
<PAGE>

Liquidity and Capital Resources

PDI has financed its growth primarily by a combination of equity financings,
loans, lines of credit, and cash flows from operations. As of June 30, 1999,
PDI had working capital of $14.9 million of which $5.9 million was cash and
cash equivalents.

Cash used in operating activities was $1.2 million for the nine months ended
June 30, 1999. Working capital items that significantly impacted cash balances
in the period were accounts receivable, inventories and accounts payable. PDI's
accounts receivable balance increased $5.1 million to $11.1 million in the
third quarter of fiscal 1999 from $6.0 million in the fourth quarter of fiscal
1998 due to higher shipments. This higher level of shipments resulted in a $2.4
million decrease in inventories from $6.8 million in the fourth quarter of
fiscal 1998 to $4.4 million in the third quarter of fiscal 1999. Accounts
payable increased $0.6 million from $1.5 million in the fourth quarter of
fiscal 1998 to $2.1 million in the third quarter of fiscal 1999 due to the
purchase of additional materials required to meet the increased production
requirements.

Cash generated by operating activities was $1.3 million for fiscal 1998.
Working capital items that significantly impacted cash balances were accounts
receivable and inventory. During the period, PDI's accounts receivable balance
decreased by $3.8 million to $6.0 million. This was due to lower fourth quarter
revenues and collections by PDI of a large quantity of its older receivables
balances throughout the year. PDI's credit terms to customers typically extend
a small portion of the payment, generally 10%, for a period of months after
shipment. During fiscal 1998, PDI exerted a tremendous effort to collect all of
its older outstanding receivables and successfully collected amounts that had
previously been reserved for. In fiscal 1998, inventory levels increased by
$1.7 million, reflecting an increase in raw material, work-in-progress and
finished goods inventory. This increase was due to customer purchase orders
that requested shipments at the beginning of the first quarter of 1999, rather
than late in the fourth quarter of 1998.

Capital expenditures during the first nine months of fiscal 1999 were
$180,000 compared to $484,000 in the first nine months of fiscal 1998.

Capital expenditures in fiscal 1998 and fiscal 1997 were $.7 million and
$1.6 million, respectively. Higher spending levels in 1997 resulted from PDI's
relocation to a new facility in the first quarter of fiscal 1997 and related
leasehold improvements costs. Spending levels in 1998 were in line with PDI's
normal annual capital requirements.

PDI has entered into a $3.5 million line of credit with a bank which expires
in March 2000. The line of credit is secured by substantially all of PDI's
assets and contains certain financial and other covenants. PDI is eligible to
borrow against accounts receivable and a portion of inventories. Borrowings
under this line of credit bear interest at the prime rate plus 1.00% to 1.25%
(10.00% to 10.25% as of June 30, 1999). At June 30, 1999, $1.0 million was
outstanding under this bank line of credit, and PDI was in compliance with all
bank covenants.

PDI believes that cash and cash equivalents, borrowings from the line of
credit, and cash flow from operations will be sufficient to satisfy working
capital requirements and capital equipment needs for the next twelve months. As
of June 30, 1999, PDI had no material outstanding commitments to purchase or
lease capital equipment.

PDI believes that success in its industry requires substantial capital in
order to maintain the flexibility to take advantage of opportunities as they
may arise. PDI may, from time to time, invest in or acquire complementary
businesses, products or technologies and may seek additional equity or debt
financing to fund such activities. There can be no assurance that such funding
will be available to PDI on commercially reasonable terms. The sale of
additional equity or convertible debt could result in dilution to PDI's
shareholders.

61
<PAGE>

Year 2000 Computer System Compliance

The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of PDI's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing the disruption of operations, including
among other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. In addition to PDI's
own systems PDI relies, directly and indirectly, on external systems of its
customers, vendors creditors, financial organizations, utilities providers and
government entities, both domestic and international (collectively, "Third
Parties"). Consequently, PDI could be affected by disruptions in the operations
of Third Parties with which PDI interacts.

PDI is in the process of addressing internal and external Year 2000 issues
and has established a task force with this responsibility. To date, PDI has
made several modifications to its product software, its enterprise software and
its network software to ensure Year 2000 compliance. Although PDI believes that
its products and internal systems are currently Year 2000 compliant, there can
be no assurance that the Third Parties which PDI interacts are or will be Year
2000 compliant. Failure of Third Party enterprises to achieve Year 2000
compliance could have a material adverse effect on PDI's business, financial
condition and results of operations. PDI continues to evaluate the estimated
costs associated with the efforts to prepare for Year 2000 based on actual
experience. While the efforts will involve additional costs, PDI believes,
based on available information, that it will be able to manage its total Year
2000 transition without any material adverse effect on its business operations,
products or financial prospects. The actual outcomes and results could be
affected by future factors including, but not limited to, the continued
availability of skilled personnel, cost control, the ability to locate and
correct software code problems, critical suppliers and subcontractors meeting
their commitments to be Year 2000 compliant, and timely actions by customers.
PDI anticipates that it will remediate all Year 2000 risks and be able to
conduct normal operations without having to establish a Year 2000 contingency
plan; accordingly, PDI does not have a contingency plan and does not intend to
establish one. There is no guarantee, however, that all problems will be
foreseen and corrected or that no material disruption of business will occur.

62
<PAGE>

PDI MANAGEMENT AFTER THE MERGER

Executive Officers and Directors

<TABLE>
<CAPTION>
Position Held With
Name Age the Company/Principal Occupation
---- --- --------------------------------
<C> <C> <S>
Directors
Mr. Vincent Sollitto, Jr. .. 51 President and Chief Executive Officer
Mr. Francios J. Henley...... 39 Chief Executive Officer of Silicon Genesis
Corporation
Mr. E. Floyd Kvamme......... 61 Chairman of the Board and General Partner of
Kleiner Perkins Caufield & Byers IV, a venture
capital partnership
Mr. Barry L. Cox............ 57 Chairman of the Board of Directors of Quantum
Effect Devices, Inc.
Mr. Michael J. Kim.......... 54 Vice President, Business Development, FDS,
Philips Components
Dr. Malcolm J. Thompson..... 54 President & Chief Executive Officer of Novalux,
Inc.
Officers
Mr. Vincent Sollitto, Jr. .. 51 President and Chief Executive Officer
Mr. Richard Dissly.......... 55 Chief Financial Officer and Vice President of
Operations
Dr. William Pratt........... 62 Chief Technical Officer
Mr. Jeff Hawthorne.......... 41 Vice President, Development
Mr. Richard Amtower......... 56 Vice President, Photon Dynamics, Inc. and
President of CR Technology, Inc.
</TABLE>

Mr. Sollitto joined PDI as Chief Executive Officer in June 1996 and became a
member of the Board of Directors of PDI in July 1996. From August 1993 to 1996,
Mr. Sollitto was the General Manager of Business Unit Operations for Fujitsu
Microelectronics, Inc. From April 1991 to August 1993, he was the Executive
Vice President of Technical Operations at Supercomputer Systems, Incorporated.
Mr. Sollitto spent twenty one years in various positions, including Director of
Technology and Process at International Business Machines Corporation, before
joining Supercomputer Systems, Incorporated. Mr. Sollitto serves as a director
of Irvine Sensors Corp. Mr. Sollitto is a graduate of Tufts College where he
received a B.S.E.E. in 1970.

Mr. Henley founded PDI in 1986 and has been a member of the Board of
Directors since that time. He has been Chief Executive Officer of Silicon
Genesis Corporation since June 1997. From July 1994 to July 1997, Mr. Henley
was Chief Technical Officer of the Company and from June 1986 to June 1994, he
held various other positions in PDI, including that of President. Prior to
1986, Mr. Henley held various engineering positions at Hewlett-Packard Company,
Intel Corporation and Spectrum Sciences, Inc. Mr. Henley received a B.S.E.E.
from Rensselaer Polytechnic Institute in 1980 and an M.S.E.E. from the
University of California, Berkeley in 1982, where he completed Ph.D. course
requirements in quantum electronics.

Mr. Kvamme has been a member of the board of directors of PDI since 1986. He
has been a general partner of Kleiner Perkins Caufield & Byers since March
1984. Mr. Kvamme also serves on the boards of directors of Harmonic, Inc.,
Prism Solutions, Inc., Brio Technology, National Semiconductor, Power
Integrations, Inc. and several privately held companies. Mr. Kvamme received a
B.S.E.E. from the University of California, Berkeley and an M.S.E. from
Syracuse University.

Mr. Cox has been a member of the board of directors of PDI since 1990 and is
currently a consultant and private investor. Mr. Cox served as the President,
Chief Operating Officer and a director of Weitek Corporation from 1992 to 1993
and served as its President and Chief Executive Officer from 1993 to 1995. Mr.
Cox was a founder and director of ATEQ Corporation, a semiconductor capital
equipment manufacturer, and from 1987 to 1992 served as its President and Chief
Executive Officer. Mr. Cox has also joined Quantum Effect Devices, Inc. as the
Chairman of the Board in July 1998. Mr. Cox received a B.S. in engineering from
the U.S. Air Force Academy and an M.B.A. from Boston University.

63
<PAGE>

Mr. Kim has been a member of the board of directors of PDI since 1991. He is
the Vice President, Business Development at FDS, Philips Components in San
Jose, California. He was a corporate Senior Vice President of LG Electronics,
Inc. and has served as the head of the San Jose Technology Center of LG
Electronics, Inc. from 1993 to February 1999. From 1988 to 1992, Mr. Kim served
as a Vice President at Goldstar Technology, Inc., formerly a subsidiary of LG
Electronics, Inc. Mr. Kim received a B.S.E.E. from the University of Illinois,
Chicago and an M.S.E.E. from the University of Santa Clara.

Dr. Thompson has been a member of the board of directors of PDI since 1992.
He is the President and Chief Executive Officer of Novalux, Inc. located in
Sunnyvale, California. Prior to Novalux he was President and CEO of dpiX Inc.
Dr. Thompson was previously Chief Technologist for Xerox PARC from 1981 to
1996. He also has served as Chairman of the Board of the Unites States Display
Consortium (USDC), an industry-government consortium of over 135 member
companies. Dr. Thompson received a B.S. and a Ph.D. in Applied Physics from the
University of Brighton, Sussex in the United Kingdom.

Mr. Dissly joined PDI in November 1998 as Chief Financial Officer and Vice
President of Operations. He has more than twenty years of experience in
establishing profitable business models and systems with several rapidly
growing international electronics companies. Prior to joining Photon Dynamics,
Mr. Dissly was the CFO of Semaphore Communications, CrossCheck Technology,
AwardSoftware, and Megatest Corporation. His responsibilities have included
managing operations, strategic planning, MIS, finance, human resources, and
facilities. Mr. Dissly has an M.B.A. from Santa Clara University and is a
licensed certified public accountant.

Dr. Pratt joined PDI in October 1996 as the Chief Technical Officer for
Software. From 1988 through 1994 he was Director of Multimedia and Imaging
Technology at Sun Microsystems, Inc. In 1993, he founded Pixelsoft, Inc., a
start-up image processing software development company. Dr. Pratt received a
B.S. degree in electrical engineering from Bradley University and an M.S. and
Ph.D. in electrical engineering from University of Southern California. Dr.
Pratt holds five patents and is the author of several books on image
processing.

Mr. Hawthorne joined PDI in November 1991 as Senior Applications Engineer,
FIS Products. He was promoted to Project Manager FIS Products and then General
Manager and Vice President, General Manager, Inspection Products Division in
August 1992 and in September 1994, respectively. From June 1990 to November
1991, he was a consultant with Display Tech, Inc., which provided consulting
services in the area of liquid crystal displays. He received a B.S. in
engineering physics from the University of Colorado in 1987 and a M.S. in
optical engineering from the University of Rochester in 1990.

Mr. Amtower joined CRT in 1984 and has served as a member of the board of
directors and the President and Chief Executive Officer of CRT since that time.
Mr. Amtower is a graduate of the University of California at Riverside, where
he received a B.A. degree in physics in 1965.

Board Committees And Meetings

During the fiscal year ended September 30, 1998, the board of directors of
PDI held thirteen meetings. The board of directors has an audit committee and a
compensation committee.

The audit committee meets with PDI's independent auditors at least annually
to review the results of the annual audit and discuss the financial statements;
recommends to the board the independent auditors to be retained; and receives
and considers the accountants' comments as to controls, adequacy of staff and
management performance and procedures in connection with audit and financial
controls. The audit committee is composed of three (3) non-employee directors:
Messrs. Kvamme, Thompson and Kim. It met once during such fiscal year. The
compensation committee makes recommendations concerning salaries and incentive
compensation, awards stock options to employees and consultants under PDI's
stock option plans and otherwise determines compensation levels and performs
such other functions regarding compensation as the board may delegate. The
compensation committee is composed of three (3) non-employee directors: Messrs.
Kvamme, Cox and Krausz. It met once during such fiscal year.

64
<PAGE>

During the fiscal year ended September 30, 1998, all directors except Mr.
Kim attended at least 75% of the aggregate of the meetings of the board of
directors and of the committees on which he served, held during the period for
which he was a director or committee member, respectively.

Board Composition

Director Compensation

Each non-employee director of PDI is entitled to receive a per meeting fee
of $1,000 plus $500 for each committee meeting attended by the committee
member. In the fiscal year ended September 30, 1998, the total compensation
paid to non-employee directors was $70,500. Dr. Thompson elected to forego cash
compensation for service as a non-employee director of PDI during the last
fiscal year. The members of the board of directors are also eligible for
reimbursement for their expenses incurred in connection with attendance at
board meetings in accordance with PDI policy. During the last fiscal year, the
Company granted options covering an aggregate 10,000 shares in the individual
amounts of 2,500 shares to each of Messrs. Cox, Henley, Krausz, and Thompson at
an exercise of $3.00 per share. Options granted during the last fiscal year
have exercise prices equal to 100% of the fair market value on the date of
grant (based on the closing sales price reported in the Nasdaq National Market
for the date of grant). As of November 30, 1998, no options had been exercised
by non-employee directors during the last fiscal year.

65
<PAGE>

Compensation of Executive Officers

The following table shows for the fiscal years ended September 30, 1996,
1997 and 1998, compensation awarded or paid to, or earned by, PDI's Chief
Executive Officer and its other four most highly compensated executive officers
at September 30, 1998 (the "Named Executive Officers"):

Summary Compensation Table

<TABLE>
<CAPTION>
Annual Compensation Other Annual Securities
------------------------- Compensation Underlying
Name and Principal Position Year Salary ($) Bonus ($) ($) Options (#)(1)
- --------------------------- ---- ---------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Vincent Sollitto.......... 1998 234,766 50,000 -- --
Chief Executive Officer 1997 225,900 50,000 -- --
1996 64,048 -- -- 81,727

Carl J. Meurell........... 1998 155,002 5,000 76,461(2) 12,000
Vice President, Marketing 1997 144,679 29,500 32,639(2) 12,000
and
Business Development 1996 -- -- -- 37,876

Jeffrey Hawthorne......... 1998 154,327 16,640 -- 22,000
Vice President, 1997 126,771 5,000 -- 10,000
Development
1996 126,618 3,250 -- 20,000

William Pratt............. 1998 149,732 19,600 -- 22,000
Chief Technical Officer 1997 133,024 44,600 -- 40,000
1996 -- -- -- --

Vince M. DePalma(3)....... 1998 155,712 40,000 -- 72,000
Vice President, 1997 -- -- -- --
Technology
1996 -- -- -- --

Howard M. Bailey(4)....... 1998 131,423 42,000 -- 22,000(5)
Chief Financial Officer 1997 155,693 54,000 -- --
and Secretary
1996 150,503 49,875 -- 38,700(5)
</TABLE>
- --------
(1) Subsequent to September 30, 1998, PDI repriced options held by certain
employees, including certain Named Executive Officers. Reference is made
to the PDI's Annual Report on Form 10-KSB.
(2) Represents commissions earned.
(3) Mr. DePalma resigned as Vice President, Technology of PDI as of September
11, 1998.
(4) Mr. Bailey resigned as Chief Financial Officer and Secretary of PDI as of
June 30, 1998.
(5) All outstanding options were cancelled following Mr. Bailey's resignation
from PDI (See Note 4).

66
<PAGE>

Stock Option Grants and Exercises

PDI grants options to its executive officers under its 1995 Stock Option
Plan. As of November 30, 1998, options to purchase a total of 999,410 shares
were outstanding under the Option Plan and options to purchase 255,632 shares
remained available for grant thereunder.

The following tables show for the fiscal year ended September 30, 1998,
certain information regarding options granted to, exercised by, and held at
year-end by, the Named Executive Officers:

Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
Individual Grants
-----------------------------------
%
Number of Of Total Options
Securities % Granted To
Underlying Options Employees in Exercise price Expiration
Name Granted (#)(1) Fiscal Year ($/SH)(1) Date
- ---- ------------------ ---------------- -------------- ----------
<S> <C> <C> <C> <C>
Mr. Sollitto, Jr. ...... -- -- -- --
Mr. Meurell............. 6,966 1.64% $ 3.25 03/30/08
5,034 1.19% $ 3.25 03/30/08
Mr. Hawthorne........... 10,000 2.35% $5.0630 10/27/07
12,000 2.83% $ 3.25 03/30/08
Dr. Pratt............... 10,000 2.35% $5.0630 10/27/07
12,000 2.83% $ 3.25 03/30/08
Mr. DePalma............. 60,000 14.13% $5.0630 10/27/07
12,000 2.83% $ 3.25 03/30/08
Mr. Bailey.............. 9,600 2.26% $5.0630 (2)
400 .001% $5.0630 (2)
12,000 2.83% $ 3.25 (2)
</TABLE>
- --------
* Less than one percent.
(1) Subsequent to September 30, 1998, PDI repriced options held by certain
employees, including certain Named Executive Officers. Reference is made to
PDI's Annual Report on Form 10-KSB.
(2) Outstanding options cancelled following Mr. Bailey's resignation from PDI
as of June 30, 1998.

Aggregated Option Exercises in Last Fiscal Year

<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised In-
Unexercised The-Money
Options at FY- Options at FY-
Shares End End
Acquired on Value Realized (#) Exercisable/ ($) Exercisable/
Name Exercise (#) ($) Unexercisable(1) Unexercisable(1)
- ---- ------------ -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Mr. Sollitto, Jr. ...... -- -- 107,999/92,001 --/--
Mr. Meurell............. -- -- 1,295/10,705 --/--
Mr. Hawthorne........... -- -- 40,732/31,268 $59,292/$19,367
Dr. Pratt............... -- -- 1,440/10,560 --/--
Mr. DePalma............. -- -- 14,460/57,360 --/--
Mr. Bailey.............. 62,322 118,538 --/--(2) --/--(2)
</TABLE>
- --------
(1) Subsequent to September 30, 1998, PDI repriced options held by certain
employees, including certain Named Executive Officers. Reference is made to
PDI's Annual Report on Form 10-KSB.
(2) In addition to the 62,322 shares acquired pursuant to stock option
exercises during the last fiscal year, unexercised options to purchase
74,835 shares were cancelled following Mr. Bailey's resignation from PDI as
of June 30, 1998.

67
<PAGE>

Employment Agreements

Each of Messrs. Sollitto and Hawthorne is party to an agreement which
provides certain severance and other benefits in the event of a termination of
such person's employment with the Company following a change of control of the
Company. In the event of a termination of such officer's employment (other than
a voluntary termination by the officer or a termination for cause) that occurs
within up to fifteen (15) months of a change in control of the Company, the
officer is entitled to between six (6) months and fifteen (15) months of
severance payments and benefits depending upon the timing of such termination
and the officer's obtaining alternative employment following termination. Upon
such change of control, each officer's options under the Option Plan become
fully exercisable if his employment is to terminate as of the closing of the
change of control. If such officer's employment is to continue following a
change of control, vesting of his options is accelerated by two (2) years as of
the closing of the change of control. Under these agreements, severance
benefits consist of a continuation of the officer's base salary and non-
discretionary bonuses, if any, during the applicable severance period and of
his medical, health and other insurance benefits.

Limitation of Liability and Indemnification Matters

PDI has adopted provisions in its articles of incorporation which eliminate
the liability of the directors of PDI to the fullest extent permissible under
California law and authorize PDI to indemnify its directors and officers within
certain applicable limits of the California Corporations Code. Such limitation
of liability does not affect the availability of equitable remedies, such as
injunctive relief or recession. In addition, PDI's bylaws provide that PDI
shall indemnify its directors and officers who are, or are threatened to be
made, parties to proceedings as a result of their position with PDI against
expenses, judgments, fines, settlements and certain other amounts in connection
with such proceedings, subject to certain limitations, except that with regard
to any action by or in right of PDI, such indemnification shall be only for
certain expenses incurred by such parties and shall be subject to certain
limitations, including compliance with fiduciary obligations.

PDI has entered into separate indemnification agreements with its officers
and directors that contain provisions which are in some respects broader than
the specific indemnification provisions contained in the California
Corporations Code. The indemnification agreements may require PDI, among other
things, to indemnify these officers and directors against certain liabilities
that may arise by reason of their status or service to PDI as directors,
officers or employees or in some other official capacities and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of PDI pursuant to the foregoing provisions, or otherwise,
PDI has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is therefore, unenforceable.

There is no pending litigation or proceeding involving a director or officer
of PDI as to which indemnification is being sought, nor is PDI aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.

Certain Transactions of PDI

During fiscal year 1998, LG Electronics purchased approximately $6.2 million
of PDI's systems. Since the date of purchase and through June 1999, LG
Electronics was a significant shareholder and was represented on PDI's board of
directors.

At September 30, 1998, PDI had a loan outstanding in the principal amount of
$72,520 to Francois J. Henley, a director of PDI. Such loan was entered into in
June 1995 for the purpose of exercising options to purchase Common Stock of
PDI. Such loan is evidenced by a full recourse promissory note secured by
shares of PDI's Common Stock and is due on June 1, 2000. The interest rate on
such loan is 6.83%, compounded semiannually. PDI forgave all accrued interest
under the promissory note and the promissory note was paid in August 1999.

68
<PAGE>

On October 10, 1996, Vincent Sollitto, Jr., Chief Executive Officer and a
director of the Company, issued a full recourse promissory note to the Company
in the amount of $56,253 at an interest rate of 6.72%, compounded annually, for
the purpose of purchasing Common Stock of the Company. Under the terms of the
promissory note, principal and accrued but unpaid interest were payable in
installments in the amount of ten percent (10%) of Mr. Sollitto's salary on the
first day of each month beginning on November 1, 1996. The Company forgave all
accrued interest under the promissory note and this promissory note was repaid
in September 1998.

The Company has entered into indemnity agreements with certain officers and
directors which provide, among other things, that the Company will indemnify
such officer or director, under the circumstances and to the extent provided
for therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings which he is or may be made a party by
reason of his position as a director, officer or other agent of the Company,
and otherwise to the full extent permitted under California law and the
Company's Bylaws.

69
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF PDI

The following table sets forth certain information regarding the ownership
of PDI's common stock as of August 24, 1999 by: (i) each director and nominee
for director; (ii) each of the executive officers named in the Summary
Compensation Table; (iii) all executive officers and directors of PDI as a
group; and (iv) all those known by PDI to be beneficial owners of more than
five percent (5%) of its common stock.

<TABLE>
<CAPTION>
Beneficial Ownership(1)
-------------------------
Number of Percent
Beneficial Owner Shares of Total
- ---------------- ------------ -----------
<S> <C> <C>
Kern Capital Management LLC(2)..................... 928,400 11.94%
114 West 47th Street
Suite 1926
New York, NY 10036

Fidelity Management(3)............................. 525,700 6.76%
One Federal Street
Boston, MA 02109

Wechsler & Co Inc.(4).............................. 498,429 6.29%
105 S Bedford Road
Suite 310
New York, NY 10549

Norman J. Wechsler(4).............................. 498,429 6.29%

Dimensional Fund Advisors(5)....................... 490,000 6.30%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401

Francois J. Henley(6).............................. 146,944 1.88%
E. Floyd Kvamme(7)................................. 27,636 *
Vincent Sollitto, Jr.(8)........................... 157,033 1.99%
Jeffrey Hawthorne(9)............................... 71,616 *
Barry L. Cox(10)................................... 25,833 *
Richard Dissly(11)................................. 17,094 *
William Pratt(12).................................. 33,640 *
Malcolm J. Thompson(13)............................ 25,833 *
Michael Kim(14).................................... 6,666 *
All executive officers and directors as a group (9 512,295 6.32%
persons)(15)......................................
</TABLE>
- --------
* Less that 1%
(1) This table is based upon information supplied by officers, directors and
principal shareholders and Schedules 13D and 13G filed with the
Securities and Exchange Commission (the "SEC"). Unless otherwise
indicated in the footnotes to this table and subject to community
property laws where applicable, PDI believes that each of the
shareholders named in this table has sole voting and investment power
with respect to the shares indicated as beneficially owned. Applicable
percentages are based on 7,774,925 shares outstanding on August 24, 1999,
adjusted as required by rules promulgated by the SEC.
(2) Includes 928,400 shares held by Kern Capital Management LLC. Robert E.
Kern and David G. Kern may be deemed beneficial owners of these shares in
that they are the controlling members of Kern Capital Management. However,
they do not own shares in PDI themselves and disclaim beneficial ownership
of the foregoing shares of PDI's common stock except to the extent of any
pecuniary interest therein.
(3) Includes 510,800 shares indirectly held by Fidelity Management & Research
Company, and 14,900 shares indirectly held by Fidelity Management Trust
Company.

70
<PAGE>

(4) Includes 498,429 shares held of record by Wechsler & Co., Inc. ("Wechsler
& Co") and 498,429 shares held of record by Norman J. Wechsler, the
president of Wechsler & Co.
(5) Certain registered investment companies and commercial group trusts
advised by Dimensional Fund Advisors Inc. own 490,000 shares of Photon
Dynamics, Inc. Dimensional Fund Advisors Inc. owns no shares of Photon
Dynamics, Inc., and disclaims all beneficial ownership.
(6) Includes 36,078 shares subject to stock options held by Mr. Henley
exercisable within 60 days of the date of this table.
(7) Includes 4,166 shares subject to stock options held by Mr. Kvamme
exercisable within 60 days of the date of this table.
(8) Includes 132,020 shares subject to stock options held by Mr. Sollitto
exercisable within 60 days of the date of this table.
(9) Includes 63,383 shares subject to stock options held by Mr. Hawthorne
exercisable within 60 days of the date of this table.
(10) Includes 9,966 shares subject to stock options held by Mr. Cox
exercisable within 60 days of the date of this table.
(11) Includes 16,200 shares subject to stock options held by Mr. Dissly
exercisable within 60 days of the date of this table.
(12) Includes 33,042 shares subject to stock options held by Dr. Pratt
exercisable within 60 days of the date of this table.
(13) Includes 25,833 shares subject to stock options held by Mr. Thompson
exercisable within 60 days of the date of this table.
(14) Includes 6,666 shares subject to stock options held by Mr. Kim
exercisable within 60 days of the date of this table.
(15) Includes shares described in the notes above, as applicable. Includes
shares which certain executive officers, directors and principal
shareholders of the Company have the right to acquire within 60 days of
the date of this table pursuant to outstanding options and warrants.

71
<PAGE>

INFORMATION RELATING TO CRT

Business of CRT

CRT is a leading worldwide supplier of X-ray and automated visual inspection
systems for the electronics and semiconductor industries. CRT offers a suite of
products to inspect all types of printed circuit board assemblies and
semiconductor packages. CRT's machine vision and image technologies products
have been developed during over sixteen years of experience in manufacturing
environments. CRT's products emphasize ease-of-use with respect to the user
interface. CRT's products utilize proprietary X-ray and other machine vision
technologies to enable electronics and semiconductor manufacturers to analyze
and report on product quality at critical steps in the manufacturing process.
CRT manufactures and distributes products for both off-line inspection purposes
and for automated monitoring of process-induced defects in printed circuit
boards, semiconductors and other electronics. CRT's products include manual and
automated real-times X-ray systems that inspect and verify the assembly of
internal semiconductor features and "hidden" printed circuit board features and
optical inspection systems to monitor the assembly of populated printed circuit
boards.

Driven by the need to put more performance and capability into smaller
packages, manufacturers of electronic products are increasingly building high-
density assemblies with smaller components and more complex connections.
Examples of such products include cell phones, personal digital assistants,
notebook computers, electronic cameras, electronic games and many other
everyday electronic products. CRT's machine vision and imaging systems are used
by customers to control quality, monitor production processes and reduce costs
of the semiconductor devices, electronic components, and/or electronic
assemblies that they manufacture. CRTs X-ray systems are available with a wide
range of X-ray sources and imagers to provide solutions tailored to individual
customer's needs.

Industry Background

Market Overview. CRT believes that a common trend driving the need for
automated visual inspection systems in both the semiconductor and printed
circuit board manufacturing industries is the increasing density and complexity
of advanced electronics product designs that contain features which cannot be
adequately inspected by human observation. High resolution and high
magnification are required to inspect these micron-sized features. The
increasing density and complexity of advanced electronics designs is in turn
being driven by consumer demands for electronic products that have provided
increasingly more features and power within a single compact device. One
example of the industry's response to these demands is the increasing use of
components with hidden connections under the package, which can only be
inspected with X-ray or machine vision technology. Unlike older integrated
circuits which have leads around the edges of their packages, these ball-grid-
array components are connected to printed circuit boards by an array of solder
balls underneath the package, where they are hidden from visual inspection. CRT
believes that the growing use of ball-grid-array devices in advanced
electronics products is a major factor influencing the purchase and use of X-
ray and machine vision inspection equipment by electronics manufacturers.

These trends to smaller packages, greater complexity and rapid time to
market, combined with pressure on reducing costs, are causing traditional
electrical testing systems and manual inspection to be inadequate. Electronics
manufacturers have recognized the need for new inspection systems using X-ray
and automated optical inspection to check, measure and control the quality of
finished product.

The need to reduce cost and increase quality and precision requirements has
also resulted in electronics manufacturers shifting more of their production to
contract manufacturing. Many major manufacturers, such as Compaq Computers,
have discontinued their board production lines and out-sourced production to
contract manufacturers. This shift has created an additional product sales
opportunity for CRT's products as contract manufacturing production increases.

Current worldwide sales of X-ray and visual inspection systems are estimated
at approximately $300 million per year and are estimated to be growing at
compounded annual growth rate of 20% to 25%, according to Prime Research Group
and the Electronic Industries Association.

72
<PAGE>

Market Segmentation. CRT markets its products to manufacturers of
semiconductor devices and their customers, manufacturers of print circuit
boards assemblies and manufacturers of other electronic components, modules and
assemblies, as well as other manufacturers, end-users and OEMs. The following
discussion includes both domestic and international markets with respect to
such customers.

Semiconductor Market. The semiconductor industry is an important existing
market for CRT's X-ray inspection systems, and a large prospective market for
CRT's machine vision inspection systems. The world market for semiconductor
capital equipment in 1997 was approximately $35.3 billion, according to
Dataquest, of which approximately $17.5 billion was spent on test, assembly and
packaging equipment. The test, assembly and packaging equipment market forecast
for 1998 for this market sector was estimated to be approximately $21 billion,
representing growth of approximately 20% for this market, with an annual growth
of 20% to 25% expected to continue, according to the Semiconductor Equipment &
Materials International.

Semiconductor manufacturers are among the largest electronic companies and
many are members of the Fortune 100. The top five semiconductor manufacturers
are Intel Corporation, Motorola, Texas Instruments, IBM and Lucent
Technologies, with total combined revenues from semiconductors sales of over
$39 billion. The semiconductor market includes two main categories of customers
for CRT's products: manufacturers of integrated circuits, microprocessors,
dynamic random access memory chips and digital signal processors (DSPs), such
as Intel Corporation, Texas Instruments and Motorola; and contract assemblers--
companies that assemble silicon integrated circuit chips into usable packages
by mounting the die on lead frames, bonding wires to the chips, and
encapsulating the package. Contract assemblers include Anam, Amkor, Alphatec,
Kyocera and smaller companies. Contract assembler companies are mostly
privately held and are typically located in the Pacific Rim or have major
offshore operations outside the United States.

Semiconductor customers purchase X-ray and machine vision inspection systems
to verify the correct packaging of semiconductor devices. Examples of
semiconductor device features inspected include die attach, bond wires and
encapsulation. Because of the small geometry involved in inspecting
semiconductor devices, these customers typically purchase high resolution, high
magnification systems, with average prices of $160,000 or more.

Purchasing decisions are based primarily on image quality, system features,
customer support and service and price. CRT believes that, of all these
factors, price is not the most important consideration for such customers.
Customers will nearly always "try before they buy", either by evaluating
equipment at trade shows, visiting other customer sites, or by visiting the
supplier's factory. X-ray inspection system purchases are important decisions,
as the equipment will be used for five to ten years or more.

CRT believes that there are more than 500 semiconductor manufacturers,
contract assemblers and foundries that are potential customers for CRT's X-ray
inspection systems. In addition, many of the leading semiconductor
manufacturers, such as Intel Corporation, Motorola and Texas Instruments, have
multiple production facilities.

Printed Circuit Board Market. Printed circuit board manufacturers purchase
both X-ray inspection systems and machine vision printed circuit board
inspection systems, such as CRT's RTI-6500/6520 product. These systems can be
quickly and easily set up for automated inspection of populated printed circuit
boards for common defects, including missing components, wrong components,
mispositioned components, polarity errors, solder defects and other problems.
Printed circuit board manufacturers benefit from reduced labor, lower
inspection costs, improved quality and increased customer satisfaction.

X-ray inspection is typically used only by the more advanced printed circuit
board manufacturers who use new component types with hidden solder joints.
Examples of these new component types include ball-grid-array and micro ball-
grid-array and chip scale packaging. Because the solder connections are
concealed underneath the component, only X-ray inspection systems can verify
that these components are correctly soldered to the printed circuit board.
Automated visual inspection reduces the cost of inspection, reduces the cost of
in-circuit electrical testing, and improves processes and product quality for
printed circuit board manufacturers.

73
<PAGE>

The use of X-ray is growing rapidly as new components with concealed solder
joints are gaining wider use. The number and type of integrated circuits
packaged as ball-grid array devices is estimated to be growing annually at a
compounded annual growth rate of 62%, and is anticipated to account for up to
4.5% of all integrated circuit packages sold worldwide by the year 2001, or
over 3 billion packages per year. Printed circuit board manufacturers are more
price-sensitive than semiconductor manufacturers and pricing is therefore a
more important consideration for these customers. X-ray inspection systems
purchased by the printed circuit board manufacturers are believed to average in
the range of $100,000 per system to $125,000 per system.

CRT believes that there are more than 5,000 potential customers in the
printed circuit board market, and that many of such customers present multiple
installation opportunities for both X-ray and automated machine vision
inspection systems. Because real-time, in-line inspection is desired, the
buying decision is typically based primarily on a hands-on product evaluation
by the potential customer, and on price. CRT's new CRX-80 X-ray inspection
system, priced at approximately $65,000, is specifically designed for this
market.

Electronic Products Manufacturers. The electronics industry includes not
only semiconductor manufacturers and printed circuit board manufacturers, but
component and subsystem manufacturers, manufacturers of products for consumers,
OEMs and other end users as well. The total electronics market in 1997 was
approximately $835 billion, according to Dataquest, of which approximately $154
billion was comprised of semiconductor products. Electronic product
manufacturers, both contract and captive, accounted for approximately $443
billion in sales in 1997, with growth projected at over 13% per year, to up to
approximately $700 billion by the year 2001, according to Semiconductor
Equipment & Materials International.

Manufacturers of various electronic products and devices, such as power
supply, cell phone and toy manufacturers, either manufacture their own
products, or wish to verify the quality of products which they outsource to
contract manufacturers. CRT believes that there are over 30,000 companies
involved in manufacturing various other electronic products and believes that
the largest ten percent of such electronic product manufacturers, or
approximately 3,000 companies, are potential customers for CRT's products.

The electronic products market includes three main categories of customers
for CRT's products:

. Captive (in-house) manufacturers: These customers are comprised primarily
of the internal manufacturing operations of large electronics companies
and their only products are the parent company's products. Many large
companies, such as Rockwell, IBM, Compaq Computers/Digital Equipment
Corporation, Hewlett-Packard, Honeywell, Sun Microsystems and Qualcomm,
maintain such internal production operations. These major electronics
companies have internal printed circuit board manufacturing operations
for historic reasons. However, the trend toward outsourcing board
manufacturing is growing rapidly. In 1997, nearly 90% of electronic
product manufacturing sales were generated by captive manufacturing
operations. These customers typically produce only a few products over
relatively long production runs.

. Contract manufacturers: These customers are independent operating
companies who perform contract assembly services for electronics
companies. These companies operate in a quick-turn, high-mix, low-volume
environment, although production runs for larger customers can be longer.
Contract manufacturing service companies are estimated to be growing at a
rate of 27% per year, as more companies turn to contract manufacturing to
reduce costs and improve efficiency. The best known contract
manufacturers include SCI Systems, Solectron, Celestica, Jabil Circuits
and AVEX Electronics. The large number of smaller manufacturers and the
relatively small market share of the top five contract manufacturing
companies suggests the presence of a large, diverse market that is highly
competitive and committed to developing and maintaining a competitive
edge.

. End-user companies: These are companies that outsource their
manufacturing and wish to verify the quality of the products which are
delivered to them by their outsource suppliers. Such end-user companies
may wish to inspect final assemblies, printed circuit boards, and/or
critical components such as high-cost semiconductor devices.

74
<PAGE>

Other Markets. Other potential customers for CRT's products include OEMs and
VARs, as well non-electronic product manufacturers, customized inspection
product end-users, and display inspection end-users. Although CRT believes that
there are potentially thousands of such other prospective customers, CRT
conservatively estimates that approximately 500 companies within this market
segment are viable prospects for CRT's current X-ray and machine vision
inspection systems. However, as new products are developed by CRT which might
be more suitable for such companies, CRT expects this potential market to
present a greater marketing opportunity for its products.

The current market-by-market segmentation that CRT believes represents the
allocation of potential sales of CRT's products in the respective markets are
as follows:

. Approximately 10% for the semiconductor manufacturer market

. Approximately 55% for the printed circuit board manufacturer market

. Approximately 25% for the electronic products manufacturer market

. Approximately 10% for all other markets identified above

Products

CRT offers a suite of products designed to provide a variety of
nondestructive X-ray and machine vision inspection tools primarily for
semiconductor and printed circuit board manufacturers.

CRT's products share a common Windows(R) operating platform, with similar
graphical user interfaces and controls. Products can be networked together to
provide factory-and enterprise-wide access to product defect and production
data. Customers use these systems to detect and identify defects in integrated
circuits, electronic components and printed circuit boards, to reduce
inspection costs, and to improve yields and quality on production lines. Both
CRT's X-ray and visual inspection product lines are based on proprietary
machine vision and image processing technology, integrated with an attractive
user interface.

Automated Optical Inspection Systems. CRT's Automated Optical Inspection
(AOI) systems automatically check assembled printed circuit boards for defects
in assembly, many of which cannot be detected electrically. Common printed
circuit board defects checked by CRT's AOI systems include solder defects,
missing or wrong components, component position errors, wrong polarity, and
other defects. CRT offers both off-line systems and in-line systems, which can
check printed circuit boards either before or after the soldering step in the
manufacturing process.

CRT's AOI 2020 product is a low-cost, bench-top printed circuit board
inspection system. The AOI 2020 system offers off-line operation only and is
based on scanner technology. The AOI 2020 system is specifically designed to
target the large market of small contract manufacturing companies which often
cite price as the most important criteria influencing their purchasing
decision. With a maximum printed circuit board size of 9" x 12", the AOI 2020
system is well suited for inspection of notebook computer motherboards and
similar compact, complex assemblies.

CRX Real-time X-ray Inspection Systems. CRT's CRX X-ray inspection systems
are offered in manual, semi-automated and automated formats. Each CRX System
provides high-quality X-ray images of hidden features in both semiconductor and
electronic products. CRX systems all use high-resolution X-ray subsystems for
sharp, high magnification images, with CRT's proprietary Windows-based image
processing software. CRX customers use these systems to analyze failures, to
control quality and to monitor processes on their production line. Typical
defects found with CRX systems include hidden solder joint defects, broken
wiring, missing components and other defective assembly features. CRT offers a
variety of CRX systems to meet customer

75
<PAGE>

requirements for resolution, magnification, penetration, pricing and other
factors, including the following products:

. CRX-80 -for printed circuit board sizes up to 18" x 24", with up to 80
kev output;

. CRX-1000 -for semiconductor manufacturing use; up to 160 kev, with over
1000x magnification; and

. CRX-2000 -for semiconductor manufacturing and printed circuit board sizes
up to 18" x 24", with up to 160 kev.

RTl-6500 and RTI-6520 Printed Circuit Board Inspection Systems. CRT's RTI-
6500 and RTI-6520 products are off-line and in-line inspection systems,
respectively, which automatically inspect populated printed circuit boards for
correct assembly. Typical defects found by the RTl-6500 and RTI-6520 systems
include incorrect components, wrong placement or position, incorrect polarity,
solder defects and other defects. The RTI-6500 is an off-line (stand-alone)
system which can inspect printed circuit board sizes up to 24" x 24". The RTI-
6520 is an in-line system with a built-in conveyor which inspects printed
circuit board sizes up to 18" x 20" on the production conveyor line, without
the need for manual load or unload. Each system features an integrated multi-
camera/lighting head which indexes over the surface of the printed circuit
board, selecting different magnifications depending on the size of the
components.

XRV Combined X-ray and Machine Vision Inspection Systems. As indicated
above, CRT's product suite includes both X-ray and AOI inspection systems,
which CRT believes is a competitive advantage in selling to the printed circuit
board industry. Many of CRT's customers have found the ability to use both X-
ray and AOI inspection systems to be a desirable capability, and have ordered
both X-ray and AOI products from CRT. CRT's newest product, the XRV, combines
X-ray and visual inspection into one system, using X-ray specifically to verify
the quality of ball-grid-array components, and using optical inspection to
check visible features.

The XRV combo system is an automated, in-line printed circuit board
inspection system which combines the respective advantages of visual and X-ray
inspection, allowing the simultaneous inspection of both visible and hidden
features on a printed circuit board. The XRV system uses cameras for optical
inspection to check for missing or incorrect components, misplacement of
components, orientation, polarity errors and other visually evident defects.
The XRV inspects the majority of features on a printed circuit board using its
integrated video cameras. The system also uses an X-ray source, an X-ray-
sensitive video camera and radiation shielding and interlocks to add X-ray
image processing to the optical inspection sequence for ball-grid-array, micro
ball-grid array, flip chip and other chip scale packages, J-leads and other
hidden solder connections which cannot be visually inspected. The XRV system is
designed to automatically check every feature on assembled printed circuit
boards while reducing handling and speeding throughput and saving floor space.

Patents and Proprietary Rights

CRT currently holds two United States patents issued in April 1986 and March
1989; although CRT believes that neither patent is essential to CRT's business.
CRT has recently applied for a patent on its XRV combo system. CRT's software
products are copyrighted and are generally licensed to customers pursuant to a
license agreement that restricts the use of the products to the customer's
purposes using a designated CRT inspection system. CRT also attempts to protect
its trade secrets and other proprietary information through proprietary
information agreements with its employees and consultants.

CRT frequently reviews its inventions and attempts to determine which
inventions will provide substantial differentiation between CRT's products and
those of its competitors. In certain cases, CRT may also choose to

76
<PAGE>

keep an invention or a process as a trade secret. Trade secrets are routinely
employed in CRT's manufacturing processes. CRT has entered into non-disclosure
agreements to protect its proprietary technology with its employees and
consultants. Because of rapid technological developments in the semiconductor,
printed circuit board and electronic products industries and the broad and
rapidly developing patent coverage in such industries, the patent position of
any manufacturer or industry participant, including CRT, is subject to
uncertainties and may involve complex legal and factual issues. Consequently,
although CRT holds certain patents and is currently processing additional
patent applications, there can be no assurance that patents will issue from any
pending applications or that claims allowed by any existing or future patents
issued to CRT will not be challenged, invalidated, or circumvented, or that any
rights granted thereunder will provide adequate protection to CRT. Furthermore,
there can be no assurance that others will not develop technologies that are
similar or superior to CRT's technology, duplicate CRT's technology or design
around the patents owned by CRT. In addition, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries.
There can be no assurance that the steps taken by CRT will prevent
misappropriation of its technology. In addition, litigation may be necessary in
the future to enforce CRT's patents and other intellectual property rights, to
protect CRT's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on CRT's business, financial
condition or results of operations. Moreover, CRT may be required to
participate in interference proceedings to determine the priority of
inventions, which also could result in substantial cost to CRT. See "Risks
Relating to the Business of CRT--CRT's Intellectual Property Protection May Be
Inadequate or Ineffective."

Research and Development

The market for X-ray and machine vision inspection equipment is
characterized by rapid and continuous technological development and product
innovation. CRT believes that continued and timely development of new products
and enhancements to existing products is necessary to maintain its competitive
position. Accordingly, CRT devotes a portion of its personnel and financial
resources to research and development programs and seeks to maintain close
relationships with customers to remain responsive to their product needs and to
identify market demands. CRT's current research and development efforts are
focused on increasing the performance and reliability of its inspection
systems, enhancing the functionality of its inspection systems, expanding the
application of its existing inspection systems for use in other related markets
and developing new vision and X-ray inspection products for the semiconductor
manufacturing and electronic assembly industries. Because the proprietary
software incorporated by CRT into its products represents a significant portion
of the value added by these products, as much as 75% of CRT's research and
development personnel are focused on software development.

CRT's research and development expenses were approximately $612,000 and
$291,000 in fiscal 1998 and fiscal 1997, respectively, or approximately 7% and
5% of net sales, respectively. Research and development expenses consist
primarily of salaries, project materials and other costs associated with CRT's
ongoing efforts to improve and enhance CRT's existing products and related
software and to develop new products.

Customers, Sales and Service

CRT sells its products primarily to semiconductor manufacturers and printed
circuit board manufacturers and assemblers, as well as to other electronic
product manufacturers and end-users. Sales to CRT's top ten customers
contributed 34% of revenue in fiscal 1998 and 46% of revenue in fiscal 1997.
Sales to CRT's top five domestic customers contributed 15% of revenue and 25%
of revenue in fiscal 1998 and fiscal 1997, respectively, and sales to CRT's top
five international customers contributed 18% of revenue and 21% of revenue in
fiscal 1998 and fiscal 1997, respectively.

