DYNATECH CORP, 10-Q, 2000-02-14

DYNATECH CORP
10-Q, 2000-02-14
INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS

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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 1999

Commission file number 1-12657

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

DYNATECH CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
DELAWARE 04-2258582
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>

3 New England Executive Park
Burlington, Massachusetts 01803-5087
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (781) 272-6100

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

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]

At January 15, 2000 there were 122,094,029 shares of common stock of the
registrant outstanding.

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<PAGE>

PART I. Financial Information

Item 1. Financial Statements

DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)

<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales................................. $160,206 $136,781 $477,125 $369,525
Cost of sales......................... 64,619 60,050 205,900 158,868
-------- -------- -------- --------
Gross profit.......................... 95,587 76,731 271,225 210,657
Selling, general & administrative
expense.............................. 49,233 36,331 131,604 107,517
Product development expense........... 19,936 13,239 51,628 40,306
Recapitalization-related costs........ -- -- 13,259 43,386
Amortization of intangibles........... 3,896 1,625 7,053 4,697
Amortization of unearned
compensation......................... 599 574 1,451 977
-------- -------- -------- --------
Total operating expenses.......... 73,664 51,769 204,995 196,883
-------- -------- -------- --------
Operating income...................... 21,923 24,962 66,230 13,774
Interest expense...................... (12,990) (13,125) (38,433) (33,106)
Interest income....................... 571 782 1,874 2,870
Gain on sale of subsidiary............ -- -- -- 15,900
Other income (expense)................ (17) (208) 11 (275)
-------- -------- -------- --------
Income (loss) before income taxes..... 9,487 12,411 29,682 (837)
Income tax provision.................. 4,734 5,462 12,812 486
-------- -------- -------- --------
Net income (loss)..................... $ 4,753 $ 6,949 $ 16,870 $ (1,323)
======== ======== ======== ========
Income (loss) per common share:
Basic............................... $ 0.04 $ 0.06 $ 0.14 $ (0.01)
Diluted............................. $ 0.04 $ 0.05 $ 0.13 $ (0.01)
======== ======== ======== ========
Weighted average number of common
shares:
Basic............................... 122,061 120,313 121,310 101,480
Diluted............................. 134,549 127,657 131,366 101,480
======== ======== ======== ========
</TABLE>

See notes to condensed consolidated financial statements.

2
<PAGE>

DYNATECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 39,016 $ 70,362
Accounts receivable, net.............................. 88,813 70,996
Inventories:
Raw materials........................................ 21,577 16,680
Work in process...................................... 18,054 13,644
Finished goods....................................... 11,613 16,947
--------- ---------
Total inventory..................................... 51,244 47,271
Other current assets.................................. 27,670 22,150
--------- ---------
Total current assets................................ 206,743 210,779
Property and equipment, net............................. 32,781 25,619
Intangible assets, net.................................. 92,769 56,768
Other assets............................................ 74,704 54,938
--------- ---------
$ 406,997 $ 348,104
========= =========
LIABILITIES & STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable & current portion of long-term debt..... $ 6,398 $ 23,191
Accounts payable...................................... 32,647 34,317
Income taxes payable.................................. 12,326 10,772
Accrued expenses:
Compensation and benefits............................ 28,271 24,420
Deferred revenue..................................... 37,332 27,141
Interest............................................. 3,432 10,129
Other................................................ 19,579 25,311
--------- ---------
Total current liabilities........................... 139,985 155,281
Long-term debt.......................................... 560,198 504,151
Deferred compensation................................... 7,145 5,112
Stockholders' Deficit:
Common stock......................................... 1,221 --
Additional paid-in capital........................... 321,865 322,746
Retained earnings (deficit).......................... (613,071) (629,941)
Unearned compensation................................ (8,686) (7,563)
Other comprehensive loss............................. (1,660) (1,682)
--------- ---------
Total stockholders' deficit......................... (300,331) (316,440)
--------- ---------
$ 406,997 $ 348,104
========= =========
</TABLE>

See notes to condensed consolidated financial statements.

3
<PAGE>

DYNATECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-------------------
1999 1998
-------- ---------
<S> <C> <C>
Operating activities:
Net income (loss)....................................... $ 16,870 $ (1,323)
Adjustments to net income (loss):
Depreciation........................................... 9,103 8,874
Amortization of intangibles............................ 7,053 4,697
Gain on sale of subsidiary............................. -- (15,900)
Recapitalization-related costs......................... -- 14,640
Amortization of unearned compensation.................. 1,451 977
Amortization of deferred debt issuance costs........... 2,424 1,716
Other.................................................. 84 75
Change in deferred income tax asset..................... -- (5,757)
Change in operating assets and liabilities.............. (19,615) 8,591
-------- ---------
Net cash flows provided by continuing operations........ 17,370 16,590
Net cash flows used in discontinued operations.......... (1,668) (200)
-------- ---------
Net cash flows provided by operating activities........... 15,702 16,390
Investing activities:
Purchases of property and equipment..................... (12,960) (7,425)
Proceeds from disposals of property and equipment....... -- 246
Proceeds from sale of business.......................... -- 21,000
Businesses acquired in purchase transaction, net of cash
acquired............................................... (73,394) (19,615)
Other................................................... (3,660) (5,043)
-------- ---------
Net cash flows used in investing activities............... (90,014) (10,837)
-------- ---------
Financing activities:
Net borrowings of debt.................................. 39,595 536,000
Repayment of notes payable.............................. -- (2,156)
Repayment of capital lease obligations.................. (341) (132)
Financing fees.......................................... -- (39,608)
Proceeds from issuance of stock......................... 3,149 277,000
Proceeds from exercise of stock options................. 455 1,800
Purchases of treasury stock and stock outstanding....... -- (806,508)
-------- ---------
Net cash flows provided by (used in) financing
activities............................................... 42,858 (33,604)
Effect of exchange rate on cash........................... 108 (354)
-------- ---------
Decrease in cash and cash equivalents..................... (31,346) (28,405)
Cash and cash equivalents at beginning of year............ 70,362 64,904
-------- ---------
Cash and cash equivalents at end of period................ $ 39,016 $ 36,499
======== =========
</TABLE>