CRT's revenue is obtained primarily from sales of its inspection systems to
printed circuit board manufacturers and assemblers and to semiconductor
manufacturers. In the semiconductor and printed circuit

77
<PAGE>

board manufacturer market, CRT focuses on high-end applications where its high
resolution, advanced image processing and machine vision technologies and
products provide its customers with unique product quality assurance
capabilities. In the electronic products manufacturer market, CRT's sales
strategy is to focus on contract manufacturers who seek a competitive
advantage. Operating on narrow margins, these contract manufacturers compete by
reducing costs and improving quality, as well as promoting their advanced
capabilities. These customers require flexible systems that are easy to set up
and cost-efficient.

CRT maintains its marketing, sales and service office at its headquarters in
Aliso Viejo, California. CRT's domestic (North American) sales strategy
generally includes both direct sales and manufacturer representatives, who act
as commission-only salespersons for their principals. CRT seeks out
representatives with experience, a proven track record, and most importantly,
an excellent reputation for integrity, product knowledge and reliability.

CRT generally sells its products on net 30-day terms to its customers, with
a small portion held back until final acceptance. However, a substantial
portion of its customers remit payments on significantly longer terms. CRT
generally warrants its products for a period of one year from final acceptance
by customers. Installation is generally included in the price of the product.
CRT's field engineers provide customers with repair and maintenance services.
Customers may enter into repair and maintenance service contracts covering
CRT's products. CRT provides customer training for a fee to enable its
customers to perform routine service and provides telephone consultation
services generally free of charge. CRT does not consider its business to be
seasonal in nature, but it may become cyclical with respect to the capital
equipment procurement practices of major semiconductor and printed circuit
board manufacturers.

Manufacturing and Suppliers

CRT's principal manufacturing activities take place in Aliso Viejo,
California and consist primarily of assembling and testing components and
subassemblies which are acquired from third party vendors and then integrated
into CRT's finished products. Certain of the components and subassemblies
included in CRT's inspection systems are obtained from a single source or a
limited group of suppliers. CRT has not entered into any formal agreements with
such suppliers, other than long-term purchase orders and, in some cases, volume
pricing agreements. The partial or complete loss of such suppliers could
increase CRT's manufacturing costs or delay product shipments while CRT
qualifies a new supplier, could require redesigning CRT's products and could
therefore have an adverse effect on CRT's results of operations and damage
customer relationships. Further, a significant increase in the price of one or
more of the components supplied by such suppliers could adversely affect CRT's
results of operations.

Sub-assemblies, such as X-ray cabinets, printed circuit boards and
electronic enclosures, are contracted to third parties for manufacturing and
initial testing. CRT outsources these functions to maximize its production
efficiency and to focus its efforts on product development and design. CRT's
manufacturing consists of final assembly, test, burn-in and quality control for
its systems, subassemblies and components. These functions are all performed in
CRT's facilities in Aliso Viejo, California.

CRT schedules production based upon firm customer purchase orders and
anticipated orders during the planning cycle. CRT generally expects to be able
to accept a customer order, build the required machinery and ship to the
customer within eight weeks. Quality control is maintained through incoming
inspection of components, in-process inspection during equipment assembly and
final inspection and operation of all manufactured equipment prior to shipment.
CRT works in close collaboration with its employees, customers and suppliers
and trains all of its employees in basic quality.

Backlog

As of June 30, 1999, CRT's backlog was approximately $3.0 million, as
compared to approximately $1.0 million as of June 30, 1998. CRT's backlog
consists of those customer orders for which it has accepted

78
<PAGE>

purchase orders and assigned shipment dates within the next two quarters. All
orders are subject to delay or cancellation with limited or no penalty to the
customer. Because of possible changes in product delivery schedules and
cancellation of product orders, because orders received by CRT in any
particular quarter may vary significantly and because CRT's sales will often
reflect orders shipped in the same quarter they are received, CRT's backlog may
vary significantly and at any particular date is not necessarily indicative of
actual sales for any succeeding period.

Competition

The component inspection systems industry is highly competitive. CRT faces
substantial competition from many firms, ranging from small regional companies
to large national corporations, some of which have larger service
organizations, long-standing customer relationships and greater financial,
engineering, manufacturing and marketing resources than CRT. CRT also expects
that it may face additional competition from new entrants into the component
inspection systems industry and from competitors utilizing new technologies.
CRT believes that it can compete effectively with these firms by building on
its substantial installed customer base, providing technologically superior,
competitively priced products, continuing to emphasize its easy-to-use user
interface and customer support, and offering best performance at any price
point. However, there can be no assurance that CRT will be able to do so.

CRT's competitors can be expected to continue to improve the design and
performance of their products and to introduce new products with competitive
price/performance characteristics. In addition, CRT's customers may choose to
develop proprietary technology and equipment, which may obviate or lessen their
need to purchase CRT's products. CRT's customers may also use multiple
technologies and solutions, including competitors' products, to replicate the
functionality of CRT's systems. Competitive pressures may necessitate price
reductions, which could adversely affect CRT's results of operations. Although
CRT believes that it has certain technological and other advantages over its
competitors, realizing and maintaining such advantages will require a continued
high level of investment by CRT in engineering, research and development,
marketing and customer service and support. There can be no assurance that CRT
will have sufficient resources to continue to make such investments or that
even if sufficient funds are available, CRT will be able to make the
technological advances necessary to maintain such competitive advantages.

Competitors of CRT in the X-ray inspection systems field include Fein Focus
(Germany), Sony Corporation and Toshiba (Japan), Nicolet Imaging Systems (a
division of Thermo-Spectra Corporation), and a number of smaller companies in
the USA, Europe and Japan. CRT's X-ray systems compete with these companies by
providing a wide range of X-ray features, resolutions and magnifications at
competitive prices. CRT's proprietary image processing system provides images
and inspection capabilities that CRT believes are equivalent or superior to
that of its competitors.

Competitors in the printed circuit board inspection systems field include
Teradyne, GenRad, Hewlett-Packard, Orbotech, Omron, and a number of smaller
companies in the USA, Europe and Japan. Some of these competitors have entered
the imaging market through the acquisition of other companies. When comparing
systems offered by CRT's competitors, customers have expressed a preference for
the user interface and inspection capabilities of the RTl 6500 and 6520, and
for the rapid payback of the equipment. The rapid payback is achieved by labor
and test cost savings compared to purchase price and cost of operation. CRT
also believes that it has a competitive advantage based on its X-ray inspection
systems product line, which offers synergistic and compatible inspection
capabilities to its customers, many of whom have purchased both X-ray and
machine vision inspection systems.

Governmental Regulation

79
<PAGE>

are sold or used. Compliance with such regulations, which include C.F.R.
Section 21, Subchapter J, in regard to the CRX X-ray inspection systems, may be
time-consuming and expensive and may delay or even prevent sales in the United
States or in particular jurisdictions. See "Risks of the Business of CRT--CRT's
Business May Be Adversely Affected If It Is Unable to Comply With Governmental
Regulations."

Facilities

CRT currently occupies approximately 19,700 square feet of office,
manufacturing and warehouse space at its headquarters in Aliso Viejo,
California. CRT leases this space through a lease agreement, which expires in
2004. Monthly rent for CRT's headquarters is approximately $17,353. In addition
to base rent, CRT also pays for utility costs and other expenses. CRT believes
its facilities are adequate for its current needs and that suitable additional
space will be available as and if needed.

Employees

As of June 30, 1999, CRT employed 46 persons. Many of CRT's employees are
highly skilled, and CRT's success will depend in part upon its ability to
retain such employees and attract new qualified employees, who are in great
demand. CRT has never had a work stoppage or strike, and no employees are
represented by a labor union or covered by a collective bargaining agreement.
CRT considers its employee relations to be good. See "Risks of the Business of
CRT--Failure To Retain or Attract Key Personnel Could Adversely Affect CRT."

80
<PAGE>

CRT MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. To the extent that the following discussion
discusses financial projections, information or expectations about products or
markets of CRT, all such forward-looking statements are based on information
available to CRT on the date hereof, and CRT assumes no obligation to update
any such forward-looking statements. It is important to note that the CRT's
actual results could differ materially from those in such forward-looking
statements. CRT's results will be affected, particularly when measured on a
quarterly basis, by the volume, composition and timing of orders for capital
equipment by semiconductor manufacturers and printed circuit board
manufacturers. Other uncertainties include, without limitation, acceptance of
new products, timing of orders received, costs associated with new product
introductions, and managing growth, as well as those discussed in "Risks of the
Business of CRT."

Overview

CRT develops, manufactures and markets X-ray and automated optical
inspection ("AOI") systems for the electronics and semiconductor industries to
inspect all types of printed circuit board assemblies and semiconductors
packages. CRT's products utilize proprietary X-ray and other machine vision
technologies to enable electronics and semiconductors manufacturers to analyze
and report on product quality at critical steps in the manufacturing process.

CRT manufactures and markets products for both off-line inspection purposes
and for automated monitoring of process-induced defects in printed circuit
boards, semiconductors and other electronics. CRT's products include manual and
automated real-time X-ray systems that inspect and verify the assembly of
internal semiconductor features and "hidden" printed circuit board features and
optical inspection systems to monitor the assembly of populated printed circuit
boards.

CRT's revenue is obtained primarily through sales of its products to
semiconductor manufacturers and printed circuit board manufacturers and, to a
lesser extent, other electronic product manufacturers and contract
manufacturers. CRT does not expect that service revenue for continuing
maintenance of its products will represent a significant portion of its revenue
in 1999.

The following table sets forth certain operating data as a percentage of
total revenue:

<TABLE>
<CAPTION>
Six Months
Ended Years Ended
June 30, December 31,
------------ --------------
1999 1998 1998 1997
----- ----- ------ ------
<S> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 52.0 53.4 56.4 55.7
----- ----- ------ ------
Gross profit...................................... 48.0 46.6 43.6 44.3
----- ----- ------ ------
Operating expenses:
Selling, general and administrative............. 29.1 35.9 34.3 31.7
Research and development........................ 5.0 5.7 7.1 5.1
----- ----- ------ ------
Total operating expenses.......................... 34.1 41.6 41.4 36.8
----- ----- ------ ------
Operating income.................................. 13.9 5.0 2.2 7.5
Interest income (expense) and other income........ 0.3 0.4 0.4 0.6
----- ----- ------ ------
Income before provision for income taxes.......... 14.2 5.4 2.6 8.1
Provision (benefit) for income taxes.............. 1.3 1.0 (0.4) (2.4)
----- ----- ------ ------
Net income........................................ 12.9% 4.4% 3.0% 10.5%
===== ===== ====== ======
</TABLE>

81
<PAGE>

Comparison of The Six Months Ended June 30, 1998 to the Six Months Ended June
30, 1997

Net sales. Net sales for the six month period ended June 30, 1999 increased
80.0% to $7.4 million from $4.1 million for the comparable period of 1998. The
increase in net sales reflects increased sales in both X-ray inspection systems
and AOI products.

Gross profit. Gross profit for the six month period ended June 30, 1999
increased to $3.6 million, or 48.0% of net sales, from $1.9 million, or 46.6%
of net sales, for the comparable period of 1998. The increase is due primarily
to increased operating efficiencies and increased sales of both X-ray
inspection systems and AOI products.

Selling, general and administrative expenses. Selling, general and
administrative expenses for the six month period ended June 30, 1999 were $2.2
million, or 29.1% of net sales, compared to $1.5 million, or 35.9% of net
sales, for the six month period ended June 30, 1998. The increase is due
primarily to the hiring of additional personnel and increased sales and
marketing costs associated with the increase in net sales of CRT's products.

Research and development expenses. Research and development expenses
increased to $0.4 million, or 5.0% of net sales, for the six month period ended
June 30, 1999 from $0.2 million, or 5.7% of net sales, for the comparable
period of 1998. The increase was due to an increase in costs associated with
the development of new products.

Interest income and other income (net). Interest income and other income
(net) was $24,000 for the six month period ended June 30, 1999 as compared to
$17,000 for the six month period ended June 30, 1998. This was primarily due to
higher cash balances during the first six months of 1999, which accrued
interest.

Income taxes. The provision for income taxes was $97,000 for the six month
period ended June 30, 1999 as compared to $43,000 for the six month period
ended June 30, 1998.

Comparison of Years Ended December 31, 1998 and 1997

Net sales. Net sales in 1998 increased 49.8% to $8.6 million from $5.7
million in 1997. The increase in revenues during 1998 is due to an increase in
sales of CRT's X-ray and AOI inspection system products.

Gross profit. Gross profit as a percent of net sales was 43.6% for 1998
compared to 44.3% in 1997. The lower gross profit for 1998 is primarily due to
slightly higher material costs attributable to the X-ray inspection system
product line.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $2.9 million, or 34.3% of net sales, in
1998 compared to $1.8 million, or 31.7% of net sales, in 1997. The increase in
expenses for 1998 is due to higher sales and marketing expenses associated with
the increase in net sales of CRT's products.

Research and development expenses. Research and development expenses
increased to $0.6 million, or 7.1% of net sales, in 1998 compared to $0.3
million, or 5.1% of net sales, in 1997. The increase in expenses for 1998 is
due to the increased costs of obtaining additional resources to improve CRT's
existing products and to develop new products. In addition, $0.1 million of the
increase is due to reduction of the estimated economic life of capitalized
software costs to three years.

Interest income and other income (net). Interest income and other income
(net) was $37,100 in 1998 compared to $34,500 in 1997. This increase was due to
slightly higher cash balances in 1998, which accrued interested.

82
<PAGE>

Income taxes. The benefit for income taxes was $35,500 in 1998 compared to
$134,200 in 1997. In 1998, the Company recorded a deferred tax benefit of
$160,000 against a current tax provision of $124,500. In 1997, the Company
recorded a deferred tax benefit of $180,000 against a current tax provision of
$45,800. The remaining tax expense of $45,800 is the amount due for the
California franchise tax. CRT has federal net operating loss carry forwards of
approximately $1.5 million as of December 31, 1998, expiring through 2006 if
not utilized.

Liquidity and Capital Resources

Cash provided by operating activities was $246,000 for the year ended
December 31, 1998. Accounts receivable and inventories remained fairly constant
despite a significant increase in sales due to higher collection of accounts
receivable and control of inventory purchases. Accounts payable declined due to
a faster payment cycle to vendors.

Cash provided by operating activities was $797,000 for the six month period
ended June 30, 1999. Working capital items that significantly impacted cash
balances were accounts receivable, inventories and accounts payable. The
increase in shipments during the first six months of 1999 resulted in higher
level of accounts receivables. An increase in inventory purchases required to
meet the higher level of shipments resulted in higher accounts payable and
inventory levels.

Capital expenditures for the year ended December 31, 1998 and 1997 were
$47,900 and $141,700, respectively. Higher spending levels in 1997 were the
result of manufacturing and engineering machinery purchases and computer and
facility upgrades. Spending levels for 1998 were in line with CRT's normal
annual capital requirements.

CRT has a $1.5 million line of credit with a bank which expires on October
4, 1999. Borrowings under this line of credit bear interest at a rate equal to
the prime rate. The line of credit is secured by substantially all of the CRT's
assets and contains certain financial and other covenants. As of June 30, 1999,
there were no outstanding balances under this line of credit, and CRT was in
compliance with all bank covenants.

CRT believes that cash and cash equivalents and cash flow from operations
will be sufficient to satisfy working capital requirements for the next twelve
months. CRT had no material outstanding commitments to purchase or lease
capital equipment as of June 30, 1999. There can be no assurance, however, that
changes in CRT's revenue and operational plans will not result in the
requirement of additional cash resources.

Year 2000 Computer System Compliance

The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of CRT's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing the disruption of operations, including
among other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. In addition to CRT's
own systems, CRT relies, directly and indirectly, on external systems of its
customers, vendors, creditors, financial organizations, utility providers, and
government entities, both domestic and international. Consequently, CRT could
be affected by disruptions in the operations of third parties with which CRT
interacts.

CRT is in the process of addressing internal and external Year 2000 issues
and has established a task force with this responsibility. To date, CRT has
made several modifications to its product software, its enterprise software and
its network software to ensure Year 2000 compliance. Although CRT believes that
its products and internal systems are currently Year 2000 compliant, there can
be no assurance that the third parties with which CRT interacts are or will be
Year 2000 compliant. Failure of third party enterprises to achieve Year 2000

83
<PAGE>

compliance could have a material adverse effect on CRT's business, financial
condition and results of operations. CRT continues to evaluate the estimated
costs associated with the efforts to prepare for the year 2000 based on actual
experience. While the efforts will involve additional costs, CRT believes,
based on available information, that it will be able to manage its total Year
2000 transition without any material adverse effect on its business operations,
products or financial prospects. The actual outcome and result could be
affected by future factors including, but not limited to, the continued
availability of skilled personnel, cost control, the ability to locate and
correct software code problems, critical suppliers and subcontractors meeting
their commitments to be Year 2000 compliant, and timely actions by customers.
CRT anticipates that it will remediate all Year 2000 risks and be able to
conduct normal operations without having to establish a Year 2000 contingency
plan; accordingly CRT does not have a contingency plan and does not intend to
establish one. There is no guarantee, however, that all problems will be
foreseen and corrected or that no material disruption of business will occur.

84
<PAGE>

CRT MANAGEMENT

Executive Officer and Director

The only executive officer and director of CRT that is expected to be an
executive officer and director of PDI after the merger and his age as of August
30, 1999 are as follows:

<TABLE>
<CAPTION>
Position Held With the
Name Age Company/Principal Occupation
---- --- ----------------------------
<S> <C> <C>
Mr. Richard Amtower,(1).... 56 President, Chief Executive Officer and Director
</TABLE>
- --------
(1) Named Executive Officer.

Mr. Amtower joined CRT in 1984 and has served as a member of the board of
directors and the President and Chief Executive Officer of CRT since that time.
Mr. Amtower is a graduate of the University of California, Riverside, where he
received a B.A. degree in physics in 1965.

Board Meetings

During the fiscal year ended December 31, 1998, the CRT board of directors
held three meetings. Mr. Amtower attended each meeting.

Director Compensation

Mr. Amtower, who is the President and Chief Executive Officer of CRT, does
not receive any separate compensation for serving as a director.

Compensation of Executive Officer

The following table shows for the fiscal years ended December 31, 1996, 1997
and 1998 compensation awarded or paid to, or earned by, the named executive
officer:

Summary Compensation Table

<TABLE>
<CAPTION>
Annual
Compensation
--------------- Other Annual Securities
Salary ($) Compensation Underlying
Name and Principal Position Year Bonus ($) ($) Options (#)
--------------------------- ---- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Mr. Richard Amtower................ 1998 145,000 45,000(1) 42,500
President, and Chief Executive
Officer and Director 1997 140,000 40,000(1) 42,500
1996 120,000 40,000(1) 118,882
</TABLE>
- --------
(1) Mr. Amtower also receives a car allowance which currently covers the
expenses of Mr. Amtower under a certain automobile lease dated November
24, 1997 between Mr. Amtower and South Coast Acura.

85
<PAGE>

STOCK OPTION GRANTS AND EXERCISES

CRT has granted options to its directors, executive officers and other
employees. As of June 30, 1998 options to purchase a total of 206,500 shares
were outstanding. Each of such options, to the extent not exercised prior to
the effective date of the Merger, will be assumed by PDI. See "The Merger
Agreement--Stock Options and Warrants."

The following tables show for the fiscal year ended December 31, 1998,
certain information regarding options granted to, exercised by, and held at
year-end by, the named executive officer:

Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
Individual Grants
--------------------------------------
Of Total
Number of Securities Options Granted
Underlying Options to Employees Exercise
Name Granted (#) in Fiscal Year(1) Price ($/SH) Expiration Date
---- -------------------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C>
Mr. Richard Amtower..... 0 0% N/A N/A
</TABLE>
- --------
(1) No options to purchase any shares of CRT common stock were granted to
employees of CRT during the fiscal year ended December 31, 1998.

Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values

<TABLE>
<CAPTION>
Value of
Unexercised
Number of Securities In-The-Money
Underlying Unexercised Options at FY-End
Shares Acquired Value Options at FY-End (#) ($) Exercisable/
Name on Exercise (#) Realized ($) Exercisable/Unexercisable Unexercisable(1)
---- --------------- ------------ ------------------------- -----------------
<S> <C> <C> <C> <C>
Mr. Richard Amtower..... -- -- 34,000/8,500 $525,718/$131,430
</TABLE>
- --------
(1) Represents the difference between (i) the product of (a) the number of
such shares of PDI Common Stock into which the shares of CRT Common Stock
will be converted into in connection with the Merger, multiplied by (b)
the average closing price per share of PDI Common Stock over the ten
trading days prior to August 10, 1999, and (ii) the aggregate exercise
price payable for the shares.

86
<PAGE>

EMPLOYMENT AGREEMENTS

CRT does not have any employment agreements with its named executive
officers or any of its other employees.

All employees of CRT, except commissioned sales personnel, who have been
with CRT for at least three months are eligible for CRT's bonus program in the
following year. Employees with less than one year of full service receive
prorated bonuses according to their percent of the year employed. Maximum bonus
under the bonus plan is 10% of base salary/wages for non-officer employees.
Bonuses may be awarded to an employee based upon CRT's and such employee's
achievement of targeted performance goals, as set by CRT's Board of Directors.

Limitation of Liability and Indemnification Matters

The Bylaws of CRT (the "CRT bylaws") provide that CRT will indemnify its
directors and executive officers and may indemnify its other officers,
employees and other agents to the fullest extent permitted by California law.
CRT is also empowered under the CRT bylaws to enter into indemnification
contracts with its directors and officers and to purchase insurance on behalf
of any person it is required or permitted to indemnify.

In addition, the CRT Articles of Incorporation provide that, to the fullest
extent permitted by California law, CRT's directors will not be liable for
monetary damages for breach of the directors' fiduciary duty of care to CRT and
its shareholders. This provision in the CRT Articles of Incorporation does not
eliminate the duty of care, and in appropriate circumstances, equitable
remedies such as an injunction or other forms of non-monetary relief would
remain available under California law. Under current California law, a
director's liability to CRT or its shareholders may not be limited with respect
to any breach of the director's duty of loyalty to CRT or its shareholders, for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law and for any transaction from which the director
derived an improper personal benefit. This provision also does not affect a
director's responsibilities under any other laws such as the federal securities
laws or state or federal environmental laws.

There is no pending litigation or proceeding involving a director or officer
of CRT as to which indemnification is being sought, nor is CRT aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.

87
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CRT

The following table sets forth certain information regarding the ownership
of CRT's Common Stock as of August 10, 1999 by: (i) each director; (ii) the
named executive officer of CRT; (iii) the named executive officer and directors
of CRT as a group; and (iv) all those known by CRT to be beneficial owners of
more than five percent (5%) of its common stock.

<TABLE>
<CAPTION>
Beneficial
Ownership(1)
------------------
Number of Percent
Beneficial Owner Shares of Total
---------------- --------- --------
<S> <C> <C>
Hall, Morris & Drufva II, L.P.(2)......................... 658,491 49.30%
26161 La Paz Road
Suite E
Mission Viejo, CA 92691
Inco Securities Corp.(3).................................. 81,652 8.31%
145 King Street West
Suite 1500
Toronto, Ontario Canada M5H 4B7
Raoul P. LaBate........................................... 82,187 8.94%
18 North Vista De Catalina
South Laguna, CA 92677
North American Partners L.P. II........................... 73,315 7.98%
12400 Olive Blvd.
Suite 307
St. Louis, MO 63141-1347
Richard E. Amtower(4)..................................... 164,666 17.38%
Ronald J. Hall(5)......................................... 9,819 1.07%
Hall Morris & Drufva Capital Management
26161 La Paz Rd., Suite E
Mission Viejo, CA 92691
George Olenik(6).......................................... 6,000 *
200 Via Antibes #3
Newport Beach, CA 92663
Robert L. Thomason(7)..................................... 162,187 17.35%
PO Box 100-232
Mammoth, CA 93546
Stuart Feiner(8).......................................... 0 *
Inco Limited
145 King Street West
Suite 1500
Toronto, Ontario
CANADA M5H 4B7
All Named Executive Officer and all directors as a group
(5 persons)(9)........................................... 376,672 38.85%
</TABLE>
- --------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal shareholders. Unless otherwise indicated in the footnotes to
this table and subject to community property laws where applicable, CRT
believes that each of the shareholders named in this table has sole
voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 919,011 shares
outstanding on August 10, 1999, adjusted as required by rules promulgated
by the Securities and Exchange Commission. Unless otherwise indicated,
all addresses for the shareholders are c/o CR Technology, Inc., 125B
Columbia , Aliso Viejo, California 92656.

88
<PAGE>

(2) Includes 416,644 shares of common stock of CRT issuable upon conversion
of 416,644 issued and outstanding shares of Series A preferred stock.
(3) Includes 63,356 shares of common stock of CRT issuable upon conversion of
63,356 issued and outstanding shares of Series A preferred stock.
(4) Includes 20,000 shares of common stock of CRT issuable upon conversion of
20,000 issued and outstanding shares of Series A preferred stock and
8,500 shares subject to stock options held by Mr. Amtower exercisable
within 60 days of the date of this table.
(5) Mr. Hall, a director of CRT, is a principal of Hall, Morris & Drufva II,
L.P. Mr. Hall disclaims any beneficial ownership of any of the securities
of CRT beneficially owned by Hall, Morris & Drufva II, L.P.
(6) Includes 6,000 shares subject to stock options held by Mr. Olenik
exercisable within 60 days of the date of this table.
(7) Includes 16,000 shares subject to stock options held by Mr. Thomason
exercisable within 60 days of the date of this table.
(8) Mr. Feiner, a director of CRT, is an executive officer of Inco Securities
Corp. and a principal of North American Partners, L.P. Mr. Feiner
disclaims any beneficial ownership of any of the securities of CRT
beneficially owned by Inco Securities Corp. or North American Partners,
L.P.
(9) Includes shares described in the notes above, as applicable. Includes
shares which certain executive officers, directors and principal
shareholders of CRT have the right to acquire within 60 days of the date
of this table pursuant to outstanding options.

89
<PAGE>

COMPARISON OF CAPITAL STOCK

Description of PDI Capital Stock

The authorized capital stock of PDI consists of 20,000,000 shares of common
stock, no par value, and 5,000,000 shares of preferred stock, no par value.

PDI Common Stock. As of October , 1999, there were shares of PDI common
stock outstanding held of record by approximately shareholders. PDI common
stock is listed on Nasdaq under the symbol "PHTN." Holders of PDI common stock
are entitled to one vote per share on all matters to be voted upon by the
shareholders. With respect to the election of directors, they may also exercise
cumulative voting rights. The holders of PDI common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the board of directors out of funds legally available thereof. In the event of
a liquidation, dissolution or winding up of PDI, holders of PDI common stock
are entitled to share ratably in all assets remaining after payment of
liabilities. Holders of PDI common stock have no preemptive rights and no right
to convert their PDI common stock into any other securities. There are no
redemption or sinking fund provision applicable to PDI common stock. All
outstanding shares of PDI common stock are, and all shares of PDI common stock
to be outstanding after the completion of the merger will be, validly issued,
fully-paid and nonassessable.

PDI Preferred Stock. PDI has 5,000,000 shares of authorized preferred stock,
and no shares are outstanding. The board of directors has the authority to
issue up to 5,000,000 shares of preferred stock, including the series already
designated, in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued and
undesignated shares of preferred stock and to fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by the shareholders. Although it presently has no intentions to
do so, the board of directors, without shareholder approval, can issue
preferred stock with voting and conversion rights which could adversely affect
the voting power or other rights of the holders of PDI common stock. The
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of PDI. PDI has no present plans to issue
preferred stock.

Warrants. The Company has 54,388 warrants outstanding to purchase shares of
Series E preferred stock, which are currently exercisable in exchange for
18,129 shares of common stock at $5.40 per share. The warrants expire in 2000.

Transfer Agent and Registrar. The transfer agent and registrar for the PDI
common stock is Boston Equiserve, Inc., 289 South San Antonio Road, Suite 100,
Los Altos, CA 94022 and its telephone number is (650) 917-3800

Description of CRT Capital Stock

The authorized capital stock of CRT consists of 5,000,000 shares of common
stock, without par value, and 5,000,000 shares of preferred stock, without par
value, 500,000 shares of which are designated as Series A preferred stock.

CRT Common Stock. As of October , 1999, there were shares of CRT common
stock outstanding and held of record by shareholders. Holders of CRT common
stock have no preemptive rights and no right to convert CRT common stock into
any other securities. All outstanding shares of CRT common stock are validly
issued, fully-paid and nonassessable.

CRT Preferred Stock. As of October , 1999, there were shares of CRT
Series A preferred stock outstanding and held of record by shareholders.
The principal rights, privileges and preferences of the issued and outstanding
shares of CRT Series A preferred stock are as set forth below.

90
<PAGE>

Dividend. Holders of CRT Series A preferred stock are entitled to dividend
preferences, when, as and if declared by the Board of Directors, at the rate of
six percent of the original issue price which is $2 per share. All dividends
are non-cumulative. CRT may not pay any dividend, whether in cash or property,
to holders of the CRT common stock.

Liquidation. In the event of any liquidation, dissolution or winding up of
CRT (which, as defined in CRT's Certificate of Determination of Preferences of
the Series A Preferred Stock, "CRT's Certificate of Determination," would
include this merger), holders of CRT Series A preferred stock are entitled to
receive, prior and in preference to any distribution of any assets of CRT to
the holders of CRT common stock, (i) $3.00, (ii) an amount equal to six percent
of the original issue price of $2.00 multiplied by the number of years of full
years such shares of CRT Series A preferred stock have been outstanding and
(iii) all declared and unpaid dividends on such shares of CRT Series A
preferred stock for each share of CRT Series A preferred stock held by them.
After the holders of CRT Series A preferred stock have received the full amount
of their liquidation preference, the remaining assets of CRT shall be
distributed ratably to the holders of CRT common stock and the holders of CRT
Series A preferred stock on an as-if converted to common stock basis.

Conversion. Each share of the holders of CRT preferred stock is convertible
into one share of CRT common stock, subject to anti-dilution adjustment
provisions.

Certain Protective Provisions. In addition to any other rights provided by
law, so long as at least 100,000 shares of the holders of CRT Series A
preferred stock remain outstanding, CRT may not, without first obtaining the
affirmative vote or written consent of the holders of at least a majority of
the outstanding shares of Series A preferred stock: (i) amend the Articles of
Incorporation or the Bylaws to adversely affect the voting powers, preferences
or other special rights or privileges of the CRT Series A preferred stock; (ii)
increase or decrease the authorized number of shares of CRT common stock or CRT
preferred stock; (iii) create any new class or series of stock or any other
securities convertible into equity securities of CRT ranking on a parity or
senior to the CRT Series A preferred stock in rights of redemption, liquidation
preference, voting or dividends or increase the authorized or designated number
of any such class or series; (iv) redeem, repurchase or pay dividends or
distributions with respect to stock ranking junior to CRT Series A preferred
stock; (v) agree with shareholders regarding an asset transfer or acquisition
(which would include this merger); or (vi) increase or decease the authorized
number of members of CRT's board of directors.

Voting Rights. Subject to the protective provisions described above and
except as otherwise required by law, the holders of CRT Series A preferred
stock are entitled to notice of any shareholders' meeting and to vote together
with the shares of the CRT common stock and not as a separate class upon any
matter submitted to the shareholders for a vote. Each holder of shares of CRT
Series A preferred stock shall be entitled to such number of votes as shall be
equal to the whole number of shares of CRT common stock into which such
holder's aggregate number of shares of CRT Series A preferred stock are
convertible immediately after the close of business on the record date fixed
for such meeting or the effective date of such written consent.

COMPARISON OF SHAREHOLDERS' RIGHTS

Upon consummation of the merger, the holders of CRT common stock and CRT
Series A preferred stock will become holders of PDI common stock. As such, the
holders of CRT Series A preferred stock will no longer be entitled to certain
rights and privileges previously provided for in CRT's Certificate of
Determination. Such rights include (i) a dividend preference in the amounts
described above, (ii) a liquidation preference in the amounts described above,
(iii) certain anti-dilution adjustments upon dilutive issuances of CRT capital
stock and (iv) the right to vote as a separate class concerning certain
corporate transactions including this merger. Appraisal and dissenters' rights
are available to shareholders of CRT with respect to the merger. See "Approval
of the Merger and Related Transactions--Rights of Dissenting Shareholders of
CRT."

In addition, certain other rights and privileges of CRT shareholders will
change as a result of the merger. Upon completion of the merger, the percentage
ownership of PDI by each former CRT shareholder will be

91
<PAGE>

substantially less than his, her or its current percentage ownership of CRT.
Accordingly, former CRT shareholders will have a significantly smaller voting
influence over the affairs of PDI than they currently enjoy over the affairs of
CRT. Moreover, certain contractual rights presently possessed by holders of CRT
Series A preferred stock will cease to exist after the merger. Specifically,
certain information rights, registration rights and rights of first refusal
will terminate at the effective date of the merger.

THE BOARD OF DIRECTORS OF PDI RECOMMENDS A VOTE FOR APPROVAL
OF THE ISSUANCE OF SHARES OF PDI'S COMMON STOCK PURSUANT TO THE MERGER
AGREEMENT.

92
<PAGE>

OTHER INFORMATION FOR THE PDI ANNUAL MEETING

Election of Directors

There are six nominees for the nine Board positions presently authorized in
PDI's bylaws. PDI has chosen to nominate only six directors at this time and
may, in the future, consider additional candidates but currently does not
intend to appoint additional members to the Board. Each director to be elected
will hold office until the next annual meeting of shareholders and until his
successor is elected and has qualified, or until such director's earlier death,
resignation or removal. Each nominee listed below is currently a director of
the Company, each having been elected by the shareholders: Vincent Sollitto,
Jr., Francois J. Henley, E. Floyd Kvamme, Barry L. Cox, Michael J. Kim and
Malcolm J. Thompson.

Shares represented by executed proxies will be voted, if authority to do so
is not withheld, for the election of the six nominees named below, subject to
the discretionary power to cumulate votes. Proxies cannot be voted for a
greater number of persons than the number of nominees named. In the event that
any nominee should be unavailable for election as a result of an unexpected
occurrence, such shares will be voted for the election of such substitute
nominee as management may propose. Each person nominated for election has
agreed to serve if elected and management has no reason to believe that any
nominee will be unable to serve.

The six candidates receiving the highest number of affirmative votes cast at
the meeting will be elected directors of the Company.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.

Nominees

The names of the nominees and certain information about them are set forth
below:

<TABLE>
<CAPTION>
Position Held with the
Name Age Company/Principal Occupation
---- --- ----------------------------
<S> <C> <C>
Mr. Vincent Sollitto, Jr. ...... 51 President and Chief Executive Officer

Mr. Francois J. Henley.......... 39 Chief Executive Officer of Silicon Genesis
Corporation

Mr. E. Floyd Kvamme............. 61 Chairman of the Board and General Partner
of Kleiner Perkins Caufield & Byers IV, a
venture capital partnership

Mr. Barry L. Cox................ 57 Chairman of the Board of Directors of
Quantum Effect Devices, Inc.

Mr. Michael J. Kim.............. 54 Vice President, Business Development, FDS,
Philips Components

Dr. Malcolm J. Thompson......... 54 President and Chief Executive Officer of
Novalux, Inc.
</TABLE>

Board Committees and Meetings

During the fiscal year ended September 30, 1998, the board of directors held
thirteen (13) meetings. The board has an audit committee and a compensation
committee.

93
<PAGE>

composed of three (3) non-employee directors: Messrs. Kvamme, Thompson and Kim.
It met once during such fiscal year. The compensation committee makes
recommendations concerning salaries and incentive compensation, awards stock
options to employees and consultants under PDI stock option plans and otherwise
determines compensation levels and performs such other functions regarding
compensation as the board may delegate. The compensation committee is composed
of two (2) non-employee directors: Messrs. Kvamme, and Cox. It met once during
such fiscal year.

During the fiscal year ended September 30, 1998, all directors attended at
least 75% of the aggregate of the meetings of the Board and of the committees
on which he served, held during the period for which he was a director or
committee member, respectively.

Approval of 1995 Stock Option Plan, as Amended

In March 1995, the board of directors adopted, and the shareholders
subsequently approved, PDI's 1995 Stock Option Plan (the "Option Plan"). As a
result of a series of amendments, as of September 30, 1998, there were
1,110,943 shares of the Company's Common Stock reserved for issuance under the
Option Plan.

At September 30, 1998, options (net of cancelled or expired options)
covering an aggregate of 1,216,884 shares had been granted under the Option
Plan and only 279,332 shares (plus any shares that might in the future be
returned to the Option Plan as a result of cancellations or expiration of
options) remained available for future grant under the Option Plan. In November
1998, the board approved an amendment to the Option Plan, subject to
shareholder approval, to increase the number of shares authorized for issuance
under the Option Plan from 1,110,943 shares to 1,340,943 shares. This amendment
is intended to afford PDI greater flexibility in granting employees with stock
options and ensures that PDI can continue to grant such stock options at levels
determined appropriate by the board. During the last fiscal year, options were
granted under the Option Plan covering shares in the amounts as follows: Mr.
Meurell 12,000 shares, Mr. Hawthorne 22,000 shares, Dr. Pratt 22,000 shares,
Mr. DePalma 72,000 shares, Mr. Bailey 22,000 shares, all current executive
officers as a group 150,000 shares, and all employees (excluding executive
officers) as a group 274,700 shares.

Shareholders are requested to approve the Option Plan, as amended. The
affirmative vote of the holders of a majority of the shares present in person
or represented by proxy and voting at the meeting will be required to approve
the Option Plan, as amended. For purposes of this vote abstentions and broker
non-votes will not be counted for any purpose in determining whether this
matter has been approved.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF THE AMENDED OPTION PLAN.

The essential features of the Option Plan, as amended, are outlined below:

General

The Option Plan provides for the grant of both incentive and nonqualified
stock options to employees, officers, directors, independent contractors, and
consultants of PDI and its affiliates.

Incentive stock options granted under the Option Plan are intended to
qualify as "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Nonqualified stock
options granted under the Option Plan are intended not to qualify as incentive
stock options under the Code. See "Federal Income Tax Information" for a
discussion of the tax treatment of incentive and nonqualified stock options.

Purpose

The Option Plan was adopted to give the employees, officers, directors,
independent contractors, and consultants to PDI and its affiliates incentive,
through ownership of PDI's common stock, to continue in their service to PDI
and to help PDI compete effectively with other enterprises for the services of
qualified individuals.

94
<PAGE>

Administration

The board of directors of PDI or a committee composed of two or more members
of the board, is authorized to administer the Option Plan. If administration is
delegated to a committee, such committee will have, in connection with the
administration of the Option Plan, the powers possessed by the board. As used
herein with respect to the Option Plan, the "board" refers to the committee as
well as the board itself.

Notwithstanding the foregoing, a subcommittee of the committee composed
solely of two (2) or more "outside directors," as such term is defined under
Section 162(m) of the Code and the regulations thereunder, shall make all
grants of awards to eligible persons who are "covered employees" as such term
is defined in Section 162(m) of the Code. References to the committee include
the subcommittee.

The board has the power to construe and interpret the Option Plan and,
subject to the provisions of the Option Plan, to determine the persons to whom
and the dates on which options will be granted, what type of option will be
granted, the number of shares to be subject to each option, the time or times
during the term of each option within which all or a portion of such option may
be exercised, the exercise price, the type of consideration, in addition to
cash, that may be used to pay the purchase price upon exercise of the option,
and other terms of the option.

Shares Subject to the Option Plan

Pursuant to the November 10, 1998 amendment, the common stock that may be
issued pursuant to awards under the Option Plan shall not exceed in the
aggregate one million three hundred forty thousand nine hundred forty-three
(1,340,943) shares of PDI's common stock. If any option is surrendered (except
surrender for shares of common stock) or for any other reason ceases to be
exercisable, in whole or in part, without having been exercised in full, the
stock not purchased under such option will revert to and again become available
for issuance under the Option Plan.

Eligibility

Incentive stock options may be granted only to employees (including officers
and directors who are employees). Nonqualified stock options may be granted to
employees, directors, officers, independent contractors, and consultants. All
of PDI's executive officers, employees, consultants and directors of PDI are
eligible to receive grants under the Option Plan. As of November 30, 1998, PDI
and its subsidiaries had approximately one hundred six (106) executive
officers, employees, consultants, and directors. Non-Employee Directors, of
which there are currently six (6) are only eligible to receive the automatic,
non-discretionary stock options described below.

No person is eligible for the grant of an incentive stock option, if at the
time of grant, such person owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of PDI (a "10%
Shareholder") unless the exercise price of such option is at least one hundred
ten percent (110%) of the fair market value of such common stock subject to the
option at the date of grant and the option is not exercisable after the
expiration of five (5) years from the date of grant. The aggregate fair market
value, determined at the time of grant, of the shares of common stock with
respect to which incentive stock options are exercisable for the first time
during any calendar year (under all such plans of PDI and its affiliates) may
not exceed one hundred thousand ($100,000) dollars. In addition, no person
shall be eligible to be granted options covering more than two hundred fifty
thousand (250,000) shares of PDI's common stock in any calendar year.

Terms of Discretionary Options

Term. No discretionary option is exercisable after the expiration of ten
(10) years from the date it was granted.

95
<PAGE>

Exercise/Purchase Price. The exercise price of each discretionary option
will not be less than one hundred percent (100%) of the fair market value of
the common stock on the date of grant.

Consideration. The purchase price of stock acquired pursuant to a
discretionary option is paid either: (a) in cash at the time the option is
exercised; or (b) at the discretion of the committee, (i) by delivery of
already owned common stock of PDI or by withholding common stock otherwise
deliverable upon exercise of the discretionary option, (ii) by delivery on a
form prescribed by the committee of an irrevocable direction to a securities
broker approved by the Committee to sell shares of stock and deliver all or a
portion of the proceeds to PDI in payment for the stock, (iii) by delivery of
the optionee's promissory note with such provisions as the committee determines
appropriate, or (iv) any combination of the foregoing (including cash). If the
exercise price of an option is paid by withholding common stock otherwise
deliverable upon exercise of the option, the committee may issue the optionee
an additional option to purchase a number of shares of common stock equal to
the number of shares withheld. This additional option shall have the same terms
as the option that was exercised except that its exercise price shall be the
fair market value of the common stock on the date of grant of the additional
option.

The committee may, in its sole discretion, authorize the surrender of all or
part of an unexercised option (excluding non-discretionary options described
below) and authorize a payment thereof of an amount equal to the difference
between the aggregate fair market value of the common stock subject to such
option and the aggregate option price of such common stock. Such payment may be
made in cash, shares of common stock (using the fair market value on the date
of surrender), or some combination thereof.

Transferability. An incentive stock option shall not be transferable except
by will or by the laws of descent and distribution, and shall be exercisable
during the lifetime of the person to whom the incentive stock option is granted
only by such person. A discretionary nonqualified stock option shall be
transferable to the extent permitted by the option agreement covering the
option.

Terms of Non-Discretionary Options

General. Each person who is elected for the first time to be a non-employee
director, and who is not an affiliate of a five percent (5%) shareholder (a
"Non-Employee Director"), will automatically, upon the date of his or her
initial election to be a Non-Employee Director, be granted a nonqualified stock
option to purchase 5,000 shares of common stock (an "Initial Grant").
Immediately following each annual meeting of PDI's shareholders, each Non-
Employee Director shall be granted a nonqualified stock option to purchase an
additional 2,500 shares of common stock, provided such Non-Employee Director
has provided services to PDI for at least one year (a "Subsequent Grant").

Term. No non-discretionary option is exercisable after the expiration of ten
(10) years from the date it was granted.

Exercise/Purchase Price. The exercise price of each non-discretionary option
shall be one hundred percent (100%) of the fair market value of the common
stock on the date of grant.

Consideration. The purchase price of stock acquired pursuant to a non-
discretionary option is paid either: (a) in cash at the time the non-
discretionary option is exercised; or (b) at the discretion of the committee,
(i) by delivery of already owned common stock of PDI or by withholding common
stock otherwise deliverable upon exercise of the non-discretionary option, or
(ii) by delivery on a form prescribed by the committee of an irrevocable
direction to a securities broker approved by the committee to sell shares of
stock and deliver all or a portion of the proceeds to PDI in payment for the
stock, or (iii) any combination of the foregoing (including cash).

Transferability. Non-discretionary stock options granted to Non-Employee
Directors shall be transferable to the fullest extent permitted by Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended ("Rule 16b-
3").

96
<PAGE>

Vesting. Each Initial Grant shall be fully vested and exercisable upon
receipt. Each Subsequent Grant shall vest and become exercisable in equal
monthly installments over a period of one year from the date of grant.

Effect of Certain Corporate Events

If any change is made in the common stock subject to the Option Plan, or
subject to any option granted under the Option Plan through merger,
consolidation, reorganization, recapitalization, reincorporation, stock split,
stock dividend (in excess of two percent (2%)) or other change in the capital
structure of PDI, appropriate adjustments shall be made by the committee in
order to preserve but not increase the benefits to the individual, including
adjustments to the number and kind of shares and the price per share subject to
outstanding options.

A stock option agreement may provide for accelerated vesting in the event of
certain changes in control (all grants to Non-Employee Directors shall so
provide). If a stock option agreement contains a change in control provision,
it will also provide that the stock option will remain exercisable for the
remainder of its term except that it will terminate upon the effective date of
a change in control in which PDI is not the surviving entity, or in which all
or substantially all assets of the company are disposed of, sold or
transferred, or upon the complete liquidation or dissolution of PDI.

Amendment of Plan and Grants

The board at any time, and from time to time, may amend the Option Plan.
However, no amendment will be effective without the consent of shareholders
then sufficient to approve the Option Plan in the first instance where the
amendment will increase the maximum number of shares subject to stock options
issued under the Option Plan or change the designation or class of persons
eligible to receive incentive stock options under the Option Plan.

Except for non-discretionary grants to Non-Employee Directors, the board may
amend the terms of any outstanding option. However, any amendment which would
adversely affect the optionee's rights under an outstanding option shall not be
made without optionee's written consent. Notwithstanding the foregoing, the
board may, without written consent, cancel any outstanding option or accept any
outstanding option in exchange for a new option.

Termination of Plan

The board may suspend or terminate the Option Plan at any time or from time
to time. Unless sooner terminated by the board, the Option Plan will terminate
on September 27, 2005.

Federal Income Tax Information

Incentive Stock Options. Options granted under the Option Plan which are
designated as incentive stock options are intended to be eligible for the
favorable federal income tax treatment accorded "incentive stock options" under
Section 422 of the Code.

There generally are no federal income tax consequences to the optionee or
PDI by reason of the grant or exercise of an incentive stock option. However,
the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.

If an optionee holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
at least one year from the date on which the shares are transferred to the
optionee upon exercise of the option, any gain or loss on a disposition of such
stock will be capital gain or loss. Generally, if the optionee disposes of the
stock before the expiration of either of these holding periods (a
"disqualifying disposition"), at the time of disposition, the optionee will
realize taxable

97
<PAGE>

ordinary income equal to the lesser of (a) the excess of the stock's fair
market value on the date of exercise over the exercise price, or (b) the
optionee's actual gain, if any, on the purchase and sale. The optionee's
additional gain, or any loss, upon the disqualifying disposition will be a
capital gain or loss, which will be long-term or short-term depending on how
long the optionee holds the stock. Capital gains are generally subject to lower
tax rates than ordinary income. Slightly different rules may apply to optionees
who acquire stock subject to certain repurchase options or who are subject to
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").

To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, PDI will generally be entitled (subject to the
requirement of reasonableness, the provision of 162(m) of the Code, and the
satisfaction of a tax reporting obligation) to a corresponding business expense
deduction in the tax year in which the disqualifying disposition occurs.

Nonqualified Stock Options. Options granted under the Option Plan which are
not designated as incentive stock options are "nonqualified stock options"
which generally have the following federal income tax consequences:

There are no tax consequences to the optionee or PDI by reason of the grant
of a nonqualified stock option. Upon exercise of a nonqualified stock option,
the optionee normally will recognize taxable ordinary income equal to the
excess of the stock's fair market value on the date of exercise over the option
exercise price. Generally, with respect to employees, PDI is required to
withhold from regular wages or supplemental wage payments an amount based on
the ordinary income recognized. Subject to the requirement of reasonableness,
the provisions of Section 162(m) of the Code, and the satisfaction of a tax
reporting obligation, PDI will generally be entitled to a business expense
deduction equal to the taxable ordinary income realized by the optionee. Upon
disposition of the stock, the optionee will recognize a capital gain or loss
equal to the difference between the selling price and the sum of the amount
paid for such stock plus any amount recognized as ordinary income upon exercise
of the option. Such gain or loss will be long-term or short-term depending on
how long the optionee holds the stock. Slightly different rules may apply to
optionees who acquire stock subject to certain repurchase options or who are
subject to Section 16 of the Exchange Act.

Potential Limitation on Company Deductions. Section 162(m) of the Code
denies a deduction to any publicly held corporation for compensation paid to
certain employees in a taxable year to the extent that compensation exceeds $1
million for a covered employee. It is possible that compensation attributable
to awards granted under the Option Plan, when combined with all other types of
compensation received by a covered employee from PDI, may cause this limitation
to be exceeded in any particular year.

Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m) of the Code,
compensation attributable to stock options will qualify as performance-based
compensation, provided that the option is granted by a compensation committee
comprised solely of "outside directors" and either: (i) the stock option plan
contains a per-employee limitation on the number of shares for which stock
options may be granted during a specified period, the per-employee limitation
is approved by the shareholders and the exercise price of the option is no less
than the fair market value of the stock on the date of grant; or (ii) the
option is granted (or exercisable) only upon the achievement (as certified in
writing by the compensation committee) of an objective performance goal
established in writing by the compensation committee while the outcome is
substantially uncertain and the option is approved by shareholders. Stock
options granted under the Plan are intended to qualify for the exemption for
performance-based compensation.

Approval of 1995 Employee Stock Purchase Plan, as Amended

In September 1995, the board of directors adopted, and the shareholders
subsequently approved, the 1995 Employee Stock Purchase Plan (the "Purchase
Plan") authorizing the issuance of 100,000 shares of PDI's common stock. In
November 1998, the board of directors subsequently amended the Purchase Plan to
increase

98
<PAGE>

the number of shares authorized for issuance thereunder to an aggregate of
200,000 shares. The shareholders of PDI approved the amendment to the Purchase
Plan in January 1998. The Purchase Plan is intended to qualify as an "Employee
Stock Purchase Plan" under Section 423(b) of the Code.

At November 30, 1998, an aggregate of 167,383 shares had been issued under
the Purchase Plan and only 32,617 shares remained for the grant of future
rights under the Plan. In November 1998, the board of directors of PDI adopted
amendments to the Purchase Plan to increase the number of shares authorized for
issuance under the Purchase Plan to 350,000 shares. This amendment is intended
to afford PDI greater flexibility in providing employees with stock incentives
and ensures that PDI can continue to provide such incentives at levels
determined appropriate by the board. During the last fiscal year, shares were
purchased under the Purchase Plan at the weighted average price of $2.3375 per
share in the following amounts: Mr. Sollitto 5,013 shares, Mr. Meurell 1,509
shares, Mr. DePalma 1,026 shares, Mr. Bailey 2,736 shares, all current
executive officers as a group 10,284 shares, and all employees (excluding
executive officers) as a group 92,059 shares.

Shareholders are requested to approve the Purchase Plan, as amended. The
affirmative vote of the holders of a majority of the shares present in person
or represented by proxy and voting at the meeting will be required to approve
the Purchase Plan, as amended. For purposes of this vote abstentions and broker
non-votes will not be counted for any purpose in determining whether this
matter has been approved.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF THE AMENDED PURCHASE PLAN.

The essential features of the Purchase Plan, as amended, are outlined below:

Purpose

The Purchase Plan was adopted to provide a means by which employees of PDI
(and any subsidiary of PDI designated by the Board to participate in the
Purchase Plan) may be given an opportunity to purchase Common Stock of PDI
through accumulated payroll deductions. The Purchase Plan is intended to
qualify as an "Employee Stock Purchase Plan" as that term is defined in Section
423(b) of the Code.

Administration

The Purchase Plan may be administered by the board or by a committee of the
board. The board has delegated the administration of the Purchase Plan to the
committee. The committee has, in connection with the administration of the
Purchase Plan, the powers possessed by the board. As used herein with respect
to the Purchase Plan, the "board" refers to such committee as well as to the
board itself.

The board has the power to construe, interpret and apply the terms of the
Purchase Plan, to determine eligibility and to adjudicate all disputed claims
filed under the plan in such a manner as shall comply with Rule 16b-3, as
amended.

Purchase Periods

The Purchase Plan is implemented by a series of overlapping or consecutive
purchase periods (the "Purchase Period"). The maximum duration of any Purchase
Period shall be twenty-seven (27) months. An accrual period is a period of
approximately six (6) months, commencing on February 1 and August 1 of each
year and terminating the following July 31 or January 31, respectively (an
"Accrual Period").

An employee who participates in the Purchase Plan is granted a separate
option to purchase shares of common stock for each Purchase Period in which he
or she participates. The option is granted on the first day of the Purchase
Period and is automatically exercised in successive installments on the last
day of each Accrual Period ending within the Purchase Period (the "Exercise
Date"). An employee may participate in only one

99
<PAGE>

Purchase Period at a time. In the event that the fair market value of PDI's
common stock is less than the fair market value of PDI's common stock on the
first day of the first Accrual Period within the Purchase Period, the Purchase
Period shall be terminated and the employee shall be enrolled automatically in
the new Purchase Period that has its first Accrual Period commencing on that
date, provided the employee is eligible to participate in the Purchase Plan on
that date and has not elected to terminate participation in the Purchase Plan.

Shares Subject to the Plan

Pursuant to the November 10, 1998 amendment, the common stock that may be
sold pursuant to awards under the Purchase Plan shall not exceed in the
aggregate three hundred fifty thousand (350,000) shares of PDI's common stock.

Eligibility

Rights to purchase stock may be granted under the Purchase Plan only to
employees who are employed by PDI and whose customary employment is at least
twenty (20) hours per week and at least five (5) months per calendar year.

An eligible employee may be granted rights under the Purchase Plan only if
such rights, together with any other rights granted under all such employee
stock purchase plans of PDI or any affiliate do not permit such employee's
rights to purchase stock of PDI or any subsidiary to accrue at a rate which
exceeds $25,000 of the fair market value of such stock (determined at the time
such rights are granted) for each calendar year in which such rights are
outstanding at any time. No rights may be granted under the Purchase Plan to
any person who, immediately following such grant, would own stock or hold
outstanding options to purchase stock possessing 5% or more of the total
combined voting power or value of all classes of stock of PDI or of any
subsidiary of PDI.

Terms of Rights

Rights; Purchase Price. On the first day of each Purchase Period, each
eligible employee participating in such Purchase Period shall be granted the
right to purchase up to the number of shares of common stock purchasable with a
percentage not exceeding 10% of such employee's compensation during each
Accrual Period in the Purchase Period. The maximum number of shares which may
be purchased by any employee in any Accrual Period shall be 5,000 shares. If on
a given Exercise Date the number of shares with respect to which options are to
be exercised exceeds the number of shares then available under the Purchase
Plan, PDI shall make a pro rata allocation of the shares remaining available
for purchase.

The purchase price per share of common stock acquired pursuant to rights
granted under the Purchase Plan will not be less than the lesser of (i) 85% of
the fair market value of a share of common stock on the first day of the
Purchase Period or (ii) 85% of the fair market value of a share of common stock
on the Exercise Date.

Transferability. Rights granted under the Purchase Plan are nontransferable
except by will or the laws of descent and distribution and may be exercised
only by the person to whom such rights are granted while that person is still
alive.

Exercise. On each Exercise Date, a participant's accumulated payroll
deductions (without any increase for interest) will be applied to the purchase
of whole shares of common stock, up to the maximum number of shares permitted
pursuant to the terms of the Purchase Plan. No fractional shares will be issued
upon the exercise of rights granted under the Purchase Plan. Any accumulated
payroll earnings remaining in a participant's account after the purchase of the
number of whole shares purchasable in an amount less than is required to
purchase one whole share on the final Exercise Date will be held in the
participant's account for the purchase of shares on the next Exercise Date
under the Purchase Plan, unless the participant withdraws from the Purchase
Period or is no longer eligible to be granted rights under the Purchase Plan,
in which case such amount shall be distributed to the participant after the
final Exercise Date, without interest.

100
<PAGE>

Participation; Withdrawal; Termination. An eligible employee may become a
participant in a Purchase Period by delivering a subscription agreement to PDI
authorizing payroll deductions of up to 10% of such employee's earnings during
the Purchase Period to PDI's payroll office at least fifteen (15) business days
prior to the Enrollment Date or as specified by the board for such Purchase
Period. Payroll deductions made for a participant shall be credited to an
account for such participant under the Purchase Plan. A participant may (a)
reduce payroll deductions during the Purchase Period, or (b) increase payroll
deductions for a future Purchase Period by filing a new subscription agreement
with PDI.

A participant may withdraw all but not less than all the payroll deductions
credited to his/her account and not yet used to exercise his/her option under
the Purchase Plan at any time by giving written notice to PDI. All of the
participant's payroll deductions credited to his/her account will be paid to
such participant promptly after receipt of notice of withdrawal, such
participant's option for the Purchase Period will be automatically terminated,
and no further payroll deductions for the purchase of shares will be made
during the Purchase Period. If a participant withdraws from a Purchase Period,
payroll deductions will not resume at the beginning of the succeeding Purchase
Period unless the participant delivers to PDI a new subscription agreement.

Upon a participant's ceasing to be an employee for any reason or upon
termination of a participant's employment relationship, the payroll deductions
credited to such participant's account during the Purchase Period but not yet
used to exercise the option will be returned to such participant or, in the
case of his/her death, to the person or persons entitled thereto, and such
participant's option will be automatically terminated.

Duration, Amendment and Termination

The board may suspend or terminate the Purchase Plan at any time, provided
that except as described under "Effect of Certain Corporate Events," no such
amendment or termination can adversely affect options previously granted,
except that a Purchase Period may be terminated by the board on any Exercise
Date if the Board determines that the termination of the Plan is in the best
interests of the Company and its shareholders. To the extent necessary to
comply with Rule 16b-3 or Section 423 of the Code (or any successor rule or
provision or any other applicable law or regulation), PDI shall obtain
shareholder approval in such a manner and to such a degree as required.

Notwithstanding the foregoing, without shareholder consent and without
regard to whether any participant rights may be considered to have been
adversely affected, the board shall be entitled to change the Purchase Periods,
limit the frequency and/or number of changes in the amount withheld during
Purchase Periods, establish the exchange ratio applicable to amounts withheld
in a currency other than U.S. dollars, permit payroll withholding in excess of
the amount designated by a participant in order to adjust for delays or
mistakes in PDI's processing of properly completed withholding elections,
establish reasonable waiting and adjustment periods and/or accounting and
crediting procedures to ensure that amounts applied toward the purchase of
common stock for each participant properly correspond with amounts withheld
from the participant's earnings, and establish such other limitations or
procedures as the board determines in its sole discretion advisable which are
consistent with the Purchase Plan.

Effect of Certain Corporate Events

If there is any change in the stock subject to the Purchase Plan or subject
to any options granted under the Purchase Plan (through stock split, reverse
stock split, stock dividend, combination or reclassification of the common
stock, or any other increase or decrease in the number of shares of common
stock effected without receipt of consideration by PDI (not including
conversions of convertible securities)), the Purchase Plan and options
outstanding thereunder will be appropriately adjusted as to the class and the
maximum number of shares subject to such plan and the class, number of shares
and price per share of stock subject to such outstanding options.

In the event of a proposed sale of all or substantially all of the assets of
PDI, the merger of PDI with or into another corporation, in which PDI will not
be the surviving corporation (other than a reorganization

101
<PAGE>

effectuated primarily to change the state in which PDI is incorporated), or a
reverse merger in which PDI is the surviving corporation but in which
securities possessing more than fifty percent (50%) of the total combined
voting power of PDI's outstanding securities are transferred to a person or
persons different from the person or persons holding those securities
immediately prior to the transfer, then any successor corporation or parent or
subsidiary of such successor corporation shall assume such outstanding options
or substitute equivalent options for those outstanding under the Purchase Plan,
unless the board determines, in the exercise of its sole discretion and in lieu
of such assumption or substitution, to shorten the Purchase Period then in
progress by setting a new exercise date.

Federal Income Tax Information

Participation in the Purchase Plan is intended to qualify for the favorable
federal tax treatment accorded "employee stock purchase plans" under Section
423 of the Code. Under these provisions, a participant will be taxed on amounts
withheld for the purchase of shares as if such amounts were actually received.
Other than this, no income will be taxable to a participant until disposition
of the shares acquired and the method of taxation will depend upon the holding
period of the purchased shares.

If the stock is disposed of at least two years after the beginning of the
Purchase Period and at least one year after the stock is transferred to the
participant, the lesser of (i) the excess of the fair market value of the stock
at the time of such disposition over the exercise price or (ii) the excess of
the fair market value of the stock as of the beginning of the Purchase Period
over the exercise price (determined as of the beginning of the Purchase Period)
will be treated as ordinary income. Any further gain or any loss will be taxed
as a long-term capital gain or loss. Such capital gains currently are generally
subject to lower tax rates than ordinary income.

If the stock is sold or disposed of before the expiration of either of the
holding periods described above, the excess of the fair market value of the
stock on the Exercise Date over the exercise price will be treated as ordinary
income at the time of such disposition. Even if the stock is later disposed of
for less than its fair market value on the Exercise Date, the same amount of
money is attributed to the participant, and a capital loss is recognized equal
to the difference between the sales price and the fair market value of the
stock on such Exercise Date.

Any capital gain or loss recognized by a participant upon the disposition of
stock acquired under the Purchase Plan will be long-term or short-term,
depending on how long the stock is held.

There are no federal income tax consequences to PDI by reason of the grant
or exercise of rights under the Purchase Plan. PDI is entitled to a deduction
to the extent such amounts are taxed as ordinary income to a participant
(subject to the requirement of reasonableness, the provisions of 162(m) of the
Internal Revenue Code and the satisfaction of a tax reporting obligation).

Ratification of Selection of Independent Auditors

The board of directors has selected Ernst & Young LLP as PDI's independent
auditors for the fiscal year ending September 30, 2000 and has further directed
that management submit the selection of independent auditors for ratification
by the shareholders at the annual meeting. Ernst & Young LLP has audited the
Company's financial statements since the year ended September 30, 1994.
Representatives of Ernst & Young LLP are expected to be present at the annual
meeting, will have an opportunity to make a statement if they so desire and
will be available to respond to appropriate questions.

Shareholder ratification of the selection of Ernst & Young LLP as PDI's
independent auditors is not required by PDI's bylaws or otherwise. However, the
board is submitting the selection of Ernst & Young LLP to the shareholders for
ratification as a matter of good corporate practice. If the shareholders fail
to ratify the selection, the audit committee and the board will reconsider
whether or not to retain that firm. Even if the selection is ratified, the
audit committee and the board in their discretion may direct the appointment of

102
<PAGE>

different independent auditors at any time during the year if they determine
that such a change would be in the best interests of PDI and its shareholders.

The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and voting at the annual meeting will be
required to ratify the selection of Ernst & Young LLP.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF SELECTION OF ERNST & YOUNG LLP.

The board of directors knows of no other matters that will be presented for
consideration at the annual meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment.

PDI Shareholder Proposals

Shareholder proposals for inclusion in the proxy statement of PDI to be
issued in connection with the 1999 annual meeting of PDI shareholders must be
delivered to or mailed and received at the principal executive offices of PDI
not later than on the close of business on the sixtieth day nor earlier than
the close of business on the ninetieth day prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the event
public announcement of the date of such annual meeting is first made by PDI
fewer than seventy days prior to the date of such annual meeting, the close of
business on the tenth day following the day on which public announcement is
first made by PDI.

EXPERTS

The consolidated financial statements of Photon Dynamics, Inc. as of
September 30, 1998 and 1997 and for the years then ended, included in this
proxy statement of Photon Dynamics, Inc., which is referred to and made a part
of this prospectus and registration statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.

The consolidated financial statements and schedule of CR Technology, Inc. as
of December 31, 1998 and 1997 and for each of the years in the two-year period
ended December 31, 1998, included in this Proxy Statement/Prospectus, have been
so included in reliance upon the report of Cacciamatta Accountancy Corporation,
independent certified public accountants, given upon the authority of that firm
as experts in accounting and auditing.

LEGAL MATTERS

The validity of the shares of common stock offered hereby and other legal
matters will be passed upon for PDI by Cooley Godward LLP, Palo Alto,
California. Cooley Godward LLP and certain members and associates in such firm
own an aggregate of approximately 100 shares of PDI common stock.

Certain legal matters in connection with the merger will be passed upon for
CRT by Rutan & Tucker LLP.

103
<PAGE>

INDEX TO PDI AND CRT FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Photon Dynamics, Inc

Report of Ernst & Young LLP, Independent Auditors......................... F-2

Financial Statements

Consolidated Balance Sheets at September 30, 1998 and 1997.............. F-3

Consolidated Statements of Operations for the years ended September 30,
1998 and 1997.......................................................... F-4

Consolidated Statements of Cash Flows for the years ended September 30,
1998 and 1997.......................................................... F-5

Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1998 and 1997............................................ F-6

Notes to Consolidated Financial Statements.............................. F-7

Interim Financial Statements

Interim Condensed Consolidated Balance Sheets at June 30, 1999 and
September 30, 1998..................................................... F-15

Interim Condensed Consolidated Statements of Operations for the three
months and nine months ended June 30 1999 and 1998..................... F-16

Interim Condensed Consolidated Statements of Cash Flows for the nine
months ended
June 30 1999 and 1998.................................................. F-17

Notes to Interim Condensed Consolidated Financial Statements............ F-18

CR Technology, Inc.

Report of Independent Certified Public Accountants........................ F-20

Financial Statements

Consolidated Balance Sheets at December 31, 1998 and 1997............... F-21

Consolidated Statements of Income for the years ended December 31, 1998
and 1997............................................................... F-22

Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998 and 1997............................................. F-23

Statements of Cash Flows for the years ended December 31, 1998 and
1997................................................................... F-24

Notes to Consolidated Financial Statements.............................. F-25

Interim Financial Statements

Interim Condensed Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998...................................................... F-32

Interim Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 1999 and 1998..................... F-33

Interim Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998.................................... F-34

Notes to Interim Consolidated Financial Statements...................... F-35

Photon Dynamics, Inc. and CR Technology, Inc.

ProForma Financial Statements

Unaudited Pro Forma Combined Condensed Financial Statements............. F-36

Unaudited Pro Forma Combined Condensed Balance Sheet at June 30, 1999... F-37

Unaudited Pro Forma Combined Condensed Statement of Operations for the
nine months ended June 30, 1999........................................ F-38

Unaudited Pro Forma Combined Condensed Statement of Operations for the
nine months ended June 30, 1998........................................ F-39

Unaudited Pro Forma Combined Condensed Statement of Operations for the
year ended September 30, 1998.......................................... F-40

Unaudited Pro Forma Combined Condensed Statement of Operations for the
year ended September 30, 1997.......................................... F-41

Notes to Unaudited Pro Forma Combined Condensed Financial Statements.... F-42
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Photon Dynamics, Inc.

We have audited the accompanying consolidated balance sheets of Photon
Dynamics, Inc. as of September 30, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Photon Dynamics, Inc. as of September 30, 1998 and 1997, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

San Jose, California
October 22, 1998

F-2
<PAGE>

PHOTON DYNAMICS, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

<TABLE>
<CAPTION>
September 30,
-----------------
1998 1997
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,562 $ 4,831
Accounts receivable, net of allowance for doubtful
accounts of $850 ($951 in 1997); including $1,092
receivable from related parties ($3,093 in 1997)......... 6,027 9,785
Inventories............................................... 6,767 5,076
Prepaid expenses and other current assets................. 276 512
-------- -------
Total current assets.................................... 18,632 20,204
Property, equipment and leasehold improvements, net......... 1,798 2,226
Other assets................................................ 603 773
-------- -------
Total assets............................................ $ 21,033 $23,203
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,486 $ 2,666
Accrued expenses and other liabilities.................... 2,936 2,489
Customer deposits and deferred revenue.................... 116 276
Current portion of capital lease obligation............... 4 4
-------- -------
Total current liabilities............................... 4,542 5,435
Noncurrent portion of capital lease obligation.............. 2 6
Commitments and contingencies............................... -- --
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized, none issued and outstanding.................. -- --
Common stock, no par value, 20,000,000 shares authorized,
7,324,615 and 7,147,714 shares issued and outstanding.... 38,918 38,573
Accumulated deficit....................................... (22,147) (20,682)
Foreign currency translation adjustment and other......... (197) (14)
Notes receivable from shareholders........................ (85) (115)
-------- -------
Total shareholders' equity.............................. 16,489 17,762
-------- -------
Total liabilities and shareholders' equity.............. $ 21,033 $23,203
======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

PHOTON DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
Years Ended
September 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Revenue:
Product revenue........................................... $22,420 $23,157
Non-product revenue....................................... -- 1,350
------- -------
22,420 24,507
Cost of revenue:
Product revenue........................................... 13,059 13,789
Non-product revenue....................................... -- --
------- -------
13,059 13,789
------- -------
Gross margin................................................ 9,361 10,718
Operating expenses:
Research and development.................................. 5,911 7,776
Selling, general and administrative....................... 5,389 5,637
Asset recovery related to product line disposal........... (350) --
------- -------
Total operating expenses.................................... 10,950 13,413
------- -------
Operating loss.............................................. (1,589) (2,695)
Interest income............................................. 245 348
Interest expense and other.................................. (13) (114)
------- -------
Loss before provision for income taxes...................... (1,357) (2,461)
Provision for income taxes.................................. 108 20
------- -------
Net loss.................................................... $(1,465) $(2,481)
======= =======
Basic and diluted net loss per share:....................... $ (0.20) $ (0.35)
Shares used in computing basic and diluted net income loss
per share:................................................. 7,231 7,049
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

PHOTON DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Years Ended
September 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Operating activities
Net income (loss)........................................... $(1,465) $(2,481)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 1,170 1,186
Changes in operating assets and liabilities:
Accounts receivable..................................... 3,758 (1,133)
Inventories............................................. (1,691) (951)
Prepaid expenses and other current assets............... 235 6
Other assets............................................ 171 (133)
Accounts payable........................................ (1,180) (77)
Accrued expenses and other liabilities.................. 447 422
Customer deposits and deferred revenue.................. (160) (77)
------- -------
Net cash provided by (used in) operating activities......... 1,285 (3,238)
Investing activities
Acquisition of property and equipment, net.................. (742) (1,563)
Acquisition of short-term investments....................... -- (2,745)
Maturities of short-term investments........................ -- 6,811
------- -------
Net cash provided by (used in) investing activities......... (742) 2,503
Financing activities
Principal payments under capital leases..................... (4) (15)
Issuance of common stock.................................... 345 509
Repayment of notes receivable from shareholders............. 30 27
Issuance of note receivable from shareholder................ -- (56)
------- -------
Net cash provided by financing activities................... 371 465
------- -------
Effect of exchange rate changes............................. (183) (7)
------- -------
Net increase (decrease) in cash and cash equivalents........ 731 (277)
Cash and cash equivalents at beginning of period............ 4,831 5,108
------- -------
Cash and cash equivalents at end of period.................. $ 5,562 $ 4,831
======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

PHOTON DYNAMICS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)

<TABLE>
<CAPTION>
Foreign
Currency
Common Stock Translation Total
-------------- Accumulated Adjustment Notes Receivable Shareholders'
Shares Amount Deficit and Other From Shareholders Equity
------ ------- ----------- ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1,
1996................... 6,888 $38,064 $(18,201) $ (7) $ (86) $19,770
Issuance of common
stock.................. 260 509 -- -- -- 509
Foreign currency
translation
adjustment............. -- -- -- (7) -- (7)
Issuance of notes
receivable............. -- -- -- -- (56) (56)
Repayment of notes
receivable............. -- -- -- -- 27 27
Net loss................ -- -- (2,481) -- -- (2,481)
----- ------- -------- ----- ----- -------
Balance at September 30,
1997................... 7,148 38,573 (20,682) (14) (115) 17,762
Issuance of common
stock.................. 177 345 -- -- -- 345
Foreign currency
translation
adjustment............. -- -- -- (183) -- (183)
Repayment of notes
receivable............. -- -- -- -- 30 30
Net loss................ -- -- (1,465) -- -- (1,465)
----- ------- -------- ----- ----- -------
Balance at September 30,
1998................... 7,325 $38,918 $(22,147) $(197) $ (85) $16,489
===== ======= ======== ===== ===== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

PHOTON DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 1998 and 1997

NOTE 1--Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of all material
intercompany balances and transactions.

Photon Dynamics, Inc. is a manufacturer of test, inspection and repair
systems for the flat panel display ("FPD") industry.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Inventories

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

<TABLE>
<CAPTION>
September 30,
-------------
1998 1997
------ ------
<S> <C> <C>
Inventories comprise (in thousands):
Raw materials............................................ $1,888 $1,376
Work-in-progress......................................... 2,144 1,677
Finished goods........................................... 2,735 2,023
------ ------
$6,767 $5,076
====== ======
</TABLE>

Property, Equipment and Leasehold Improvements

Property and equipment are recorded at cost. Equipment includes assets
recorded under capital lease obligations. Depreciation is computed using the
straight-line method based upon the estimated useful lives of the assets,
generally three to five years. Equipment recorded under capital leases is
amortized using the straight-line method over the lesser of the lease terms or
the lives of the related assets.

<TABLE>
<CAPTION>
September 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Property and equipment comprise (in thousands):
Equipment............................................. $ 4,455 $ 3,772
Office furniture and fixtures......................... 322 330
Leasehold improvements................................ 510 455
------- -------
5,287 4,557
Less accumulated depreciation and amortization........ (3,489) (2,331)
------- -------
$1,798 $ 2,226
======= =======
</TABLE>

F-7
<PAGE>

PHOTON DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Accrued Liabilities

Accrued expenses and other liabilities consist of the following:

<TABLE>
<CAPTION>
September 30,
-------------
1998 1997
------ ------
<S> <C> <C>
Accrued liabilities comprise (in thousands):
Warranty................................................. $1,105 $1,001
Compensation............................................. 855 820
Other accrued expenses................................... 976 668
------ ------
$2,936 $2,489
====== ======
</TABLE>

Foreign Currency Translation

Assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars at year-end exchange rates and revenues and expenses are
translated at average rates prevailing during the year. Translation adjustments
are included in a separate component of shareholders' equity. Foreign currency
transaction gains and losses are included in results of operations.

Revenue Recognition

The Company generally recognizes revenue from product sales at the time of
shipment, which usually precedes final acceptance. The Company also sells one-
year service contracts, for which revenue is recognized ratably over the
contract period.

Non-product revenue in fiscal 1997 included a non recurring $1 million
initial fee paid by a Korean company for the rights to be the exclusive value
added reseller of the Company's FIS Flex-P product in Korea.

Concentrations of Credit Risk

The Company markets its products primarily to a limited number of customers
in the Far East, primarily Japan and Korea. The Company is subject to economic
conditions and specifically exchange rate movements affecting its customers and
the countries in which it operates. The Company believes its credit evaluation
and monitoring process mitigates this credit risk and does not generally
require collateral. In 1998, sales to two unaffiliated and one affiliated
customer represented 45%, 27%, and 17% of total revenue. In 1997, sales to
three unaffiliated and one affiliated customer accounted for 26%, 20%, 11% and
26% respectively. International sales accounted for 96% and 98% of total
revenue in 1998 and 1997, respectively.

Warranty and Installation

The Company generally warrants its systems for a period of twelve months
from installation for material and labor to repair and service the system. A
provision for the estimated cost of installation and warranty is recorded upon
shipment.

Fair Value of Financial Instruments

The Company has evaluated the estimated fair value of financial instruments.
The amounts reported for cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate the fair value due to their
short maturities.

F-8
<PAGE>

PHOTON DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net Income (Loss) Per Share

In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 128, "Earnings per Share." Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. The Company's diluted earnings per share are very
similar to the previously reported primary earnings per share. All earnings per
share amounts for all prior periods presented, where necessary, have been
restated to conform to the Statement 128 requirements. As the Company incurred
a loss in fiscal 1998 and 1997, the effect of dilutive securities totaling
approximately 299,234 in 1998 and 434,949 in 1997 have been excluded from the
computation as they are antidilutive.

Stock Based Compensation Plans

The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with the provisions of the Accounting Principles
Board's Opinion No. 25 "Accounting For Stock Issued to Employees" (APB 25). Pro
forma information regarding net income (loss) per share is disclosed as
required by the FASB's Statement No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), see Note 6.

Impact of Recently Issued Accounting Standards

In June 1997, the FASB released Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The Company
will adopt the standard in Fiscal 1999. The Company believes that adoption of
FAS 130 will not have a material impact on the Company's consolidated financial
statements.

In June 1997, the FASB released Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("FAS 131"). This statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. The Company will adopt the standard in fiscal 1999. The Company
believes that adoption of FAS 131 will not have a material impact on the
Company's consolidated financial statements.

Reclassification

Reclassifications have been made to the prior years' consolidated financial
statements to conform to the current years' presentation.

NOTE 2--Related Parties

During 1998 and 1997 the Company sold approximately $6,157,000 and
$6,341,000 of its systems to LG Electronics, Inc. LG Electronics, Inc. owns
approximately 8% of the Company's common stock, and warrants to purchase 28,333
shares of Common Stock at an exercise price of $0.60 per share, as well as a
seat on the Board of Directors. The Company believes its sales to LG
Electronics, Inc. were made on terms no less favorable than would have been
obtained from unaffiliated parties.

F-9
<PAGE>

PHOTON DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 3--Asset Recovery Related to Product Line Disposal

During the quarter ended December 31, 1997, the Company received a payment
of $350,000 in settlement of a dispute related to the closure of its Defect
Monitoring Tool ("DMT") product line. In September 1996, the Company ceased
operations of its DMT product line. The DMT product group worked exclusively on
a single customer project not in the FPD market. As a result of the
cancellation of this project, the Company disposed of the associated inventory
and assets of this product line which were not transferred to other products
and recorded a $844,000 charge to write down such inventory and assets in that
fiscal year.

NOTE 4--Short Term Borrowings

The Company has a $5 million line of credit financing from Imperial Bank,
which expires in February 1999. No amounts were outstanding as of September 30,
1998. Borrowings under this line of credit bear interest at the prime rate.
This line of credit is secured by substantially all of the Company's assets and
contains certain financial and other covenants. As of September 30, 1998 the
Company was in compliance with these financial covenants.

NOTE 5--Lease Obligations and Commitments

The Company leases its main facility under a noncancelable operating lease
agreement that expires in fiscal 2002.

Total future minimum lease obligations are as follows (in thousands):

<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
1999............................... $738
2000............................... 753
2001............................... 769
2002............................... 103
2003............................... --
</TABLE>

Rental expense for the years ended September 30, 1998 and 1997 was $719,000
and $781,000, respectively.

NOTE 6--Shareholders' Equity

Warrants

The Company has 148,832 warrants outstanding to purchase shares of Series E
preferred stock, which are currently exercisable in exchange for 49,610 shares
of common stock at $5.40 per share. The warrants expire from 2000 to 2002. The
Company also has 128,055 warrants outstanding to purchase shares of common
stock at $0.60 per share. These warrants expire in 1999.

Stock Reserved for Future Issuance

As of September 30, 1998, the Company has reserved 1,304,698 shares of
common stock for future issuance.

F-10
<PAGE>

PHOTON DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock Option and Purchase Plans

Under the Company's stock option plans, the Board of Directors may, at its
discretion, grant incentive or nonqualified stock options to employees and
directors. Options granted under the plans are for periods not to exceed ten
years, at prices at least equal to the fair market value of common stock at the
grant date, and become exercisable generally over a period of four years.

The following table summarizes activity under the Plans:

<TABLE>
<CAPTION>
Shares Under Weighted Average
Option Exercise Price
------------ ----------------
<S> <C> <C>
Balance at October 1, 1996.................. 1,102,519 $4.58
Granted................................... 239,933 $6.24
Exercised................................. (179,649) $1.29
Canceled.................................. (154,298) $6.65
--------- -----
Balance at September 30, 1997............... 1,008,505 $5.24
Granted................................... 424,700 $3.80
Exercised................................. (131,639) $1.05
Canceled.................................. (276,200) $5.43
--------- -----
Balance at September 30, 1998............... 1,025,366 $5.13
========= =====
</TABLE>
Options to purchase 279,332 shares of common stock are available for grant
as of September 30, 1998. Options for 485,361 shares are currently exercisable
(options for 452,173 shares at September 30, 1997).

The Company has reserved 200,000 shares of common stock to be issued under
the 1995 Employee Stock Purchase Plan. The plan permits eligible employees to
purchase common stock, through payroll deductions, at 85% of the lower of the
fair market value of the common stock on the date at the beginning of the two-
year offering period or the last day of the purchase period. Substantially all
employees are eligible to participate in the plan. Employees purchased 102,343
shares in fiscal 1998 for $239,227 and 46,924 shares for $289,000 in fiscal
1997. At September 30, 1998, 32,617 shares were available for issuance under
the plan.

Accounting for Stock Based Compensation Plans

In accordance with the provisions of FAS 123, the Company applies APB
Opinion 25 and related Interpretations in accounting for its Stock Option and
Employee Stock Purchase plans and accordingly, does not recognize compensation
expense in the statement of operations because the exercise price of the
employees' stock options equals the market price of the underlying stock on the
date of grant. If the Company had elected to recognize compensation expense
based on the fair value of the options granted at the grant date as prescribed
by FAS 123, net income (loss) and net income (loss) per share would have been
adjusted to the pro forma amounts indicated in the table below (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
Year ended
September 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Net income (loss) as reported......................... $(1,465) $(2,481)
Net income (loss) pro forma........................... $(2,091) $(3,468)
Basic and diluted net income (loss) per share--as
reported............................................. $( 0.20) $( 0.35)
Basic and diluted net income (loss) per share--pro
forma................................................ $( 0.28) $( 0.49)
</TABLE>

F-11
<PAGE>

PHOTON DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The effects on pro forma disclosures of applying FAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years
because FAS 123 is applicable only to options granted subsequent to October 1,
1995. Compensation expense for the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option pricing model for
the multiple option approach with the following weighted average assumptions:

<TABLE>
<CAPTION>
Options ESPP
---------------- -----------------
1998 1997 1998 1997
------- ------- --------- ------
<S> <C> <C> <C> <C>
Expected dividend yield.................. -- -- -- --
Expected stock price volatility.......... 0.80 0.70 0.79 0.70
Risk free interest rate.................. 5.54% 6.01% 5.30% 5.75%
Expected life of options (from grant
date)................................... 3 years 3 years 1.5 years 1 year
</TABLE>

The following table summarizes information about stock options outstanding
at September 30, 1998:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- --------------------
Weighted
average Weighted Weighted
Number remaining average Number average
outstanding contractual exercise outstanding exercise
Range of exercise prices at 9/30/98 life (years) price at 9/30/98 price
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.60-$0.90............. 97,321 5.51 $0.74 92,037 $0.75
$2.40-$3.60............. 312,724 8.92 $3.22 83,237 $3.09
$4.63-$5.88............. 190,056 8.71 $5.34 56,860 $5.54
$6.00-$6.75............. 321,242 7.83 $6.65 184,285 $6.64
$7.20-$11.00............ 104,023 7.55 $9.89 68,942 $9.76
--------- ---- ----- ------- -----
$0.60-$11.00............ 1,025,366 8.08 $5.13 485,361 $5.23
</TABLE>

The weighted average grant date fair value of stock options and employee
purchase plan rights granted in fiscal 1998 and 1997 was approximately $1.99
and $3.66, respectively.

NOTE 7--Notes Receivable from Shareholders

Notes receivable from shareholders arose from certain employees exercising
their stock options as well as advances to purchase stock on the open market.
The notes bear interest at 6.83% per annum, and are secured by the shares of
common stock.

NOTE 8--Income Taxes

The provision for income taxes for the year ended September 30, 1998
consists of the following (in thousands):

<TABLE>
<CAPTION>
Year Ended
September
30,
-----------
1998 1997
----- -----
<S> <C> <C>
Federal--current.............................................. $ -- $ --
State--current................................................ -- --
Foreign--current.............................................. 108 20
----- -----
Total....................................................... $ 108 $ 20
===== =====
</TABLE>

F-12
<PAGE>

PHOTON DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The provisions for taxes on income differed from the provisions calculated
by applying the federal statutory rate to income before taxes as follows (in
thousands):

<TABLE>
<CAPTION>
Year Ended
September
30,
------------
1998 1997
----- -----
<S> <C> <C>
Expected provision (benefit) at statutory rate............. $(475) $(868)
Foreign taxes.............................................. 108 20
Alternative minimum taxes.................................. 28 --
Benefit of operating loss carryforwards.................... -- --
Unbenefited current year loss.............................. 447 868
----- -----
$ 108 $ 20
===== =====
</TABLE>

As of September 30, 1998, the Company has federal and state net operating
loss carryforwards of approximately $14,300,000 and $700,000, respectively. The
Company also has federal and state research and development tax credit
carryforwards of approximately $1,200,000 and $670,000, respectively. The net
operating loss and credit carryforwards will expire at various times beginning
in 1999 through 2013, if not utilized.

Under certain provisions of the Internal Revenue Code of 1986, as amended,
the availability of the Company's net operating loss and tax credit
carryforwards may be subject to limitation if it should be determined that
there has been a change in ownership of more than 50% of the value of the
Company's stock. Such determination could limit the utilization of net
operating loss and tax credit carryforwards.

Deferred tax assets reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, net operating loss and
credit carryforwards.

Significant components of the Company's deferred tax assets are as follows
(in thousands):

<TABLE>
<CAPTION>
Year Ended
September 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 4,902 $ 5,043
Research credit carryforwards......................... 1,698 1,551
Capitalized research costs............................ 538 424
Inventory writedowns.................................. 715 851
Depreciation.......................................... 613 220
Other individually immaterial items................... 1,446 1,101
------- -------
Total deferred tax assets............................... 9,912 9,190
Valuation allowance................................... (9,912) (9,190)
------- -------
Net deferred tax assets................................. $ -- $ --
======= =======
</TABLE>

F-13
<PAGE>

PHOTON DYNAMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 9--Statements of Cash Flows Data

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
(In thousands)
Supplemental disclosure of cash flow information
Interest paid................................................. $ 9 $ 4
Income taxes paid............................................. $21 $20
</TABLE>

NOTE 10--Subsequent Events

On November 27, 1998, the Company presented its employees with the
opportunity to exchange stock option grants with a an exercise price in excess
of $5.00 per share for prorated stock option grants with an exercise price of
$4.50 per share. Under this program, employees exchanged 431,833 old option
grants for 353,464 new option grants.

F-14
<PAGE>

PHOTON DYNAMICS, INC.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 5,916 $ 5,562
Accounts receivable,
net..................... 11,067 6,027
Inventories, net......... 4,352 6,767
Prepaid expenses and
other current assets.... 245 276
-------- --------
Total current assets..... 21,580 18,632
Property, equipment and
leasehold improvements,
net....................... 1,196 1,798
Other assets............... 606 603
-------- --------
Total assets............... $ 23,382 $ 21,033
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......... $ 2,122 $ 1,486
Accrued expenses and
other liabilities....... 3,389 2,936
Customer deposits and
deferred revenue........ 118 116
Current obligations under
lines of credit......... 1,000 --
Current portion of long-
term debt............... 3 4
-------- --------
Total current liabilities.. 6,632 4,542
Noncurrent portion of long-
term debt................. -- 2
Shareholders' equity:
Common stock............. 39,506 38,918
Accumulated deficit...... (22,617) (22,147)
Foreign currency
translation adjustment
and other............... (66) (197)
Notes receivable from
shareholders............ (73) (85)
-------- --------
Total shareholders'
equity.................. 16,750 16,489
-------- --------
Total liabilities and
shareholders' equity.... $ 23,382 $ 21,033
======== ========
</TABLE>
- --------
Note: The balance sheet at September 30, 1998 has been derived from the audited
consolidated financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.

See accompanying notes to condensed consolidated financial statements.

F-15
<PAGE>

PHOTON DYNAMICS, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

<TABLE>
<CAPTION>
Three Months
Ended June Nine Months
30, Ended June 30,
------------- ----------------
1999 1998 1999 1998
------ ------ ------- -------
<S> <C> <C> <C> <C>
Revenue:
Product revenue............................ $9,391 $5,625 $20,199 $18,362
Non-product revenue........................ -- -- 500 --
------ ------ ------- -------
9,391 5,625 20,699 18,362
Cost of revenue:
Product revenue............................ 5,263 3,061 12,327 10,103
Non-product revenue........................ -- -- -- --
------ ------ ------- -------
5,263 3,061 12,327 10,103
------ ------ ------- -------
Gross margin................................. 4,128 2,564 8,372 8,259
Operating expenses:
Research and development................... 1,426 1,386 3,743 4,738
Selling, general and administrative........ 1,700 1,235 5,117 3,728
Asset recovery related to product line
disposal.................................. -- -- -- (350)
------ ------ ------- -------
Total operating expenses..................... 3,126 2,621 8,860 8,116
------ ------ ------- -------
Operating income (loss)...................... 1,002 (57) (488) 143
Interest income.............................. 39 46 162 184
Interest expense and other................... 11 60 (92) 11
------ ------ ------- -------
Income (loss) before provision for income
taxes....................................... 1,052 49 (418) 338
Provision for income taxes................... 50 -- 52 21
------ ------ ------- -------
Net income (loss)............................ $1,002 $ 49 $ (470) $ 317
====== ====== ======= =======
Basic net income (loss) per share............ $ 0.13 $ 0.01 $ (0.06) $ 0.04
====== ====== ======= =======
Diluted net income (loss) per share.......... $ 0.12 $ 0.01 $ (0.06) $ 0.04
====== ====== ======= =======
Shares used in computing basic net income
(loss) per share............................ 7,635 7,269 7,495 7,214
====== ====== ======= =======
Shares used in computing diluted net income
(loss) per share............................ 8,275 7,586 7,495 7,513
====== ====== ======= =======
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-16
<PAGE>

PHOTON DYNAMICS, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

<TABLE>
<CAPTION>
Nine Months
Ended June 30,
---------------
1999 1998
------- ------
<S> <C> <C>
Operating activities:
Net income (loss)............................................ $ (470) $ 317
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.............................. 737 860
Changes in operating assets and liabilities:
Accounts receivable...................................... (5,040) 1,780
Inventories.............................................. 2,415 (682)
Prepaid expenses and other current assets................ 31 256
Other assets............................................. (3) 342
Accounts payable......................................... 636 (925)
Accrued expenses and other liabilities................... 453 80
Customer deposits and deferred revenue................... 2 (165)
------- ------
Net cash provided by (used in) operating activities.......... (1,239) 1,863

Investing activities:
Acquisition of property and equipment........................ (180) (484)
Disposal of property and equipment........................... 45 --
------- ------
Net cash used in investing activities........................ (135) (484)

Financing activities:
Proceeds from borrowings under lines of credit............... 1,000 --
Principal payments under capital leases...................... (3) (3)
Proceeds from issuance of common stock....................... 588 218
Repayment of notes receivable from shareholders.............. 12 16
------- ------
Net cash provided by financing activities.................... 1,597 231
------- ------
Effect of exchange rate changes.............................. 131 (226)
------- ------
Net increase in cash and cash equivalents.................... 354 1,384
Cash and cash equivalents at beginning of period............. 5,562 4,831
------- ------
Cash and cash equivalents at end of period................... $ 5,916 $6,215
======= ======
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-17
<PAGE>

PHOTON DYNAMICS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Significant Accounting Policies

Interim Financial Statements

The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended June 30, 1999 are not necessarily indicative
of the results that may be expected for the fiscal year ending September 30,
1999. For further information, refer to the audited consolidated financial
statements and footnotes thereto included elsewhere herein and included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended September 30,
1998.