See notes to condensed consolidated financial statements.

4
<PAGE>

DYNATECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. Basis of Presentation and Results of Operations

Dynatech Corporation (the "Company") was organized in 1959 and its
operations are conducted primarily by wholly owned subsidiaries located
principally in the United States with distribution and sales offices in
Germany, England, France, and the Pacific Rim.

The Company operates in three business segments: communications test,
industrial computing and communications, and visual communications. The
communications test segment provides communications test instruments to
communications service providers and long-distance companies, among others.
The industrial computing and communications segment provides computer
products to the ruggedized computer market. The visual communications
segment manufactures (1) airplane passenger cabin video information display
systems and information services, and (2) digital color enhancement systems
used in the process of transferring film images into electronic signals.

The Company operates on a fiscal year ended March 31 in the calendar year
indicated (e.g., references to fiscal 2000 are references to the Company's
fiscal year which began April 1, 1999 and will end March 31, 2000).

B. Condensed Consolidated Financial Statements

In the opinion of management, the unaudited condensed consolidated balance
sheet at December 31, 1999, and the unaudited consolidated statements of
operations and unaudited consolidated condensed statements of cash flows
for the interim periods ended December 31, 1999 and 1998 include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly these financial statements.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The year-end balance sheet data
was derived from audited financial statements, but does not include
disclosures required by generally accepted accounting principles. It is
suggested that these condensed statements be read in conjunction with the
Company's most recent Form 10-K as of March 31, 1999.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported period. Significant estimates in these
financial statements include allowances for accounts receivable, net
realizable value of inventories, warranty accruals and tax valuation
reserves. Actual results could differ from those estimates.

C. Acquisitions

Sierra Design Labs

On September 10, 1999 the Company, through one of its wholly owned
subsidiaries, purchased the outstanding stock of Sierra Design Labs
("Sierra"), a Nevada corporation. The purchase price was $6.3 million,
which resulted in $4.9 million of goodwill. The purchase method of
accounting was applied to the acquisition, and the excess purchase price
will be amortized over 10 years. Sierra designs, manufactures, and markets
uncompressed, real-time videodisk recorders and will be included in the
Company's visual communications segment. The Company has not presented
separate pro forma financial information for the acquisition of Sierra due
to the immateriality of such pro forma effects on the consolidated
financial statements of the Company.

Applied Digital Access, Inc.

5
<PAGE>

DYNATECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

per outstanding share which approximated $81 million in the aggregate
including acquisition costs. The purchase method of accounting was applied
to the acquisition and generated approximately $36 million of goodwill
which will be amortized over three years.

The Company funded the purchase by expending from available funds $16
million and by borrowing $65 million under its revolving credit facility.
The Company subsequently repaid $9.0 million of its borrowings between the
acquisition dates and December 31, 1999.

ADA is headquartered in San Diego, CA and is a provider of network
performance management products that include systems, software and services
used to manage the quality, performance, availability and reliability of
telecommunications service providers' networks. The results of operations
of ADA are included with the Company's communications test business
segment.

The financial results of the Company included in this 10-Q include the
results of operations of ADA since ADA was acquired: November 1, 1999
through December 31, 1999. The following unaudited pro forma financial data
summarizes the consolidated results of operations for the periods
indicated, assuming the acquisition of ADA had taken place at the beginning
of each of the periods presented.

<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Net sales................................................. $501,719 $393,470
Net income (loss)......................................... 5,316 (21,633)
Net income (loss) per common share:
--Basic................................................. 0.04 (0.21)
--Diluted............................................... 0.04 (0.21)
</TABLE>

The unaudited pro forma financial data for the nine months ended December
31, 1999 and 1998 was compiled by combining the unaudited historical
consolidated statements of operations of the Company for the nine months
ended December 31, 1999 and 1998 and the unaudited historical statement of
operations of ADA for the same periods. In addition, the Company has
included adjustments to the combined financial data for the amortization of
the excess purchase price and the elimination of redundant expenses. In
addition, the financial data includes a lower interest income and
additional interest expense due to the lower cash balance and additional
debt incurred in connection with the acquisition. The pro forma information
also includes a tax provision adjustment for the combined entity.