2. Inventories

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

<TABLE>
<CAPTION>
June
30, September 30,
1999 1998
------- -------------
<S> <C> <C>
Inventories comprise (in thousands):
Raw materials....................................... $ 1,232 $1,888
Work-in-process..................................... 2,773 2,144
Finished goods...................................... 347 2,735
------- ------
$ 4,352 $6,767
======= ======
</TABLE>

3. Net Income (Loss) Per Share

For the three and nine months ended June 30, 1999, basic and diluted net
income (loss) per share is computed using the weighted average number of shares
of common stock outstanding. As the Company incurred a loss for the nine month
period ended June 30, 1999, the effect of dilutive securities totaling
approximately 410,822 from stock options and warrants has been excluded from
the computation of diluted net income (loss) per share as their effect is
antidilutive. The following table sets forth the computation of basic and
diluted net income (loss) per share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
--------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator for basic and diluted net income
(loss) per share............................ $ 1,002 $ 49 $ (470) $ 317
Denominator for basic net income (loss) per
share....................................... 7,635 7,269 7,495 7,214
Effect of dilutive securities:
Employee stock options..................... 593 207 -- 191
Warrants................................... 47 110 -- 108
------- ------- ------- -------
Denominator for diluted net income (loss) per
share....................................... 8,275 7,586 7,495 7,513
Basic net income (loss) per share............ $ 0.13 $ 0.01 $ (0.06) $ 0.04
Diluted net income (loss) per share.......... $ 0.12 $ 0.01 $ (0.06) $ 0.04
</TABLE>

F-18
<PAGE>

PHOTON DYNAMICS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. Comprehensive Income

Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components. Comprehensive income generally represents all changes in
shareholders' equity except those resulting from investments or contributions
by shareholders. The Company has reclassified earlier financial statements for
comparative purposes. The Company's total comprehensive income was as follows
(in thousands):

<TABLE>
<CAPTION>
Three
Months Nine Months
Ended June Ended
30, June 30,
------------ ------------
1999 1998 1999 1998
------ ---- ----- -----
<S> <C> <C> <C> <C>
Net income (loss)................................... $1,002 $ 49 $(470) $ 317
Foreign currency translation income (loss).......... (27) (26) 131 (226)
------ ---- ----- -----
Total comprehensive income (loss)................... $ 975 $ 23 $(339) $ 91
====== ==== ===== =====
</TABLE>

5. New Accounting Pronouncement

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes special accounting
rules for different types of hedges. Adoption of this statement is required in
the year ending September 30, 2001 and is not expected to have a material
impact on the Company's results of operations or financial condition.

6. Subsequent Event

On August 10, 1999, the Company entered into an Agreement and Plan of Merger
and Reorganization (the "Plan") to acquire CR Technology, Inc. ("CRT") in
exchange for approximately 2,000,000 shares of the Company's common stock. The
Plan is subject to the approval of the Company's and CRT's respective
shareholders and terminates if the acquisition is not consummated by December
31, 1999.

F-19
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
CR Technology, Inc.

We have audited the accompanying consolidated balance sheets of CR
Technology, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CR
Technology, Inc. and Subsidiary as of December 31, 1998 and 1997 and the
results of their consolidated operations and cash flows for the years then
ended in conformity with generally accepted accounting principles.

/s/ Cacciamatta Accountancy
Corporation

Irvine, California
May 7, 1999
(except for Note 11, as to which
the date is August 25, 1999)

F-20
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................... $ 555,327 $ 277,154
Short-term investments............................. 177,611 292,576
Accounts receivable, net of allowance for doubtful
accounts of $159,560 in 1998 and $7,962 in 1997... 1,421,559 1,573,625
Inventories........................................ 1,467,529 1,431,360
Deferred income taxes.............................. 340,000 180,000
Other.............................................. 26,744 34,894
----------- -----------
Total current assets............................. 3,988,770 3,789,609
Equipment............................................ 150,921 311,209
Patents and trademarks............................... 17,828 20,904
----------- -----------
$ 4,157,519 $ 4,121,722
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit..................................... $ -- $ 50,000
Accounts payable................................... 372,032 764,830
Accrued expenses................................... 627,832 483,779
Income taxes payable............................... 78,620 16,957
----------- -----------
Total current liabilities........................ 1,078,484 1,315,566
----------- -----------
Commitments and contingencies........................ -- --
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized,
500,000 shares issued and outstanding............. 943,420 943,420
Common stock, no par value; 5,000,000 shares
authorized, 813,011 and 803,192 shares issued and
outstanding at December 31, 1998 and 1997......... 5,123,796 5,109,061
Accumulated deficit................................ (2,988,181) (3,246,325)
----------- -----------
Net stockholders' equity......................... 3,079,035 2,806,156
----------- -----------
$ 4,157,519 $ 4,121,722
=========== ===========
</TABLE>

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

F-21
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales........................................... $ 8,550,047 $ 5,707,707
Cost of sales....................................... 4,819,952 3,177,394
----------- -----------
Gross profit........................................ 3,730,095 2,530,313
----------- -----------
Operating expenses:
Selling, general and administrative............... 2,932,609 1,808,731
Research and development.......................... 611,980 290,956
----------- -----------
Total operating expenses............................ 3,544,589 2,099,687
----------- -----------
Operating income.................................... 185,506 430,626
Interest income..................................... 37,138 34,541
----------- -----------
Income before benefit for income taxes.............. 222,644 465,167
Benefit for income taxes............................ (35,500) (134,200)
----------- -----------
Net income.......................................... $ 258,144 $ 599,367
=========== ===========

Basic earnings per share............................ $ 0.32 $ 0.78
=========== ===========
Basic weighted average number of shares
outstanding........................................ 808,101 770,000
=========== ===========

Diluted earnings per share.......................... $ 0.18 $ 0.43
=========== ===========
Diluted weighted average number of shares
outstanding........................................ 1,448,851 1,404,385
=========== ===========
</TABLE>

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

F-22
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years Ended December 31, 1998 and 1999

<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- ----------------------
Number of Number of Net
Shares Shares Accumulated Stockholders'
Outstanding Amount Outstanding Amount Deficit Equity
----------- -------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 500,000 $943,420 736,629 $5,114,678 $(3,845,692) $2,212,406
Common stock issued
for exercise of
options.............. -- -- 76,382 7,638 -- 7,638
Purchase and
retirement of common
stock................ -- -- (9,819) (13,255) -- (13,255)
Net income............ -- -- -- -- 599,367 599,367
------- -------- ------- ---------- ----------- ----------
Balance, December 31,
1997................... 500,000 943,420 803,192 5,109,061 (3,246,325) 2,806,156
Common stock issued
for cash............. -- -- 47,854 60,377 -- 60,377
Purchase and
retirement of common
stock................ -- -- (38,035) (45,642) -- (45,642)
Net income............ -- -- -- -- 258,144 258,144
------- -------- ------- ---------- ----------- ----------
Balance, December 31,
1998................... 500,000 $943,420 813,011 $5,123,796 $(2,988,181) $3,079,035
======= ======== ======= ========== =========== ==========
</TABLE>

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

F-23
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1998 1997
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 258,144 $ 599,367
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization....................... 208,223 93,327
Provision for doubtful accounts..................... 151,598 --
(Increase) decrease in assets:
Accounts receivable............................... 468 (1,046,927)
Inventories....................................... (36,169) (424,861)
Deferred taxes.................................... (160,000) (180,000)
Other............................................. 11,226 (23,765)
Increase (decrease) in liabilities:
Accounts payable.................................. (392,798) 448,911
Accrued expenses.................................. 144,053 239,679
Income taxes payable.............................. 61,663 16,957
--------- -----------
Net cash provided (used) by operating
activities..................................... 246,408 (277,312)
--------- -----------
Cash flows from investing activities:
Proceeds from sale of short-term investments........ 140,069 --
Purchase of short-term investments.................. (25,104) (92,454)
Capital expenditures................................ (47,935) (141,741)
--------- -----------
Net cash provided (used) by investing
activities..................................... 67,030 (234,195)
--------- -----------
Cash flows from financing activities:
Repayment of debt................................... (50,000) --
Borrowings on line of credit........................ -- 50,000
Repurchase of common stock.......................... (45,642) (13,255)
Issuance of common stock............................ 60,377 7,638
--------- -----------
Net cash (used) provided by financing
activities..................................... (35,265) 44,383
--------- -----------
Net increase (decrease) in cash....................... 278,173 (467,124)
Cash, beginning of year............................... 277,154 744,278
--------- -----------
Cash, end of year..................................... $ 555,327 $ 277,154
========= ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.............. $ 813 $ 338
========= ===========
Cash paid during the year for income taxes.......... $ 62,837 $ 29,572
========= ===========
</TABLE>

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

F-24
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998

1. Nature of operations and summary of significant accounting policies

Nature of operations

CR Technology, Inc. (the "Company" or "CRT"), a California corporation is a
leading worldwide supplier of X-ray and automated visual inspection systems for
the electronics and semiconductor industries. CRT's products employ X-ray and
machine vision technologies to enable electronics and semiconductor
manufacturers to analyze and report product quality at critical manufacturing
process steps. CRT manufactures products for off-line inspection, and for
automated monitoring of process-induced defects in printed circuit boards,
semiconductors and other electronic components.

The Company's markets include the semiconductor and electronics
manufacturing industry. Applications for the Company's products include
automated visual inspection, image and non-destructive inspections.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its subsidiary, a dormant entity with no assets, liabilities or
operations.

Major customers

The top five customers for the years ended December 31, 1998 and 1997
accounted for 20 and 37 percent of total sales, respectively. Sales outside the
U.S. accounted for 21 and 36 percent of total sales in 1998 and 1997,
respectively.

Concentrations of risk

Financial instruments which subject the Company to concentrations of credit
risk consist of cash, short-term investments and trade receivables. The Company
places its cash and short-term investments with high credit quality financial
institutions, and has never experienced a loss. The Company routinely assesses
the financial strength of its customers and, as a consequence, believes that
its trade accounts receivable credit risk exposure is limited.

Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.

Cash equivalents

For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposit, and all highly liquid debt instruments with
original maturities of three months or less.

Inventories

Inventories are reported at the lower of cost (determined on the first-in-
first-out method) or market.

F-25
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Equipment

Equipment is recorded at cost. Depreciation of equipment is computed using
the straight-line method based on the estimated useful lives of the individual
assets, generally three to five years.

The Company capitalizes internally developed computer software in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed". When the
product is released for distribution, the development expenses are amortized,
generally over a five year period or less. Amounts capitalized principally
represent the cost of writing software for the Company's new product line,
which include only a portion of the total expenses related to the product's
development. Amortization is computed on an individual product group on the
straight-line method over the estimated economic life of the product. During
1998, the Company reduced the estimated economic life to three years for all
capitalized software costs. Amortization expense was $175,544 and $72,652 in
1998 and 1997, respectively. The change in estimate increased 1998 amortization
expense by $112,314, reducing net income by $.14 per share.

Research and development costs

Research and development costs are charged to expense when incurred.

Patents and trademarks

The acquisition cost of $43,830 for patents and trademarks is amortized on
the straight-line method over their remaining lives of 7 to 14 years.
Amortization expense of $3,076 and $2,562 was charged to operations in 1998 and
1997, respectively.

Stock-Based Compensation

The Company accounts for compensation costs related to employee stock
options and other forms of employee stock-based compensation plans in
accordance with the requirements of Accounting Principles Board Opinion 25
("APB 25"). APB 25 requires compensation costs for stock-based compensation
plans to be recognized based on the difference, if any, between the fair market
value of the stock on the date of the grant and the option exercise price. In
October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 123, Accounting for Stock-Based Compensation
("SFAS 123"). SFAS 123 established a fair value-based method of accounting for
compensation plans. However, SFAS 123 allows an entity to continue to measure
compensation costs using the principles of APB 25 if certain pro forma
disclosures are made. The Company has adopted the provisions of pro forma
disclosure requirements of SFAS 123 in fiscal 1996. Options granted to non-
employees are recognized at their fair value at the date of grant.

2. Inventories

<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Raw materials...................................... $ 586,855 $ 409,634
Work in process.................................... 880,674 1,021,726
----------- ----------
$ 1,467,529 $1,431,360
=========== ==========
</TABLE>

F-26
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. Equipment

<TABLE>
<CAPTION>
Life 1998 1997
------- --------- ---------
<S> <C> <C> <C>
Leasehold improvements............................ 5 years $ 10,700 $ --
Computer software................................. 3 years 277,461 277,461
Computers......................................... 3 years 95,962 85,724
Machinery and equipment........................... 5 years 235,672 208,675
--------- ---------
619,795 571,860
Accumulated depreciation.......................... (468,874) (260,651)
--------- ---------
$ 150,921 $ 311,209
========= =========
Depreciation expense.............................. $ 205,147 $ 90,765
========= =========
</TABLE>

4. Line of credit

The Company has a $1,500,000 line of credit at prime expiring on August 2,
1999. There were no borrowings on this line during 1998.

The Company had a $1,000,000 line of credit at 9.25%, which expired May 31,
1998. A $50,000 outstanding balance at December 31, 1997 was repaid in January
1998.

5. Accrued expenses

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Employee bonuses........................................ $200,000 $159,018
Vacation................................................ 104,105 81,519
Commissions............................................. 194,703 2,580
Warranty................................................ 94,000 36,723
Customer deposits....................................... 2,145 147,317
Other................................................... 32,879 56,622
-------- --------
$627,832 $483,779
======== ========
</TABLE>

6. Income taxes

Deferred tax assets and liabilities are recognized for temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. Deferred tax assets are reduced by a valuation allowance when
deemed appropriate. The measurement of deferred tax assets and liabilities is
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. Measurement is computed using applicable
current tax rates (34% for 1998 and 1997).

In 1998, the Company recorded a deferred tax benefit of $160,000 against a
current tax provision of $124,500. The tax benefit of $35,500 includes: $70,000
due to the California Franchise Tax Board as a result of its 1997 and 1996
audit, $47,500 of California franchise taxes due for 1998, $7,000 for federal
AMT taxes for 1998 and a benefit for the reduction in the valuation allowance
of $160,000.

In 1997, the Company recorded a deferred tax benefit of $180,000 against a
current tax provision of $45,800. The remaining tax expense of $45,800 is the
amount due for the California franchise tax.

F-27
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's deferred tax assets, which have been partially offset by
valuation allowances, comprise the following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
Federal
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Loss carryforwards................................ $1,496,260 $1,651,704
Temporary differences:
Accounts receivable allowance................... 151,200 7,900
Inventory allowance............................. 114,000 187,000
Accrued expenses................................ 122,000 210,000
---------- ----------
1,883,460 2,056,604
Applicable tax rate............................... 34% 34%
---------- ----------
640,376 699,245
Valuation allowance............................... (300,376) (519,245)
---------- ----------
$ 340,000 $ 180,000
========== ==========
</TABLE>

During 1998 and 1997, the Company reduced the valuation allowance to reflect
the deferred tax assets recognized. In 1998 and 1997, a deferred tax asset of
$160,000 and $180,000 was recognized due to a decrease in the valuation
allowance. The deferred tax asset is based upon expected utilization of federal
net operating loss carryforwards. The ultimate realization of all deferred tax
assets will require aggregate taxable income of approximately $1,900,000 in
future years.

At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes expiring as follows:

Under Section 382 of the Internal Revenue Code, the utilization of net
operating loss carryforwards is limited after an ownership change, as defined,
to an annual amount equal to the market value of the loss corporation's
outstanding stock immediately before the date of the ownership change
multiplied by the highest Federal long-term tax exempt rate in effect for any
month in the three calendar month period ending with the calendar month in
which the ownership change occurred. Should an ownership change occur, the
Company's utilization of its net operating losses may be limited.

7. Warrants and Stock Option Plans

Warrants

In 1994, in connection with obtaining bridge financing, the Company issued
warrants to purchase 120,000 shares of its common stock to the investors. These
warrants expire on December 31, 2001 or 180 days after an initial public
offering, whichever occurs earlier and are exercisable at the lower of fifty
percent of the public offering price or $2.50 per share. All warrants are
outstanding at December 31, 1998.

F-28
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock option plans

Under the 1983 incentive stock option plan as amended in 1997, 160,382
common shares were reserved for grant to employees; 50,000 options exercisable
at $1.02 per share, which approximated market value were granted in 1997.

The 1991 non-qualified stock option plan reserves 150,000 common shares for
grant. The plan provides for issuance of options to key employees, officers and
directors of the Company or a subsidiary of the Company, consultants, business
associates, or others with important business relationships with the Company.
Option prices range from 85% to 110% of the fair market value of the stock at
the date of grant, and expiration dates range from five to 10 years.

A summary of stock option activity related to the Company's stock option
plans follows:

<TABLE>
<CAPTION>
1983 1991
Plan Plan Total
------- ------- -------
<S> <C> <C> <C>
Outstanding, December 31, 1996..................... 110,382 122,500 232,882
Granted.......................................... 50,000 -- 50,000
Exercised........................................ (76,382) -- (76,382)
Cancelled........................................ -- -- --
------- ------- -------
Outstanding, December 31, 1997..................... 84,000 122,500 206,500
Granted.......................................... -- -- --
Exercised........................................ -- -- --
Cancelled........................................ -- -- --
------- ------- -------
Outstanding, December 31, 1998..................... 84,000 122,500 206,500
======= ======= =======
</TABLE>

The following information applies to employee options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
Average
remaining Weighted Weighted
contractual average average
Number life exercise Number exercise
outstanding (years) price exercisable price
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Options............... 34,000 3 $0.10 31,500 $0.10
Options............... 122,500 3 $0.20 98,000 $0.20
Options............... 50,000 3 $1.02 12,376 $1.02
</TABLE>

Had compensation cost been determined based on the fair value of the options
at the grant date consistent with the method of SFAS 123, the Company's net
income would have been:

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income
As reported........................................... $258,144 $599,367
Pro forma............................................. $243,887 $576,452
</TABLE>

These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1995. The fair value of these options was estimated at the
grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions for 1997:

<TABLE>
<S> <C> <C>
Expected life (years)........................................... 4
Risk free interest rate......................................... 7.00%
Volatility...................................................... 200%
</TABLE>

F-29
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The weighted fair value of options granted during December 31, 1997 for
which the exercise price approximated the market price on the grant date was
$0.97. No options were granted during 1998.

8. Preferred Stock

In 1996 the Company issued 500,000 shares of its Series A Preferred Shares
at $2.00 per share. These preferred shares are convertible into common shares
based on a formula as fully outlined in the "Certificate of Determination of
Preferences of the Series A Preferred Stock of CR Technology, Inc." The shares
are presently convertible into an equal number of common shares, but this
conversion rate may fluctuate due to a number of factors including: stock
splits and combinations, common stock dividends, reorganizations or mergers or
a public offering of common stock. The preferred shareholders are entitled to
voting privileges in the same ratio as their preferred shares are convertible
into common shares and to receive a 6% non-cumulative dividend. No dividends
have been declared since the issuance of these shares.

9. Basic and Diluted Net Earnings Per Share

The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations:

<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Basic Earnings Per Share:
Numerator
Net income....................................... $ 258,144 $ 599,367
========== ==========
Denominator
Basic weighted average number of common shares
outstanding during the period................... 808,101 770,000
========== ==========
Basic net income per share........................... $ 0.32 $ 0.78
========== ==========
Diluted Earnings Per Share:
Numerator
Net income....................................... $ 258,144 $ 599,367
========== ==========
Denominator
Basic weighted average number of common shares
outstanding during the period................... 808,101 770,000
Stock options.................................... 140,750 134,385
Preferred stock.................................. 500,000 500,000
========== ==========
Diluted weighted average number of common shares
outstanding during the period................... 1,448,851 1,404,385
========== ==========
Diluted net income per share......................... $ 0.18 $ 0.43
========== ==========
Incremental common shares (not included in
denominator of diluted earnings per share
calculation due to their anti-dilutive nature)
attributable to exercise of:
Warrants........................................... 120,000 120,000
========== ==========
</TABLE>

Net earnings per share is calculated in accordance with Statement of
Financial Accounting Standards 128, Earnings per Share ("SFAS 128"), which
superseded Accounting Principles Board Opinion 15 ("APB 15").

F-30
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net earnings per share for all periods presented has been restated to reflect
the adoption of SFAS 128. Basic net earnings per share is based upon the
weighted average number of common shares outstanding. Diluted net earnings per
share is based on the assumption that all dilutive convertible shares and stock
options were converted or exercised. Dilution is computed by applying the
treasury stock method. Under this method, options and warrants are assumed to
be exercised at the beginning of the period (or at the time of issuance, if
later), and as if funds obtained thereby were used to purchase common stock at
the average market price during the period.

10. Commitments

As of December 31, 1998 the Company leases its operating facilities, certain
office equipment, and a vehicle under operating lease agreements expiring on
various dates through September 1999. Minimum future rental payments under
noncancelable operating leases for 1999 are $106,947. Rent expense totaled
$162,210 and $128,920 for 1998 and 1997, respectively.

11. Subsequent event

In August 1999, the Company entered into an agreement with Photon Dynamics,
Inc. ("Photon"), a California corporation, whereby Photon will acquire all of
the outstanding common and preferred shares of CRT in exchange for
approximately 2,000,000 Photon shares as detailed in the "Agreement and Plan of
Merger and Reorganization." The Plan must be approved by a vote of CRT's and
Photon's shareholders. The agreement terminates on December 31, 1999 if the
merger has not occurred by that date. Photon is a publicly traded company,
trading on the NASDAQ stock exchange under the symbol PHTN.

F-31
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:.......................................
Cash................................................ $1,465 $ 555
Short-term investments.............................. 59 178
Accounts receivable, net............................ 2,597 1,422
Inventories......................................... 2,478 1,467
Deferred income taxes............................... 340 340
Other............................................... 51 27
------ ------
Total current assets................................ 6,990 3,989
Equipment............................................. 102 151
Patents and trademarks................................ 16 18
------ ------
Total assets.......................................... $7,108 $4,158
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $1,683 $ 372
Accrued expenses.................................... 1,252 628
Income taxes payable................................ 141 79
------ ------
Total current liabilities............................. 3,076 1,079
Stockholders' equity:
Preferred stock..................................... 943 943
Common stock........................................ 5,124 5,124
Accumulated deficit................................. (2,035) (2,988)
------ ------
Net stockholders' equity............................ 4,032 3,079
------ ------
Total liabilities and stockholders' equity.......... $7,108 $4,158
====== ======
</TABLE>
- --------
Note: The balance sheet at December 31, 1998 has been derived from the audited
consolidated financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.

See accompanying notes to condensed consolidated financial statements.

F-32
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

<TABLE>
<CAPTION>
Three Months Six Months
Ended June Ended June
30, 30,
-------------- --------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales...................................... $4,309 $2,110 $7,408 $4,115
Cost of sales.................................. 2,236 1,122 3,849 2,197
------ ------ ------ ------
Gross profit................................... 2,073 988 3,559 1,918
Operating expenses:
Selling, general and administrative.......... 1,123 693 2,156 1,475
Research and development..................... 215 120 376 236
------ ------ ------ ------
Total operating expenses....................... 1,338 813 2,532 1,711
------ ------ ------ ------
Operating income............................... 735 175 1,027 207
Interest income................................ 12 6 26 18
Interest expense and other..................... (2) -- (2) (1)
------ ------ ------ ------
Income before provision for income taxes....... 745 181 1,051 224
Provision for income taxes..................... 69 43 97 43
------ ------ ------ ------
Net income..................................... $ 676 $ 138 $ 954 $ 181
====== ====== ====== ======

Basic earnings per share....................... $ 0.83 $ 0.17 $ 1.17 $ 0.23
====== ====== ====== ======
Diluted earnings per share..................... $ 0.46 $ 0.10 $ 0.66 $ 0.13
====== ====== ====== ======

Basic weighted average number of shares
outstanding................................... 813 805 813 794
====== ====== ====== ======
Diluted weighted average number of shares
outstanding................................... 1,454 1,446 1,454 1,435
====== ====== ====== ======
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-33
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

<TABLE>
<CAPTION>
Six Months
Ended
June 30,
--------------
1999 1998
------- -----
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 954 $ 181
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 56 102
(Increase) decrease in assets:
Accounts receivable....................................... (1,175) 166
Inventories............................................... (1,011) (468)
Other..................................................... (24) 48
Increase (decrease) in liabilities:
Accounts payable.......................................... 1,311 (17)
Accrued expenses.......................................... 624 281
Income taxes payable...................................... 62 (15)
------- -----
Net cash provided by operating activities..................... 797 278
Cash flows from investing activities:
Proceeds from sale of short-term investments.................. 119 31
Capital expenditures.......................................... (6) (48)
------- -----
Net cash provided by (used in) investing activities........... 113 (17)
Cash flows from financing activities:
Repayment of debt............................................. -- (50)
Issuance of common stock...................................... -- 7
------- -----
Net cash (used in) financing activities....................... -- (43)
------- -----
Net increase in cash.......................................... 910 218
Cash, beginning of year....................................... 555 277
------- -----
Cash, end of year............................................. $ 1,465 $ 495
======= =====
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-34
<PAGE>

CR TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Significant Accounting Policies

Interim Financial Statements

The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month period
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 1999.

2. Inventories

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

<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Inventories comprise (in thousands):
Raw materials..................................... $ 716 $ 587
Work in process................................... 1,762 880
------ ------
$2,478 $1,467
====== ======
</TABLE>

3. Earnings Per Share

For the three and six months ended June 30, 1999, basic and diluted
earnings per share is computed using the weighted average number of shares of
common stock outstanding. The following table sets forth the computation of
basic and diluted earnings per share:

<TABLE>
<CAPTION>
Three Months
Ended June Six Months Ended
30, June 30,
------------- -----------------
1999 1998 1999 1998
------ ------ -------- --------
(In thousands, except per share
amounts)
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings
per share................................ $ 676 $ 138 $ 954 $ 181
Denominator for basic earnings per share.. 813 805 813 794
Effect of dilutive securities:
Stock options........................... 141 141 141 141
Preferred stock......................... 500 500 500 500
------ ------ -------- --------
Denominator for diluted earnings per
share.................................... 1,454 1,446 1,454 1,435
Basic earnings per share.................. $ 0.83 $ 0.17 $ 1.17 $ 0.23
Diluted earnings per share................ $ 0.46 $ 0.10 $ 0.66 $ 0.13
</TABLE>

4. Subsequent Event

In August 1999, the Company entered into an agreement with Photon Dynamics,
Inc. ("Photon"), a California corporation, whereby Photon will acquire all of
the outstanding common and preferred shares of the Company in exchange for
approximately 2,000,000 Photon shares as detailed in the "Agreement and Plan
of Merger and Reorganization." The Plan must be approved by a vote of CRT's
and Photon's shareholders. The agreement terminates on December 31, 1999 if
the merger has not occurred by that date. Photon is a publicly traded company,
trading on the NASDAQ stock exchange under the symbol PHTN.

F-35
<PAGE>

PHOTON DYNAMICS, INC. AND CR TECHNOLOGY, INC.

UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed financial statements
have been prepared to give effect to the merger, using the pooling of interests
method of accounting. These financial statements reflect certain assumptions
deemed probable by management regarding the merger (e.g., that share
information used in the unaudited pro forma information approximates actual
share information at the effective date). No adjustments to the unaudited pro
forma combined condensed financial statements have been made to account for
different possible results in connection with the foregoing, as management
believes that the impact on such information of varying outcomes, individually
or in the aggregate, would not be material.

PDI has a fiscal year ending on September 30 and CRT has a fiscal year
ending on December 31. If the Acquisition is consummated, the fiscal year of
CRT will be conformed to that of PDI commencing with the fiscal year ending
September 30, 2000. Accordingly, the unaudited pro forma combined statement of
operations data combine PDI's historical results for the fiscal years ended
September 30, 1998 and 1997 and the nine months ended June 30, 1999 and 1998
with the CRT historical results for the years ended December 31, 1998 and 1997
and the nine months ended June 30, 1999 and September 30, 1998, respectively,
giving effect to the Acquisition as if it had occurred at the beginning of the
earliest period presented. The unaudited pro forma combined balance sheet data
combine PDI's consolidated balance sheet as of June 30, 1999 with the CRT
consolidated balance sheet as of June 30, 1999, giving effect to the
Acquisition as if it had occurred on June 30, 1999.

PDI and CRT estimate that they will incur direct transaction costs of
approximately $1.0 million associated with the merger, which will be charged to
operations upon consummation of the merger. In addition, it is expected that
following the merger, the combined company will incur additional costs, which
can not currently be estimated, associated with integrating the operations of
the two companies. Integration-related costs are not included in the
accompanying unaudited pro forma combined condensed financial statements.

Unaudited pro forma combined condensed financial information is presented
for illustrative purposes only and is not necessarily indicative of the
financial position or results of operations that would have actually been
reported had the merger occurred at the beginning of the earliest period
presented, nor is it necessarily indicative of future financial position or
results of operations. These unaudited pro forma combined condensed financial
statements are based upon the respective historical consolidated financial
statements of PDI and CRT and notes thereto, included elsewhere in this proxy
statement/prospectus. These unaudited pro forma combined condensed financial
statements do not incorporate, nor do they assume, any benefits from cost
savings or synergies of operations of the combined company.

F-36
<PAGE>

PHOTON DYNAMICS, INC. AND CR TECHNOLOGY, INC.

UNAUDITED PRO FORMA
COMBINED CONDENSED BALANCE SHEETS
June 30, 1999
(In thousands)

<TABLE>
<CAPTION>
Pro Forma Pro Forma
PDI CRT Adjustments Combined
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........... $ 5,916 $ 1,465 $ -- $ 7,381
Short-term investments.............. -- 59 -- 59
Accounts receivable, net............ 11,067 2,597 -- 13,664
Inventories, net.................... 4,352 2,478 -- 6,830
Deferred income taxes............... -- 340 -- 340
Prepaid expenses and other current
assets............................. 245 51 -- 296
-------- ------- ------- --------
Total current assets.............. 21,580 6,990 -- 28,570
Property, equipment and leasehold
improvements, net.................. 1,196 102 -- 1,298
Other assets........................ 606 16 -- 622
-------- ------- ------- --------
Total assets...................... $ 23,382 $ 7,108 $ -- $ 30,490
======== ======= ======= ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable.................... $ 2,122 $ 1,683 $ -- $ 3,805
Accrued expenses and other
liabilities........................ 3,389 1,214 -- 4,603
Accrued transaction costs........... -- -- 1,000 1,000
Income taxes payable................ -- 141 -- 141
Customer deposits and deferred
revenue............................ 118 38 -- 156
Current obligations under lines of
credit............................. 1,000 -- -- 1,000
Current portion of long-term debt... 3 -- -- 3
-------- ------- ------- --------
Total current liabilities......... 6,632 3,076 1,000 10,708
Shareholders' equity:
Preferred stock..................... -- 943 (943) --
Common stock........................ 39,506 5,124 943 45,573
Accumulated deficit................. (22,617) (2,035) (1,000) (25,652)
Foreign currency translation
adjustment and other............... (66) -- -- (66)
Notes receivable from shareholders.. (73) -- -- (73)
-------- ------- ------- --------
Total shareholders' equity........ 16,750 4,032 (1,000) 19,782
-------- ------- ------- --------
Total liabilities and
shareholders' equity............. $ 23,382 $ 7,108 $ -- $ 30,490
======== ======= ======= ========
</TABLE>

See accompanying notes to unaudited pro forma combined condensed financial
statements.

F-37
<PAGE>

PHOTON DYNAMICS, INC. AND CR TECHNOLOGY, INC.

UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
Nine Months Ended June 30, 1999
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
Nine Months Nine Months
Ended June 30, Ended June 30,
1999 1999
-------------- -------------- Pro Forma
PDI CRT Combined
-------------- -------------- ---------
<S> <C> <C> <C>
Revenue:
Product revenue....................... $20,199 $9,831 $30,030
Non-product revenue................... 500 -- 500
------- ------ -------
20,699 9,831 30,530
Cost of revenue:
Product revenue....................... 12,327 5,278 17,605
Non-product revenue................... -- -- --
------- ------ -------
12,327 5,278 17,605
------- ------ -------
Gross margin.......................... 8,372 4,553 12,925
Operating expenses:
Research and development.............. 3,743 560 4,303
Selling, general and administrative... 5,117 2,957 8,074
------- ------ -------
Total operating expenses............ 8,860 3,517 12,377
------- ------ -------
Operating income (loss)............... (488) 1,036 548
Interest income....................... 162 36 198
Interest expense and other............ (92) (2) (94)
------- ------ -------
Income (loss) before provision for
income taxes......................... (418) 1,070 652
Provision for income taxes............ 52 19 71
------- ------ -------
Net income (loss)..................... $ (470) $1,051 $ 581
======= ====== =======
Basic net income (loss) per share..... $ (0.06) $ 1.29 $ 0.06
======= ====== =======
Diluted net income (loss) per share... $ (0.06) $ 0.72 $ 0.06
======= ====== =======
Shares used in computing basic net
income (loss) per share.............. 7,495 813 9,200
======= ====== =======
Shares used in computing diluted net
income (loss) per share.............. 7,495 1,454 9,779
======= ====== =======
</TABLE>

See accompanying notes to unaudited pro forma combined condensed financial
statement.

F-38
<PAGE>

PHOTON DYNAMICS, INC. AND CR TECHNOLOGY, INC.

UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
Nine Months Ended June 30, 1998
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
Nine Months
Nine Months Ended
Ended June 30, September 30,
1998 1998
-------------- ------------- Pro Forma
PDI CRT Combined
-------------- ------------- ---------
<S> <C> <C> <C>
Revenue:
Product revenue........................ $18,362 $6,127 $24,489
Non-product revenue.................... -- -- --
------- ------ -------
18,362 6,127 24,489
Cost of revenue:
Product revenue........................ 10,103 3,391 13,494
Non-product revenue.................... -- -- --
------- ------ -------
10,103 3,391 13,494
------- ------ -------
Gross margin........................... 8,259 2,736 10,995
Operating expenses:
Research and development............... 4,738 428 5,166
Selling, general and administrative.... 3,728 2,131 5,859
Asset recovery related to product line
disposal.............................. (350) -- (350)
------- ------ -------
Total operating expenses............. 8,116 2,559 10,675
------- ------ -------
Operating income....................... 143 177 320
Interest income........................ 184 27 211
Interest expense and other............. 11 -- 11
------- ------ -------
Income before provision for income
taxes................................. 338 204 542
Provision for income taxes............. 21 43 64
------- ------ -------
Net income............................. $ 317 $ 161 $ 478
======= ====== =======
Basic net income per share............. $ 0.04 $ 0.20 $ 0.05
======= ====== =======
Diluted net income per share........... $ 0.04 $ 0.11 $ 0.05
======= ====== =======
Shares used in computing basic net
income per share...................... 7,214 799 8,902
======= ====== =======
Shares used in computing diluted net
income per share...................... 7,513 1,440 9,370
======= ====== =======
</TABLE>

See accompanying notes to unaudited pro forma combined condensed financial
statement.

F-39
<PAGE>

PHOTON DYNAMICS, INC. AND CR TECHNOLOGY, INC.

UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
Year Ended September 30, 1998
(In thousands, except per share data)

<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, December 31,
1998 1998
------------- ------------ Pro Forma
PDI CRT Combined
------------- ------------ ---------
<S> <C> <C> <C>
Revenue:
Product revenue.......................... $22,420 $8,550 $30,970
Non-product revenue...................... -- -- --
------- ------ -------
22,420 8,550 30,970
Cost of revenue:
Product revenue.......................... 13,059 4,820 17,879
Non-product revenue...................... -- -- --
------- ------ -------
13,059 4,820 17,879
------- ------ -------
Gross margin............................. 9,361 3,730 13,091
Operating expenses:
Research and development................. 5,911 612 6,523
Selling, general and administrative...... 5,389 2,932 8,321
Asset recovery related to product line
disposal................................ (350) -- (350)
------- ------ -------
Total operating expenses............... 10,950 3,544 14,494
------- ------ -------
Operating income (loss).................. (1,589) 186 (1,403)
Interest income.......................... 245 37 282
Interest expense and other............... (13) -- (13)
------- ------ -------
Income (loss) before provision for income
taxes................................... (1,357) 223 (1,134)
Provision (benefit) for income taxes..... 108 (35) 73
------- ------ -------
Net income (loss)........................ $(1,465) $ 258 $(1,207)
======= ====== =======
Basic net income (loss) per share........ $ (0.20) $ 0.32 $ (0.14)
======= ====== =======
Diluted net income (loss) per share...... $ (0.20) $ 0.18 $ (0.14)
======= ====== =======
Shares used in computing basic net income
(loss) per share........................ 7,231 808 8,930
======= ====== =======
Shares used in computing diluted net
income (loss) per share................. 7,231 1,449 8,930
======= ====== =======
</TABLE>

See accompanying notes to unaudited pro forma combined condensed financial
statement.

F-40
<PAGE>

PHOTON DYNAMICS, INC. AND CR TECHNOLOGY, INC.

UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
Year Ended September 30, 1997
(In thousands, except per share data)

<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, December 31,
1997 1997
------------- ------------ Pro Forma
PDI CRT Combined
------------- ------------ ---------
<S> <C> <C> <C>
Revenue:
Product revenue.......................... $23,157 $5,708 $28,865
Non-product revenue...................... 1,350 -- 1,350
------- ------ -------
24,507 5,708 30,215
Cost of revenue:
Product revenue.......................... 13,789 3,177 16,966
Non-product revenue...................... -- -- --
------- ------ -------
13,789 3,177 16,966
------- ------ -------
Gross margin............................. 10,718 2,531 13,249
Operating expenses:
Research and development................. 7,776 291 8,067
Selling, general and administrative...... 5,637 1,809 7,446
------- ------ -------
Total operating expenses............... 13,413 2,100 15,513
------- ------ -------
Operating income (loss).................. (2,695) 431 (2,264)
Interest income.......................... 348 34 382
Interest expense and other............... (114) -- (114)
------- ------ -------
Income (loss) before provision for income
taxes................................... (2,461) 465 (1,996)
Provision (benefit) for income taxes..... 20 (134) (114)
------- ------ -------
Net income (loss)........................ $(2,481) $ 599 $(1,882)
======= ====== =======
Basic net income (loss) per share........ $ (0.35) $ 0.78 $ (0.22)
======= ====== =======
Diluted net income (loss) per share...... $ (0.35) $ 0.43 $ (0.22)
======= ====== =======
Shares used in computing basic net income
(loss) per share........................ 7,049 770 8,702
======= ====== =======
Shares used in computing diluted net
income (loss) per share................. 7,049 1,404 8,702
======= ====== =======
</TABLE>

See accompanying notes to unaudited pro forma combined condensed financial
statement.

F-41
<PAGE>

PHOTON DYNAMICS, INC. AND CR TECHNOLOGY, INC.

NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS

NOTE 1--PERIODS COMBINED

The consolidated balance sheet of Photon Dynamics, Inc. ("PDI") as of June
30, 1999 has been combined with the consolidated balance sheet of CR
Technology, Inc. ("CRT") as of June 30, 1999. The PDI consolidated statements
of operations for the nine months ended June 30, 1999 and 1998 and for the
years ended September 30, 1998 and 1997 have been combined with the CRT
consolidated statements of operations for the nine months ended June 30, 1999
and September 30, 1998, and for the years ended December 31, 1998 and 1997,
respectively. The unaudited combined condensed statements of operations for the
year ended September 30, 1998 and for the nine months ended June 30, 1999 both
include the CRT results of operations for the three months ended December 31,
1998. The results of operations for those three months are summarized as
follows (in thousands):

<TABLE>
<S> <C>
Revenues.......................... $2,423
Operating income ................. $ 9
Net income ....................... $ 97
</TABLE>

NOTE 2--MERGER COSTS

PDI and CRT estimate they will incur direct transaction costs of
approximately $1.0 million associated with the merger, consisting primarily of
fees for investment banking, filings with regulatory agencies, legal,
accounting, financial printing and other related costs. These nonrecurring
costs will be charged to operations in the fiscal quarter in which the merger
is consummated. The unaudited pro forma combined condensed balance sheet gives
effect to such charges as if they had been incurred as of June 30, 1999, but
the effects of these costs have not been reflected in the unaudited pro forma
combined condensed statements of operations as they are nonrecurring in nature.
It is expected that substantially all of the costs will be paid out of existing
cash reserves within six to twelve months after the consummation of the merger.

In addition, it is expected that following the merger, the combined company
will incur additional costs, which can not currently be estimated, associated
with integrating the operations of the two companies. Integration-related costs
are not included in the accompanying unaudited pro forma combined condensed
financial statements.

NOTE 3--PRO FORMA NET INCOME PER SHARE

The unaudited pro forma combined net income per common share amounts are
based upon the weighted average number of common and dilutive equivalent shares
of PDI and CRT outstanding at the exchange ratio for each period.

NOTE 4--FISCAL YEARS

The unaudited pro forma combined financial data combine financial data of
PDI for the nine months ended June 30, 1999 and 1998 and the years ended
September 30, 1998 and 1997 with financial data of CRT for the nine months
ended June 30, 1999 and September 30, 1998 and the years ended December 31,
1998 and 1997, respectively.

F-42
<PAGE>

PHOTON DYNAMICS, INC. AND CR TECHNOLOGY, INC.

NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)

NOTE 5--PRO FORMA NET INCOME (LOSS) PER SHARE

The following table reconciles the number of shares used in the pro forma
earnings per share computations to the numbers set forth in PDI's and CRT's
historical statements of operations (in thousands, except for the exchange
ratio):

<TABLE>
<CAPTION>
Nine Months Ended Year Ended
June 30, September 30,
----------------- --------------
1999 1998 1998 1997
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Weighted average shares used in basic per
share computation:
Historical CRT--Common...................... 813 799 808 770
Historical CRT--Preferred................... 500 500 500 500
-------- -------- ------ ------

1,313 1,299 1,308 1,270
Exchange ratio.............................. 1.2033 1.2033 1.2033 1.2033
-------- -------- ------ ------

1,580 1,563 1,574 1,528
Liquidation preference shares............... 125 125 125 125
-------- -------- ------ ------

CRT shares of PDI common stock.............. 1,705 1,688 1,699 1,653
Historical PDI.............................. 7,495 7,214 7,231 7,049
-------- -------- ------ ------

Pro forma combined--basic................... 9,200 8,902 8,930 8,702
======== ======== ====== ======

Pro forma combined net income per share--
basic...................................... $ 0.06 $ 0.05 $(0.14) $(0.22)
======== ======== ====== ======

Weighted average shares used in diluted per
share computation:
Pro forma combined--basic................... 9,200 8,902 8,930 8,702
Dilutive CRT stock options.................. 141 141 -- --
Exchange ratio.............................. 1.2033 1.2033 1.2033 1.2033
-------- -------- ------ ------
169 169 -- --
-------- -------- ------ ------
9,369 9,071 8,930 8,702
Dilutive PDI securities..................... 410 299 -- --
-------- -------- ------ ------

Pro forma combined--diluted................. 9,779 9,370 8,930 8,702
======== ======== ====== ======

Pro forma combined net income per share--
diluted.................................... $ 0.06 $ 0.05 $(0.14) $(0.22)
======== ======== ====== ======
</TABLE>

F-43
<PAGE>

Appendix A

AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

This Agreement and Plan of Merger and Reorganization ("Agreement") is made
and entered into as of August 10, 1999, by and among: Photon Dynamics, Inc., a
California corporation ("Parent"); Pharaoh Acquisition Corp., a California
corporation and a wholly owned subsidiary of Parent ("Merger Sub") and CR
Technology, Inc., a California corporation (the "Company"). Certain other
capitalized terms used in this Agreement are defined in Exhibit B.

Recitals

A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company in accordance with this Agreement and the California
General Corporation Law (the "Merger"). Upon consummation of the Merger, Merger
Sub will cease to exist, and the Company will become a wholly owned subsidiary
of Parent.

B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For accounting purposes, it is intended that the Merger
be treated as a "pooling of interests."

C. This Agreement has been approved by the respective boards of directors of
Parent, Merger Sub and the Company.

D. Shareholders of the Company holding at least seventy percent (70%) of the
Common Stock outstanding as of the date of this Agreement (with no par value)
of the Company ("Company Common Stock") and one hundred percent (100%) of the
Series A Preferred Stock outstanding as of the date of this Agreement (with no
par value) of the Company ("Series A Preferred Stock") will contemporaneously
with the execution and delivery of this Agreement execute and deliver to Parent
a Shareholder Agreement of even date herewith.

Agreement

The parties to this Agreement agree as follows:

SECTION 1. Description of Transaction

1.1 Merger of Merger Sub into the Company. Upon the terms and subject to the
conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "Surviving Corporation").

1.2 Effect of the Merger. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the California General
Corporation Law.

1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, Five Palo Alto Square, Palo Alto, California 94306 at
10:00 a.m. on the second business day following the day on which all of the
conditions set forth in Sections 6 and 7 have been satisfied or duly waived
(the "Scheduled Closing Time"). (The date on which the Closing actually takes
place is referred to in this Agreement as the "Closing Date.")
Contemporaneously with or as promptly as practicable after the Closing, a
properly executed agreement of merger conforming to the requirements of Chapter
11 of the California General Corporation Law and related Certificates of
Approval of Merger Sub and the Company, together with a Tax Clearance
Certificate, shall be

A-1
<PAGE>

filed with the Secretary of State of the State of California. The Merger shall
become effective at the time such agreement of merger and related Certificates
of Approval of Merger Sub and the Company, together with a Tax Clearance
Certificate, is filed with the Secretary of State of the State of California
(the "Effective Time").

1.4 Articles of Incorporation and Bylaws; Directors and Officers. Unless
otherwise determined by Parent and the Company prior to the Effective Time:

(a) the Articles of Incorporation of the Surviving Corporation shall be
amended and restated as of the Effective Time to conform to Exhibit C-1;

(b) the Bylaws of the Surviving Corporation shall be amended and
restated as of the Effective Time to conform to the Bylaws of Merger Sub as
in effect immediately prior to the Effective Time to conform to Exhibit C-
2; and

(c) the directors and officers of the Surviving Corporation immediately
after the Effective Time shall be the individuals identified on Exhibit D.

1.5 Conversion of Shares.

(a) Subject to Sections 1.8(c) and 1.9, at the Effective Time, by virtue
of the Merger and without any further action on the part of Parent, Merger
Sub, the Company or any shareholder of the Company ("Shareholder"):

(i) each share of Company Common Stock outstanding immediately prior
to the Effective Time shall be converted into the right to receive that
number of shares of Parent Common Stock equal to the Applicable
Fraction;

(ii) each share of Series A Preferred Stock outstanding immediately
prior to the Effective Time shall be converted into the right to
receive the number of shares of Parent Common Stock obtained by
multiplying (A) the Applicable Fraction, by (B) the number of shares of
Company Common Stock into which each share of Series A Preferred Stock
is convertible immediately prior to the Effective Time, plus a number
of additional shares of Parent Common Stock obtained by dividing (x)
$3.36, by (y) the Current Parent Stock Price (collectively, the
"Liquidation Preference Shares"); and

(iii) each share of the common stock (with no par value) of Merger
Sub outstanding immediately prior to the Effective Time shall be
converted into one share of common stock of the Surviving Corporation.

(b) If any shares of Company Common Stock outstanding immediately prior
to the Effective Time are unvested or are subject to a repurchase option,
risk of forfeiture or other condition under any applicable restricted stock
purchase agreement or other agreement with the Company, then the shares of
Parent Common Stock issued in exchange for such shares of Company Common
Stock will also be unvested and subject to the same repurchase option, risk
of forfeiture or other condition, and the certificates representing such
shares of Parent Common Stock may accordingly be marked with appropriate
legends.

1.6 Employee Stock Options. At the Effective Time, each stock option that is
then outstanding under the Company's 1983 Stock Plan or 1991 Stock Plan
(together, the "Company's Stock Plans"), whether vested or unvested (a "Company
Option"), shall be assumed by Parent in accordance with the terms (as in effect
as of the date of this Agreement) of the Company's Stock Plans and the stock
option agreement by which such Company Option is evidenced. All rights with
respect to Company Common Stock under outstanding Company Options shall
thereupon be converted into rights with respect to Parent Common Stock.
Accordingly, from and after the Effective Time, (a) each Company Option assumed
by Parent may be exercised solely for shares of Parent Common Stock, (b) the
number of shares of Parent Common Stock subject to each such assumed

A-2
<PAGE>

Company Option shall be equal to the number of shares of Company Common Stock
that were subject to such Company Option immediately prior to the Effective
Time multiplied by the Applicable Fraction, rounded down to the nearest whole
number of shares of Parent Common Stock, (c) the per share exercise price for
the Parent Common Stock issuable upon exercise of each such assumed Company
Option shall be determined by dividing the exercise price per share of Company
Common Stock subject to such Company Option, as in effect immediately prior to
the Effective Time, by the Applicable Fraction, and rounding the resulting
exercise price up to the nearest whole cent, and (d) all restrictions on the
exercise of each such assumed Company Option shall continue in full force and
effect, and the term, exercisability, vesting schedule and other provisions of
such Company Option shall otherwise remain unchanged; provided, however, that
each such assumed Company Option shall, in accordance with its terms, be
subject to further adjustment as appropriate to reflect any stock split,
reverse stock split, stock dividend, recapitalization or other similar
transaction effected by Parent after the Effective Time. The Company and Parent
shall take all action that may be necessary (under the Company's Stock Plans
and otherwise) to effectuate the provisions of this Section 1.6. Following the
Closing, Parent will send to each holder of an assumed Company Option a written
notice setting forth (i) the number of shares of Parent Common Stock subject to
such assumed Company Option, and (ii) the exercise price per share of Parent
Common Stock issuable upon exercise of such assumed Company Option. Parent
shall file with the SEC, within sixty (60) days after the Effective Time, a
registration statement on Form S-8 registering the exercise of the Company
Options assumed by Parent pursuant to this Section 1.6.

1.7 Closing of the Company's Transfer Books. At the Effective Time, holders
of certificates representing shares of the Company's capital stock that were
outstanding immediately prior to the Effective Time shall cease to have any
rights as shareholders of the Company, and the stock transfer books of the
Company shall be closed with respect to all shares of such capital stock
outstanding immediately prior to the Effective Time. No further transfer of any
such shares of the Company's capital stock shall be made on such stock transfer
books after the Effective Time. If, after the Effective Time, a valid
certificate previously representing any of such shares of the Company's capital
stock (a "Company Stock Certificate") is presented to the Surviving Corporation
or Parent, such Company Stock Certificate shall be canceled and shall be
exchanged as provided in Section 1.8.

1.8 Exchange of Certificates.

(a) At or as soon as reasonably practicable after the Effective Time,
Parent will send to the holders of Company Stock Certificates (i) a Letter
of Transmittal in the form of Exhibit N ("Letter of Transmittal"), and (ii)
instructions for use in effecting the surrender of Company Stock
Certificates in exchange for certificates representing Parent Common Stock.
Upon surrender of a Company Stock Certificate to Parent for exchange,
together with a duly executed Letter of Transmittal and such other
documents as may be reasonably required by Parent, the holder of such
Company Stock Certificate shall be entitled to receive in exchange therefor
a certificate representing the number of whole shares of Parent Common
Stock that such holder has the right to receive pursuant to the provisions
of this Section 1, and the Company Stock Certificate so surrendered shall
be canceled. Until surrendered as contemplated by this Section 1.8, each
Company Stock Certificate shall be deemed, from and after the Effective
Time, to represent only the right to receive upon such surrender a
certificate representing shares of Parent Common Stock (and cash in lieu of
any fractional share of Parent Common Stock) as contemplated by this
Section 1. If any Company Stock Certificate shall have been lost, stolen or
destroyed, Parent may, in its discretion and as a condition precedent to
the issuance of any certificate representing Parent Common Stock, require
the owner of such lost, stolen or destroyed Company Stock Certificate to
provide an appropriate affidavit and to deliver a bond (in such sum as
Parent may reasonably direct) as indemnity against any claim that may be
made against Parent or the Surviving Corporation with respect to such
Company Stock Certificate.

(b) No dividends or other distributions declared or made with respect to
Parent Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Company Stock Certificate with
respect to the shares of Parent Common Stock represented thereby, and no
cash payment in lieu of any fractional share shall be paid to any such
holder, until such holder surrenders such Company

A-3
<PAGE>

Stock Certificate in accordance with this Section 1.8 (at which time such
holder shall be entitled to receive all such dividends and distributions
and such cash payment).

(c) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional
shares shall be issued. In lieu of such fractional shares, any holder of
capital stock of the Company who would otherwise be entitled to receive a
fraction of a share of Parent Common Stock (after aggregating all
fractional shares of Parent Common Stock issuable to such holder) shall,
upon surrender of such holder's Company Stock Certificate(s), be paid in
cash the dollar amount (rounded to the nearest whole cent), without
interest, determined by multiplying such fraction by the Designated Parent
Stock Price.

(d) Parent and the Surviving Corporation shall be entitled to deduct and
withhold from any consideration payable or otherwise deliverable to any
holder or former holder of capital stock of the Company pursuant to this
Agreement such amounts as Parent or the Surviving Corporation may be
required to deduct or withhold therefrom under the Code or under any
provision of state, local or foreign tax law. To the extent such amounts
are so deducted or withheld, such amounts shall be treated for all purposes
under this Agreement as having been paid to the Person to whom such amounts
would otherwise have been paid.

(e) Neither Parent nor the Surviving Corporation shall be liable to any
holder or former holder of capital stock of the Company for any shares of
Parent Common Stock (or dividends or distributions with respect thereto),
or for any cash amounts, delivered to any public official pursuant to any
applicable abandoned property, escheat or similar law.

1.9 Dissenting Shares.

(a) Notwithstanding anything to the contrary contained in this
Agreement, any shares of capital stock of the Company that, as of the
Effective Time, are or may become "dissenting shares" within the meaning of
Section 1300(b) of the California Corporations Code shall not be converted
into or represent the right to receive Parent Common Stock in accordance
with Section 1.5 (or cash in lieu of fractional shares in accordance with
Section 1.8(c)), and the holder or holders of such shares shall be entitled
only to such rights as may be granted to such holder or holders in Chapter
13 of the California General Corporation Law; provided, however, that if
the status of any such shares as "dissenting shares" shall not be
perfected, or if any such shares shall lose their status as "dissenting
shares," then, as of the later of the Effective Time or the time of the
failure to perfect such status or the loss of such status, such shares
shall automatically be converted into and shall represent only the right to
receive (upon the surrender of the certificate or certificates representing
such shares) Parent Common Stock in accordance with Section 1.5 (and cash
in lieu of fractional shares in accordance with Section 1.8(c)).

(b) The Company shall give Parent (i) prompt notice of any written
demand received by the Company prior to the Effective Time to require the
Company to purchase shares of capital stock of the Company pursuant to
Chapter 13 of the California General Corporation Law and of any other
demand, notice or instrument delivered to the Company prior to the
Effective Time pursuant to the California General Corporation Law, and (ii)
the opportunity to participate in all negotiations and proceedings with
respect to any such demand, notice or instrument. The Company shall not
make any payment or settlement offer prior to the Effective Time with
respect to any such demand unless Parent shall have consented in writing to
such payment or settlement offer.

1.10 Tax Consequences. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of
the Code. The parties to this Agreement hereby adopt this Agreement as a "plan
of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of
the United States Treasury Regulations.

A-4
<PAGE>

1.11 Accounting Treatment. For accounting purposes, the Merger is intended
to be treated as a "pooling of interests."

1.12 Further Action. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation or Parent with
full right, title and possession of and to all rights and property of Merger
Sub and the Company, the officers and directors of the Surviving Corporation
and Parent shall be fully authorized (in the name of Merger Sub, in the name of
the Company and otherwise) to take such action.

SECTION 2. Representations and Warranties of the Company

The Company represents and warrants, to and for the benefit of the Parent
Indemnitees, as follows:

2.1 Due Organization; No Subsidiaries; Parent Entity; Etc.

(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has all
necessary power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own and use its
assets in the manner in which its assets are currently owned and used; and
(iii) to perform its obligations under all Company Contracts.

(b) Except as set forth in Part 2.1(b) of the Disclosure Schedule, the
Company has not conducted any business under or otherwise used, for any
purpose or in any jurisdiction, any fictitious name, assumed name, trade
name or other name, other than the name "CR Technology".

(c) The Company is not and has not been required to be qualified,
authorized, registered or licensed to do business as a foreign corporation
in any jurisdiction other than the jurisdictions identified in Part 2.1(c)
of the Disclosure Schedule, except where the failure to be so qualified,
authorized, registered or licensed has not had and will not have a Material
Adverse Effect on the Company. Except as otherwise disclosed in Part 2.1(c)
of the Disclosure Schedule, the Company is in good standing as a foreign
corporation in each of the jurisdictions identified in Part 2.1(c) of the
Disclosure Schedule.

(d) Part 2.1(d) of the Disclosure Schedule accurately sets forth (i) the
names of the members of the Company's board of directors, (ii) the names of
the members of each committee of the Company's board of directors, and
(iii) the names and titles of the Company's officers.

(e) The Company does not own any controlling interest in any Entity and,
except for the equity interests identified in Part 2.1(e) of the Disclosure
Schedule, the Company has never owned, beneficially or otherwise, any
shares or other securities of, or any direct or indirect equity interest
in, any Entity. The Company has not agreed and is not obligated to make any
future investment in or capital contribution to any Entity. The Company has
not guaranteed and is not responsible or liable for any obligation of any
of the Entities in which it owns or has owned any equity interest.

(f) The Company is its own "ultimate parent entity" as defined under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.

2.2 Articles of Incorporation and Bylaws; Records. The Company has delivered
to Parent accurate and complete copies of: (1) the Company's articles of
incorporation and bylaws, including all amendments thereto; (2) the stock
records of the Company; and (3) the minutes and other records of the meetings
and other proceedings (including any actions taken by written consent or
otherwise without a meeting) of the shareholders of the Company, the board of
directors of the Company and all committees of the board of directors of the
Company. There have been no formal meetings or other proceedings of the
shareholders of the Company, the board of directors of the Company or any
committee of the board of directors of the Company that are not fully reflected
in such minutes or other records. There has not been any violation of any of
the provisions of the Company's articles of incorporation or bylaws, and the
Company has not taken any action that is inconsistent in any material respect
with any resolution adopted by the Company's

A-5
<PAGE>

shareholders, the Company's board of directors or any committee of the
Company's board of directors. The books of account, stock records, minute
books and other records of the Company are accurate, up-to-date and
complete in all material respects, and have been maintained in accordance
with prudent business practices.

2.3 Capitalization, Etc.

(a) The authorized capital stock of the Company consists of: (i)
5,000,000 shares of Common Stock (with no par value), of which Nine Hundred
Nineteen Thousand and Eleven (919,011) shares have been issued and are
outstanding as of the date of this Agreement; and (ii) 5,000,000 shares of
Preferred Stock (with no par value), all of which have been designated
"Series A Preferred Stock," of which Five Hundred Thousand (500,000) shares
have been issued and are outstanding as of the date of this Agreement.
Exhibit A lists each Shareholder of the Company as of the date of this
Agreement and the number of shares of Common Stock and Series A Preferred
Stock beneficially owned by such Shareholder. Each outstanding share of
Series A Preferred Stock is convertible into one share of Company Common
Stock. All of the outstanding shares of Company Common Stock and Series A
Preferred Stock have been duly authorized and validly issued, and are fully
paid and non-assessable.

(b) The Company has reserved 160,382 shares of Company Common Stock for
issuance under its 1983 Stock Plan, of which options to purchase 81,000
shares are outstanding as of the date of this Agreement, and 150,000 shares
of Company Common Stock for issuance under its 1991 Stock Plan, of which
options to purchase 24,500 shares are outstanding as of the date of this
Agreement. Part 2.3 of the Disclosure Schedule accurately sets forth, with
respect to each Company Option that is outstanding as of the date of this
Agreement: (i) the name of the holder of such Company Option; (ii) the
total number of shares of Company Common Stock that are subject to such
Company Option and the number of shares of Company Common Stock with
respect to which such Company Option is immediately exercisable; (iii) the
date on which such Company Option was granted and the term of such Company
Option; (iv) the vesting schedule for such Company Option; (v) the exercise
price per share of Company Common Stock purchasable under such Company
Option; and (vi) whether such Company Option has been designated an
"incentive stock option" as defined in Section 422 of the Code. Except as
set forth in Part 2.3 of the Disclosure Schedule and other than with
respect to the Series A Preferred Stock, there is no: (i) outstanding
subscription, option, call, warrant or right (whether or not currently
exercisable) to acquire any shares of the capital stock or other securities
of the Company; (ii) outstanding security, instrument or obligation that is
or may become convertible into or exchangeable for any shares of the
capital stock or other securities of the Company; (iii) Contract under
which the Company is or may become obligated to sell or otherwise issue any
shares of its capital stock or any other securities; or (iv) to the best of
the knowledge of the Company, condition or circumstance that may give rise
to or provide a basis for the assertion of a claim by any Person to the
effect that such Person is entitled to acquire or receive any shares of
capital stock or other securities of the Company.

(c) All outstanding shares of Company Common Stock and Series A
Preferred Stock, and all outstanding Company Options, have been issued and
granted in compliance with (i) all applicable securities laws and other
applicable Legal Requirements, and (ii) all requirements set forth in
applicable Contracts.

(d) Except as set forth in Part 2.3 of the Disclosure Schedule, the
Company has never repurchased, redeemed or otherwise reacquired any shares
of capital stock or other securities of the Company. All securities so
reacquired by the Company were reacquired in compliance with (i) the
applicable provisions of the California General Corporation Law and all
other applicable Legal Requirements, and (ii) all requirements set forth in
applicable restricted stock purchase agreements and other applicable
Contracts.

2.4 Financial Statements.

(a) The Company has delivered to Parent the following financial
statements and notes (collectively, the "Company Financial Statements"):

A-6
<PAGE>

(i) The draft audited balance sheets of the Company as of December
31, 1998 and 1997, and the related draft audited income statements,
statements of shareholders' equity and statements of cash flows of the
Company for the years then ended, together with the notes thereto and
the draft unqualified report and opinion of Caciamatta Accountancy
Corporation LLP relating thereto and the final audited versions of such
balance sheets, income statement, statements of shareholders' equity
and statements of cash flows, the notes thereto and final unqualified
report and opinion of the accountants shall not differ from the draft
versions in any material respect; and

(ii) the unaudited balance sheet of the Company as of June 30, 1999
(the "Unaudited Interim Balance Sheet"), and the related unaudited
income statement of the Company for the six months then ended.

(b) The Company Financial Statements are accurate and complete in all
material respects and present fairly the financial position of the Company
as of the respective dates thereof and the results of operations and (in
the case of the financial statements referred to in Section 2.4(a)(i)) cash
flows of the Company for the periods covered thereby. The Company Financial
Statements have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods covered (except that the financial statements referred to in
Section 2.4(a)(ii) do not contain footnotes required under GAAP).

(c) To the knowledge of the Company, neither the Company nor any of its
affiliates has taken or agreed to, or plans to, take any action that would
prevent Parent from accounting for the Merger as a "pooling of interests."

2.5 Absence of Changes. Except as set forth in Part 2.5 of the Disclosure
Schedule, since June 30, 1999:

(a) there has not been any material adverse change in the Company's
business, condition, assets, liabilities, operations, financial performance
or prospects, and, to the best of the knowledge of the Company, no event
has occurred that will, or could reasonably be expected to, have a Material
Adverse Effect on the Company;

(b) there has not been any material loss, damage or destruction to, or
any material interruption in the use of, any of the Company's assets
(whether or not covered by insurance);

(c) the Company has not declared, accrued, set aside or paid any
dividend or made any other distribution in respect of any shares of capital
stock, and has not repurchased, redeemed or otherwise reacquired any shares
of capital stock or other securities;

(d) the Company has not sold, issued or authorized the issuance of (i)
any capital stock or other security (except for Company Common Stock issued
upon the exercise of outstanding Company Options), (ii) any option or right
to acquire any capital stock or any other security (except for Company
Options described in Part 2.3 of the Disclosure Schedule), or (iii) any
instrument convertible into or exchangeable for any capital stock or other
security;

(e) the Company has not amended or waived any of its rights under, or
permitted the acceleration of vesting under, (i) any provision of the
Company's Stock Plans, (ii) any provision of any agreement evidencing any
outstanding Company Option, or (iii) any restricted stock purchase
agreement;

(f) there has been no amendment to the Company's articles of
incorporation or bylaws, and the Company has not effected or been a party
to any Acquisition Transaction, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;

(g) the Company has not formed any subsidiary or acquired any equity
interest or other interest in any other Entity;

(h) the Company has not made any capital expenditure which, when added
to all other capital expenditures made on behalf of the Company since June
30, 1999, exceeds $60,000;

A-7
<PAGE>

(i) the Company has not (i) entered into or permitted any of the assets
owned or used by it to become bound by any Material Contract (as defined in
Section 2.10(a)), or (ii) amended or prematurely terminated, or waived any
material right or remedy under, any such Contract;

(j) the Company has not (i) acquired, leased or licensed any right or
other asset from any other Person, (ii) sold or otherwise disposed of, or
leased or licensed, any right or other asset to any other Person, or (iii)
waived or relinquished any right, except for immaterial rights or other
immaterial assets acquired, leased, licensed or disposed of in the ordinary
course of business and consistent with the Company's past practices;

(k) the Company has not written off as uncollectible, or established any
extraordinary reserve with respect to, any account receivable or other
indebtedness;

(l) the Company has not made any pledge of any of its assets or
otherwise permitted any of its assets to become subject to any Encumbrance,
except for pledges of immaterial assets made in the ordinary course of
business and consistent with the Company's past practices;

(m) the Company has not (i) lent money to any Person (other than
pursuant to routine travel and other expense advances made to employees in
the ordinary course of business), or (ii) incurred or guaranteed any
indebtedness for borrowed money;

(n) the Company has not (i) established or adopted any Employee Benefit
Plan, (ii) paid any bonus or made any profit-sharing or similar payment to,
or increased the amount of the wages, salary, commissions, fringe benefits
or other compensation or remuneration payable to, any of its directors,
officers or employees, or (iii) hired any new employee;

(o) the Company has not changed any of its methods of accounting or
accounting practices in any respect;

(p) the Company has not made any Tax election;

(q) the Company has not commenced or settled any Legal Proceeding;

(r) other than as explicitly contemplated by this Agreement, the Company
has not entered into any material transaction or taken any other material
action outside the ordinary course of business or inconsistent with its
past practices; and

(s) the Company has not agreed or committed to take any of the actions
referred to in clauses "(c)" through "(r)" above.

2.6 Title to Assets.

(a) Except as set forth in Part 2.6 of the Disclosure Schedule, the
Company owns, and has good, valid and marketable title to, all assets
purported to be owned by it, including: (i) all assets reflected on the
Unaudited Interim Balance Sheet; (ii) all assets referred to in Parts
2.1(b) and (e), 2.7 and 2.9 of the Disclosure Schedule and all of the
Company's rights under the Contracts identified in Part 2.10 of the
Disclosure Schedule; and (iii) all other assets reflected in the Company's
books and records as being owned by the Company. Except as set forth in
Part 2.6 of the Disclosure Schedule, all of said assets are owned by the
Company free and clear of any liens or other Encumbrances, except for (x)
any lien for current taxes not yet due and payable, and (y) minor liens
that have arisen in the ordinary course of business and that do not (in any
case or in the aggregate) materially detract from the value of the assets
subject thereto or materially impair the operations of the Company.

(b) Part 2.6 of the Disclosure Schedule identifies all assets that are
material to the business of the Company and that are being leased or
licensed to the Company.

A-8
<PAGE>

2.7 Receivables. Part 2.7 of the Disclosure Schedule provides an accurate
and complete breakdown and aging of all accounts receivable, notes receivable
and other receivables of the Company as of June 30, 1999. Except as set forth
in Part 2.7 of the Disclosure Schedule, all existing accounts receivable of the
Company (including those accounts receivable reflected on the Unaudited Interim
Balance Sheet that have not yet been collected and those accounts receivable
that have arisen since June 30, 1999 and have not yet been collected)
(i) represent valid obligations of customers of the Company arising from bona
fide transactions entered into in the ordinary course of business, (ii) are
current and will be collected in full when due, without any counterclaim or set
off (net of an allowance for doubtful accounts not to exceed $105,000 in the
aggregate).

2.8 Equipment; Leasehold.

(a) All material items of equipment and other tangible assets owned by
or leased to the Company are adequate for the uses to which they are being
put, are in good condition and repair (ordinary wear and tear excepted) and
are adequate for the conduct of the Company's business in the manner in
which such business is currently being conducted.

(b) The Company does not own any real property or any interest in real
property, except for the leasehold created under the real property lease
identified in Part 2.10 of the Disclosure Schedule.

2.9 Proprietary Assets.

(a) Part 2.9(a)(i) of the Disclosure Schedule sets forth, with respect
to each Company Proprietary Asset registered with any Governmental Body or
for which an application has been filed with any Governmental Body, (i) a
brief description of such Proprietary Asset, and (ii) the names of the
jurisdictions covered by the applicable registration or application. Part
2.9(a)(ii) of the Disclosure Schedule identifies and provides a brief
description of all other Company Proprietary Assets owned by the Company.
Part 2.9(a)(iii) of the Disclosure Schedule identifies and provides a brief
description of each Proprietary Asset licensed to the Company by any Person
(except for any Proprietary Asset that is licensed to the Company under any
third party software license generally available to the public at a cost of
less than $2,000), and identifies the license agreement under which such
Proprietary Asset is being licensed to the Company. Except as set forth in
Part 2.9(a)(iv) of the Disclosure Schedule, the Company has good, valid and
marketable title (subject to any third party rights with respect to Company
Proprietary Assets that are licensed by the Company from third parties and
which are identified on part 2.9(a)(iii) of the Disclosure Schedule) to all
Company Proprietary Assets, free and clear of all liens and other
Encumbrances, and has a valid right to use all Proprietary Assets
identified in Part 2.9(a)(iii) of the Disclosure Schedule. Except as set
forth in Part 2.9(a)(v) of the Disclosure Schedule, the Company is not
obligated to make any payment to any Person for the use of any Company
Proprietary Asset. Except as set forth in Part 2.9(a)(vi) of the Disclosure
Schedule, the Company has not developed jointly with any other Person any
Company Proprietary Asset with respect to which such other Person has any
rights.

(b) The Company has taken all measures and precautions necessary to
protect and maintain the confidentiality and secrecy of all Company
Proprietary Assets (except Company Proprietary Assets whose value would be
unimpaired by public disclosure) and otherwise to maintain and protect the
value of all Company Proprietary Assets. Except as set forth in Part 2.9(b)
of the Disclosure Schedule, the Company has not (other than pursuant to
license agreements identified in Part 2.10 of the Disclosure Schedule)
disclosed or delivered to any Person, or permitted the disclosure or
delivery to any Person of, (i) the source code, or any portion or aspect of
the source code, of any Company Proprietary Asset, or (ii) the object code,
or any portion or aspect of the object code, of any Company Proprietary
Asset.

(c) Except as set forth in Part 2.9(c) of the Disclosure Schedule, none
of the Company Proprietary Assets infringes or conflicts with any
Proprietary Asset owned or used by any other Person. The Company is not
infringing, misappropriating or making any unlawful use of, and the Company
has not at any time infringed, misappropriated or made any unlawful use of,
or received any notice or other communication

A-9
<PAGE>

(in writing or otherwise) of any actual, alleged, possible or potential
infringement, misappropriation or unlawful use of, any Proprietary Asset
owned or used by any other Person. To the best of the knowledge of the
Company, no other Person is infringing, misappropriating or making any
unlawful use of, and no Proprietary Asset owned or used by any other Person
(excluding the patents listed in Schedule 2.9(d)) infringes or conflicts
with, any Company Proprietary Asset.

(d) None of the patents listed in Schedule 2.9(d) infringes or conflicts
with any Company Proprietary Asset.

(e) Except as set forth in Part 2.9(e) of the Disclosure Schedule: (i)
each Company Proprietary Asset conforms in all material respects with any
specification, documentation, performance standard, representation or
statement made or provided with respect thereto by or on behalf of the
Company; and (ii) there has not been any claim by any customer or other
Person alleging that any Company Proprietary Asset (including each version
thereof that has ever been licensed or otherwise made available by the
Company to any Person) does not conform in all material respects with any
specification, documentation, performance standard, representation or
statement made or provided by or on behalf of the Company, and, to the best
of the knowledge of the Company, there is no basis for any such claim. The
Company has established adequate reserves on the Unaudited Interim Balance
Sheet to cover all costs associated with any obligations that the Company
may have with respect to the correction or repair of programming errors or
other defects in the Company Proprietary Assets.

(f) The Company Proprietary Assets constitute all the Proprietary Assets
necessary to enable the Company to conduct its business in the manner in
which such business has been and is currently being conducted. Except as
set forth in Part 2.9(f) of the Disclosure Schedule, (i) the Company has
not licensed any of the Company Proprietary Assets to any Person on an
exclusive basis, and (ii) the Company has not entered into any covenant not
to compete or Contract limiting its ability to exploit fully any of its
Proprietary Assets or to transact business in any market or geographical
area or with any Person.

(g) Except as set forth in Part 2.9(g) of the Disclosure Schedule, (i)
all current and former employees of the Company have executed and delivered
to the Company an agreement that is, or are otherwise subject to
obligations of confidentiality that are, substantially similar to the form
of Confidential Information and Invention Assignment Agreement previously
delivered to Parent, and (ii) all current and former consultants and
independent contractors to the Company have executed and delivered to the
Company an agreement that is, or are otherwise subject to obligations of
confidentiality that are, substantially similar to the form of Consultant
Confidential Information and Invention Assignment Agreement previously
delivered to Parent.

(h) All software (and related Company Proprietary Assets) that are sold,
licensed or transferred by the Company to any Person ("Products") are
designed to be used prior to, during and after the year 2000 ("Year 2000"),
and are Year 2000 Compliant (as defined below). The Company has taken
adequate steps to ensure that all software (and related Proprietary Assets)
used in its operations are Year 2000 Compliant (as defined below). For
purposes of this Agreement, "Year 2000 Compliant" shall mean that the
Products can, individually and, in combination and in conjunction with all
other systems, products or processes with which they are required or
designed to interface, continue to be used normally and to operate
successfully (both in functionality and performance in all respects) over
the transition into the twenty first century when used in accordance with
the documentation relating to the Products, including being able to,
before, on and after January 1, 2000 conform to the following: (i) use
logic pertaining to dates which allow users to identify and/or use the
century portion of any date fields without special processing; and (ii)
respond to all date elements and date input so as to resolve any ambiguity
as to century in a disclosed, defined and pre-determined manner and provide
date information in ways which are unambiguous as to century, either by
permitting or requiring the century to be specified or where the data
element is represented without a century, the correct century is
unambiguous for all manipulations involving that element.

A-10
<PAGE>

2.10 Contracts.

(a) Part 2.10 of the Disclosure Schedule identifies:

(i) each Company Contract relating to the employment of, or the
performance of services by, any employee, consultant or independent
contractor;

(ii) each Company Contract relating to the acquisition, transfer,
use, development, sharing or license of any technology or any
Proprietary Asset (except for the license of any third party software
generally available to the public at a cost of less than $2,000);

(iii) except as set forth in Part 2.9(e) of the Disclosure Schedule,
each Company Contract imposing any restriction on the Company's right
or ability (A) to compete with any other Person, (B) to acquire any
product or other asset or any services from any other Person, to sell
any product or other asset to or perform any services for any other
Person or to transact business or deal in any other manner with any
other Person, or (C) develop or distribute any technology;

(iv) each Company Contract creating or involving any agency
relationship, distribution arrangement or franchise relationship;

(v) each Company Contract that was entered into on or after January
1, 1997 relating to the acquisition, issuance or transfer of any
securities;

(vi) except as set forth on Part 2.6 or Part 2.9(a)(iv) of the
Disclosure Schedule, each Company Contract relating to the creation of
any Encumbrance with respect to any asset of the Company;

(vii) each Company Contract involving or incorporating any guaranty,
any pledge, any performance or completion bond, any indemnity or any
surety arrangement;

(viii) each Company Contract creating or relating to any partnership
or joint venture or any sharing of revenues, profits, losses, costs or
liabilities;

(ix) each Company Contract relating to the purchase or sale of any
product or other asset by or to, or the performance of any services by
or for, any Related Party (as defined in Section 2.18);

(x) each Company Contract constituting or relating to a Government
Contract or Government Bid;

(xi) any other Company Contract that was entered into outside the
ordinary course of business or was inconsistent with the Company's past
practices;

(xii) any other Company Contract that has a term of more than 90
days and that may not be terminated by the Company (without penalty)
within 90 days after the delivery of a termination notice by the
Company; and

(xiii) any other Company Contract that contemplates or involves (A)
the payment or delivery of cash or other consideration in an amount or
having a value in excess of $10,000 in the aggregate, or (B) the
performance of services having a value in excess of $10,000 in the
aggregate.

(Contracts in the respective categories described in clauses "(i)"
through "(xiii)" above are referred to in this Agreement as "Material
Contracts.")

(b) The Company has delivered to Parent accurate and complete copies of
all written Material Contracts, including all amendments thereto. Part 2.10
of the Disclosure Schedule provides an accurate description of the terms of
each Material Contract that is not in written form. Each Material Contract
is

A-11
<PAGE>

valid and in full force and effect, and, to the best of the knowledge of
the Company, is enforceable by the Company in accordance with its terms,
subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing
specific performance, injunctive relief and other equitable remedies.

(i) the Company has not violated or breached, or committed any
default under, any Company Contract, and, to the best of the knowledge
of the Company, no other Person has violated or breached, or committed
any default under, any Company Contract;

(ii) to the best of the knowledge of the Company, no event has
occurred, and no circumstance or condition exists, that (with or
without notice or lapse of time) will, or could reasonably be expected
to, (A) result in a violation or breach of any of the provisions of any
Company Contract, (B) give any Person the right to declare a default or
exercise any remedy under any Company Contract, (C) give any Person the
right to accelerate the maturity or performance of any Company
Contract, or (D) give any Person the right to cancel, terminate or
modify any Company Contract;

(iii) since January 1, 1997, the Company has not received any notice
or other communication regarding any actual or possible violation or
breach of, or default under, any Company Contract; and

(iv) the Company has not waived any of its material rights under any
Material Contract.

(d) No Person is currently renegotiating any amount paid or payable to
the Company under any Material Contract or any other material term or
provision of any Material Contract.

(e) The Contracts identified in Part 2.10 of the Disclosure Schedule
collectively constitute all of the Contracts necessary to enable the
Company to conduct its business in the manner in which its business is
currently being conducted.

(f) Part 2.10 of the Disclosure Schedule identifies each proposed
Material Contract as to which any currently outstanding bid, offer, award,
written proposal, term sheet or similar document has been submitted or
received by the Company since January 1, 1997.

(g) Part 2.10 of the Disclosure Schedule provides an accurate
description and breakdown of the Company's backlog under all Material
Contracts as of June 30, 1999.

2.11 Liabilities. The Company has no accrued, contingent or other
liabilities of any nature, either matured or unmatured (whether or not required
to be reflected in financial statements in accordance with generally accepted
accounting principles, and whether due or to become due), except for: (a)
liabilities identified as such in the "liabilities" column of the Unaudited
Interim Balance Sheet; (b) accounts payable or accrued salaries that have been
incurred by the Company since June 30, 1999 in the ordinary course of business
and consistent with the Company's past practices; (c) liabilities under the
Material Contracts, to the extent the nature and magnitude of such liabilities
can be specifically ascertained by reference to the text of such Material
Contracts; and (d) the liabilities identified in Part 2.11 of the Disclosure
Schedule.

2.12 Compliance with Legal Requirements. The Company is, and has at all
times since January 1, 1997 been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on the Company. Except
as set forth in Part 2.12 of the Disclosure Schedule, since January 1, 1997,
the Company has not received any notice or other communication from any
Governmental Body regarding any actual or possible violation of, or failure to
comply with, any Legal Requirement.

2.13 Governmental Authorizations. Part 2.13 of the Disclosure Schedule
identifies each material Governmental Authorization held by the Company, and
the Company has delivered to Parent accurate and complete copies of all
Governmental Authorizations. The Governmental Authorizations identified in Part
2.13

A-12
<PAGE>

of the Disclosure Schedule are valid and in full force and effect, and
collectively constitute all Governmental Authorizations necessary to enable the
Company to conduct its business in the manner in which its business is
currently being conducted. The Company is, and at all times since January 1,
1997 has been, in substantial compliance with the terms and requirements of the
respective Governmental Authorizations identified in Part 2.13 of the
Disclosure Schedule. Since January 1, 1997, the Company has not received any
notice or other communication from any Governmental Body regarding (a) any
actual or possible violation of or failure to comply with any term or
requirement of any Governmental Authorization, or (b) any actual or possible
revocation, withdrawal, suspension, cancellation, termination or modification
of any Governmental Authorization.

2.14 Tax Matters.

(a) All Tax Returns required to be filed by or on behalf of the Company
with any Governmental Body with respect to any taxable period ending on or
before the Closing Date (the "Company Returns") (i) have been or will be
filed on or before the applicable due date (including any valid extensions
of such due date), and (ii) have been, or will be when filed, accurately
and completely prepared in all material respects in compliance with all
applicable Legal Requirements. All amounts shown on the Company Returns to
be due on or before the Closing Date have been or will be paid on or before
the Closing Date. The Company has delivered to Parent accurate and complete
copies of all Company Returns filed since December 31, 1994.

(b) The Company Financial Statements fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the
dates thereof in accordance with generally accepted accounting principles.
The Company will establish, in the ordinary course of business and
consistent with its past practices, reserves adequate for the payment of
all Taxes for the period from June 30, 1999 through the Closing Date, and
the Company will disclose the dollar amount of such reserves to Parent on
or prior to the Closing Date.

(c) Except as set forth in Part 2.14(c) of the Disclosure Schedule, no
Company Return relating to income Taxes has ever been examined or audited
by any Governmental Body. Except as set forth in Part 2.14 of the
Disclosure Schedule, no extension or waiver of the limitation period
applicable to any of the Company Returns has been granted (by the Company
or any other Person), and no such extension or waiver has been requested
from the Company.

(d) Except as set forth in Part 2.14(d) of the Disclosure Schedule, no
claim or Proceeding is pending or has been threatened against or with
respect to the Company in respect of any Tax. There are no unsatisfied
liabilities for Taxes (including liabilities for interest, additions to tax
and penalties thereon and related expenses) with respect to any notice of
deficiency or similar document received by the Company with respect to any
Tax (other than liabilities for Taxes asserted under any such notice of
deficiency or similar document which are being contested in good faith by
the Company and with respect to which adequate reserves for payment have
been established). There are no liens for Taxes upon any of the assets of
the Company except liens for current Taxes not yet due and payable. The
Company has not entered into or become bound by any agreement or consent
pursuant to Section 341(f) of the Code. The Company has not been, and the
Company will not be, required to include any adjustment in taxable income
for any tax period (or portion thereof) pursuant to Section 481 or 263A of
the Code or any comparable provision under state or foreign Tax laws as a
result of transactions or events occurring, or accounting methods employed,
prior to the Closing.

(e) There is no agreement, plan, arrangement or other Contract covering
any employee or independent contractor or former employee or independent
contractor of the Company that, considered individually or considered
collectively with any other such Contracts, will, or could reasonably be
expected to, give rise directly or indirectly to the payment of any amount
that would not be deductible pursuant to Section 280G or Section 162 of the
Code. The Company is not, and has never been, a party to

A-13
<PAGE>

or bound by any tax indemnity agreement, tax sharing agreement, tax
allocation agreement or similar Contract.

2.15 Employee and Labor Matters; Benefit Plans.

(a) Part 2.15(a) of the Disclosure Schedule identifies each salary,
bonus, deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, hospitalization, medical, life or
other insurance, supplemental unemployment benefits, profit-sharing,
pension or retirement plan, program or agreement (collectively, the
"Plans") sponsored, maintained, contributed to or required to be
contributed to by the Company for the benefit of any employee of the
Company ("Employee"), except for Plans which would not require the Company
to make payments or provide benefits having a value in excess of $15,000 in
the aggregate. In particular, Part 2.15(a) of the Disclosure Schedule
identifies each of the Company's sales incentive plans ("Sales Incentive
Plans") and lists the material terms of each such plan.

(b) Except as set forth in Part 2.15(a) of the Disclosure Schedule, the
Company does not maintain, sponsor or contribute to, and, has not at any
time in the past maintained, sponsored or contributed to, any employee
pension benefit plan (as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), whether or not excluded
from coverage under specific Titles or Merger Subtitles of ERISA) for the
benefit of Employees or former Employees (a "Pension Plan").

(c) The Company maintains, sponsors or contributes only to those
employee welfare benefit plans (as defined in Section 3(1) of ERISA,
whether or not excluded from coverage under specific Titles or Merger
Subtitles of ERISA) for the benefit of Employees or former Employees which
are described in Part 2.15(c) of the Disclosure Schedule (the "Welfare
Plans"), none of which is a multiemployer plan (within the meaning of
Section 3(37) of ERISA).

(d) With respect to each Plan, except as set forth in Part 2.15(d) of
the Disclosure Schedule, the Company has delivered to Parent an accurate
and complete copy of such Plan (including all amendments thereto) and all
material financial information, correspondence, reports and employee
communications of any kind related thereto (including without limitation
annual reports, summary plan descriptions, trust and funding agreements, if
any, and most recent financial statements with respect thereto, if any, any
Contracts related thereto and determination letters from the Internal
Revenue Service related thereto).

(e) The Company is not required to be, and, to the best of the
knowledge of the Company, has never been required to be, treated as a
single employer with any other Person under Section 4001(b)(1) of ERISA or
Section 414(b), (c), (m) or (o) of the Code. The Company has never been a
member of an "affiliated service group" within the meaning of Section
414(m) of the Code. To the best of the knowledge of the Company, the
Company has never made a complete or partial withdrawal from a
multiemployer plan, as such term is defined in Section 3(37) of ERISA,
resulting in "withdrawal liability," as such term is defined in Section
4201 of ERISA (without regard to subsequent reduction or waiver of such
liability under either Section 4207 or 4208 of ERISA).

(f) The Company does not have any commitment to create any additional
Welfare Plan or any Pension Plan, or, other than in connection with the
termination of the Plans as contemplated hereby, to modify or change any
existing Welfare Plan or Pension Plan (other than to comply with applicable
law) in a manner that would affect any Employee.

(g) Except as set forth in Part 2.15(g) of the Disclosure Schedule, no
Welfare Plan provides death, medical or health benefits (whether or not
insured) with respect to any current or former Employee after any such
Employee's termination of service (other than (i) benefit coverage mandated
by applicable law, including coverage provided pursuant to Section 4980B of
the Code, (ii) deferred compensation benefits

A-14
<PAGE>

accrued as liabilities on the Unaudited Interim Balance Sheet, and (iii)
benefits the full cost of which are borne by current or former Employees
(or the Employees' beneficiaries)).

(h) With respect to each of the Welfare Plans constituting a group
health plan within the meaning of Section 4980B(g)(2) of the Code, the
provisions of Section 4980B of the Code ("COBRA") have been complied with
in all material respects.

(i) Each of the Plans has been operated and administered in all material
respects in accordance with applicable Legal Requirements, including but
not limited to ERISA and the Code.

(j) Each of the Plans intended to be qualified under Section 401(a) of
the Code, if any, has received a favorable determination from the Internal
Revenue Service, and the Company is not aware of any reason why any such
determination letter should be revoked.

(k) Except as set forth in Part 2.15(k) of the Disclosure Schedule and
other than in connection with the termination of the Plans as contemplated
hereby, neither the execution, delivery or performance of this Agreement,
nor the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will result in any payment (including any
bonus, golden parachute or severance payment) to any current or former
Employee or director of the Company (whether or not under any Plan), or
materially increase the benefits payable under any Plan, or result in any
acceleration of the time of payment or vesting of any such benefits.

(l) Part 2.15(l) of the Disclosure Schedule contains a list of all
salaried employees of the Company as of the date of this Agreement, and
correctly reflects, in all material respects, their salaries, any other
compensation payable to them (including compensation payable pursuant to
bonus, deferred compensation or commission arrangements), their dates of
employment and their positions. The Company is not a party to any
collective bargaining contract or other Contract with a labor union
involving any of its Employees. All of the Company's employees are "at
will" employees.

(m) Part 2.15(m) of the Disclosure Schedule identifies each Employee who
is not fully available to perform work because of disability or other leave
and sets forth the basis of such leave and the anticipated date of return
to full service.

(n) The Company is in compliance in all material respects with all
applicable Legal Requirements and Contracts relating to employment,
employment practices, wages, bonuses and terms and conditions of
employment, including employee compensation matters.

(o) Except as set forth in Part 2.15(o) of the Disclosure Schedule, the
Company has good labor relations, and the Company does not have any reason
to believe that (i) the consummation of the Merger or any of the other
transactions contemplated by this Agreement will have a material adverse
effect on the Company's labor relations, or (ii) any of the Company's key
employees intends to terminate his or her employment with the Company.

2.16 Environmental Matters. The Company is in compliance with all applicable
Environmental Laws, which compliance includes the possession by the Company of
all permits and other Governmental Authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof. The
Company has not received any notice or other communication (in writing or
otherwise), whether from a Governmental Body, citizens group, employee or
otherwise, that alleges that the Company is not in compliance with any
Environmental Law, and, to the best of the knowledge of the Company, there are
no circumstances that may prevent or interfere with the Company's compliance
with any Environmental Law in the future. To the best of the knowledge of the
Company, no current or prior owner of any property leased or controlled by the
Company has received any notice or other communication (in writing or
otherwise), whether from a Government Body, citizens group, employee or
otherwise, that alleges that such current or prior owner or the Company is not
in compliance with any Environmental Law. All Governmental Authorizations
currently held by the Company pursuant to Environmental Laws are identified in
Part 2.16 of the Disclosure Schedule.

A-15
<PAGE>

(For purposes of this Section 2.16: (i) "Environmental Law" means any federal,
state, local or foreign Legal Requirement relating to pollution or protection
of human health or the environment (including ambient air, surface water,
ground water, land surface or subsurface strata), including any law or
regulation relating to emissions, discharges, releases or threatened releases
of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern; and (ii)
"Materials of Environmental Concern" include chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products and
any other substance that is now or hereafter regulated by any Environmental Law
or that is otherwise a danger to health, reproduction or the environment.)

2.17 Insurance. Part 2.17 of the Disclosure Schedule identifies all
insurance policies maintained by, at the expense of or for the benefit of the
Company and identifies any material claims made thereunder, and the Company has
delivered to Parent accurate and complete copies of the insurance policies
identified on Part 2.17 of the Disclosure Schedule. Each of the insurance
policies identified in Part 2.17 of the Disclosure Schedule is in full force
and effect. Since January 1, 1998, the Company has not received any notice or
other communication regarding any actual or possible (a) cancellation or
invalidation of any insurance policy, (b) refusal of any coverage or rejection
of any claim under any insurance policy, or (c) material adjustment in the
amount of the premiums payable with respect to any insurance policy.

2.18 Related Party Transactions. Except as set forth in Part 2.18 of the
Disclosure Schedule: (a) no Related Party has, and no Related Party has at any
time since January 1, 1997 had, any direct or indirect interest in any material
asset used in or otherwise relating to the business of the Company; (b) no
Related Party is, or has at any time since January 1, 1997 been, indebted to
the Company; (c) since January 1, 1997, no Related Party has entered into, or
has had any direct or indirect financial interest in, any Material Contract,
transaction or business dealing involving the Company; (d) no Related Party is
competing, or has at any time since January 1, 1997 competed, directly or
indirectly, with the Company; and (e) no Related Party has any claim or right
against the Company (other than rights under Company Options and Series A
Preferred Stock and rights to receive compensation for services performed as an
employee of the Company). (For purposes of this Section 2.18, each of the
following shall be deemed to be a "Related Party": (i) each of the Shareholders
who owns beneficially in excess of 5% of any class or the Company's capital
stock; (ii) each individual who is, or who has at any time since January 1,
1997 been, an officer of the Company; (iii) each member of the immediate family
of each of the individuals referred to in clauses "(i)" and "(ii)" above; and
(iv) any trust or other Entity (other than the Company) in which any one of the
individuals referred to in clauses "(i)", "(ii)" and "(iii)" above holds (or in
which more than one of such individuals collectively hold), beneficially or
otherwise, in excess of 5% of the voting, proprietary or equity interest.)

2.19 Legal Proceedings; Orders.

(a) Except as set forth in Part 2.19 of the Disclosure Schedule, there
is no pending Legal Proceeding, and (to the best of the knowledge of the
Company) no Person has threatened to commence any Legal Proceeding: (i)
that involves the Company or any of the assets owned or used by the Company
or any Person whose liability the Company retained or assumed, either
contractually or by operation of law; or (ii) that challenges, or that may
have the effect of preventing, delaying, making illegal or otherwise
interfering with, the Merger or any of the other transactions contemplated
by this Agreement. To the best of the knowledge of the Company, except as
set forth in Part 2.19 of the Disclosure Schedule, no event has occurred,
and no claim, dispute or other condition or circumstance currently exists,
that will, or that could reasonably be expected to, give rise to or serve
as a basis for the commencement of any such Legal Proceeding.