This unaudited pro forma information does not purport to be indicative of
the results of operations that would have been obtained if the acquisition
had occurred at the beginning of the fiscal years presented, and it is not
intended to be a projection of future results. This information should be
read in conjunction with the audited financial statements of both
organizations.

D. Change of Jurisdiction of Incorporation

On September 8, 1999 the stockholders of the Company approved a proposal to
change the jurisdiction of incorporation of the Company from the
Commonwealth of Massachusetts to the State of Delaware and the jurisdiction
of incorporation changed effective such date.

The common stock of the Company issued when it was incorporated under the
laws of the Commonwealth of Massachusetts had no par value per share.
Therefore, the Company did not reflect a value for the common stock on the
balance sheet. The common stock issued under the laws of the State of
Delaware has a par

6
<PAGE>

DYNATECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

value of $0.01 per share, and the balance sheet reflects a reclassification
from additional paid-in capital of $1,214 (representing the par value of
121,408,993 outstanding shares at September 30, 1999).

E. Recapitalization and Other Related Costs

During the first nine months of fiscal 2000, the Company recorded a charge
of $13.3 million, most of which amount related to the retirement of John F.
Reno, former Chairman, President and Chief Executive Officer of the
Company.

In connection with the Merger in fiscal 1999, the Company incurred a charge
of $43.4 million principally for the cancellation payments of employee
stock options and compensation expense due to the acceleration of unvested
stock options. The Company incurred an additional $41.3 million in
expenses, of which $27.3 million was capitalized and will be amortized over
the life of the Senior Secured Credit Facilities and Senior Subordinated
Notes, and $14.0 million was charged directly to stockholders' equity.

F. Recapitalization And Merger

On May 21, 1998, CDRD Merger Corporation ("MergerCo"), a nonsubstantive
transitory merger vehicle, which was organized at the direction of Clayton,
Dubilier & Rice, Inc., a private investment firm, was merged with and into
the Company (the "Merger") with the Company continuing as the surviving
corporation. In the Merger, (i) each then outstanding share of common
stock, par value $0.20 per share, of the Company was converted into the
right to receive $47.75 in cash and 0.5 shares of common stock, no par
value, of the Company (the "Common Stock") and (ii) each then outstanding
share of common stock of MergerCo was converted into one share of Common
Stock.

G. New Pronouncements

On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." FAS 133 was amended by
Statement of Financial Accounting Standards No. 137 which modified the
effective date of FAS 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. FAS 133, as amended, requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are to be recorded each
period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if
it is, the type of hedge transaction. The Company is assessing the impact
of the adoption of FAS 133 on its results of operations and its financial
position.

H. Legal Proceedings

Litigation. The Company is involved from time to time in routine legal
matters incidental to its business. The Company believes that the
resolution of such matters will not have a material adverse effect on the
Company's financial condition or results of operations.

7
<PAGE>

DYNATECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of the Company's Whistler series radar detectors and will be offering the
opinion, among other things, as evidence that any alleged infringement was
not willful. On March 24, 1998, CMI, together with its co-plaintiff and
patent assignee Escort, Inc., moved for summary judgment. The Company and
Whistler have opposed the motion for summary judgment. Discovery in this
matter closed on June 20, 1998. On May 27, 1999 Whistler filed a Chapter 11
bankruptcy case in the United States Bankruptcy Court for the District of
Massachusetts. The case is scheduled for trial in April 2000 and the
Company intends to defend the lawsuit vigorously. The Company does not
believe that the outcome of the litigation is likely to have a material
adverse effect on the Company's financial condition, results of operations
or liquidity.

On September 7, 1999, the Company and ADA entered into an Agreement and
Plan of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement,
a subsidiary of the Company commenced a cash tender offer to purchase all
of the outstanding shares of ADA's common stock at a price of $5.37 per
share. Following the public announcement of the Merger Agreement, four
class action complaints were filed (three in Superior Court of California
in San Diego and one in Delaware Chancery Court) asserting claims that ADA
and certain of its directors breached their fiduciary duties to ADA's
stockholders in connection with the Merger Agreement, and one of which
asserted a claim that the Company aided and abetted in the ADA's directors'
breach of fiduciary duties. In October, the California actions were
consolidated and an amended consolidated complaint was served on the
Company. On October 29, 1999 the Superior Court of California denied the
plaintiff's motion for a preliminary injunction to enjoin the tender offer
by the Company for all ADA's shares and the proposed merger of ADA with the
Company. On December 3, 1999, the California plaintiffs served a second
amended consolidated class action complaint in which they added claims
against, among others, the Company and certain of its officers, alleging
that material information was omitted from the Company's Offer to Purchase
ADA shares, and that certain officers of the Company aided and abetted the
ADA directors in a breach of their fiduciary duties to ADA stockholders. On
January 13, 2000, the Company and certain officers filed a demurrer seeking
judgment on the pleadings. In the Company's opinion, those lawsuits and
four similar lawsuits filed against ADA have no merit and the Company
intends to vigorously defend against them.