(b) Except as set forth in Part 2.19 of the Disclosure Schedule, no
Legal Proceeding has ever been commenced by or has ever been pending
against the Company.

(c) There is no order, writ, injunction, judgment or decree to which the
Company, or any of the assets owned or used by the Company, is subject. To
the best of the knowledge of the Company, no officer

A-16
<PAGE>

or other employee of the Company is subject to any order, writ, injunction,
judgment or decree that prohibits such officer or other employee from
engaging in or continuing any conduct, activity or practice relating to the
Company's business.

2.20 Authority; Binding Nature of Agreement. The Company has full corporate
power and authority to enter into and to perform its obligations under this
Agreement; and the execution, delivery and performance by the Company of this
Agreement have been duly authorized by all necessary action on the part of the
Company and its board of directors. This Agreement constitutes the legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.

2.21 Non-Contravention; Consents. Except as set forth in Part 2.21 of the
Disclosure Schedule, neither (1) the execution, delivery or performance of this
Agreement by the Company or any of the other agreements referred to in this
Agreement, nor (2) the consummation by the Company of the Merger or any of the
other transactions contemplated by this Agreement, will directly or indirectly
(with or without notice or lapse of time):

(a) contravene, conflict with or result in a violation of (i) any of the
provisions of the Company's articles of incorporation or bylaws, or (ii)
any resolution adopted by the Company's shareholders, the Company's board
of directors or any committee of the Company's board of directors;

(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the
transactions contemplated by this Agreement or to exercise any remedy or
obtain any relief under, any applicable Legal Requirement or any order,
writ, injunction, judgment or decree to which the Company, or any of the
assets owned or used by the Company, is subject;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by the Company or that otherwise relates to the
Company's business or to any of the assets owned or used by the Company;

(d) contravene, conflict with or result in a violation or breach of, or
result in a default under, any provision of any Material Contract, or give
any Person the right to (i) declare a default or exercise any remedy under
any such Company Contract, (ii) accelerate the maturity or performance of
any such Company Contract, or (iii) cancel, terminate or modify any such
Company Contract; or

(e) result in the imposition or creation of any lien or other
Encumbrance upon or with respect to any asset owned or used by the Company
(except for minor liens that will not, in any case or in the aggregate,
materially detract from the value of the assets subject thereto or
materially impair the operations of the Company).

Except as set forth in Part 2.21 of the Disclosure Schedule, the Company is
not and will not be required to make any filing with or give any notice to, or
to obtain any Consent from, any Person in connection with (x) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement, or (y) the consummation of the Merger or any of
the other transactions contemplated by this Agreement.

2.22 Full Disclosure.

(a) This Agreement (including the Disclosure Schedule) does not (i)
contain any representation or warranty by the Company or information from
the Company that is false or misleading with respect to any material fact,
or (ii) omit to state any material fact necessary in order to make such
representations, warranties and information contained and to be contained
herein and therein (in the light of the circumstances under which such
representations and warranties by the Company and information from the
Company were or will be made or provided) not false or misleading.

A-17
<PAGE>

(b) None of the information supplied or to be supplied by or on behalf
of the Company for inclusion in the registration statement on Form S-4 to
be filed with the SEC by Parent in connection with the issuance of Parent
Common Stock in the Merger (the "S-4 Registration Statement") will, at the
time the S-4 Registration Statement is filed with the SEC or at the time it
becomes effective under the Securities Act, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light
of the circumstances under which they are made, not misleading. None of the
information supplied or to be supplied by or on behalf of the Company for
inclusion in the Prospectus/Proxy Statement to be filed with the SEC as
part of the S-4 Registration Statement (the "Prospectus/Proxy Statement"),
will, at the time the Prospectus/Proxy Statement is mailed to the
shareholders of the Company or Parent, at the time of the Company
Shareholders' Meeting or Parent Shareholders' Meeting or as of the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under
which they are made, not misleading.

2.23 Financial Advisor. Except for Sutro & Co., no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or any of the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. The total of all fees, commissions and other amounts that have
been or will be paid by the Company to Sutro & Co. and all fees, commissions
and other amounts that may become payable to Sutro & Co. by the Company if the
Merger is consummated are set forth on Part 2.23 of the Disclosure Schedule and
the amounts to be paid shall not exceed such amounts. The Company has delivered
to Parent copies of all written agreements under which any such fees,
commissions or other amounts have been paid or may become payable and all
indemnification and other agreements relating to the engagement of Sutro & Co.

SECTION 3. Representations and Warranties of Parent and Merger Sub

Parent and Merger Sub jointly and severally represent and warrant to the
Company as follows:

3.1 Due Organization; Etc.

Each of Parent and Merger Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of California and has
all necessary power and authority; (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own and use its assets
in the manner in which its assets are currently owned and used; and (iii) to
perform its obligations under all Contracts to which it is a party or by which
it or its assets or properties are subject or bound.

3.2 SEC Filings; Financial Statements.

(a) Parent has delivered to the Company accurate and complete copies
(excluding copies of exhibits) of each report, registration statement (on a
form other than Form S-8) and definitive proxy statement filed by Parent
with the SEC between January 1, 1998 and the date of this Agreement (the
"Parent SEC Documents"). As of the time it was filed with the SEC (or, if
amended or superseded by a filing prior to the date of this Agreement, then
on the date of such filing): (i) each of the Parent SEC Documents complied
in all material respects with the applicable requirements of the Securities
Act or the Exchange Act (as the case may be); and (ii) none of the Parent
SEC Documents contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. All of the Parent SEC Documents
were timely filed, unless a filing under Rule 12b-25 of the Exchange Act
was timely filed, in which case the applicable filing was made within the
time period prescribed in Rule 12b-25.

(b) The consolidated financial statements contained in the Parent SEC
Documents: (i) complied as to form in all material respects with the
published rules and regulations of the SEC applicable thereto;

A-18
<PAGE>

(ii) were prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods covered,
except as may be indicated in the notes to such financial statements and
(in the case of unaudited statements) as permitted by Form 10-Q or Form 10-
QSB, as applicable of the SEC, and except that unaudited financial
statements may not contain footnotes and are subject to year-end audit
adjustments; and (iii) fairly present the consolidated financial position
of Parent and its subsidiaries as of the respective dates thereof and the
consolidated results of operations of Parent and its subsidiaries for the
periods covered thereby.

3.3 Authority; Binding Nature of Agreement. Parent and Merger Sub have the
full corporate power and authority to perform their obligations under this
Agreement; and the execution, delivery and performance by Parent and Merger Sub
of this Agreement (including the contemplated issuance of Parent Common Stock
in the Merger in accordance with this Agreement) have been duly authorized by
all necessary action on the part of Parent and Merger Sub and their respective
boards of directors. This Agreement constitutes the legal, valid and binding
obligation of Parent and Merger Sub, enforceable against them in accordance
with its terms, subject to (i) laws of general application relating to
bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.

3.4 Valid Issuance. Subject to Section 1.5(c), the Parent Common Stock to be
issued in the Merger will, when issued in accordance with the provisions of
this Agreement, be validly issued, fully paid and nonassessable.

3.5 Disclosure. None of the information to be supplied by or on behalf of
Parent for inclusion in the S-4 Registration Statement will, at the time the S-
4 Registration Statement becomes effective under the Securities Act, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. None of the information to be supplied by or on behalf of Parent
for inclusion or incorporation by reference in the Prospectus/Proxy Statement
will, at the time the Prospectus/Proxy Statement is mailed to the shareholders
of the Company or Parent, at the time of the Company Shareholders' Meeting or
the Parent Shareholders' Meeting or as of the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. The
S-4 Registration Statement will comply as to form in all material respects with
the provisions of the Securities Act and the rules and regulations promulgated
by the SEC thereunder, except that no representation or warranty is made by
Parent with respect to statements made therein based on information supplied by
the Company for inclusion in the Prospectus/Proxy Statement.

SECTION 4. Certain Covenants of the Company and Parent

4.1 Access and Investigation.

(a) During the period from the date of this Agreement through the
Effective Time (the "Pre-Closing Period"), the Company shall, and shall
cause its Representatives to: (a) provide Parent and Parent's
Representatives with reasonable access to the Company's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to the Company; and (b)
provide Parent and Parent's Representatives with copies of such existing
books, records, Tax Returns, work papers and other documents and
information relating to the Company, and with such additional financial,
operating and other data and information regarding the Company, as Parent
may reasonably request.

(b) During the Pre-Closing Period, Parent shall, and shall cause its
Representatives to: (a) provide a single executive officer of the Company
and a single member of the Company's legal Representatives with reasonable
access to the Parent's Representatives, personnel and assets and to all
existing books, records, Tax Returns, work papers and other documents and
information relating to Parent; and (b) provide

A-19
<PAGE>

Company and Company's Representatives with copies of such existing books,
records, Tax Returns, work papers and other documents and information
relating to Parent, and with such additional financial, operating and other
data and information regarding Parent, as Company may reasonably request.
The Company and its Representatives shall only be entitled to receive
copies of records and information of Parent to the extent such records and
information are not publicly available (through the Securities and Exchange
Commission's Electronic Data Gathering and Retrieval system or otherwise).
Each director, officer, employee and Representative of the Company who
receives non-public information of Parent pursuant to this Section 4.1
shall have signed an agreement with Parent which prohibits any transaction
involving Parent Common Stock (other than pursuant to this Agreement) while
such information remains non-public.

4.2 Operation of the Company's Business. During the Pre-Closing Period:

(a) the Company shall conduct its business and operations in the
ordinary course and in substantially the same manner as such business and
operations have been conducted prior to the date of this Agreement;

(b) the Company shall use commercially reasonable efforts to preserve
intact its current business organization, keep available the services of
its current officers and employees and maintain its relations and good will
with all suppliers, customers, landlords, creditors, employees and other
Persons having business relationships with the Company;

(d) the Company shall not declare, accrue, set aside or pay any dividend
or make any other distribution in respect of any shares of capital stock,
and shall not repurchase, redeem or otherwise reacquire any shares of
capital stock or other securities (except that the Company may repurchase
Company Common Stock from former employees pursuant to the terms of
existing restricted stock purchase agreements);

(e) the Company shall not sell, issue or authorize the issuance of (i)
any capital stock or other security, (ii) any option or right to acquire
any capital stock or other security, or (iii) any instrument convertible
into or exchangeable for any capital stock or other security (except that
the Company shall be permitted (x) to grant stock options to employees in
accordance with its past practices, provided, that the Company has obtained
Parent's prior written consent with respect to each proposed optionee and
the number, exercise price, vesting schedule and other terms of each
proposed option grant, (y) to issue Company Common Stock to employees upon
the exercise of outstanding Company Options, and (z) to issue shares of
Company Common Stock upon the conversion of shares of Series A Preferred
Stock);

(f) the Company shall not amend or waive any of its rights under, or
permit the acceleration of vesting under, (i) any provision of the
Company's Stock Plans, (ii) any provision of any agreement evidencing any
outstanding Company Option, or (iii) any provision of any restricted stock
purchase agreement;

(g) the Company shall not amend or permit the adoption of any amendment
to the Company's articles of incorporation or bylaws, or effect or permit
the Company to become a party to any Acquisition Transaction,
recapitalization, reclassification of shares, stock split, reverse stock
split or similar transaction (except that the Company may issue shares of
Company Common Stock upon the conversion of shares of Series A Preferred
Stock);

(h) the Company shall not form any subsidiary or acquire any equity
interest or other interest in any other Entity;

A-20
<PAGE>

(i) the Company shall not make any capital expenditure, except for
capital expenditures that, when added to all other capital expenditures
made on behalf of the Company during the Pre-Closing Period, do not exceed
$30,000 per fiscal quarter;

(j) except for the sale and lease of inventory in the ordinary course of
business and consistent with past practices, the Company shall not (i)
enter into, or permit any of the assets owned or used by it to become bound
by, any Contract that is or would constitute a Material Contract, or (ii)
amend or prematurely terminate, or waive any material right or remedy
under, any such Contract;

(k) the Company shall not (i) acquire, lease or license any right or
other asset from any other Person, (ii) sell or otherwise dispose of, or
lease or license, any right or other asset to any other Person, except for
the sale and lease of inventory in the ordinary course of business and
consistent with past practices, or (iii) waive or relinquish any right,
except for assets acquired, leased, licensed or disposed of by the Company
pursuant to Contracts that are not Material Contracts;

(l) the Company shall not (i) lend money to any Person (except that the
Company may make routine travel and other expense advances to employees in
the ordinary course of business and may, consistent with its past
practices, allow employees to acquire Company Common Stock in exchange for
promissory notes upon exercise of Company Options), or (ii) incur or
guarantee any indebtedness for borrowed money (except that the Company may
make routine borrowings in the ordinary course of business under its line
of credit with Pacific Century Bank, which line of credit may be extended
and increased to an aggregate total line of credit up to $1,500,000);

(m) except as set forth in Part 2.15 of the Disclosure Schedule, the
Company shall not (i) establish, adopt or amend any Employee Benefit Plan,
(ii) pay any bonus or make any profit-sharing payment, cash incentive
payment or similar payment to, or increase the amount of the wages, salary,
commissions, fringe benefits or other compensation or remuneration payable
to, any of its directors, officers or employees, or (iii) hire any new
employee whose aggregate annual compensation is expected to exceed $80,000;

(n) the Company shall not change any of its methods of accounting or
accounting practices in any material respect;

(o) the Company shall not make any Tax election;

(p) the Company shall not commence or settle any material Legal
Proceeding;

(q) the Company shall not agree or commit to take any of the actions
described in clauses "(d)" through "(p)" above.

Notwithstanding the foregoing, the Company may take any action described in
clauses "(d)" through "(q)" above if Parent gives its prior written consent to
the taking of such action by the Company, which consent will not be
unreasonably withheld (it being understood that Parent's withholding of consent
to any action will not be deemed unreasonable if Parent determines in good
faith that the taking of such action would not be in the best interests of
Parent or would not be in the best interests of the Company).

4.3 Notification; Updates to Disclosure Schedule.

(a) During the Pre-Closing Period, each of Parent and the Company shall
promptly notify the other in writing of:

(i) the discovery of any event, condition, fact or circumstance that
occurred or existed on or prior to the date of this Agreement and that
caused or constitutes an inaccuracy in or breach of any representation
or warranty made by it;

A-21
<PAGE>

(ii) any event, condition, fact or circumstance that occurs, arises
or exists after the date of this Agreement and that would cause or
constitute an inaccuracy in or breach of any representation or warranty
made by it in this Agreement if (A) such representation or warranty had
been made as of the time of the occurrence, existence or discovery of
such event, condition, fact or circumstance, or (B) such event,
condition, fact or circumstance had occurred, arisen or existed on or
prior to the date of this Agreement;

(iii) any breach of any of its covenants or obligations; and

(iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 6 or
Section 7 impossible or unlikely.

(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.3(a) requires any change in the Disclosure
Schedule, or if any such event, condition, fact or circumstance would
require such a change assuming the Disclosure Schedule were dated as of the
date of the occurrence, existence or discovery of such event, condition,
fact or circumstance, then the Company shall promptly deliver to Parent an
update to the Disclosure Schedule specifying such change. No such update
shall be deemed to supplement or amend the Disclosure Schedule for the
purpose of (i) determining the accuracy of any of the representations and
warranties made by the Company in this Agreement, or (ii) determining
whether any of the conditions set forth in Section 6 has been satisfied.

4.4 No Negotiation. During the Pre-Closing Period, the Company shall not,
directly or indirectly:

(a) solicit or encourage the initiation of any inquiry, proposal or
offer from any Person (other than Parent or Merger Sub) relating to a
possible Acquisition Transaction;

(b) participate in any discussions or negotiations or enter into any
agreement with, or provide any non-public information to, any Person (other
than Parent or Merger Sub) relating to or in connection with a possible
Acquisition Transaction; or

(c) consider, entertain or accept any proposal or offer from any Person
(other than Parent or Merger Sub) relating to a possible Acquisition
Transaction.

The Company shall promptly notify Parent in writing of any material
inquiry, proposal or offer relating to a possible Acquisition Transaction
that is received by the Company during the Pre-Closing Period.

SECTION 5. Additional Covenants of the Parties

5.1 Filings and Consents. As promptly as practicable after the date of this
Agreement, each party to this Agreement (a) shall make all filings (if any) and
give all notices (if any) required to be made and given by such party in
connection with the Merger and the other transactions contemplated by this
Agreement, and (b) shall use all reasonable efforts to obtain all Consents (if
any) required to be obtained (pursuant to any applicable Legal Requirement or
Contract, or otherwise) by such party in connection with the Merger and the
other transactions contemplated by this Agreement. The Company shall (upon
request) promptly deliver to Parent a copy of each such filing made, each such
notice given and each such Consent obtained by the Company during the Pre-
Closing Period.

5.2 Registration Statement; Prospectus/Proxy Statement.

(a) As promptly as practicable after the date of this Agreement, the
Company and Parent shall prepare and cause to be filed with the SEC the S-4
Registration Statement covering the maximum number of shares of Parent
Common Stock to be issued to the Shareholders hereunder, together with the
Prospectus/Proxy Statement and any other documents required by the
Securities Act, the Exchange Act or any other Federal, foreign or Blue Sky
or related laws in connection with the Merger and the transactions

A-22
<PAGE>

contemplated by this Agreement ("Other Filings"). Parent will notify the
Company promptly upon the receipt of any comments from the SEC or its staff
or any other government officials and of any request by the SEC or its
staff or any other government officials for amendments or supplements to
the S-4 Registration Statement, the Prospectus/Proxy Statement or any Other
Filings or for additional information and will supply the Company with
copies of all correspondence between Parent or any of its representatives,
on the one hand, and the SEC, or its staff or any other government
officials, on the other hand, with respect to the S-4 Registration
Statement, the Prospectus/Proxy Statement covering the maximum number of
shares of Parent Common Stock to be issued to the Shareholders hereunder,
any Other Filings or the Merger. Each of Parent and the Company shall use
all reasonable efforts to cause the S-4 Registration Statement (including
the Prospectus/Proxy Statement) and any Other Filings to comply with the
rules and regulations promulgated by the SEC, to respond promptly to any
comments of the SEC or its staff and to have the S-4 Registration Statement
declared effective under the Securities Act as promptly as practicable
after it is filed with the SEC. Parent will use all reasonable efforts to
cause the Prospectus/Proxy Statement to be mailed to Parent's shareholders
and the Company will use all reasonable efforts to cause the
Prospectus/Proxy Statement to be mailed to the Company's shareholders, as
promptly as practicable after the Form S-4 Registration Statement is
declared effective under the Securities Act. The Company shall promptly
furnish to Parent all information concerning the Company and the Company's
shareholders that may be required or reasonably requested in connection
with any action contemplated by this Section 5.2. If any event relating to
the Company occurs, or if the Company becomes aware of any information,
that is required by any applicable Legal Requirement to be set forth in an
amendment or supplement to the S-4 Registration Statement or the
Prospectus/Proxy Statement, then the Company shall promptly inform Parent
thereof and shall cooperate with Parent in filing such amendment or
supplement with the SEC and, if appropriate, in mailing such amendment or
supplement to the shareholders of the Company and Parent.

(b) Prior to the Effective Time, Parent shall use all reasonable efforts
to obtain all regulatory approvals needed to ensure that the Parent Common
Stock to be issued in the Merger will be registered or qualified under the
securities law of every jurisdiction of the United States in which any
registered holder of Company Capital Stock has an address of record on the
record date for determining the shareholders entitled to notice of and to
vote at the Company Shareholders' Meeting; provided, however, that Parent
shall not be required (i) to qualify to do business as a foreign
corporation in any jurisdiction in which it is not now qualified or (ii)
file a general consent to service of process in any jurisdiction in which
it has not already filed a general consent to service of process.

5.3 Shareholders' Meetings.

(a) Company Shareholders' Meeting. The Company shall, in accordance with
its articles of incorporation and bylaws and the applicable requirements of
the California General Corporation Law, call and hold a special meeting of
its shareholders as promptly as practicable for the purpose of permitting
them to consider and to vote upon and approve the Merger and this Agreement
(the "Company Shareholders' Meeting"). As soon as permissible under all
applicable Legal Requirements, the Company shall cause a copy of the
Prospectus/Proxy Statement to be delivered to each shareholder of the
Company who is entitled to vote at the Company Shareholders' Meeting.

(b) Parent Shareholders' Meeting. Parent shall take all action necessary
and permitted under all applicable Legal Requirements to call, give notice
of, convene and hold a meeting of the holders of Parent Common Stock to
consider and vote upon the issuance of Parent Common Stock in the Merger
(the "Parent Shareholders' Meeting"). The Parent Shareholders' Meeting will
be held as promptly as practicable and in any event, if permitted under
applicable law, within forty-five (45) days after the S-4 Registration
Statement is declared effective under the Securities Act; provided,
however, that notwithstanding anything to the contrary contained in this
Agreement, Parent may adjourn or postpone the Parent Shareholders' Meeting
to the extent necessary to ensure that any necessary supplement or
amendment to the Prospectus/Proxy Statement is provided to Parent's
shareholders in advance of a vote on

A-23
<PAGE>

the issuance of Parent Common Stock in the Merger or, if as of the time for
which the Parent Shareholders' Meeting is originally scheduled (as set
forth in the Prospectus/Proxy Statement) there are insufficient shares of
Parent Common Stock represented (either in person or by proxy) either to
constitute a quorum necessary to conduct the business of the Parent's
Shareholders' Meeting or to approve the issuance of Parent Common Stock in
the Merger.

5.4 Public Announcements. During the Pre-Closing Period, (a) the Company
shall not (and the Company shall not permit any of its Representatives to)
issue any press release or make any public statement regarding this Agreement
or the Merger, or regarding any of the other transactions contemplated by this
Agreement, without Parent's prior written consent, and (b) Parent will consult
with the Company prior to issuing any press release or making any public
statement regarding the Merger.

5.5 Pooling of Interests. Each of the Company and Parent agrees (a) not to
take any action during the Pre-Closing Period that would adversely affect the
ability of Parent to account for the Merger as a "pooling of interests," (b) to
use its best efforts to ensure that none of its "affiliates" (as that term is
used in Rule 145 promulgated under the Securities Act) takes any action that
could adversely affect the ability of Parent to account for the Merger as a
"pooling of interests" and (c) not to take any action either prior to or after
the Effective Time that would cause the Merger to fail to qualify as a
"reorganization" under Section 368(a) of the Code.

5.6 Affiliate Agreements. Each Shareholder who signs a Shareholder Agreement
shall execute and deliver to Parent, and the Company shall use all commercially
reasonable efforts to cause each other Person identified on Exhibit E-2 (and
any other Person that could reasonably be deemed to be an "affiliate" of the
Company for purposes of the Securities Act), to execute and deliver to Parent,
as promptly as practicable after the execution of this Agreement, an Affiliate
Agreement in the form of Exhibit E-1.

5.7 Best Efforts. During the Pre-Closing Period, (a) the Company shall use
its best efforts to cause the conditions set forth in Section 6 to be satisfied
on a timely basis, and (b) Parent and Merger Sub shall use their best efforts
to cause the conditions set forth in Section 7 to be satisfied on a timely
basis.

5.8 Tax Matters. At or prior to the filing of the S-4 Registration Statement
with the SEC and, to the extent necessary, at the Closing, Parent and the
Company shall execute and deliver, to Cooley Godward LLP and to Rutan & Tucker,
LLP, tax representation letters in substantially the form of Exhibit F (which
will be used in connection with the legal opinions contemplated by Sections
6.5(g) and 7.3(b)). Each of Parent and the Company shall use reasonable efforts
to cause Cooley Godward LLP and Rutan & Tucker, LLP, respectively, to deliver
promptly to it legal opinions satisfying the requirements of Item 601 of
Regulation S-K promulgated under the Securities Act. In rendering such
opinions, each of such counsel shall be entitled to rely upon the tax
representation letters.

5.9 Noncompetition Agreements. At or prior to the Closing, each of the
employees identified on Exhibit G shall execute and deliver to the Company and
Parent a Noncompetition Agreement in the form of Exhibit H. The Company shall
use all commercially reasonable efforts to cause each of the individuals
identified on Exhibit G to execute and deliver to the Company and Parent, at
the Closing, a Noncompetition Agreement in the form of Exhibit H.

5.10 FIRPTA Matters. At the Closing, (a) the Company shall deliver to Parent
a statement (in such form as may be reasonably requested by counsel to Parent)
conforming to the requirements of Section 1.897 -2(h)(1)(i) of the United
States Treasury Regulations, and (b) the Company shall deliver to the Internal
Revenue Service the notification required under Section 1.897 -2(h)(2) of the
United States Treasury Regulations.

5.11 Release. At the Closing, each of the Shareholders who signs a
Shareholder Agreement shall execute and deliver to the Company a Release in the
form of Exhibit I.

A-24
<PAGE>

5.12 Termination of Employee Plans; Assumption of Sales Incentive Plan.

(a) At the Closing, the Company shall have made arrangements (including
obtaining formal Board approval) to terminate its 401(k) plan and to ensure
that any liabilities of the Company under such plan (including any such
liabilities relating to services performed prior to the Closing) will be
fully extinguished at no cost to the Company.

(b) At the Closing, Parent shall assume the Company's Sales Incentive
Plans identified on Part 2.15(a) of the Disclosure Schedule and shall
fulfill the Company's obligations thereunder.

5.13 Nasdaq Listing. Parent shall have the shares of Parent Common Stock
issuable to the shareholders of the Company pursuant to this Agreement and such
other shares required to be reserved for issuance in connection with the Merger
authorized for listing on the Nasdaq National Market upon official notice of
issuance. In addition, so long as the Shareholders hold shares of Parent Common
Stock issued in the Merger (up to the first anniversary of the Closing Date),
Parent shall use commercially reasonable efforts to file, on a timely basis,
all required filings under the Exchange Act and to maintain a Nasdaq National
Market listing for Parent Common Stock.

5.14 Form S-8. Parent agrees to file a registration statement on Form S-8
for the shares of Parent Common Stock issuable with respect to assumed Company
Options, within sixty (60) days after the Effective Time.

5.15 Company Employees. At the Closing, Parent shall extend offers of
employment to all of the employees of the Company employed as of the Closing.

5.16 Indemnification of Officers and Directors.

(a) All rights to indemnification existing in favor of the directors and
officers of the Company for acts and omissions occurring prior to the
Effective Time, as provided in the Company's Articles of Incorporation or
Bylaws (as in effect as of the date of this Agreement) and as provided in
any indemnification agreements between the Company and said officers and
directors (as in effect at the Effective Time), shall survive the Merger
and shall be the obligation of and observed by Parent and the Surviving
Corporation for a period of not less than six (6) years from and after the
Effective Time.

(b) This Section 5.16 shall survive the consummation of the Merger at
the Effective Time, is intended to be for the benefit of, and enforceable
by, each person entitled to indemnification pursuant hereto and each such
person's or entity's heirs and representatives, and shall be binding on all
successors and assigns of Parent and the Surviving Corporation.

SECTION 6. Conditions Precedent to Obligations of Parent and Merger Sub

The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:

6.1 Accuracy of Representations. Each of the representations and warranties
made by the Company in this Agreement and in each of the other agreements and
instruments delivered to Parent in connection with the transactions
contemplated by this Agreement shall have been accurate in all material
respects as of the date of this Agreement (without giving effect to any
"Material Adverse Effect" or other materiality qualifications, or any similar
qualifications, contained or incorporated directly or indirectly in such
representations and warranties), and shall be accurate in all material respects
as of the Scheduled Closing Time as if made at the Scheduled Closing Time
(without giving effect to any update to the Disclosure Schedule, and without
giving

A-25
<PAGE>

effect to any "Material Adverse Effect" or other materiality qualifications,
or any similar qualifications, contained or incorporated directly or
indirectly in such representations and warranties).

6.2 Performance of Covenants. All of the covenants and obligations that the
Company is required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all respects.

6.3 Shareholder Approval. The principal terms of the Merger shall have been
duly approved by (a) the affirmative vote of no less than ninety percent (90%)
of the shares of Company Common Stock entitled to vote with respect thereto,
and no less than one hundred percent (100%) of the shares of Series A
Preferred Stock entitled to vote with respect thereto and (b) the affirmative
vote of Parent's shareholders required to approve the issuance of Parent
Common Stock in the Merger as prescribed by the rules of the National
Association of Securities Dealers, Inc. (the "Required Parent Shareholder
Vote").

6.4 Consents. All Consents required to be obtained in connection with the
Merger and the other transactions contemplated by this Agreement (including
the Consents identified in Part 2.21 of the Disclosure Schedule) shall have
been obtained and shall be in full force and effect.

6.5 Agreements and Documents. Parent and the Company shall have received
the following agreements and documents, each of which shall be in full force
and effect:

(a) Affiliate Agreements in the form of Exhibit E-1, executed by the
Persons identified on Exhibit E-2;

(b) Noncompetition Agreements in the form of Exhibit H, executed by the
individuals identified on Exhibit G;

(d) the statement referred to in Section 5.10(a), executed by the
Company;

(e) a legal opinion of Rutan & Tucker LLP, dated as of the Closing Date,
in the form of Exhibit J;

(f) a legal opinion of Cooley Godward LLP (or, if Cooley Godward LLP for
any reason does not render such legal opinion, a legal opinion of Rutan &
Tucker, LLP), dated as of the Closing Date, to the effect that the Merger
will constitute a reorganization within the meaning of Section 368 of the
Code (it being understood that, in rendering such opinion, such counsel may
rely upon the tax representation letters referred to in Section 5.8);

(g) a letter from Ernst & Young LLP, dated as of the Closing Date,
confirming that Parent may account for the Merger as a "pooling of
interests" in accordance with generally accepted accounting principles,
Accounting Principles Board Opinion No. 16 and all published rules,
regulations and policies of the SEC;

(h) a letter from Caciamatta Accountancy Corporation LLP, dated as of
the Closing Date, confirming that no transaction entered into by the
Company, and no other fact or circumstance relating to the Company, will
prevent Parent from accounting for the Merger as a "pooling of interests"
in accordance with generally accepted principles, Accounting Principles
Board Opinion No. 16 and all published rules, regulations and policies of
the SEC;

(i) a certificate executed by the Company containing the representation
and warranty of the Company that the conditions set forth in Sections 6.1,
6.2, 6.3 and 6.4 have been duly satisfied (the "Company Closing
Certificate"); and

(j) written resignations of all directors of the Company, effective as
of the Effective Time.

A-26
<PAGE>

6.6 FIRPTA Compliance. The Company shall have filed with the Internal
Revenue Service the notification referred to in Section 5.10(b).

6.7 Listing. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market.

6.8 No Restraints. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger shall have
been issued by any court of competent jurisdiction and remain in effect, and
there shall not be any Legal Requirement that makes consummation of the Merger
illegal.

6.9 No Legal Proceedings. No Person shall have commenced or threatened to
commence any Legal Proceeding challenging or seeking the recovery of a material
amount of damages in connection with the Merger or seeking to prohibit or limit
the exercise by Parent of any material right pertaining to its ownership of
stock of the Surviving Corporation.

6.10 No Material Adverse Change. There shall have been no material adverse
change in the business, financial condition, operations or financial
performance of the Company since the date of this Agreement.

6.11 Effectiveness of Registration Statement. The S-4 Registration Statement
shall have become effective in accordance with the provisions of the Securities
Act, and no stop order shall have been issued by the SEC with respect to the S-
4 Registration Statement.

6.12 Employees. Neither Richard Amtower nor more than three (3) other exempt
employees of the Company on the date of this Agreement, not including
probationary employees or employees terminated for cause, shall have ceased to
be employed by, or expressed an intention to Richard Amtower to terminate their
employment with, the Company.

6.13 Termination of Employee Plans. The Company shall have provided Parent
with evidence, reasonably satisfactory to Parent, as to the termination of the
benefit plans referred to in Section 5.12(a).

SECTION 7. Conditions Precedent to Obligations of the Company

The obligations of the Company to effect the Merger and otherwise consummate
the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions:

7.1 Accuracy of Representations. Each of the representations and warranties
made by Parent and Merger Sub in this Agreement shall have been accurate in all
material respects as of the date of this Agreement (without giving effect to
any materiality or similar qualifications contained in such representations and
warranties), and shall be accurate in all material respects as of the Scheduled
Closing Time as if made at the Scheduled Closing Time (without giving effect to
any materiality or similar qualifications contained in such representations and
warranties).

7.2 Performance of Covenants. All of the covenants and obligations that
Parent and Merger Sub are required to comply with or to perform at or prior to
the Closing shall have been complied with and performed in all respects.

7.3 Documents. The Company shall have received the following documents:

(a) a legal opinion of Cooley Godward LLP, dated as of the Closing Date,
in the form of Exhibit L; and

(b) a legal opinion of Rutan & Tucker, LLP (or, if Rutan & Tucker, LLP
for any reason does not render such legal opinion, a legal opinion of
Cooley Godward LLP), dated as of the Closing Date, to the

A-27
<PAGE>

effect that the Merger will constitute a reorganization within the meaning
of Section 368 of the Code (it being understood that, in rendering such
opinion, such counsel may rely upon the tax representation letters referred
to in Section 5.8); and

(c) a certificate executed by Parent and containing the representation
and warranty of Parent that the conditions set forth in Sections 7.1 and
7.2 have been duly satisfied.

7.4 Listing. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing (subject to notice of issuance) on the
Nasdaq National Market.

7.5 Effectiveness of Registration Statement. The S-4 Registration Statement
shall have become effective in accordance with the provisions of the Securities
Act, and no stop order shall have been issued by the SEC with respect to the S-
4 Registration Statement.

7.6 Shareholder Approval. This Agreement and the Merger shall have been duly
approved by the affirmative vote of a majority of the shares of Company Common
Stock and a majority of the Series A Preferred entitled to vote with respect
thereto, and the issuance of Parent Common Stock in the Merger shall have been
duly approved by the Required Parent Shareholder Vote.

7.7 No Restraints. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger shall have
been issued by any court of competent jurisdiction and remain in effect, and
there shall not be any Legal Requirement that makes consummation of the Merger
illegal.

7.8 No Material Adverse Change. Since the date of this Agreement, there
shall have been no material adverse change in the business of Parent which
shall have directly caused the closing sale price of Parent Common Stock on the
trading day immediately preceding the Parent Shareholders' Meeting to be less
than six dollars ($6.00).

SECTION 8. Termination

8.1 Termination Events. This Agreement may be terminated prior to the
Closing:

(a) by Parent if Parent reasonably determines that the timely
satisfaction of any condition set forth in Section 6 has become impossible
(other than as a result of any failure on the part of Parent or Merger Sub
to comply with or perform any covenant or obligation of Parent or Merger
Sub set forth in this Agreement);

(b) by the Company if the Company reasonably determines that the timely
satisfaction of any condition set forth in Section 7 has become impossible
(other than as a result of any failure on the part of the Company to comply
with or perform any covenant or obligation set forth in this Agreement or
in any other agreement or instrument delivered to Parent);

(c) by Parent if the Closing has not taken place on or before December
31, 1999 (other than as a result of any failure on the part of Parent to
comply with or perform any covenant or obligation of Parent set forth in
this Agreement);

(d) by the Company if the Closing has not taken place on or before
December 31, 1999 (other than as a result of the failure on the part of the
Company to comply with or perform any covenant or obligation set forth in
this Agreement or in any other agreement or instrument delivered to
Parent); or

(e) by the mutual consent of Parent and the Company.

8.2 Termination Procedures. If Parent wishes to terminate this Agreement
pursuant to Section 8.1(a) or Section 8.1(c), Parent shall deliver to the
Company a written notice stating that Parent is terminating this

A-28
<PAGE>

Agreement and setting forth a brief description of the basis on which Parent is
terminating this Agreement. If the Company wishes to terminate this Agreement
pursuant to Section 8.1(b) or Section 8.1(d), the Company shall deliver to
Parent a written notice stating that the Company is terminating this Agreement
and setting forth a brief description of the basis on which the Company is
terminating this Agreement.

8.3 Effect of Termination. If this Agreement is terminated pursuant to
Section 8.1, all further obligations of the parties under this Agreement shall
terminate; provided, however, that: (a) neither the Company nor Parent shall be
relieved of any obligation or liability arising from any prior breach by such
party of any provision of this Agreement; (b) the parties shall, in all events,
remain bound by and continue to be subject to the provisions set forth in
Section 10 (other than Sections 10.2 and 10.7); and (c) the Company shall, in
all events, remain bound by and continue to be subject to Section 5.4.

SECTION 9. Indemnification, Etc.

9.1 Survival of Representations, Etc.

(a) The representations and warranties made by the Company (including
the representations and warranties set forth in Section 2) and the
representations and warranties set forth in the Company Closing Certificate
shall survive the Closing and shall expire on the first anniversary of the
Closing Date; provided, however, that if, at any time prior to the earlier
of (1) the first anniversary of the Closing Date or (2) the date of the
first audit report of the combined company, any Parent Indemnitee (acting
in good faith) delivers to the Shareholders' Agent a written notice
alleging the existence of an inaccuracy in or a breach of any of the
representations and warranties made by the Company (and setting forth in
reasonable detail the basis for such Indemnitee's belief that such an
inaccuracy or breach may exist) and asserting a claim for recovery under
Section 9.2 based on such alleged inaccuracy or breach, then the claim
asserted in such notice shall survive the first anniversary of the Closing
until such time as such claim is fully and finally resolved. The
representations and warranties made by Parent and Merger Sub shall survive
the Closing and shall expire on the first anniversary of the Closing Date.

(b) The representations, warranties, covenants and obligations of the
Company, and the rights and remedies that may be exercised by the Parent
Indemnitees, shall not be limited or otherwise affected by or as a result
of any information furnished to, or any investigation made by or knowledge
of, any of the Parent Indemnitees or any of their Representatives. The
representations, warranties, covenants and obligations of Parent, and the
rights and remedies that may be exercised by the Company Indemnitees, shall
not be limited or otherwise affected by or as a result of any information
furnished to, or any investigation made by or knowledge of, any of the
Company Indemnitees or any of their Representatives.

(c) For purposes of this Agreement, each statement or other item of
information set forth in the Disclosure Schedule or in any update to the
Disclosure Schedule shall be deemed to be a representation and warranty
made by the Company in this Agreement.

9.2 Indemnification by Shareholders.

(a) From and after the Effective Time (but subject to Section 9.1(a) and
9.4), the Shareholders shall hold harmless and indemnify each of the Parent
Indemnitees from and against, and shall compensate and reimburse each of
the Parent Indemnitees for, any Damages which are directly or indirectly
suffered or incurred by any of the Parent Indemnitees or to which any of
the Parent Indemnitees may otherwise become subject (regardless of whether
or not such Damages relate to any third-party claim) and which arise from
or as a result of, or are directly or indirectly connected with: (i) any
inaccuracy in or breach of any representation or warranty set forth in
Section 2 or in the Company Closing Certificate (without giving effect to
any update to the Disclosure Schedule delivered by the Company to Parent
prior to the Closing); (ii) any breach of any covenant or obligation of the
Company (including the covenants of the Company set

A-29
<PAGE>

forth in Sections 4 and 5); (iii) any Legal Proceeding relating to any
inaccuracy or breach of the type referred to in clause "(i)" or "(ii)"
above (including any Legal Proceeding commenced by any Parent Indemnitee
for the purpose of enforcing any of its rights under this Section 9); or
(iv) the matters identified in Part 2.9(c) of the Disclosure Schedule.

(b) If the Surviving Corporation suffers, incurs or otherwise becomes
subject to any Damages as a result of or in connection with any inaccuracy
in or breach of any representation, warranty, covenant or obligation, then
(without limiting any of the rights of the Surviving Corporation as a
Parent Indemnitee) Parent shall also be deemed, by virtue of its ownership
of the stock of the Surviving Corporation, to have incurred Damages as a
result of and in connection with such inaccuracy or breach.

9.3 [Reserved].

9.4 Company Threshold; Ceiling.

(a) No indemnification payment shall be required to be made pursuant to
Section 9.2(a) until such time as the total amount of all Damages
(including the Damages arising from such inaccuracy or breach and all other
Damages arising from any other inaccuracies in or breaches of any
representations or warranties) that have been directly or indirectly
suffered or incurred by any one or more of the Parent Indemnitees, or to
which any one or more of the Parent Indemnitees has or have otherwise
become subject, exceeds $400,000 in the aggregate. (If the total amount of
such Damages exceeds $400,000, then the Parent Indemnitees shall be
entitled to be indemnified against and compensated and reimbursed for the
total amount of such Damages and not only for the portion of such Damages
exceeding $400,000.)

(b) The maximum liability of each Shareholder under Section 9.2(a) shall
be equal to the dollar value (valued at the Designated Parent Stock Price)
of the shares of Parent Common Stock issued to such Shareholder and placed
in the Escrow Fund. The Escrow Fund shall be the sole source of recovery by
any Parent Indemnitee for any Damages.

9.5 [Reserved].

9.6 [Reserved].

9.7 Escrow Fund.

(a) Indemnification for any Damages to any Parent Indemnitee under this
Section 9 shall be satisfied solely from the Escrow Fund.

(b) Each Shareholder (by approving this Agreement at the Company
Shareholders' Meeting and by later signing the Letter of Transmittal),
Parent, the Company and U.S. Bank Corporation Trust Services, (San
Francisco, CA) (or one of its affiliates), or another banking institution
of equal or greater size mutually acceptable to Parent and the Company, as
escrow agent ("Escrow Agent") shall enter into an Escrow Agreement in
substantially the form attached hereto as Exhibit M (modified as requested
by the Escrow Agent), under which, on the terms and conditions set forth
therein, a portion of the shares of Parent Common Stock to be issued to the
Shareholders hereunder will be escrowed to pay amounts payable to the
Indemnitees under this Section 9. Each Shareholder, by approving this
Agreement at the Company Shareholders' Meeting and by later signing the
Letter of Transmittal, will agree to be bound by this Section 9 and the
Escrow Agreement.

(c) As more fully described in the Escrow Agreement, the Escrow fund
shall consist of a number of shares of Parent Common Stock equal to the
product of (i) the aggregate number of shares of Parent Common Stock issued
to the Company Shareholders pursuant to Section 1.5(a) (without deduction
for amounts withheld and contributed to the Escrow Fund); and (iii) one-
tenth (0.10) (as adjusted for rounding pursuant to the following sentence).
The amount to be withheld from each individual Shareholder and contributed
to the

A-30
<PAGE>

Escrow Fund shall be an amount equal to the amount obtained by multiplying
the total number of shares of Parent Common Stock received by each such
Shareholder as computed under Section 1.5 (without deduction for amounts
withheld and contributed to the Escrow Fund) times 0.10 (rounded down to
the next whole share of Parent Common Stock). An amount equal to the amount
then in the Escrow Fund less the sum of (i) any amounts previously
distributed to any Parent Indemnitee and (ii) any amounts payable from the
Escrow Fund that are subject to a claim made by an Parent Indemnitee under
this Section 9 not yet resolved shall be distributed to the Shareholders on
the first anniversary of the Effective Date.

9.8 Claim Procedure. Upon delivery to the Escrow Agent and the Shareholders'
Agent in accordance with Section 10.5 on or before the first anniversary of the
Effective Date a certificate signed by any officer of Parent (an "Officer's
Certificate")

(a) stating that a Parent Indemnitee has paid or properly accrued or
reasonably anticipates that such Parent Indemnitee will have to pay or
accrue Damages in an aggregate stated amount, and stating that such Parent
Indemnitee is entitled to indemnity pursuant to this Agreement with respect
to such amount, and

(b) specifying in reasonable detail the individual items of Damages
included in the amount so stated, the date each such item was paid or
properly accrued, or the basis for such anticipated liability,

the Escrow Agent shall deliver to such Parent Indemnitee, as promptly as
practicable, an amount sufficient to fully indemnify such Parent Indemnitee
against such Damages (or, if the amount in the Escrow Fund is insufficient, the
Escrow Agent shall deliver as promptly as practicable to such Parent Indemnitee
the remaining amount in the Escrow Fund, if any); provided, that no such
payment or delivery need be made if the Shareholders' Agent shall object in a
written statement to the claim made in the Officer's Certificate, and such
statement shall have been delivered to Parent (with a copy to the Escrow Agent)
prior to the expiration of the 30-day period following delivery of the
Officer's Certificate.

9.9 Resolution of Conflicts.

(a) In case the Shareholders' Agent shall so object in writing to the
indemnity of a Parent Indemnitee in respect of any claim or claims made in
any Officer's Certificate, the Shareholders' Agent and Parent (acting on
its own behalf or on behalf of any Parent Indemnitee) shall attempt in good
faith to agree upon the rights of the respective parties with respect to
each of such claims. If the Shareholders' Agent and Parent should so agree,
a memorandum setting forth such agreement shall be prepared and signed by
both parties and shall be furnished to the Escrow Agent who shall thereupon
pay the agreed upon amount of the claim or claims in shares of Parent
Common Stock not to exceed the number of shares of Parent Common Stock in
the Escrow Fund.

(b) If no such agreement can be reached after good faith negotiation,
the claim or claims shall be submitted to non-binding mediation under the
rules then in effect under the American Arbitration Association, or such
other forum as the parties may select. Each party shall have in attendance
at such mediation persons who have actual authority to bind the party to
any settlement reached. If the matter cannot be settled through mediation,
then the claim or claims shall be submitted to binding arbitration under
the following rules:

(i) Unless otherwise agreed by the parties, all such claims shall be
decided in San Jose, California by a single arbitrator, acting under
the Commercial Rules of the American Arbitration Association except as
modified herein. Either party may initiate the arbitration following
failure of mediation to resolve the issue by filing a Demand for
Arbitration with the American Arbitration Association, and
simultaneously delivering a copy of such demand to the other party.

(ii) Unless the parties agree to a mutually acceptable arbitrator
within 30 days of a demand for Arbitration, the arbitrator shall be
selected by the American Arbitration Association.

A-31
<PAGE>

(iii) Unless otherwise agreed by the parties, the arbitrator shall
be a business attorney in practice for at least ten (10) years, with at
least ten (10) years experience in the negotiating and drafting of
business acquisition agreements.

(iv) It is the intent of the parties that the arbitration be held in
an efficient, economical and expeditious manner. Accordingly, the
parties shall meet in a pre-hearing conference as promptly as
practicable after selection of the arbitrator to establish the scope
and extent of all discovery and the schedule of the arbitration.
Discovery shall be limited to that necessary to resolve the disputed
issues, in the judgment of the arbitrator. If any party wishes to take
discovery, including document productions, interrogatories or
depositions, a request to do so must be submitted to the arbitrator in
accordance with the procedures determined at the pre-hearing
conference. The arbitrator in his sole discretion may allow limited
discovery, all of which must be completed within 20 business days of
the arbitrator's directive unless extended for good cause by the
arbitrator. Subject to the arbitrator's decisions relating to the scope
and extent of discovery, the Shareholders' Agent and its attorneys,
accountants and other representatives shall have reasonable access upon
reasonable notice to the pre-Merger books and records of the Company
for the purpose of defending themselves against any claim.

(v) The arbitrator shall not be bound by rules of evidence or
judicial procedures regarding the conduct of the hearing and shall be
obligated to follow California substantive law.

(vi) The arbitrator's authority shall be limited to determining
whether the claim gives rise to a right to indemnification under the
provisions of this Section 9 and, if so, the amount of Damages as to
such claim. No other issue involving interpretation of this Agreement
shall be submitted to the arbitrator without the consent of both
parties.

(vii) The decision of the arbitrator as to the validity and amount
of damages as to any claim shall, subject to the above limitations, be
binding and conclusive upon the parties of this Agreement. The
arbitrator shall issue such decision, including a brief statement of
the reasons for the award and the calculation of damages awarded,
within 25 days after completion of the arbitration hearing.

(c) Judgment upon any award rendered by the arbitrators may be entered
in any court having jurisdiction. The Non-Prevailing Party shall pay the
reasonable expenses (including attorneys' fees) of the Prevailing Party and
the arbitrator fees and administrative expenses associated with the
arbitration (which expenses and fees, in the event Parent is the Prevailing
Party, shall constitute Damages which shall be satisfied from the Escrow
Fund). For purposes of this Section 9.9(c), in any arbitration hereunder in
which any claim or any portion of a claim stated in the Officer's
Certificate is at issue, Parent shall be deemed to be the Non-Prevailing
Party in the event that the arbitrators award Parent less than 50% of the
amount of the claim at issue; otherwise, the Shareholders' Agent shall be
deemed to be the Non-Prevailing Party.

9.10 No Contribution. By approving the Merger and later signing a Letter of
Transmittal, each Shareholder waives, and acknowledges and agrees that he shall
not have and shall not exercise or assert (or attempt to exercise or assert),
any right of contribution, right of indemnity or other right or remedy against
the Surviving Corporation in connection with any indemnification obligation or
any other liability to which he may become subject under or in connection with
this Agreement.

9.11 Defense of Third Party Claims. In the event of the assertion or
commencement by any Person of any claim or Legal Proceeding (whether against
the Surviving Corporation, against Parent or against any other Person) with
respect to which any of the Shareholders may become obligated to hold harmless,
indemnify, compensate or reimburse any Parent Indemnitee pursuant to this
Section 9, Parent shall have the right, at its election, to proceed with the
defense of such claim or Legal Proceeding on its own. If Parent so proceeds
with the defense of any such claim or Legal Proceeding:

(a) all reasonable expenses relating to the defense of such claim or
Legal Proceeding shall be borne and paid exclusively out of the Escrow
Fund;

A-32
<PAGE>

(b) if reasonably requested by Parent, each Shareholder who signs a
Shareholder Agreement shall make available to Parent any documents and
materials in his possession or control that may be necessary to the defense
of such claim or Legal Proceeding; and

(c) Parent shall have the right to settle, adjust or compromise such
claim or Legal Proceeding with the consent of the Shareholders' Agent;
provided, however, that such consent shall not be unreasonably withheld;

(d) the Shareholders' Agent may designate separate legal counsel
("Separate Counsel") which may participate in, but shall not control, the
defense of such claim or Legal Proceeding to the extent that such
participation does not materially interfere with Parent's defense of such
claim or Legal Proceeding;

(e) all reasonable expenses of Separate Counsel (up to $5,000 per month
and $50,000 in the aggregate) shall be borne and paid out of the Escrow
Fund; and

(f) if reasonably requested by the Shareholders' Agent or Separate
Counsel, Parent shall make available to the Shareholders' Agent and
Separate Counsel any documents and materials in Parent's or the Company's
possession or control that are relevant to the Shareholders' interests in
such claim or Legal Proceeding and the disclosure of which would not impair
Parent's defense of such claim or Legal Proceeding.

Parent shall give the Shareholders' Agent prompt notice of the commencement
of any such Legal Proceeding against Parent or the Surviving Corporation;
provided, however, that any failure on the part of Parent to so notify the
Shareholders' Agent shall not limit any of the obligations of the Shareholders
under this Section 9 (except to the extent such failure materially prejudices
the defense of such Legal Proceeding).

9.12 Exercise of Remedies by Indemnitees Other Than Parent. No Parent
Indemnitee (other than Parent or any successor thereto or assign thereof) shall
be permitted to assert any indemnification claim or exercise any other remedy
under this Agreement unless Parent (or any successor thereto or assign thereof)
consents to the assertion of such indemnification claim or the exercise of such
other remedy.

9.13 Fraud. Notwithstanding any provision of this Agreement to the contrary,
the liability of Parent, the Company or any Shareholder for common law fraud,
intentional misrepresentation or other claim involving intentional misconduct
shall not be limited in amount, procedure for dispute resolution or as to the
time during which a claim may be made.

SECTION 10. Miscellaneous Provisions

10.1 Shareholders' Agent. In the Shareholder Agreements of even date
herewith, the Shareholders signing such agreements have irrevocably appointed
Ronald Hall as the Shareholders' Agent for purposes of Section 9 (the
"Shareholders' Agent"), and Ronald Hall has accepted his appointment as the
Shareholders' Agent. By approving the Merger and later signing a Letter of
Transmittal, each of the Shareholders that has not signed a Shareholder
Agreement shall acknowledge and ratify such appointment. Parent shall be
entitled to deal exclusively with the Shareholders' Agent on all matters
relating to Section 9, and shall be entitled to rely conclusively (without
further evidence of any kind whatsoever) on any document executed or purported
to be executed on behalf of any Shareholder by the Shareholders' Agent, and on
any other action taken or purported to be taken on behalf of any Shareholder by
the Shareholders' Agent, as fully binding upon such Shareholder. If the
Shareholders' Agent shall die, become disabled or otherwise be unable to
fulfill his responsibilities as agent of the Shareholders, then the
Shareholders who received a majority of the shares of Parent Common Stock
pursuant to Section 1.5 above shall, within ten days after such death or
disability, appoint a successor agent and, promptly thereafter, shall notify
Parent of the identity of such successor. Any such successor shall become the
"Shareholders' Agent" for purposes of Section 9 and this Section 10.1. If for
any reason there is no Shareholders' Agent at any time, all references herein
to the Shareholders' Agent shall be deemed to refer to the Shareholders.

A-33
<PAGE>

10.2 Further Assurances. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request
(prior to, at or after the Closing) for the purpose of carrying out or
evidencing any of the transactions contemplated by this Agreement.

10.3 Fees and Expenses. Each party to this Agreement shall bear and pay all
fees, costs and expenses (including legal fees and accounting fees) that have
been incurred or that are incurred by such party in connection with the
transactions contemplated by this Agreement, including all fees, costs and
expenses incurred by such party in connection with or by virtue of (a) the
investigation and review conducted by Parent and its Representatives with
respect to the Company's business (and the furnishing of information to Parent
and its Representatives in connection with such investigation and review), (b)
the negotiation, preparation and review of this Agreement (including the
Disclosure Schedule) and all agreements, certificates, opinions and other
instruments and documents delivered or to be delivered in connection with the
transactions contemplated by this Agreement, (c) the preparation and submission
of any filing or notice required to be made or given in connection with any of
the transactions contemplated by this Agreement, and the obtaining of any
Consent required to be obtained in connection with any of such transactions,
and (d) the consummation of the Merger; provided, however, that, to the extent
the total amount of all such fees, costs and expenses incurred by or for the
benefit of the Company ("Company Transaction Expenses") exceeds $100,000, such
fees, costs and expenses shall be deducted from the Escrow Fund.

10.4 Attorneys' Fees. If any action or proceeding relating to this Agreement
or the enforcement of any provision of this Agreement is brought against any
party hereto, the prevailing party shall be entitled to recover reasonable
attorneys' fees, costs and disbursements (in addition to any other relief to
which the prevailing party may be entitled).

10.5 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):

if to Parent:

PHOTON DYNAMICS, INC.
6325 San Ignacio Ave.
San Jose, CA 95119-1202
Attention: Richard Dissly
Fax: (408) 226-9910

with a copy to:

Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attention: Alan C. Mendelson
Fax: (650) 857-0663

if to the Company:

CR TECHNOLOGY, INC.
27752 El Lazo Road
Laguna Niguel, CA 92577
Attention: Richard Amtower
Fax: (949) 448-0445

A-34
<PAGE>

with a copy to:

Rutan & Tucker, LLP
611 Anton Blvd., Suite 1400
Costa Mesa, CA 92626
Attention: Gregg A. Amber, Esq.
Fax: (714) 546-9035

if to the Shareholders' Agent:

Ronald Hall
Hall Morris & Drufva Capital Management
26161 La Paz Rd., Ste. E
Mission Viejo, CA 92691
Fax: (949) 707-5121

10.6 Confidentiality. Without limiting the generality of anything contained
in Section 5.4, on and at all times after the Closing Date, the Company shall
keep confidential, and shall not use or disclose to any other Person, any non-
public document or other non-public information in the Company's possession
that relates to the business of the Company or Parent, except to the extent
that disclosure is required by applicable law or compelled by a court or other
governmental body of competent jurisdiction.

10.7 Time of the Essence. Time is of the essence of this Agreement.

10.8 Headings. The headings and captions contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.

10.9 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.

10.10 Governing Law. This Agreement shall be construed in accordance with,
and governed in all respects by, the internal laws of the State of California
(without giving effect to principles of conflicts of laws).

10.11 Successors and Assigns. This Agreement shall be binding upon: the
Company and its successors and assigns (if any); Parent and its successors and
assigns (if any); and Merger Sub and its successors and assigns (if any). This
Agreement shall inure to the benefit of: the Company; the Shareholders (to the
extent set forth in Section 1.5); the holders of assumed Company Options (to
the extent set forth in Section 1.6); Parent; Merger Sub; the other Indemnitees
(subject to Section 9.11); and the respective successors and assigns (if any)
of the foregoing. No party may assign any or all of its rights under this
Agreement, in whole or in part, to any other Person without obtaining the prior
written consent or approval of any other party hereto, which consent shall not
be unreasonably withheld or delayed.

10.12 Remedies Cumulative; Specific Performance. Subject to the provisions
of Section 9.4, the rights and remedies of the parties hereto shall be
cumulative (and not alternative). The parties to this Agreement agree that, in
the event of any breach or threatened breach by any party to this Agreement of
any covenant, obligation or other provision set forth in this Agreement for the
benefit of any other party to this Agreement, such other party shall be
entitled (in addition to any other remedy that may be available to it) to (a) a
decree or order of specific performance or mandamus to enforce the observance
and performance of such covenant, obligation or other provision, and (b) an
injunction restraining such breach or threatened breach.

10.13 Waiver.

(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any
Person in exercising any power, right, privilege or remedy

A-35
<PAGE>

under this Agreement, shall operate as a waiver of such power, right,
privilege or remedy; and no single or partial exercise of any such power,
right, privilege or remedy shall preclude any other or further exercise
thereof or of any other power, right, privilege or remedy.

(b) No Person shall be deemed to have waived any claim arising out of
this Agreement, or any power, right, privilege or remedy under this
Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such Person; and any such waiver shall not be
applicable or have any effect except in the specific instance in which it
is given.

10.14 Amendments. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto.

10.15 Severability. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.

10.16 Parties in Interest. Except for the provisions of Sections 1.5, 1.6,
5.16 and 9, none of the provisions of this Agreement is intended to provide any
rights or remedies to any Person other than the parties hereto and their
respective successors and assigns (if any).

10.17 Entire Agreement. This Agreement and the other agreements referred to
herein set forth the entire understanding of the parties hereto relating to the
subject matter hereof and thereof and supersede all prior agreements and
understandings among or between any of the parties relating to the subject
matter hereof and thereof; provided, however, that the Mutual Non-Disclosure
Agreement executed on behalf of Parent on and the Company on January 20, 1999
shall not be superseded by this Agreement and shall remain in effect in
accordance with its terms until the earlier of (a) the Effective Time, or (b)
the date on which such Mutual Non-Disclosure Agreement is terminated in
accordance with its terms.

10.18 Construction.

(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender
shall include the masculine and neuter genders; and the neuter gender shall
include the masculine and feminine genders.

(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.

(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."

(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this
Agreement and Exhibits to this Agreement.

A-36
<PAGE>

The parties hereto have caused this Agreement to be executed and delivered
as of August 10, 1999.

PHOTON DYNAMICS, INC.
a California corporation

/s/ Vincent Sollitto
By: _________________________________

Pharaoh Acquisition Corp.,
a California corporation

/s/ Vincent Sollitto
By: _________________________________

CR TECHNOLOGY, INC.
a California corporation

/s/ Richard Amtower
By: _________________________________

A-37
<PAGE>

Exhibit B

CERTAIN DEFINITIONS

For purposes of the Agreement (including this Exhibit B):

Acquisition Transaction. "Acquisition Transaction" shall mean any
transaction involving:

(a) the sale, license, disposition or acquisition of all or
substantially all of the Company's business or assets;

(b) the issuance, disposition or acquisition of (i) any capital stock
or other equity security of the Company (other than common stock issued to
employees of the Company, upon exercise of Company Options, conversion of
Series A Preferred Stock, or otherwise, in routine transactions in
accordance with the Company's past practices), (ii) any option, call,
warrant or right (whether or not immediately exercisable) to acquire any
capital stock or other equity security of the Company (other than stock
options granted to employees of the Company in routine transactions in
accordance with the Company's past practices), or (iii) any security,
instrument or obligation that is or may become convertible into or
exchangeable for any capital stock or other equity security of the Company;
or

Agreement. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit B is attached (including the Disclosure
Schedule), as it may be amended from time to time.

Applicable Fraction. "Applicable Fraction" shall mean the quotient obtained
by dividing (a) the quantity 1,960,000 minus the Liquidation Preference Shares,
by (b) the sum of (i) the number of outstanding shares of Company Common Stock
immediately prior to the Effective Time (assuming that each outstanding share
of Series A Preferred Stock is converted into Company Common Stock), and (ii)
the number of shares of Company Common Stock subject to options outstanding
pursuant to the Company's Stock Option Plans immediately prior to the Effective
Time.

Company Contract. "Company Contract" shall mean any Contract: (a) to which
the Company is a party; (b) by which the Company or any of its assets is or may
become bound or under which the Company has, or may become subject to, any
obligation; or (c) under which the Company has or may acquire any right or
interest.

Company Indemnitee. "Company Indemnitee" shall mean the following Persons:
(a) each of the Shareholders; (b) each of the Shareholders' current and future
affiliates, (c) the respective Representatives of the Persons referred to in
clauses "(a)" and "(b)" above; and (d) the respective successors and assigns of
the Persons referred to in clauses "(a)", "(b)" and "(c)" above.

Company Proprietary Asset. "Company Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to the Company or otherwise used by the
Company.

Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).

Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, warranty,
insurance policy, benefit plan or legally binding commitment or undertaking of
any nature.

Current Parent Stock Price. "Current Parent Stock Price" shall mean the
average of the closing sale prices of a share of Parent Common Stock as
reported on the Nasdaq National Market for each of the ten consecutive trading
days immediately preceding the date of the Agreement to which this Exhibit B is
attached.

A-38
<PAGE>

Damages. "Damages" shall include any loss, damage, injury, decline in value,
lost opportunity, liability, claim, demand, settlement, judgment, award, fine,
penalty, Tax obligations, fee (including reasonable attorneys' fees), charge,
cost (including reasonable costs of investigation) or expense of any nature.

Designated Parent Stock Price. "Designated Parent Stock Price" shall mean
the average of the closing sale prices of a share of Parent Common Stock as
reported on the Nasdaq National Market for each of the ten consecutive trading
days immediately preceding the Closing Date.

Disclosure Schedule. "Disclosure Schedule" shall mean the schedule (dated as
of the date of the Agreement) delivered to Parent on behalf of the Company.

Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on
the voting of any security, any restriction on the transfer of any security or
other asset, any restriction on the receipt of any income derived from any
asset, any restriction on the use of any asset and any restriction on the
possession, exercise or transfer of any other attribute of ownership of any
asset).

Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.

Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.

Government Bid. "Government Bid" shall mean any quotation, bid or proposal
submitted to any Governmental Body or any proposed prime contractor or higher-
tier subcontractor of any Governmental Body.

Government Contract. "Government Contract" shall mean any prime contract,
subcontract, letter contract, purchase order or delivery order executed or
submitted to or on behalf of any Governmental Body or any prime contractor or
higher-tier subcontractor, or under which any Governmental Body or any such
prime contractor or subcontractor otherwise has or may acquire any right or
interest.

Governmental Authorization. "Governmental Authorization" shall mean any: (a)
permit, license, certificate, franchise, permission, clearance, registration,
qualification or authorization issued, granted, given or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement; or (b) right under any Contract with any Governmental Body.

Governmental Body. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).

Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry,
audit, examination or investigation commenced, brought, conducted or heard by
or before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.

Legal Requirement. "Legal Requirement" shall mean any federal, state, local,
municipal, foreign or other law, statute, constitution, principle of common
law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or
requirement issued, enacted, adopted, promulgated, implemented or otherwise put
into effect by or under the authority of any Governmental Body.

Material Adverse Effect. A violation or other matter will be deemed to have
a "Material Adverse Effect" on the Company if such violation or other matter
(considered together with all other matters that would

A-39
<PAGE>

constitute exceptions to the representations and warranties set forth in the
Agreement or in the Company's Closing Certificate but for the presence of
"Material Adverse Effect" or other materiality qualifications, or any similar
qualifications, in such representations and warranties) would have a material
adverse effect on the Company's business, condition, assets, liabilities,
operations or financial performance.

Parent Indemnitees. "Parent Indemnitees" shall mean the following Persons:
(a) Parent; (b) Parent's current and future affiliates (including the Surviving
Corporation); (c) the respective Representatives of the Persons referred to in
clauses "(a)" and "(b)" above; and (d) the respective successors and assigns of
the Persons referred to in clauses "(a)", "(b)" and "(c)" above; provided,
however, that the Shareholders shall not be deemed to be "Parent Indemnitees."

Person. "Person" shall mean any individual, Entity or Governmental Body.

Proprietary Asset. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, invention, design, blueprint, engineering drawing,
proprietary product, technology, proprietary right or other intellectual
property right or intangible asset; or (b) right to use or exploit any of the
foregoing.

Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.

SEC. "SEC" shall mean the United States Securities and Exchange Commission.

Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.

Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax,
business tax, withholding tax or payroll tax), levy, assessment, tariff, duty
(including any customs duty), deficiency or fee, and any related charge or
amount (including any fine, penalty or interest), imposed, assessed or
collected by or under the authority of any Governmental Body.

Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information
filed with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.

A-40
<PAGE>

APPENDIX B-1

FORM OF
PARENT AFFILIATE AGREEMENT

This Parent Affiliate Agreement (this "Agreement") is dated as of August 10,
1999, by and between Photon Dynamics, Inc., a California corporation
("Parent"), CR Technology, Inc., a California corporation (the "Company"), and
the undersigned affiliate of Parent ("Affiliate").

Recitals

Whereas, Affiliate is a stockholder of Parent.

Whereas, Parent, Pharaoh Acquisition Corporation, a California corporation
and a wholly-owned subsidiary of Parent ("Merger Sub"), and the Company have
entered into an Agreement and Plan of Merger and Reorganization dated as of
August 10, 1999 (the "Merger Agreement"), providing for the merger of Merger
Sub with and into the Company (the "Merger"). The Merger Agreement contemplates
that, upon consummation of the Merger, (i) the holders of the common stock of
the Company ("Company Common Stock") will receive shares of common stock of
Parent ("Parent Common Stock") in exchange for their shares of Company Common
Stock and (ii) the Company will become a wholly-owned subsidiary of Parent.

Whereas, it is a condition to the consummation of the Merger pursuant to the
Merger Agreement that the independent accounting firms that audit the annual
financial statements of Parent and the Company will have delivered the written
concurrences with the conclusions of management of Parent and the Company to
the effect that the Merger will be accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16.

Agreement

Now, Therefore, in order to induce Parent and the Company to consummate the
transactions contemplated by the Merger Agreement, and for other valuable
consideration (the receipt and sufficiency of which are hereby acknowledged by
Affiliate), Affiliate hereby covenants and agrees as follows:

1. Representations and Warranties. Affiliate represents and warrants to
Parent as follows:

(a) Affiliate is the holder and "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of
the number of shares of the Parent Common Stock set forth under
Affiliate's signature below (the "Parent Shares"), and Affiliate has
good and valid title to the Parent Shares, free and clear of any liens,
pledges, security interests, adverse claims, equities, options,
proxies, charges, encumbrances or restrictions of any nature.

(b) Affiliate has carefully read this Agreement, and has discussed
with Affiliate's own independent counsel to the extent Affiliate felt
necessary the limitations imposed on Affiliate's ability to sell,
transfer or otherwise dispose of the shares of Parent Common Stock.
Affiliate fully understands the limitations this Agreement places upon
Affiliate's ability to sell, transfer or otherwise dispose of the
Parent Shares.

(c) Affiliate understands that the representations, warranties and
covenants set forth herein will be relied upon by Parent, the Company,
and their respective affiliates, counsel and accounting firms for
purposes of determining Parent's eligibility to account for the Merger
as a "pooling of interests," and that substantial losses and damages
may be incurred by these persons if Affiliate's representations,
warranties or covenants are breached.

B1-1
<PAGE>

2. Covenants Related to Pooling of Interests. In accordance with SEC
Staff Accounting Bulletin No. 65 ("SAB 65"), during the period contemplated
by SAB 65, until the earlier of (i) Parent's public announcement of
financial results covering at least thirty (30) days of combined operations
of Parent and the Company or (ii) the Merger Agreement is terminated in
accordance with its terms, Affiliate will not sell, exchange, transfer,
pledge, distribute, or otherwise dispose of or grant any option, establish
any "short" or put-equivalent position with respect to or enter into any
similar transaction (through derivatives or otherwise) intended or having
the effect, directly or indirectly, to reduce its risk relative to any
Parent shares. Parent may, at its discretion, place a stock transfer notice
consistent with the restrictions referred to in this Section 2 with its
transfer agent with respect to such certificates, provided such restrictive
legend shall be removed and/or notice shall be countermanded promptly upon
expiration of the necessity therefor at the request of Affiliate.

3. Permitted Transfers. Notwithstanding anything to the contrary
contained in this Agreement, Affiliate may (i) transfer a "de minimis"
amount of Parent Common Stock as contemplated by SEC Staff Accounting
Bulletin No. 76 contingent upon consultation with legal counsel for Parent
as to whether such transfer qualifies as "de minimis" and (ii) may (with
the written consent of Parent, not to be unreasonably withheld): (A)
transfer shares of Parent Common Stock in payment of the exercise price of
options to purchase Parent Common Stock; (B) transfer shares of Parent
Common Stock to any organization qualified under Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended, so long as such organization has
traditionally been supported by contributions from the general public (as
opposed to being supported largely by a specific donor); and (C) transfer
shares of Parent Common Stock to a trust established for the benefit of
Affiliate and/or for the benefit of one or more members of Affiliate's
family, or make a bona fide gift of Parent Common Stock to one or more
members of Affiliate's family, provided that in the case of a transfer or
gift pursuant to this clause (B) or (C), a transferee of such shares agrees
to be bound by the limitations set forth in this Agreement.

4. Specific Performance. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement was not
performed in accordance with its specific terms or was otherwise breached.
Affiliate agrees that, in the event of any breach or threatened breach by
Affiliate of any covenant or obligation contained in this Agreement, Parent
shall be entitled (in addition to any other remedy that may be available to
it, including monetary damages) to seek and obtain (a) a decree or order of
specific performance to enforce the observance and performance of such
covenant or obligation, and (b) an injunction restraining such breach or
threatened breach.

5. Independence of Obligations. The covenants and obligations of
Affiliate set forth in this Affiliate Agreement shall be construed as
independent of any other agreement or arrangement between Affiliate, on the
one hand, and Parent, on the other. The existence of any claim or cause of
action by Affiliate against Parent shall not constitute a defense to the
enforcement of any of such covenants or obligations against Affiliate.

6. Notices. Any notice or other communication required or permitted to
be delivered under this Agreement shall be in writing and shall be deemed
properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile
confirmation) to the address or facsimile telephone number set forth
beneath the name of such party below (or to such other address or facsimile
telephone number as such party shall have specified in a written notice
given to the other party):

if to Parent:Photon Dynamics, Inc.
6325 San Ignacio Ave.
San Jose, CA 95119

Attn: Richard Dissley

Fax: (408) 226-9910

with a copy to:
Cooley Godward llp

Five Palo Alto Square
3000 El Camino Real

B1-2
<PAGE>

Palo Alto, CA 94306
Attn: Alan Mendelson
Fax: (650) 857-0663

if to Affiliate: at the address or facsimile phone number set forth
below Affiliate's signature on the signature page hereof.

7. Severability. If any provision of this Agreement or any part of any
such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (a) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be
deemed amended to conform to applicable laws so as to be valid and
enforceable to the fullest possible extent, (b) the invalidity or
unenforceability of such provision or part thereof under such circumstances
and in such jurisdiction shall not affect the validity or enforceability of
such provision or part thereof under any other circumstances or in any
other jurisdiction, and (c) the invalidity or unenforceability of such
provision or part thereof shall not affect the validity or enforceability
of the remainder of such provision or the validity or enforceability of any
other provision of this Agreement. Each provision of this Agreement is
separable from every other provision of this Agreement, and each part of
each provision of this Agreement is separable from every other part of such
provision.

8. Governing Law. This Agreement shall be construed in accordance with,
and governed in all respects by, the laws of the State of California
(without giving effect to principles of conflicts of laws).

9. Waiver. No failure on the part of Parent to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part
of Parent in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right,
privilege or remedy shall preclude any other or further exercise thereof or
of any other power, right, privilege or remedy. Parent shall not be deemed
to have waived any claim arising out of this Agreement, or any power,
right, privilege or remedy under this Agreement, unless the waiver of such
claim, power, right, privilege or remedy is expressly set forth in a
written instrument duly executed and delivered on behalf of Parent; and any
such waiver shall not be applicable or have any effect except in the
specific instance in which it is given.

10. Captions. The captions contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction
or interpretation of this Agreement.

11. Further Assurances. Affiliate shall execute and/or cause to be
delivered to Parent such instruments and other documents and shall take
such other actions as Parent may reasonably request to effectuate the
intent and purposes of this Agreement.

12. Entire Agreement. This Agreement, constitutes the entire agreement
between the parties with respect to the subject matter hereof and thereof
and supersede all prior agreements and understandings between the parties
with respect thereto.

13. Non-Exclusivity. The rights and remedies of Parent hereunder are not
exclusive of or limited by any other rights or remedies which Parent may
have, whether at law, in equity, by contract or otherwise, all of which
shall be cumulative (and not alternative).

14. Amendments. This Agreement may not be amended, modified, altered, or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of Parent and Affiliate.

15. Binding Nature. This Agreement will be binding upon Affiliate and
Affiliate's representatives, executors, administrators, estate, heirs,
successors and assigns, and shall inure to the benefit of Parent and its
successors and assigns.

B1-3
<PAGE>

16. Attorneys' Fees and Expenses. If any legal action or other legal
proceeding relating to the enforcement of any provision of this Agreement
is brought against Affiliate, the prevailing party shall be entitled to
recover reasonable attorneys' fees, costs and disbursements (in addition to
any other relief to which the prevailing party may be entitled).

17. Assignment. This Agreement and all obligations of Affiliate
hereunder are personal to Affiliate and may not be transferred or delegated
by Affiliate at any time. Parent may freely assign any or all of its rights
under this Affiliate Agreement in whole or in part, to any other person or
entity without obtaining the consent or approval of Affiliate.

18. Survival. Each of the representations, warranties, covenants and
obligations contained in this Agreement shall survive the consummation of
the Merger.

The undersigned have executed this Agreement as of the date first set forth
above.

Photon Dynamics

By:__________________________________

Printed Name:________________________

Title:_______________________________

CR Technology

By:__________________________________

Printed Name:________________________

Title:_______________________________

Affiliate:

By:__________________________________

Printed Name:________________________

Address:_____________________________
_____________________________________
_____________________________________

Facsimile:___________________________

Photon Dynamics Stock Beneficially
owned by Affiliate:

_______________________________shares
of Common Stock

_______________________________shares
of Common Stock issuable upon
exercise of outstanding options

B1-4
<PAGE>

APPENDIX B-2
FORM OF CRT AFFILIATE AGREEMENT

This Affiliate Agreement ("Affiliate Agreement") is being executed and
delivered as of August 10, 1999 by ("Shareholder") in favor of and for the
benefit of PHOTON DYNAMICS, INC., a California corporation ("Parent") and CR
TECHNOLOGY, INC., a California corporation.

Recitals

A. Shareholder is a shareholder of, and is an officer and/or director of, CR
TECHNOLOGY, INC., a California corporation (the "Company").

B. Parent, the Company and Pharoah Acquisition Corp., a wholly owned
subsidiary of Parent ("Merger Sub"), have entered into an Agreement and Plan of
Merger and Reorganization dated as of August 10, 1999 (the "Reorganization
Agreement"), providing for the merger of Merger Sub into the Company (the
"Merger"). The Reorganization Agreement contemplates that, upon consummation of
the Merger, (i) holders of shares of the common stock and preferred stock of
the Company will receive shares of common stock of Parent ("Parent Common
Stock") in exchange for their shares of common stock of the Company and (ii)
the Company will become a wholly owned subsidiary of Parent. It is accordingly
contemplated that Shareholder will receive shares of Parent Common Stock in the
Merger. Capitalized terms not otherwise defined herein shall have the same
meaning as in the Reorganization Agreement.

C. Shareholder understands that the Parent Common Stock being issued in the
Merger will be issued pursuant to a registration statement on Form S-4, and
that Shareholder may be deemed an "affiliate" of Parent: (i) as such term is
defined for purposes of paragraphs (c) and (d) of Rule 145 under the Securities
Act of 1933, as amended (the "Securities Act"); and (ii) for purposes of
determining Parent's eligibility to account for the Merger as a "pooling of
interests" under Accounting Series Releases 130 and 135, as amended, of the
Securities and Exchange Commission (the "SEC"), and under other applicable
"pooling of interests" accounting requirements.

Agreement

Shareholder, intending to be legally bound, agrees as follows:

1. New Shares. Shareholder agrees that any shares of capital stock of
the Company that Shareholder purchases or with respect to which Shareholder
otherwise acquires beneficial ownership after the date of this Agreement
and prior to the Expiration Date (as defined in paragraph 3(a)) shall be
subject to the terms and conditions of this Agreement to the same extent as
shares beneficially owned as of the date of this Agreement.

2. Representations and Warranties of Shareholder. Shareholder represents
and warrants to Parent as follows:

(a) Shareholder is the holder and "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of
the number of outstanding shares of common stock and/or preferred stock
of the Company set forth beneath Shareholder's signature on the
signature page hereof (the "Company Shares"), and Shareholder has good
and valid title to the Company Shares, free and clear of any liens,
pledges, security interests, adverse claims, equities, options,
proxies, charges, encumbrances or restrictions of any nature.
Shareholder has the sole right to vote and to dispose of the Company
Shares.

B2-1
<PAGE>

(b) Shareholder is the holder of options to purchase the number of
shares of common stock of the Company set forth beneath Shareholder's
signature on the signature page hereof (the "Company Options"), and
Shareholder has good and valid title to the Company Options, free and
clear of any liens, pledges, security interests, adverse claims,
equities, options, proxies, charges, encumbrances or restrictions of
any nature.

(c) Shareholder does not own, of record or beneficially, directly or
indirectly, any securities of the Company other than the Company Shares
and the Company Options.

(d) Shareholder has carefully read this Affiliate Agreement and, to
the extent Shareholder felt necessary, has discussed with counsel the
limitations imposed on Shareholder's ability to sell, transfer or
otherwise dispose of the Company Shares, the Company Options, the
shares of Parent Common Stock that Shareholder is to receive in the
Merger (the "Parent Shares"), and the options to purchase shares of
Parent Common Stock that Shareholder is to receive in respect of the
Company Options in connection with the Merger. Shareholder fully
understands the limitations this Affiliate Agreement places upon
Shareholder's ability to sell, transfer or otherwise dispose of
securities of the Company and securities of Parent.

(e) Shareholder understands that the representations, warranties and
covenants set forth in this Affiliate Agreement will be relied upon by
Parent and its counsel and accountants for purposes of determining
Parent's eligibility to account for the Merger as a "pooling of
interests" and for purposes of determining whether Parent should
proceed with the Merger.

3. Prohibitions Against Transfer.

(a) Shareholder agrees that, during the period from the date 30 days
prior to the date of consummation of the Merger through the date on
which financial results covering at least 30 days of post-Merger
combined operations of Parent and the Company have been published by
Parent (within the meaning of the applicable "pooling of interests"
accounting requirements) (the "Expiration Date"):
(i) Shareholder shall not sell, transfer or otherwise dispose of,
or reduce Shareholder's interest in or risk relating to, (A) any
capital stock of the Company (including, without limitation, the
Company Shares and any additional shares of capital stock of the
Company acquired by Shareholder, whether upon exercise of a stock
option or otherwise), except pursuant to and upon consummation of
the Merger, or (B) any option or other right to purchase any shares
of capital stock of the Company, except pursuant to and upon
consummation of the Merger; and

(ii) Shareholder shall not sell, transfer or otherwise dispose
of, or reduce Shareholder's interest in or risk relating to, (A) any
shares of capital stock of Parent (including without limitation the
Parent Shares and any additional shares of capital stock of Parent
acquired by Shareholder, whether upon exercise of a stock option or
otherwise), or (B) any option or other right to purchase any shares
of capital stock of Parent.

(b) Shareholder agrees that Shareholder shall not effect any sale,
transfer or other disposition of any Parent Shares unless:

(i) such sale, transfer or other disposition is effected pursuant
to an effective registration statement under the Securities Act;

(ii) such sale, transfer or other disposition is made in
conformity with the requirements of Rule 145 under the Securities
Act, as evidenced by a broker's letter and a representation letter
executed by Shareholder (satisfactory in form and content to Parent)
stating that such requirements have been met;

(iii) counsel reasonably satisfactory to Parent (which Parent
acknowledges shall include Rutan & Tucker, LLP) shall have advised
Parent in a written opinion letter (satisfactory in form

B2-2
<PAGE>

and content to Parent), upon which Parent may rely, that such sale,
transfer or other disposition will be exempt from the registration
requirements of the Securities Act; or

(iv) an authorized representative of the SEC shall have rendered
written advice to Shareholder to the effect that the SEC would take
no action, or that the staff of the SEC would not recommend that the
SEC take action, with respect to such sale, transfer or other
disposition, and a copy of such written advice and all other related
communications with the SEC shall have been delivered to Parent.

4. Rules 144 and 145. From and after the Effective Time of the Merger
and for as long as is necessary in order to permit Shareholder to sell the
Parent Common Stock held by Shareholder pursuant to Rule 145 and, to the
extent applicable, Rule 144 under the Securities Act, Parent will use
commercially reasonable efforts to file on a timely basis all reports
required to be filed by it pursuant to Section 13 of the Securities
Exchange Act of 1934, as amended, referred to in paragraph (c)(1) of Rule
144 under the Securities Act (or, if applicable, Parent will use
commercially reasonable efforts to make publicly available the information
regarding itself referred to in paragraph (c)(2) of Rule 144), in order to
permit Shareholder to sell the Parent Common Stock held by him or it
pursuant to the terms and conditions of Rule 145 and the applicable
provisions of Rule 144.

5. Limited Resales. Shareholder understands that, in addition to the
restrictions contained herein, the provisions of Rule 144 and Rule 145
limit Shareholder's public resales of Parent Shares.

6. Stop Transfer Instructions; Legend.

Shareholder acknowledges and agrees that (a) stop transfer instructions will
be given to Parent's transfer agent with respect to the Parent Shares, and (b)
each certificate representing any of such shares shall bear a legend identical
or similar in effect to the following legend (together with any other legend or
legends required by applicable state securities laws or otherwise):

"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
TO WHICH RULE 145(d) OF THE SECURITIES ACT OF 1933 APPLIES AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED
EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF SUCH RULE AND IN ACCORDANCE
WITH THE TERMS OF AN AGREEMENT DATED AS OF AUGUST , 1999, BETWEEN THE
REGISTERED HOLDER HEREOF AND THE ISSUER, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICES OF THE ISSUER."

7. Independence of Obligations. The covenants and obligations of
Shareholder set forth in this Affiliate Agreement shall be construed as
independent of any other agreement or arrangement between Shareholder, on
the one hand, and the Company or Parent, on the other. The existence of any
claim or cause of action by Shareholder against the Company or Parent shall
not constitute a defense to the enforcement of any of such covenants or
obligations against Shareholder.

8. Specific Performance. Shareholder agrees that in the event of any
breach or threatened breach by Shareholder of any covenant, obligation or
other provision contained in this Affiliate Agreement, Parent shall be
entitled (in addition to any other remedy that may be available to Parent)
to: (a) a decree or order of specific performance or mandamus to enforce
the observance and performance of such covenant, obligation or other
provision; and (b) an injunction restraining such breach or threatened
breach. Shareholder further agrees that neither Parent nor any other person
or entity shall be required to obtain, furnish or post any bond or similar
instrument in connection with or as a condition to obtaining any remedy
referred to in this Section 6, and Shareholder irrevocably waives any right
he may have to require the obtaining, furnishing or posting of any such
bond or similar instrument.

9. Other Agreements. Nothing in this Affiliate Agreement shall limit any
of the rights or remedies of Parent under the Reorganization Agreement, or
any of the rights or remedies of Parent or any of the obligations of
Shareholder under any agreement between Shareholder and Parent or any
certificate or

B2-3
<PAGE>

instrument executed by Shareholder in favor of Parent; and nothing in the
Reorganization Agreement or in any other agreement, certificate or
instrument shall limit any of the rights or remedies of Parent or any of
the obligations of Shareholder under this Affiliate Agreement.

10. Notices. Any notice or other communication required or permitted to
be delivered to Shareholder or Parent under this Affiliate Agreement shall
be in writing and shall be deemed properly delivered, given and received
when delivered to the address or facsimile telephone number set forth
beneath the name of such party below (or to such other address or facsimile
telephone number as such party shall have specified in a written notice
given to the other party):

if to Parent:

Photon Dynamics, Inc.
6325 San Ignacio Ave.
San Jose, CA 95119-1202
Attention: Richard Dissly
Fax: 408-226-9910

if to the Company:

CR TECHNOLOGY, INC.
27752 El Lazo Road
Laguna Niguel, CA 92577
Attention: Richard Amtower
Fax: 949-448-0445

if to Shareholder:

____________________________
____________________________
____________________________
Attn:
Fax: ( ) _________________

11. Severability. If any provision of this Affiliate Agreement or any
part of any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (a) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be
deemed amended to conform to applicable laws so as to be valid and
enforceable to the fullest possible extent, (b) the invalidity or
unenforceability of such provision or part thereof under such circumstances
and in such jurisdiction shall not affect the validity or enforceability of
such provision or part thereof under any other circumstances or in any
other jurisdiction, and (c) the invalidity or unenforceability of such
provision or part thereof shall not affect the validity or enforceability
of the remainder of such provision or the validity or enforceability of any
other provision of this Affiliate Agreement. Each provision of this
Affiliate Agreement is separable from every other provision of this
Affiliate Agreement, and each part of each provision of this Affiliate
Agreement is separable from every other part of such provision.

12. Applicable Law; Jurisdiction. THIS AFFILIATE AGREEMENT IS MADE
UNDER, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF
CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY
THEREIN, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. In any
action between or among any of the parties, whether arising out of this
Affiliate Agreement or otherwise, (a) each of the parties irrevocably and
unconditionally consents and submits to the exclusive jurisdiction and
venue of the state and federal courts located in the County of Santa Clara,
State of California; (b) if any such action is commended in a state court,
then, subject to applicable law, no party shall object to the removal of
such action to any federal court located in the Northern District of
California; (c) each of the parties irrevocably waives the right to trial
by jury; and

B2-4
<PAGE>

(d) each of the parties irrevocably consents to service of process by
first class certified mail, return receipt requested, postage prepared, to
the address at which such party is to receive notice in accordance with
Section 7.

13. Waiver; Termination. No failure on the part of Parent or the Company
to exercise any power, right, privilege or remedy under this Affiliate
Agreement, and no delay on the part of Parent or the Company in exercising
any power, right, privilege or remedy under this Affiliate Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no
single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy. Neither Parent nor the Company shall be deemed
to have waived any claim arising out of this Affiliate Agreement, or any
power, right, privilege or remedy under this Affiliate Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly
set forth in a written instrument duly executed and delivered on behalf of
Parent or the Company; and any such waiver shall not be applicable or have
any effect except in the specific instance in which it is given. If the
Reorganization Agreement is terminated, this Affiliate Agreement shall
thereupon terminate.

14. Captions. The captions contained in this Affiliate Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Affiliate Agreement and shall not be referred to in connection with the
construction or interpretation of this Affiliate Agreement.

15. Further Assurances. Shareholder shall execute and/or cause to be
delivered to Parent and the Company such instruments and other documents
and shall take such other actions as Parent or the Company may reasonably
request to effectuate the intent and purposes of this Affiliate Agreement.

16. Entire Agreement. This Affiliate Agreement, the Reorganization
Agreement and any Shareholder Agreement or Noncompetition Agreement between
Shareholder and Parent collectively set forth the entire understanding of
Parent and Shareholder relating to the subject matter hereof and thereof
and supersede all other prior agreements and understandings between Parent
and Shareholder relating to the subject matter hereof and thereof.

17. Non-Exclusivity. The rights and remedies of Parent hereunder are not
exclusive of or limited by any other rights or remedies which Parent may
have, whether at law, in equity, by contract or otherwise, all of which
shall be cumulative (and not alternative).

18. Amendments. This Affiliate Agreement may not be amended, modified,
altered or supplemented other than by means of a written instrument duly
executed and delivered on behalf of Parent and Shareholder.

19. Assignment. This Affiliate Agreement and all obligations of
Shareholder hereunder are personal to Shareholder and may not be
transferred or delegated by Shareholder at any time. Parent may freely
assign any or all of its rights under this Affiliate Agreement, in whole or
in part, to any other person or entity without obtaining the consent or
approval of Shareholder.

20. Binding Nature. Subject to Section 19, this Affiliate Agreement will
inure to the benefit of Parent and the Company and their successors and
assigns and will be binding upon Shareholder and Shareholder's
representatives, executors, administrators, estate, heirs, successors and
assigns.

21. Survival. Each of the representations, warranties, covenants and
obligations contained in this Affiliate Agreement shall survive the
consummation of the Merger.

22. Counterparts. This Affiliate Agreement shall be executed in one or
more counterparts, each of which shall be deemed an original, and all of
which together shall constitute one instrument.

23. Third Party Reliance. Counsel to and accountants for the parties
shall be entitled to rely upon this Affiliate Agreement.

B2-5
<PAGE>

The parties have executed this Affiliate Agreement on August 10, 1999.

Shareholder:

_____________________________________
(Signature)

_____________________________________
(Print Name)

Parent:

By: _______________________________

Company:

By: _______________________________

Number of Outstanding shares of
Common Stock of the Company
Held by Shareholder:

_______________________

Number of Outstanding shares of
Preferred Stock of the Company
Held by Shareholder:

_______________________

Number shares of
Common Stock of the Company
Subject to Options held by Shareholder:

_______________________

B2-6
<PAGE>

APPENDIX C

FORM OF ESCROW AGREEMENT

This Escrow Agreement, dated as of August 10, 1999 (the "Closing Date"),
among Photon Dynamics, Inc., a California corporation ("Parent"), CR
Technology, Inc., a California corporation ("Company"), Ronald Hall, the
Shareholders' Agent (as such term is defined in the Reorganization Agreement
described below), and U.S. Bank Corporate Trust Services, a national banking
association, as escrow agent ("Escrow Agent").

Whereas, Parent, the Company, and Pharaoh Acquisition Corp., a California
corporation and a wholly owned subsidiary of Parent ("Merger Sub") have entered
into an Agreement and Plan of Merger and Reorganization dated as of August 10,
1999 (the "Reorganization Agreement"), pursuant to which Merger Sub is merging
with and into the Company (the "Merger"). As a result of the Merger, the
Company's shareholders are receiving shares of common stock of Parent ("Parent
Common Stock") in exchange for their shares of common stock of the Company, and
the Company is becoming a wholly owned subsidiary of Parent.

Whereas, the Reorganization Agreement contemplates the establishment of an
escrow arrangement to secure the indemnification obligations of shareholders of
the Company who are receiving shares of Parent Common Stock in the Merger (the
"Merger Shareholders") pursuant to the Reorganization Agreement. As a condition
to Parent's consummation of the Merger and required that the Shareholders'
Agent, as representative and agent of the Merger Shareholders, enter into this
Agreement; and the Shareholders' Agent has agreed to enter into this Agreement
in order to induce Parent to consummate the Merger.

Whereas, by virtue of the Company shareholders' approval of the
Reorganization Agreement at the meeting of the Company's shareholders convened
and held on , the Merger Shareholders have appointed the
Shareholders' Agent as their agent and attorney-in-fact, to act on their behalf
to the extent set forth in Section 9 of the Reorganization Agreement.

The parties, intending to be legally bound, hereby agree as follows:

1. Establishment of Escrow

(a) Parent is depositing with Escrow Agent shares of Parent's
Common Stock (the "Escrow Stock") (as increased by any earnings thereon and as
reduced by any disbursements, amounts withdrawn under Section 5(j), or losses
on investments, the "Escrow Fund"). Escrow Agent acknowledges receipt thereof.
The value of each share of Escrow Stock for the purposes of this Escrow
Agreement (the "Valuation Price") shall be deemed to be the Designated Parent
Stock Price (as defined in the Reorganization Agreement).

(b) Escrow Agent hereby agrees to act as escrow agent and to hold, safeguard
and disburse the Escrow Fund pursuant to the terms and conditions hereof.