8
<PAGE>

DYNATECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

I. Income (Loss) Per Share

Income (loss) per share is calculated as follows (in thousands except per
share data):

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -----------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)................... $ 4,753 $ 6,949 $ 16,870 $ (1,323)
========= ========= ======== ========
BASIC:
Common stock outstanding, net of
treasury stock, beginning of
period............................. 121,409 120,251 120,665 16,864
Weighted average common stock and
treasury stock issued during the
period............................. 652 62 645 98,788
Weighted average common stock
repurchased........................ -- -- -- (14,172)
--------- --------- -------- --------
Weighted average common stock
outstanding, net of treasury stock,
end of period...................... 122,061 120,313 121,310 101,480
========= ========= ======== ========
Income (loss) per common share...... $ 0.04 $ 0.06 $ 0.14 $ (0.01)
========= ========= ======== ========
DILUTED:
Common stock outstanding, net of
treasury stock, beginning of
period............................. 121,409 120,251 120,665 16,864
Weighted average common stock and
treasury stock issued during the
period............................. 652 62 645 98,788
Weighted average of dilutive
potential common stock(a).......... 12,488 7,344 10,056 --
Weighted average common stock and
treasury stock repurchased......... -- -- -- (14,172)
--------- --------- -------- --------
Weighted average common stock
outstanding, net of treasury stock,
end of period...................... 134,549 127,657 131,366 101,480
========= ========= ======== ========
Income (loss) per common share...... $ 0.04 $ 0.05 $ 0.13 $ (0.01)
========= ========= ======== ========
</TABLE>
- --------
(a) As of December 31, 1999, the Company had no options that were excluded
from the diluted earnings per share calculation, since all options had
a dilutive effect on earnings per share. As of December 31, 1999, the
Company had options outstanding to purchase 32.0 million shares of
common stock.

As of December 31, 1998, the Company had options outstanding to purchase
33.3 million shares of common stock that were excluded from the diluted
earnings per share computation as the effect of their inclusion would
have been antidilutive.

J. Comprehensive Income

The following information shows adjustments to net income (loss) for other
comprehensive income (loss) which consists primarily of foreign currency
translation adjustments.

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- -----------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss).................. $ 4,753 $ 6,949 $ 16,870 $ (1,323)
Other comprehensive income (loss).. (232) 257 22 68
--------- --------- -------- --------
Total comprehensive income
(loss)........................ $ 4,521 $ 7,206 $ 16,892 $ (1,255)
========= ========= ======== ========
</TABLE>

9
<PAGE>

DYNATECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

K. Intangible Assets

Intangible assets acquired primarily from business acquisitions are
summarized as follows:

<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
<S> <C> <C>
Product technology.................................... $ 17,608 $17,042
Excess of cost over net assets acquired............... 101,667 55,878
Other intangible assets............................... 13,307 13,307
-------- -------
132,582 86,227
Less accumulated amortization......................... 39,813 29,459
-------- -------
Intangible assets, net................................ $ 92,769 $56,768
======== =======
</TABLE>

On November 1, 1999 the Company, through one of its wholly owned
subsidiaries, acquired all the outstanding stock of ADA for $5.37 per
outstanding share which approximated $81 million in the aggregate including
acquisition costs. The purchase method of accounting was applied to the
acquisition and generated approximately $36 million of goodwill which will
be amortized over three years.

On September 10, 1999 the Company, through one of its wholly owned
subsidiaries, purchased the outstanding stock of Sierra. The purchase price
was $6.3 million which resulted in $4.9 million of goodwill.

The purchase method of accounting was applied to the acquisition, and the
excess purchase price will be amortized over 10 years.

L. Debt

Long-term debt is summarized below:

<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
<S> <C> <C>
Senior secured credit facilities...................... $291,518 $252,000
Senior subordinated notes............................. 275,000 275,000
Capitalized leases.................................... 78 342
-------- --------
Total debt........................................ 566,596 527,342
Less current portion............................. 6,398 23,191
-------- --------
Long-term debt........................................ $560,198 $504,151
======== ========
</TABLE>

10
<PAGE>

DYNATECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

M. Stockholders' Deficit

The following is a summary of the change in stockholders' deficit for the
period ended December 31, 1999:

<TABLE>
<CAPTION>
Number
of Shares Additional Other Total
Common Common Paid-In Retained Unearned Comprehensive Stockholders'
Stock Stock Capital Deficit Compensation Loss Deficit
--------- ------ ---------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1999................... 120,665 -- $322,746 $(629,941) $(7,563) $(1,682) $(316,440)
Net income current
year................... 16,870 16,870
Translation adjustment.. 22 22
Adjust unearned
compensation........... (537) 528 (6)
Stock option expense.... (5,829) (5,829)
Amort of unearned comp.. 1,451 1,448
Exercise of stock
options and other
issuances.............. 1,397 7 3,597 3,604
Unearned compensation
from stock option
grants................. 3,102 (3,102) --
Reclass of common stock
par value.............. 1,214 (1,214) --
------- ----- -------- --------- ------- ------- ---------
Balance, December 31,
1999................... 122,062 1,221 321,865 (613,071) (8,686) (1,660) (300,331)
======= ===== ======== ========= ======= ======= =========
</TABLE>

During the first nine months of fiscal 2000 the Company issued
approximately 7.1 million options to employees and non-employee directors
of which 1.8 million options were issued at an exercise price equal to the
fair market value as determined by the Company's board of directors, but at
a price lower than trading price on the open market on the dates of the
grants. The Company, therefore, incurred a charge of approximately $3.1
million for the difference between the trading price on the open market and
the exercise price of the options and recorded this unearned compensation
within stockholders' equity and will be amortized to expense over the
options' vesting periods.