2. Distributions

Except for tax-free dividends paid in shares of Parent's Common Stock with
respect to the Escrow Stock pursuant to Section 305(a) of the Internal Revenue
Code of 1986, as amended, the Escrow Agent will distribute promptly to the
Shareholder any cash dividends, distributions payables in other Securities or
distributions of any other kind made in respect of the Escrow Stock.

C-1
<PAGE>

3. Voting of Escrow Shares

The Merger Shareholders shall be entitled to vote their shares of Escrow
Stock unless and until any of such shares are disbursed to Parent pursuant to
Section 4.

4. Claims

(a) From time to time on or before the first anniversary of the Effective
Date, Parent may give notice (a "Notice") to the Shareholder's Agent and Escrow
Agent specifying in reasonable detail the nature and dollar amount of any claim
(a "Claim") it may have under Section 9 of the Reorganization Agreement; Parent
may make more than one claim with respect to any underlying state of facts. If
the Shareholders' Agent give notice to Parent and Escrow Agent disputing any
Claim (a "Counter Notice") within 30 days following receipt by Escrow Agent of
the Notice regarding such Claim, such Claim shall be resolved as provided in
4(b). If no Counter Notice is received by Escrow Agent within such 30-day
period, then the dollar amount of damages claimed by Parent as set forth in its
Notice shall be deemed established for purposes of this Escrow Agreement and
the Reorganization Agreement and, at the end of such 30-day period, Escrow
Agent shall pay to Parent an amount in shares of Escrow Stock, valued at the
Valuation Price, equal to the dollar amount claimed in the Notice from (and
only to the extent of) the Escrow Fund. Escrow Agent shall not inquire into or
consider whether a Claim complies with the requirements of the Reorganization
Agreement.

(b) If a Counter Notice is given with respect to a claim, Escrow Agent shall
make payment with respect thereto only in accordance with (i) joint written
instructions of Parent and the Shareholders' Agent, (ii) a final non-appealable
order of a court of competent jurisdiction or (iii) a decision by an arbitrator
issued pursuant to Section 9.9(b)(vii) of the Reorganization Agreement. Any
court order shall be accompanied by a legal opinion by counsel for the
presenting party satisfactory to Escrow Agent to the effect that the order is
final and non-appealable. Escrow Agent shall act on such court order and legal
opinion without further question.

5. Termination of Escrow

On , Escrow Agent shall pay and distribute the then amount of
Escrow Fund to the Merger Shareholders in accordance with the percentages set
forth opposite such Merger Shareholders' respective names on Exhibit A hereto,
unless (i) any Claims are then pending, in which case shares of Escrow Stock,
valued at the Valuation Price, with a value equal to the aggregate dollar
amount of such Claims (as shown in the Notices of such Claims) shall be
retained by Escrow Agent in the Escrow Fund (and the balance paid to the Merger
Shareholders in such proportions) or (ii) Parent has given notice to the
Shareholders' Agent and Escrow Agent specifying in reasonable detail the nature
of any other claim it may have under Section 9 of the Reorganization Agreement
with respect to which it is unable to specify the amount of Damages, in which
case their entire Escrow Fund shall be retained by Escrow Agent, in either case
until it receives joint written instructions of Parent and the Shareholders'
Agent or a final non-appealable order of a court of competent jurisdiction as
contemplated by Section 3(b).

6. Duties of Escrow Agent

(a) Escrow Agent shall not be under any duty to give the Escrow Fund held by
it hereunder any greater degree of care than it gives its own similar property.

(b) Escrow Agent shall not be liable, except for its own gross negligence or
willful misconduct and, except with respect to claims based upon such gross
negligence or willful misconduct that are successfully asserted against Escrow
Agent, the other parties hereto shall jointly and severally indemnify and hold
harmless Escrow Agent (and any successor Escrow Agent) from and against any and
all losses, liabilities, claims, actions, damages and expenses, including
reasonable attorneys' fees and disbursements, arising out of and in connection
with this Agreement. Without limiting the foregoing, Escrow Agent shall in no
event be liable in connection with its investment or reinvestment of any cash
held by it hereunder in good faith, in accordance

C-2
<PAGE>

with the terms hereof, including, without limitation, any liability for any
delays (not resulting from its gross negligence or willful misconduct) in the
investment or reinvestment of the Escrow Fund, or any loss of interest incident
to any such delays.

(c) Escrow Agent shall be entitled to rely upon any order, judgment,
certification, demand, notice, instrument or other writing delivered to it
hereunder without being required to determine the authenticity or the
correctness of any fact stated therein or the propriety or validity of the
service thereof. Escrow Agent may act in reliance upon any instrument or
signature believed by it to be genuine and may assume that the person
purporting to give receipt or advice or make any statement or execute any
document in connection with the provisions hereof has been duly authorized to
do so. Escrow Agent may conclusively presume that the undersigned
representative of any party hereto which is an entity other than a natural
person has full power and authority to instruct Escrow Agent on behalf of that
party unless written notice to the contrary is delivered to Escrow Agent.

(d) Escrow Agent may act pursuant to the advice of counsel with respect to
any matter relating to this Agreement and shall not be liable for any action
taken or omitted by it in good faith in accordance with such advice.

(e) Escrow Agent does not have any interest in the Escrow Fund deposited
hereunder but is serving as escrow holder only and having only possession
thereof. Any payments of income from this Escrow Fund shall be subject to
withholding regulations then in force with respect to United States taxes. The
parties hereto will provide Escrow Agent with appropriate Internal Revenue
Service Forms W-9 for tax identification number certification, or non-resident
alien certifications. This Section 6(e) and Section 6(b) shall survive
notwithstanding any termination of this Agreement or the resignation of Escrow
Agent.

(f) Escrow Agent makes no representation as to the validity, value,
genuineness or the collectability of any security or other document or
instrument held by or delivered to it.

(g) Escrow Agent shall not be called upon to advise any party as to the
wisdom in selling or retaining or taking or refraining from any action with
respect to any securities or other property deposited hereunder.

(h) Escrow Agent (and any successor Escrow Agent) may at any time resign as
such by delivering the Escrow Fund to any successor Escrow Agent jointly
designated by the other parties hereto in writing, or to any court of competent
jurisdiction, whereupon Escrow Agent shall be discharged of and from any and
all further obligations arising in connection with this Agreement. The
resignation of Escrow Agent will take effect on the earlier of (a) the
appointment of a successor (including a court of competent jurisdiction) or (b)
the day which is 30 days after the date of delivery of its written notice of
resignation to the other parties hereto. If at that time Escrow Agent has not
received a designation of a successor Escrow Agent, Escrow Agent's sole
responsibility after that time shall be to retain and safeguard the Escrow Fund
until receipt of a designation of successor Escrow Agent or a joint written
disposition instruction by the other parties hereto or a final non-appealable
order of a court of competent jurisdiction.

(i) In the event of any disagreement between the other parties hereto
resulting in adverse claims or demands being made in connection with the Escrow
Fund or in the event that Escrow Agent is in doubt as to what action it should
take hereunder, Escrow Agent shall be entitled to retain the Escrow Fund until
Escrow Agent shall have received (i) a final non-appealable order of a court of
competent jurisdiction directing delivery of the Escrow Fund or (ii) a written
agreement executed by the other parties hereto directing delivery of the Escrow
Fund, in which event Escrow Agent shall disburse the Escrow Fund in accordance
with such order or agreement. Any court order shall be accompanied by a legal
opinion by counsel for the presenting party satisfactory to Escrow Agent to the
effect that the order is final and non-appealable. Escrow Agent shall act on
such court order and legal opinion without further question.

(j) Parent shall pay Escrow Agent compensation (as payment in full) for the
services to be rendered by Escrow Agent hereunder in the amount of $ 1000 at
the time of execution of this Agreement and $ 1000

C-3
<PAGE>

annually thereafter and agree to reimburse Escrow Agent for all reasonable
expenses, disbursements and advances incurred or made by Escrow Agent in
performance of its duties hereunder (including reasonable fees, expenses and
disbursements of its counsel). Any such compensation and reimbursement to which
Escrow Agent is entitled shall be borne by the Parent. Any fees or expenses of
Escrow Agent or its counsel that are not paid as provided for herein may be
taken from any property held by Escrow Agent hereunder.
(k) No printed or other matter in any language (including, without
limitation, prospectuses, notices, reports and promotional material) that
mentions Escrow Agent's name or the rights, powers, or duties of Escrow Agent
shall be issued by the other parties hereto or on such parties' behalf unless
Escrow Agent shall first have given its specific written consent thereto.

(l) The other parties hereto authorize Escrow Agent, for any securities held
hereunder, to use the services of any United States central securities
depository it reasonably deems appropriate, including, without limitation, the
Depositary Trust Company and the Federal Reserve Book Entry System.

(m) Any company into which the Escrow Agent may be merged or with which it
may be consolidated, or any company to whom the Escrow Agent may transfer a
substantial amount of its Global Escrow business, shall be the Successor to the
Escrow Agent without the execution or filing of any paper or any further act on
the part of any of the parties, anything herein to the contrary
notwithstanding.

7. Shareholders' Agent.

The Merger Shareholders shall be represented hereunder by the Shareholders'
Agent. The initial Shareholders' Agent shall be Ronald Hall. In such event the
Shareholders' Agent shall die or resign or otherwise terminate his status as
such, a successor shall be appointed in accordance with Section 10.1 of the
Reorganization Agreement. The Shareholders' Agent shall receive no compensation
for his services. The Merger Shareholders have agreed that a decision by the
Shareholders' Agent shall constitute a decision of all of the Merger
Shareholders, and shall be final, binding and conclusive on each of them.
Parent, Merger Sub, the Company and the Escrow Agent may rely upon any act,
decision, consent or instruction of each and all of the Merger Shareholders and
Parent, Merger Sub, the Company and the Escrow Agent are hereby relieved of any
liability to any person for any acts done by them in accordance with any act,
decision, consent or instruction of the Shareholders' Agent.

8. Limited Responsibility

This Agreement expressly sets forth all the duties of Escrow Agent with
respect to any and all matters pertinent hereto. No implied duties or
obligations shall be read into this agreement against Escrow Agent. Escrow
Agent shall not be bound by the provisions of any agreement among the other
parties hereto except this Agreement.

9. Ownership For Tax Purposes

The Merger Shareholders and the Shareholders' Agent agree that, for purposes
of federal and other taxes based on income, the Merger Shareholders will be
treated as the owner of such percentage of the Escrow Fund, as is set forth
opposite their names on Exhibit A hereto, and that Merger Shareholders will
report all income, if any, that is earned on, or derived from, the Escrow Fund
as their income, in such proportions, in the taxable year or years in which
such income is properly includible and pay any taxes attributable thereto.

10. Notices

All notices, consents, waivers and other communications under this Agreement
must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by
telecopier (with written confirmation of receipt) provided that a copy is
mailed by registered mail, return receipt requested, or (c) when received by
the addressee, if sent by a nationally recognized overnight delivery

C-4
<PAGE>

service (receipt requested), in each case to the appropriate addresses and
telecopier numbers set forth below (or to such other addresses and telecopier
numbers as a party may designate by notice to the other parties):

Shareholders' Agent:
Attention: Ronald Hall
Facsimile No.: 949-707-5121
with a copy to:
Rutan & Tucker, LLP
Attention: Gregg A. Amber, Esq.
Facsimile No.: 714-546-9035
Parent:
Attention: Richard Dissly
Facsimile No.: 408-226-9910
with a copy to:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Attention: Alan C. Mendelson
Facsimile No.: (650) 857-0663
Escrow Agent:
Attention: _______________
Facsimile No.: ___________
with a copy to:
Attention: _______________
Facsimile No.: ___________

11. Jurisdiction; Service Of Process

Any action or proceeding seeking to enforce any provision of, or based on
any right arising out of, this Agreement may be brought against any of the
parties in the courts of the State of California, County of Santa Clara, or, if
it has or can acquire jurisdiction, in the United States District Court for the
Northern District of California, and each of the parties consents to the
jurisdiction of such courts (and of the appropriate appellate courts) in any
such action or proceeding and waives any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may
be served on any party anywhere in the world.

12. Counterparts

This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original and all of which, when taken together, will be
deemed to constitute one and the same.

13. Section Headings

The headings of sections in this Agreement are provided for convenience only
and will not affect its construction or interpretation.

14. Waiver

The rights and remedies of the parties to this Agreement are cumulative and
not alternative. Neither the failure nor any delay by any party in exercising
any right, power, or privilege under this Agreement or the documents referred
to in this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or
privilege will preclude any other or further exercise of such right, power, or
privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out
of this Agreement or the documents referred to in

C-5
<PAGE>

this Agreement can be discharged by one party, in whole or in part, by a waiver
or renunciation of the claim or right unless in writing signed by the other
party; (b) no waiver that may be given by a party will be applicable except in
the specific instance for which it is given; and (c) no notice to or demand on
one party will be deemed to be a waiver of any obligation of such party or of
the right of the party giving such notice or demand to take further action
without notice or demand as provided in this Agreement or the documents
referred to in this Agreement.

15. Exclusive Agreement and Modification

This Agreement supersedes all prior agreements among the parties with
respect to its subject matter and constitutes (along with the documents
referred to in this Agreement) a complete and exclusive statement of the terms
of the agreement between the parties with respect to its subject matter. This
Agreement may not be amended except by a written agreement executed by the
Parent, the Shareholders' Agent and the Escrow Agent.

16. Governing Law

This Agreement shall be governed by the laws of the State of California,
without regard to conflicts of law principles.

In Witness Whereof, the parties have executed and delivered this Agreement
as of the date first written above.

<TABLE>
<CAPTION>
Parent: Shareholders' Agent:
<S> <C>
By: ___________________________________ By: ___________________________________
Escrow Agent: Company:
By: ___________________________________ By: ___________________________________
</TABLE>

C-6
<PAGE>

APPENDIX D

FORM OF NONCOMPETITION AGREEMENT

This Noncompetition Agreement is being executed and delivered as of August
10, 1999 by (the "Shareholder") in favor of, and for the
benefit of: Photon Dynamics, Inc., a California corporation (the "Purchaser")
and Cr Technology, Inc., a California corporation (the "Company"). Certain
capitalized terms used in this Noncompetition Agreement are defined in Section
16.

Recitals

A. As a shareholder and employee of the Company, the Shareholder has
obtained extensive and valuable knowledge and confidential information
concerning the businesses of the Company.

B. Pursuant to an Agreement and Plan of Merger and Reorganization dated as
of August 10, 1999 between the Purchaser and the Company (the "Purchase
Agreement"), the Purchase is acquiring all of the outstanding stock of the
Company contemporaneously with the execution and delivery of this
Noncompetition Agreement. As a result of the Purchaser's acquisition of all of
the outstanding stock of the Company, the Company is becoming a subsidiary of
the Purchaser.

C. In connection with the acquisition by the Purchaser of all of the
outstanding stock of the Company pursuant to the Purchase Agreement (and as a
condition to the consummation of such acquisition), and to enable the Purchaser
to secure more fully the benefits of such acquisition, the Purchaser has
required that the Shareholder enter into this Noncompetition Agreement; and the
Shareholder is entering into this Noncompetition Agreement in order to induce
the Purchaser to consummate the acquisition contemplated by the Purchase
Agreement.

D. The Purchaser and the Shareholder are executing Key Employee Agreement
(the "Employment Agreement") contemporaneously with the execution and delivery
of this Noncompetition Agreement. Pursuant to the Key Employee Agreement, the
Shareholder is becoming a key employee of the Purchaser and will accordingly
obtain extensive and valuable knowledge and confidential information concerning
the businesses of the Purchaser, the Company and the Purchaser's other
subsidiaries.

E. The Purchaser, the Company and the Purchaser's other subsidiaries have
conducted and are conducting their respective businesses on a national basis.

Agreement

In order to induce the Purchaser to consummate the transactions contemplated
by the Purchase Agreement, and for other good and valuable consideration, the
Shareholder agrees as follows:

1. Restriction on Competition. The Shareholder agrees that, during the
Noncompetition Period, the Shareholder shall not:

(a) engage directly or indirectly in Competition in any Restricted
Territory; or

(b) directly or indirectly be or become an officer, director,
stockholder, owner, co-owner, Affiliate, partner, promoter, employee,
agent, representative, designer, consultant, advisor, manager,
licensor, sublicensor, licensee or sublicensee of, for or to, or
otherwise be or become associated with or acquire or hold (of record,
beneficially or otherwise) any direct or indirect interest in, any
Person that engages directly or indirectly in Competition in any
Restricted Territory;

D-1
<PAGE>

provided, however, that the Shareholder may, without violating this Section 1,
own, as a passive investment, shares of capital stock of a publicly-held
corporation that engages in Competition if (i) such shares are actively traded
on an established national securities market in the United States and (ii) the
number of shares of such corporation's capital stock that are owned
beneficially (directly or indirectly) by the Shareholder and the number of
shares of such corporation's capital stock that are owned beneficially
(directly or indirectly) by the Shareholder's Affiliates collectively represent
less than one percent of the total number of shares of such corporation's
capital stock outstanding.

2. No Hiring or Solicitation of Employees. The Shareholder agrees that,
during the Noncompetition Period, the Shareholder shall not: (a) hire any
Specified Employee, or (b) directly or indirectly, personally or through
others, encourage, induce, attempt to induce, solicit or attempt to solicit
(on the Shareholder's own behalf or on behalf of any other Person) any
Specified Employee or any other employee to leave his or her employment
with the Purchaser, the Company or any of the Purchaser's other
subsidiaries. (For purposes of this Section 2, "Specified Employee" shall
mean any individual who (i) is or was an employee of the Company on the
date of this Noncompetition Agreement or during the 180-day period ending
on the date of this Noncompetition Agreement, and (ii) remains or becomes
an employee of the Purchaser, the Company or any of the Purchaser's other
subsidiaries on the date of this Noncompetition Agreement or at any time
during the Noncompetition Period.)

3. Confidentiality. The Shareholder agrees that he shall hold all
Confidential Information in strict confidence and shall not at any time
(whether during or after the Noncompetition Period): (a) reveal, report,
publish, disclose or transfer any Confidential Information to any Person
(other than the Purchaser or the Company), except in the performance of his
obligations under the Key Employee Agreement; (b) use any Confidential
Information for any purpose, except in the performance of his obligations
under the Key Employee Agreement; or (c) use any Confidential Information
for the benefit of any Person (other than the Purchaser or the Company).

4. Representations and Warranties. The Shareholder represents and
warrants, to and for the benefit of the Purchaser and the Company, that:
(a) he has full power and capacity to execute and deliver, and to perform
all of his obligations under, this Noncompetition Agreement; and (b)
neither the execution and delivery of this Noncompetition Agreement nor the
performance of this Noncompetition Agreement will result directly or
indirectly in a violation or breach of (i) any agreement or obligation by
which the Shareholder or any of his Affiliates is or may be bound, or (ii)
any law, rule or regulation. The Shareholder's representations and
warranties shall survive the expiration of the Noncompetition Period.

5. Specific Performance. The Shareholder agrees that, in the event of
any breach or threatened breach by the Shareholder of any covenant or
obligation contained in this Noncompetition Agreement, each of the
Purchaser and the Company shall be entitled (in addition to any other
remedy that may be available to it) to seek and obtain (a) a decree or
order of specific performance to enforce the observance and performance of
such covenant or obligation, and (b) an injunction restraining such breach
or threatened breach. The Shareholder further agrees that neither the
Company nor the Purchaser shall be required to obtain, furnish or post any
bond or similar instrument in connection with or as a condition to
obtaining any remedy referred to in this Section 5, and the Shareholder
irrevocably waives any right he may have to require any Indemnitee to
obtain, furnish or post any such bond or similarly instrument.

6. Non-Exclusivity. The rights and remedies of the Purchaser and the
Company under this Noncompetition Agreement are not exclusive of or limited
by any other rights or remedies which they may have, whether at law, in
equity, by contract or otherwise, all of which shall be cumulative (and not
alternative). Without limiting the generality of the foregoing, the rights
and remedies of the Purchaser and the Company under this Noncompetition
Agreement, and the obligations and liabilities of the Shareholder under
this Noncompetition Agreement, are in addition to their respective rights,
remedies, obligations and liabilities under the law of unfair competition,
under laws relating to misappropriation of trade secrets, under other laws
and common law requirements and under all applicable rules and regulations.
Nothing in this Noncompetition Agreement shall limit any of the
Shareholder's obligations, or the rights or remedies

D-2
<PAGE>

of the Purchaser or the Company, under the Purchase Agreement or the Key
Employee Agreement; and nothing in the Purchase Agreement or the Key
Employee Agreement shall limit any of the Shareholder's obligations, or any
of the rights or remedies of the Purchaser or the Company, under this
Noncompetition Agreement. No breach on the part of the Purchaser, the
Company or any other party of any covenant or obligation contained in the
Purchase Agreement, the Key Employee Agreement or any other agreement shall
limit or otherwise affect any right or remedy of the Purchaser or the
Company under this Noncompetition Agreement.

7. Severability. If any provision of this Noncompetition Agreement or
any part of any such provision is held under any circumstances to be
invalid or unenforceable in any jurisdiction, then (a) such provision or
part thereof shall, with respect to such circumstances and in such
jurisdiction, be deemed amended to conform to applicable laws so as to be
valid and enforceable to the fullest possible extent, (b) the invalidity or
unenforceability of such provision or part thereof under such circumstances
and in such jurisdiction shall not affect the validity or enforceability of
such provision or part thereof under any other circumstances or in any
other jurisdiction, and (c) the invalidity or unenforceability of such
provision or part thereof shall not affect the validity or enforceability
of the remainder of such provision or the validity or enforceability of any
other provision of this Noncompetition Agreement. Each provision of this
Noncompetition Agreement is separable from every other provision of this
Noncompetition Agreement, and each part of each provision of this
Noncompetition Agreement is separable from every other part of such
provision.

8. Governing Law; Venue.

(a) This Noncompetition Agreement shall be construed in accordance
with, and governed in all respects by, the laws of the State of
California (without giving effect to principles of conflicts of laws).

(b) Any legal action or other legal proceeding relating to this
Noncompetition Agreement or the enforcement of any provision of this
Noncompetition Agreement may be brought or otherwise commenced in any
state or federal court located in the County of Santa Clara,
California. The Purchaser, the Company and the Shareholder:

(i) expressly and irrevocably consent and submit to the
jurisdiction of each state and federal court located in the County
of Santa Clara, California (and each appellate court located in the
State of California), in connection with any such legal proceeding;

(ii) agrees that service of any process, summons, notice or
document by U.S. mail addressed to them at the respective address
set forth on the signature page of this Noncompetition Agreement
shall constitute effective service of such process, summons, notice
or document for purposes of any such legal proceeding;

(iii) agrees that each state and federal court located in the
County of Santa Clara, California, shall be deemed to be a
convenient forum; and

(iv) agrees not to assert (by way of motion, as a defense or
otherwise), in any such legal proceeding commenced in any state or
federal court located in the County of Santa Clara, California, any
claim that the Purchaser, the Company or the Shareholder, as the
case may be, is not subject personally to the jurisdiction of such
court, that such legal proceeding has been brought in an
inconvenient forum, that the venue of such proceeding is improper or
that this Noncompetition Agreement or the subject matter of this
Noncompetition Agreement may not be enforced in or by such court.

9. Waiver. No failure on the part of any party to exercise any power,
right, privilege or remedy under this Noncompetition Agreement, and no
delay on the part of any party in exercising any power, right, privilege or
remedy under this Noncompetition Agreement, shall operate as a waiver of
such power, right, privilege or remedy; and no single or partial exercise
of any such power, right, privilege or remedy

D-3
<PAGE>

shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy. No party shall be deemed to have waived any
claim of such party arising out of this Noncompetition Agreement, or any
power, right, privilege or remedy of such party under this Noncompetition
Agreement,
unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of such party; and any such waiver shall not be applicable or have
any effect except in the specific instance in which it is given.

10. Successors and Assigns. Each of the Purchaser and the Company may
freely assign any or all of its rights under this Noncompetition Agreement,
at any time, in whole or in part, to any Person without obtaining the
consent or approval of the Shareholder or of any other Person. This
Noncompetition Agreement shall be binding upon the Shareholder and his
heirs, executors, estate, personal representatives, successors and assigns,
and shall inure to the benefit of the Purchaser and the Company.

11. Attorneys' Fees. If any legal action or other legal proceeding
relating to this Noncompetition Agreement or the enforcement of any
provision of this Noncompetition Agreement is brought against the
Shareholder, the prevailing party shall be entitled to recover reasonable
attorneys' fees, costs and disbursements (in addition to any other relief
to which the prevailing party may be entitled).

12. Captions. The captions contained in this Noncompetition Agreement
are for convenience of reference only, shall not be deemed to be a part of
this Noncompetition Agreement and shall not be referred to in connection
with the construction or interpretation of this Noncompetition Agreement.

13. Construction. Whenever required by the context, the singular number
shall include the plural, and vice versa; the masculine gender shall
include the feminine and neuter genders; and the neuter gender shall
include the masculine and feminine genders. Any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall
not be applied in the construction or interpretation of this Noncompetition
Agreement. Neither the drafting history nor the negotiating history of this
Noncompetition Agreement shall be used or referred to in connection with
the construction or interpretation of this Noncompetition Agreement. As
used in this Noncompetition Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, and
shall be deemed to be followed by the words "without limitation." Except as
otherwise indicated in this Noncompetition Agreement, all references in
this Noncompetition Agreement to "Sections" are intended to refer to
Sections of this Noncompetition Agreement.

14. Survival of Obligations. Except as specifically provided herein, the
obligations of the Shareholder under this Noncompetition Agreement
(including his obligations under Sections 3) shall survive the expiration
of the Noncompetition Period. The expiration of the Noncompetition Period
shall not operate to relieve the Shareholder of any obligation or liability
arising from any prior breach by the Shareholder of any provision of this
Noncompetition Agreement.

15. Amendment. This Noncompetition Agreement may not be amended,
modified, altered or supplemented other than by means of a written
instrument duly executed and delivered on behalf of the Shareholder, the
Purchaser (or any successor to the Purchaser) and the Company (or any
successor to the Company).

16. Defined Terms. For purposes of this Noncompetition Agreement:

(a) "Affiliate" means, with respect to any specified Person, any
other Person that, directly or indirectly, through one or more
intermediaries, controls, is controlled by or is under common control
with such specified Person.

(b) "Competing Product" means any real-time x-ray imaging inspection
system sold to printed circuit board assembly or semiconductor
manufacturers, or automated optical inspection system for inspecting
populated printed circuit boards.

(c) A Person shall be deemed to be engaged in "Competition" if such
Person or any of such Person's subsidiaries or other Affiliates is
engaged directly or indirectly in the design, development, manufacture,

D-4
<PAGE>

assembly, promotion, sale, supply, distribution, resale, installation,
support, maintenance, repair, refurbishment, licensing, sublicensing,
financing, leasing or subleasing of any Competing Product.

(d) "Confidential Information" means any non-public information
(whether or not in written form and whether or not expressly designated
as confidential) relating directly or indirectly to the Purchaser, the
Company or any of the Purchaser's other subsidiaries or relating
directly or indirectly to the business, operations, financial affairs,
performance, assets, technology, processes, products, contracts,
customers, licensees, sublicensees, suppliers, personnel, consultants
or plans of the Purchaser, the Company or any of the Purchaser's other
subsidiaries (including any such information consisting of or otherwise
relating to trade secrets, know-how, technology, inventions,
prototypes, designs, drawings, sketches, processes, license or
sublicense arrangements, formulae, proposals, research and development
activities, customer lists or preferences, pricing lists, referral
sources, marketing or sales techniques or plans, operations manuals,
service manuals, financial information, projections, lists of
consultants, lists of suppliers or lists of distributors); provided,
however, that "Confidential Information" shall not be deemed to include
information of the Purchaser, the Company or any of the Purchaser's
subsidiaries that: (a) was publicly available or in the public domain
at the time it was communicated to the Shareholder, (b) is or becomes
publicly available or public domain information through no fault of the
Shareholder subsequent to the time it was communicated to the
Shareholders, (c) is required, in the opinion of counsel acceptable to
the Purchaser, which acceptance shall not be unreasonably withheld, to
be disclosed by applicable law, rule or regulation or pursuant to the
order, decree or ruling of any court, tribunal or arbitrator or other
judicial or administrative body. If the Shareholder proposes to make
disclosure of any confidential information in reliance on clause (c) of
the foregoing exceptions, the Shareholder shall (i) immediately notify
the Company and the Purchaser in writing concerning the proposed
disclosure and the opinion of Shareholder's counsel that such
disclosure is required, (ii) provide the Company and the Purchaser with
copies of any information the Shareholder proposes to disclose as well
as the facts and circumstances requiring such disclosure and (iii) use
his or her best efforts (at the Company's and/or the Purchaser's sole
cost and expense) to assist the Company and the Purchaser in obtaining
a protective order or other protection if requested by the company or
the Purchaser.

(e) "Noncompetition Period" shall mean the period commencing on the
date of this Noncompetition Agreement and ending on the first
anniversary of the date of the termination of the Shareholder's
employment with the Purchaser.
(f) "Person" means any: (i) individual; (ii) corporation, general
partnership, limited partnership, limited liability partnership, trust,
company (including any limited liability company or joint stock
company) or other organization or entity; or (iii) governmental body or
authority.

(g) "Restricted Territory" means each county or similar political
subdivision of each State of the United States of America (including
each of the counties in the State of California), and each State,
territory or possession of the United States of America.

In Witness Whereof the Shareholder has duly executed and delivered this
Noncompetition Agreement as of the date first above written.

Name of Shareholder:

Address:
_______________________________
Telephone No.:( )
Facsimile:( )

D-5
<PAGE>

APPENDIX E

Chapter 13

CALIFORNIA CORPORATIONS CODE
DISSENTERS' RIGHTS

SECTION 1300. Right to Require Purchase; "Dissenting Shares" and "Dissenting
Shareholder" Defined.

(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as
defined in subdivision (b). The fair market value shall be determined as of the
day before the first announcement of the terms of the proposed reorganization
or short-form merger, excluding any appreciation or depreciation in consequence
of the proposed action, but adjusted for any stock split or share dividend
which becomes effective thereafter.

(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:

(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (0) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
stockholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to five percent or more of the outstanding
shares of that class.

(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.

(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.

(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1301.

(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.

SECTION 1301. Demand for Purchase.

(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mall to each such shareholder notice of
the approval of the reorganization by its outstanding shares (Section 152)
within ten (10) days alter the date of such approval accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description

E-1
<PAGE>

of the procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. The statement of price constitutes an
offer by the corporation to purchase at the price stated any dissenting shares
as defined in subdivision (b) of Section 1300, unless they lose their status as
dissenting shares under Section 1309.

(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders meeting to vote upon
the reorganization, or (2) in any other case within thirty (30) days alter the
date on which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.

(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.

SECTION 1302. Endorsement of Shares.

Within thirty (30) days alter the date on which notice of the approval by
the outstanding shares or the notice pursuant to subdivision (i) of Section
1110 was mailed to the shareholder, the shareholder shall submit to the
corporation at its principal office or at the office of any transfer agent
thereof, (a) if the shares are certificated securities, the shareholder's
certificates representing any shares which the stockholder demands that the
corporation purchase, to be stamped or endorsed with a statement that the
shares are dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.

SECTION 1303. Agreed Price; Time for Payment.

(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.

(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within thirty (30) days after the
amount thereof has been agreed or within thirty (30) days after any statutory
or contractual conditions to the reorganization are satisfied, whichever is
later, and in the case of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.

SECTION 1304. Dissenter's Action to Enforce Payment.

(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six (6) months after the date on
which notice of the

E-2
<PAGE>

approval by the outstanding shares (Section 152) or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder, but not
thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.

(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or mere such actions may be
consolidated.

(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.

SECTION 1305. Appraiser's Report; Payment; Costs.

(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.

(b) If a majority of the appraisers appointed fail to make and file a report
within ten (10) days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the
court, the court shall determine the fair market value of the dissenting
shares.

(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which
any dissenting shareholder who is a party, or who has intervened, is entitled
to require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.

(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.

(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of
Section 1301).

SECTION 1306. Dissenting Shareholder's Status as Creditor.

To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.

SECTION 1307. Dividends Paid as Credit Against Payment.

Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.

E-3
<PAGE>

SECTION 1308. Continuing Rights and Privileges of Dissenting Shareholders.

Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.

SECTION 1309. Termination of Dissenting Shareholder Status.

Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:

(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys fees.

(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.

(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six (6) months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.

(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.

SECTION 1310. Suspension of Proceedings for Payment Pending Litigation.

If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.

SECTION 1311. Exempt Shares.

This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.

SECTION 1312. Attacking Validity of Reorganization or Merger.

(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.

(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization

E-4
<PAGE>

or short-form merger or to have the reorganization or short-form merger set
aside or rescinded, the shareholder shall not thereafter have any right to
demand payment of cash for the shareholder's shares pursuant to this chapter.
The court in any action attacking the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded shall not restrain or enjoin the consummation of the transaction
except upon ten (10) days' prior notice to the corporation and upon a
determination by the court that clearly no other remedy will adequately protect
the complaining shareholder or the class of shareholders of which such
shareholder is a member.

(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.

E-5
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20. Indemnification of Directors and Officers.

PDI has entered into separate indemnification agreements with its officers
and directors that contain provisions which are in some respects broader than
the specific indemnification provisions contained in the California
Corporations Code. The indemnification agreements may require PDI, among other
things, to indemnify these officers and directors against certain liabilities
that may arise by reason of their status or service to PDI as directors,
officers or employees in some other official capacities and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of PDI pursuant to the foregoing provisions, or otherwise,
PDI has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as express in the Act
and is therefor, unenforceable.

There is no pending litigation or proceeding involving a director or
officers of PDI as to which indemnification is being sought, nor is PDI aware
of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.

Pursuant to the merger agreement, all rights to indemnification existing in
favor of the persons serving as directors of officers of CRT as of the date of
the merger agreement for acts and omissions occurring prior to the effective
time, as provided in the CRT bylaws and as provided in any indemnification
agreements between CRT and said officers and directors shall survive the merger
and shall be observed by PDI and the surviving corporation for a period of not
less than six year from the effective time.

Item 21. Exhibits and Financial Statement Schedules.

(a) Exhibits

II-1
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Exhibit
-------- -------
<C> <S>
10.2(2) Fourth Amended Shareholders Agreement for Photon Dynamics, Inc.
between the Registrant and the shareholders set forth therein dated
May 11, 1994
10.3(2) Form of Indemnification Agreement between the Registrant and each of
its executive officers and directors
10.4(2) 1987 Stock Option Plan and Form of Stock Option Agreement
10.5(2) 1995 Stock Option Plan and Forms of Stock Option Agreements
10.6(2) 1995 Employee Stock Purchase Plan
10.7(3) Lease agreement between Berg & Berg Developers and Photon Dynamics,
Inc. dated August 6, 1996
10.8(2) Sales Agent Agreement between the Registrant, K.K. Photon Dynamics
and Ishikawajima-Harima Heavy Industries Co., Ltd. dated June 1,
1992, the amendment thereto dated November 17, 1993 and the
modification agreement related thereto dated January 1, 1995
10.9(2) License Agreement between the Registrant and Ishikawajima-Harima
Heavy Industries Co., Ltd. dated June 1, 1992 and the addendum
thereto dated November 11, 1993
10.10(2) Commercialization Agreement between the Registrant and Ishikawajima-
Harima Heavy Industries Co., Ltd. dated June 1, 1992 and the
amendment thereto dated November 17, 1993
10.13(2) Form of Agreement to First Amended and Restated Investor Rights
Agreement
10.14(3) Agreement Regarding Change of Control between the Registrant and
Vincent Sollitto dated July 1, 1996
10.15(4) Lease agreement of CRT
21.1(2) Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Cacciamatta Accountancy Corporation, Independent Auditors
24.1 Power of Attorney (See signature page)
27.1(5) Financial Data Schedule
99.1 Form of PDI Affiliate Agreement (See Appendix B-1 to the proxy
statement/prospectus)
99.2 Form of CRT Affiliate Agreement (See Appendix B-2 to the proxy
statement/prospectus)
99.3 Form of Escrow Agreement by and among Photon Dynamics, Inc., a
California corporation, CR Technology Inc., a California corporation,
Ronald Hall, the Shareholders' Agent, and U.S. Bank Corporate Trust
Services, a national banking association, as escrow agent (See
Appendix C-1 to the proxy statement/prospectus)
99.4 Form of Noncompetition Agreement (See Appendix D of the joint proxy
statement/prospectus)
99.5 Form of PDI proxy card

- --------
Key to Exhibits:

(1) Incorporated by reference to Registrants' Registration Statement on
Form SB-2 filed with the Securities and Exchange Commission (the
"SEC") on November 15, 1995.
(2) Incorporated by reference to Registrant's Form 10-KSB filed with the
SEC on December 18, 1998.
(3) Incorporated by reference to Registrant's Form 10-KSB for the year
ended September 30, 1996.
(4) To be filed by amendment.
(5) Incorporated by reference to Registrant's Form 10-QSB for the quarter
ended June 30, 1999.
</TABLE>

(b) Financial Statement Schedules

All schedules relating to PDI have been omitted because they are not
applicable or not required or the information required to be set forth therein
is included in the Financial Statements of PDI included elsewhere in the Proxy
Statement/Prospectus.

Item 22. Undertakings.

(1) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the Proxy Statement/Prospectus pursuant
to Items 4, 10(b), 11 or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other

II-2
<PAGE>

equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.

(2) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.

(3) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the amended and restated certificate of incorporation
and the bylaws of the Registrant and the California Corporations Code, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in a successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the question has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.

(5) (A) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.

(B) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (A) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of San Jose,
County of Santa Clara, State of California on the 4th day of October 1999.

Photon Dynamics, Inc.

Date: October 4, 1999 /s/ Vincent Sollitto
By:__________________________________
Vincent Sollitto
Chief Executive Officer andDirector
(Principal Executive Officer)

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Vincent F. Sollitto Jr. and Richard Dissly, and
each of them, acting individually, as his or her attorney-in-fact, each with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments, exhibits thereto and other documents in connection
therewith) to this Registration Statement and any subsequent registration
statement filed by the registrant pursuant to Securities and Exchange
Commission Rule 462, which relates to this Registration Statement, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement of Form S-4 has been signed by the following persons in
the capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Vincent Sollitto Chief Executive Officer and Director October 4, 1999
____________________________________ (Principal Executive Officer)
Vincent Sollitto

/s/ Richard Dissly Chief Financial Officer (Principal October 4, 1999
____________________________________ Financial and Accounting Officer)
Richard Dissly

/s/ E. Floyd Kvamme Chairman of the Board October 4, 1999
____________________________________
E. Floyd Kvamme

/s/ Francois Henley Director October 4, 1999
____________________________________
Francois Henley

/s/ Barry Cox Director October 4, 1999
____________________________________
Barry Cox
</TABLE>

II-4
<PAGE>

<TABLE>
<S> <C> <C>
/s/ Michael Kim Director October 4, 1999
____________________________________
Michael Kim

/s/ Malcolm J. Thompson Director October 4, 1999
____________________________________
Malcolm J. Thompson

</TABLE>

II-5
<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
2.1 Agreement and Plan of Merger and Reorganization dated August 10,
1999, by and among Photon Dynamics, Inc., a California corporation
("Parent"), Pharaoh Acquisition Corp., a California corporation and a
wholly owned subsidiary of Parent ("Merger Sub"), and CR Technology,
Inc., a California corporation (the "Company") (see Appendix A to the
joint proxy statement/prospectus)
3.1(1) Form of Amended and Restated Articles of Incorporation the Registrant
3.2(2) Amended and Restated Bylaws of the Registrant
4.1 Reference is made to Exhibits 3.1 and 3.2
5.1(4) Legal Opinion of Cooley Godward LLP
5.2(4) Legal Opinion of Rutan & Tucker, LLP
8.1(4) Tax Opinion of Cooley Godward LLP
10.1(2) First Amended and Restated Investor Rights Agreement between
Registrant and the shareholders set forth therein dated May 11, 1994
10.2(2) Fourth Amended Shareholders Agreement for Photon Dynamics, Inc.
between the Registrant and the shareholders set forth therein dated
May 11, 1994
10.3(2) Form of Indemnification Agreement between the Registrant and each of
its executive officers and directors
10.4(2) 1987 Stock Option Plan and Form of Stock Option Agreement
10.5(2) 1995 Stock Option Plan and Forms of Stock Option Agreements
10.6(2) 1995 Employee Stock Purchase Plan
10.7(3) Lease agreement between Berg & Berg Developers and Photon Dynamics,
Inc. dated August 6, 1996
10.8(2) Sales Agent Agreement between the Registrant, K.K. Photon Dynamics
and Ishikawajima-Harima Heavy Industries Co., Ltd. dated June 1,
1992, the amendment thereto dated November 17, 1993 and the
modification agreement related thereto dated January 1, 1995
10.9(2) License Agreement between the Registrant and Ishikawajima-Harima
Heavy Industries Co., Ltd. dated June 1, 1992 and the addendum
thereto dated November 11, 1993
10.10(2) Commercialization Agreement between the Registrant and Ishikawajima-
Harima Heavy Industries Co., Ltd. dated June 1, 1992 and the
amendment thereto dated November 17, 1993
10.13(2) Form of Agreement to First Amended and Restated Investor Rights
Agreement
10.14(3) Agreement Regarding Change of Control between the Registrant and
Vincent Sollitto dated July 1, 1996
10.15(4) Lease agreement of CRT
21.1(2) Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Cacciamatta Accountancy Corporation, Independent Auditors
24.1 Power of Attorney (See signature page)
27.1(5) Financial Data Schedule
99.1 Form of PDI Affiliate Agreement (see Appendix B-1 to the proxy
statement/prospectus)
99.2 Form of CRT Affiliate Agreement (see Appendix B-2 to the proxy
statement/prospectus)
99.3 Form of Escrow Agreement by and among Photon Dynamics, Inc., a
California corporation, CR Technology Inc., a California corporation,
Ronald Hall, the Shareholders' Agent, and U.S. Bank Corporate Trust
Services, a national banking association, as escrow agent (see
Appendix C-1 to the proxy statement/prospectus)
99.4 Form of Noncompetition Agreement (see Appendix D-1 to the proxy
statement/prospectus)
99.5 Form of PDI proxy card
</TABLE>
<PAGE>

- --------
Key to Exhibits:

<TABLE>
<S> <C>
(1) Incorporated by reference to Registrants' Registration Statement on Form SB-2 filed with the
Securities and Exchange Commission (the "SEC") on November 15, 1995.
(2) Incorporated by reference to Registrant's Form 10-KSB filed with the SEC on December 18, 1998.
(3) Incorporated by reference to Registrant's Form 10-KSB for the year ended September 30, 1996.
(4) To be filed by amendment.
(5) Incorporated by reference to Registrant's Form 10Q-SB for the quarter ended June 30, 1999.
</TABLE>

<PAGE>

Exhibit 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
--------------------------------------------------

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated October 22, 1998, included in the Proxy Statement of
Photon Dynamics, Inc. that is made a part of the Registration Statement (Form
S-4) and Prospectus of Photon Dynamics for the registration of 1,960,000 shares
of its common stock.

/s/ ERNST & YOUNG LLP

San Jose, California
October 1, 1999

<PAGE>

Exhibit 23.2

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT

We hereby consent to the use of our report on the financial statements of CR
Technology, Inc. included in this Registration Statement on Form S-4 and to the
reference to our Firm under the caption "Experts" in the Prospectus.

/s/ Cacciamatta Accountancy Corporation

Cacciamatta Accountancy Corporation

Irvine, CA
October 1, 1999

<PAGE>

EXHIBIT 99.5
PROXY
PHOTON DYNAMICS, INC.

PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON NOVEMBER , 1999

The undersigned hereby appoints Vincent Sollitto and Richard Dissley and each
of them, as attorneys and proxies of the undersigned, with full power of sub-
stitution, to vote all of the shares of stock of Photon Dynamics, Inc., which
the undersigned may be entitled to vote at the Annual Meeting of Shareholders
of Photon Dynamics, Inc. to be held at the principal executive offices, 6325
San Ignacio Avenue, San Jose, California 95119 on , November , 1999 at
10:00 a.m., local time, and at any and all postponements, continuations and
adjournments thereof, with all powers that the undersigned would possess if
personally present, upon and in respect of the following matters and in accor-
dance with the following instructions, with discretionary authority as to any
and all other matters that may properly come before the meeting.

UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR ALL
NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3, 4 AND 5, AS MORE SPECIF-
ICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICAT-
ED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.

Continued and to be signed on reverse side
<PAGE>

Please mark
votes as in
this example
X
Management Recommends a Vote FOR the Nominees for Director listed below and a
vote FOR Proposals 1, 3, 4, 5 And 6

1. To approve the issuance of shares of the Company's Common Stock, pursuant to
the Agreement and Plan of Merger and Reorganization dated August 10, 1999

Nominees:
Vincent Sollitto, Jr., Francois J. Henley, E. Floyd Kvamme, Barry L.
Cox,
Michael J. Kim and Malcolm J. Thompson

FOR WITHHELD MARK HERE IF YOU PLAN
TO ATTEND THE MEETING

MARK HERE FOR ADDRESS
CHANGE AND NOTE BELOW

[_]
_____________________
For all nominees except as noted above

2. To elect directors to
serve for the ensuing
year and until their
successors are elected.

3. To approve the Company's
1995 Stock Option Plan,
as amended, to increase
the aggregate number of
shares of Common Stock
authorized for issuance
under such plan by
250,000 shares.

4. To approve the Company's
1995 Employee Stock
Purchase Plan, as
amended, to increase the
aggregate number of
shares of Common Stock
authorized for issuance
under such plan by
200,000 shares.

5. To ratify the selection
of Ernst & Young LLP as
independent auditors of
the Company for its
fiscal year ending
September 30, 2000.

6. To transact such
other business as
may properly come
before the meeting
or any adjournment
of postponement
thereof.

PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
Please sign exactly as your name appears hereon. If the stock is registered in
the names of two or more persons, each should sign. Executors, administrators,
trustees, guardians and attorneys-in-fact should add their titles. If a signer
is a corporation, please give full corporate name and have a duly authorized
officer sign stating title. If signer is a partnership, please sign in
partnership name by authorized person.

Signature: Date: _____ Signature: Date: _____
FOR AGAINST
ABSTAIN

FOR AGAINST
ABSTAIN