11
<PAGE>

DYNATECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

N. Segment Information

Sales, earnings before interest and taxes ("EBIT") and total assets for the
three and nine months ended December 31, 1999 and 1998 are shown below (in
thousands):

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
SEGMENT
Communications test:
Sales.......................... $ 96,923 $ 66,349 $241,442 $182,201
EBIT........................... $ 17,998 $ 15,009 $ 42,034 $ 33,383
Total Assets................... $ 180,275 $ 81,415 $180,275 $ 81,415
Industrial computing &
communications:
Sales.......................... 37,981 46,563 160,317 119,686
EBIT........................... 572 3,117 18,902 4,607
Total Assets................... 75,631 100,658 75,631 100,658
Visual communications:
Sales.......................... 25,302 23,869 75,366 67,638
EBIT........................... 5,404 7,883 21,148 21,331
Total Assets................... 52,040 37,497 52,040 37,497
Corporate:
EBIT........................... (469) (681) (133) (1,458)
Total Assets................... 99,051 95,806 99,051 95,806
Total:
Sales.......................... $ 160,206 $ 136,781 $477,125 $369,525
EBIT........................... $ 23,505 $ 25,328 $ 81,951 $ 57,863
Total Assets................... $ 406,997 $ 315,376 $406,997 $315,376
</TABLE>

O. SUBSEQUENT EVENTS

On February 14, 2000, the Company, DWW Acquisition Corporation, a Delaware
corporation and indirect subsidiary of the Company ("Mergerco"), and Wavetek
Wandel Goltermann, Inc., a Delaware corporation ("WWG"), entered into an
Agreement and Plan of Merger pursuant to which Mergerco would merge with WWG,
with WWG as the surviving corporation. The merger is subject to customary
closing conditions, including obtaining applicable competition law approvals.
In the merger, at the election of holders of WWG stock, each share of common
stock of WWG will be entitled to receive (i) $25.00 per share of common stock
of WWG or (ii) 4.49 shares of Common Stock of the Company per share of common
stock. The aggregate transaction value is approximately $600 million, which
includes approximately $245 million of WWG indebtedness.

In connection with the merger, the Company intends to enter into a new
multi-currency senior credit facility with a syndicate of banks for an
aggregate principal amount of approximately $860 million including revolver
and term loans, and to sell newly-issued common stock to Clayton, Dubilier &
Rice Fund VI Limited Partnership ("Fund VI"), which is an affiliate of the
Company's controlling stockholder, at a price per share of $4.00. In addition,
the Company expects to make a rights offering to the Company's other
stockholders to purchase newly-issued shares at the same price offered to Fund
VI. It is anticipated that approximately $250 million of new equity will be
raised through the sale to Fund VI, the rights offering and the issuance of
Dynatech Stock in the merger. The Company's existing 9 3/4% senior
subordinated notes will not be affected by the proposed transaction.

12
<PAGE>

DYNATECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

On January 4, 2000 the Company purchased the remaining outstanding stock of
ICS Advent (Europe) Ltd. ("ICSUK") for (Pounds)3.0 million (approximately
$4.9 million). The Company previously owned approximately 25% of ICSUK.
ICSUK is primarily a distributor of mission-critical computer systems to the
defense, factory-automation, data and telecommunications markets within
Europe as well as a distributor of rack-mounted computers supplied by the
Company's ICS Advent subsidiary.

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<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

This Form 10-Q contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, product demand and market
acceptance risks, the effect of economic conditions, the impact of competitive
products and pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, availability of
capital resources, general business and economic conditions, the effect of the
Company's accounting policies, and other risks detailed in the Company's most
recent Form 10-K as of March 31, 1999.

Overview

During the first nine months of fiscal 2000, the Company shipped products
at record levels, especially within the communications test segment. During
the previous fiscal year the Company's communications test and industrial
computing and communications segments had been experiencing certain order
delays due to the telecommunications equipment and service providers facing
capital market volatility, reduced financing availability, as well as an
overall economic slowdown in Asia. However, the Company cannot predict whether
this trend will continue due in part to the volatility of the global economy,
the unpredictability of the purchasing patterns of the Regional Bell Operating
Companies ("RBOCs"), and the timing and size of such customers' orders, among
other things.

During the first quarter of fiscal 2000, certain of the Company's key
executives, including Mr. John F. Reno, former Chairman, President and Chief
Executive Officer, terminated their employment with the Company. In accordance
with the terms of certain agreements, the Company recorded a charge of $13.3
million.

On November 1, 1999 and subsequently on November 8, 1999, the Company,
through one of its wholly owned subsidiaries, acquired all the outstanding
stock of Applied Digital Access, Inc. ("ADA") for $5.37 per outstanding share
which approximated $81 million in the aggregate including acquisition costs.
The purchase method of accounting was applied to the acquisition and generated
approximately $36 million of goodwill which will be amortized over three
years.

The Company funded the purchase by expending from available funds $16
million and by borrowing $65 million under its revolving credit facility. The
Company subsequently repaid $9.0 million of its borrowings between the
acquisition dates and December 31, 1999.

ADA is headquartered in San Diego, CA and is a provider of network
performance management products that include systems, software and services
used to manage the quality, performance, availability and reliability of
telecommunications service providers' networks. The results of operations of
ADA on a prospective basis will be included with the Company's communications
test business segment.

On September 10, 1999 the Company, through one of its wholly owned
subsidiaries, purchased the outstanding stock of Sierra Design Labs
("Sierra"), a Nevada corporation. The purchase price was $6.3 million which
resulted in $4.9 million of goodwill. The purchase method of accounting was
applied to the acquisition, and the excess purchase price will be amortized
over 10 years. Sierra designs, manufactures, and markets uncompressed, real-
time videodisk recorders and will be included in the Company's visual
communications segment.

Results of Operations

For the Three Months Ended December 31, 1999 as Compared to Three Months Ended
December 31, 1998

Sales. For the three months ended December 31, 1999 consolidated sales
increased $23.4 million or 17.1% to $160.2 million as compared to $136.8
million for the three months ended December 31, 1998. The increase occurred
within the communications test and visual communications segments and was
offset by a decrease in sales within the industrial computing and
communications segment.

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<PAGE>

During the third quarter of fiscal 1999, the Company's Itronix subsidiary,
which is included in the industrial computing and communication segment,
received orders totaling more than $72 million from two RBOCs. Itronix shipped
the products under these and other purchase orders during the third and fourth
quarters of fiscal 1999 and the first and second quarters of fiscal 2000.
These purchase orders were received from certain RBOCs for ruggedized laptops
as the RBOCs initiated a program to replace their field-based workforce
computing systems with more up-to-date ruggedized computing solutions. Itronix
has recently been experiencing marketing challenges which include competition
from "semi-rugged" products that constrain the pricing of premium, ruggedized
products like those manufactured by Itronix. As a result, Itronix's results of
operations have varied significantly in the past and may vary significantly in
the future, on both a quarterly and annual basis.

International sales (defined as sales outside of North America) were $15.4
million or 9.6% of consolidated sales for the three months ended December 31,
1999, as compared to $18.5 million or 13.5% of consolidated sales for the
three months ended December 31, 1998. The decrease in international sales is
primarily a result of the timing of orders within Europe and Asia for
communications test products.

Gross Profit. Consolidated gross profit increased $18.9 million to $95.6
million or 59.7% of consolidated sales for the three months ended December 31,
1999, as compared to $76.7 million or 56.1% of consolidated sales for the
three months ended December 31, 1998. The increase was attributable to the
higher sales volume.

Operating Expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; amortization of
intangibles; and amortization of unearned compensation. Total operating
expenses were $73.7 million or 46.0% of consolidated sales for the three
months ended December 31, 1999, as compared to $51.8 million or 37.8% of
consolidated sales for the three months ended December 31, 1998. The increase
is a result of additional spending on product development programs as well as
additional selling expense related to variable compensation plans. Included in
the operating expenses for the quarter was $4.8 million related to the
operating expenses of ADA which were included with the Company's consolidated
results for November and December 1999.

Selling, general and administrative expense was $49.2 million or 30.7% of
consolidated sales for the three months ended December 31, 1999, as compared
to $36.3 million or 26.6% of consolidated sales for the three months ended
December 31, 1998. The increase is partially a result of increased selling
expense due to higher sales commission rates in which sales personnel receive
higher commission rates when new orders received are in excess of budgeted new
orders. In addition the Company sold to certain of its non-employee directors
shares of the Company's outstanding stock at a price lower than the price
equal to the fair market value as determined by the Company's board of
directors, but at a price lower than the trading price in the open market.
These non-employee directors purchased 615,384 shares which resulted in a
charge of $1.0 million.

Product development expense was $19.9 million or 12.4% of consolidated
sales for the three months ended December 31, 1999 as compared to $13.2
million or 9.7% of consolidated sales for the same period a year ago. The
Company continues to invest in product development and enhancement within all
three segments. In addition the Company's communications business segment has
invested an additional $3.2 million during the third quarter of fiscal 2000 as
compared to the same period last year for the development of the next
generation of communications test equipment.

Amortization of intangibles was $3.9 million for the three months ended
December 31, 1999, an increase of $2.3 million as compared to the same period
a year ago. The increase is attributable to the amortization of goodwill as a
result of the acquisition of ADA.

Amortization of unearned compensation of $0.6 million for the three months
ended December 31, 1999 and for the same period a year ago relates to the
recognition of the unearned compensation recorded within shareholders' deficit
related to the stock options that were issued at a grant price equal to the
fair market value as determined by the Company's board of directors, but at a
price lower than the trading price in the open market.

15
<PAGE>

Operating income. Operating income decreased 12.2% to $21.9 million or
13.7% of consolidated sales for the three months ended December 31, 1999 as
compared to $25.0 million or 18.2% of consolidated sales for the same period a
year ago. The decrease was primarily the result of higher operating expenses
offset slightly by the increase in gross profit as compared to the same period
last year, as discussed above.

Interest. Interest expense, net of interest income, was $12.4 million for
the three months ended December 31, 1999 as compared to $12.3 million for the
same period a year ago.

Taxes. The effective tax rate increased for the three months ended December
31, 1999 to 49.9% from 44.0% for the same period a year ago, primarily due to
the permanent book/tax differences that arose as a result of the accounting
for the acquisition of ADA (primarily to non-deductible goodwill).

Net income. Net income was $4.8 million or $0.04 per share on a diluted
basis for the three months ended December 31, 1999 as compared to $6.9 million
or $0.05 per share on a diluted basis for the same period a year ago. The
decrease was primarily attributable to the higher operating expenses offset
slightly by the increase in gross profit as compared to the same period last
year.

Nine Months Ended December 31, 1999 as Compared to Nine Months Ended
December 31, 1998

Sales. For the nine months ended December 31, 1999 consolidated sales
increased $107.6 million or 29.1% to $477.1 million as compared to $369.5
million for the nine months ended December 31, 1998. The increase occurred
within all three business segments but primarily within the communications
test and industrial computing and communications segments.

International sales (defined as sales outside of North America) were $47.4
million or 9.9% of consolidated sales for the nine months ended December 31,
1999, as compared to $48.9 million or 13.2% of consolidated sales for the nine
months ended December 31, 1998. The slight dollar decrease in international
sales was a result of lower sales of the Company's communications test and
visual communications products in Europe. The percentage decrease was a result
of the increase in sales to customers within the United States.

Gross Profit. Consolidated gross profit increased $60.6 million to $271.2
million or 56.8% of consolidated sales for the nine months ended December 31,
1999 as compared to $210.7 million or 57.0% of consolidated sales for the nine
months ended December 31, 1998. The dollar increase was directly related to
the increase in sales. The slight percentage decrease was attributable to a
change in the sales mix within the consolidated group along with lower gross
margins within the Company's industrial computing and communications segment.

Operating Expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; recapitalization and
other related costs; amortization of intangibles; and amortization of unearned
compensation. Total operating expenses were $205.0 million or 43.0% of
consolidated sales for the nine months ended December 31, 1999, as compared to
$196.9 million or 53.3% of consolidated sales for the nine months ended
December 31, 1998. Included in the operating expenses was $4.8 million related
to ADA operating expense for November and December 1999. Excluding the impact
of the recapitalization and other related costs, total operating expenses were
$191.7 million or 40.2% of consolidated sales and $153.5 million or 41.5% of
consolidated sales for the nine months ended December 31, 1999 and 1998,
respectively. The percentage decrease in total operating expenses excluding
the recapitalization and other related expenses is due primarily to operating
expenses increasing at a rate slower than sales growth.

Selling, general and administrative expense was $131.6 million or 27.6% of
consolidated sales for the nine months ended December 31, 1999 as compared to
$107.5 million or 29.1% of consolidated sales for the nine months ended
December 31, 1998. The percentage decrease is in part a result of the increase
in sales as well as timing on sales commission expense as commissions in
certain of the Company's subsidiaries are expensed when new orders are
received.

16
<PAGE>

Product development expense was $51.6 million or 10.8% of consolidated
sales for the nine months ended December 31, 1999 as compared to $40.3 million
or 10.9% of consolidated sales for the same period a year ago. In addition the
Company's communications business segment has invested an additional $5.9
million during the nine months of fiscal 2000 as compared to the same period
last year for the development of the next generation of communications test
equipment.

Recapitalization and other related costs were $13.3 million and $43.4
million at December 31, 1999 and December 31, 1998, respectively. The fiscal
2000 expense relates to the costs associated with terminating certain
employees. Recapitalization costs totaling $43.4 million were incurred during
the first quarter of fiscal 1999 in connection with the Merger.

Amortization of intangibles was $7.1 million for the nine months ended
December 31, 1999, as compared to $4.7 million for the same period a year ago.
The increase was primarily due to the amortization of the excess purchase
price in connection with the acquisition of ADA.

Amortization of unearned compensation was $1.5 million and $1.0 million for
the nine months ended December 31, 1999 and 1998, respectively. This charge is
related to the recognition of the unearned compensation recorded within
stockholders' equity related to the stock options that were issued at a grant
price equal to the fair market value as determined by the Company's board of
directors, but at a price lower than the trading price on the open market.

Operating income. Operating income increased $52.4 million to $66.2 million
or 13.9% of consolidated sales for the nine months ended December 31, 1999 as
compared to $13.8 million or 3.7% of consolidated sales for the same period a
year ago. The increase was primarily a result of the recapitalization and
other related costs during fiscal 1999 as well as the increase in sales.
Excluding these expenses, the Company generated operating income of $79.5
million or 16.7% of consolidated sales and $57.2 million or 15.5% of
consolidated sales for the nine months ended December 31, 1999 and 1998,
respectively. The percentage increase was primarily the result of the increase
in sales offset slightly by the increase in operating expenses, as discussed
above.

Interest. Interest expense, net of interest income, was $36.6 million for
the nine months ended December 31, 1999 as compared to $30.2 million for the
same period a year ago. The increase in net interest expense was attributable
to a full nine months of interest expense in fiscal 2000 as compared to
approximately 7.5 months of interest expense for the same period last year, as
the debt was incurred in connection with the Merger on May 21, 1998.

Gain on sale. On June 30, 1998 the Company sold the assets of ComCoTec for
$21 million which resulted in a gain of $15.9 million. ComCoTec was a
subsidiary within the Company's visual communications segment.

Taxes. The effective tax rate for the nine months ended December 31, 1999
decreased to 43.2% from 58.0% for the same period last year. This decrease was
due to the permanent book/tax differences arising as a result of the
accounting for the Merger in fiscal 1999, which was offset by the permanent
book/tax differences (primarily to non-deductible goodwill) that arose as a
result of the accounting for the acquisition of ADA.

Net income (loss). Net income increased to $16.9 million or $0.13 per share
on a diluted basis for the nine months ended December 31, 1999 as compared to
a net loss of $1.3 million or a ($0.01) loss per share on a diluted basis for
the same period a year ago. The increase was primarily attributable to the
higher recapitalization and other related expenses offset by the gain on the
sale of ComCoTec during fiscal 1999 offset by higher sales during fiscal 2000.

Results of Operations -- Business Segments

The Company measures the performance of its subsidiaries by the their
respective new orders received ("bookings"), sales and earnings before
interest and taxes ("EBIT"), as well as backlog (defined as orders for

17
<PAGE>

goods to be shipped and services to be performed). The discussion below
includes bookings, sales and EBIT (excluding recapitalization and other
related costs and the gain on sale of subsidiary) for the three segments in
which the Company participates: communications test, industrial computing and
communications, and visual communications (in thousands).
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
December 31, December 31,
---------------- -----------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
SEGMENT:
Communications Test:
Bookings............................... $112,256 $69,700 $268,656 $180,087
Sales.................................. 96,923 66,349 241,442 182,201
EBIT................................... 17,999 15,009 42,034 33,383
Industrial Computing & Communications:
Bookings............................... 47,148 96,274 132,814 176,096
Sales.................................. 37,980 46,563 160,317 119,686
EBIT................................... 571 3,117 18,902 4,607
Visual Communications:
Bookings............................... 26,134 23,854 77,724 73,187
Sales.................................. 25,303 23,869 75,367 67,638
EBIT................................... 5,404 7,883 21,148 21,331
</TABLE>

Three and Nine Months Ended December 31, 1999 Compared to Three and Nine
Months Ended December 31, 1998 -- Communications Test Products

Bookings for communications test products increased $42.6 million or 61.1%
to $112.3 million for the three months ended December 31, 1999 as compared to
$69.7 million for the same period a year ago. For the nine months ended
December 31, 1999 bookings for communications test products increased $88.6
million or 49.2% to $268.7 million as compared to $180.1 million for the same
period a year ago. Orders for the Company's communications test instruments
products continue to recover from last year's slowdown which was a result of
the communications industry consolidation and the Asia economic crisis. In
addition approximately $6.1 million related to orders received by ADA during
November and December 1999.

Sales of communications test products increased $30.6 million or 46.1% to
$96.9 million for the three months ended December 31, 1999 as compared to
$66.4 million for the same period a year ago. For the nine months ended
December 31, 1999 sales of communications test products increased $59.2
million or 32.5% to $241.4 million as compared to $182.2 million for the nine
months ended December 31, 1998. Demand for the Company's test products has
rebounded during the first nine months of fiscal 2000 from the fiscal 1999
decrease in demand due to the consolidation of the RBOC's purchasing practices
and the economic slowdown in Asia. In addition approximately $9.2 million
related to shipments by ADA during November and December 1999.

EBIT for the communications test products increased $3.0 million or 19.9%
to $18.0 million for the three months ended December 31, 1999 as compared to
$15.0 million for the same period a year ago. For the nine months ended
December 31, 1999 EBIT increased $8.7 million or 25.9% to $42.0 million as
compared to $33.4 million for the same period a year ago. The increase in EBIT
is directly related to the increase in sales and was offset by approximately
$2.2 million of goodwill amortization related to the acquisition of ADA.

The backlog for the Company's communications test products was $95.7
million at December 31, 1999, an increase of 57.8% from the fiscal year ended
March 31, 1999.

Three and Nine Months Ended December 31, 1999 Compared to Three and Nine
Months Ended December 31, 1998--Industrial Computing and Communications
Products

Bookings for the industrial computing and communications products decreased
to $47.1 million for the three months ended December 31, 1999 as compared to
$96.3 million for the same period a year ago. For the nine

18
<PAGE>

months ended December 31, 1999 bookings for this segment decreased to $132.8
million from $176.1 million for the same period a year ago. The Company has
been experiencing a reduction in orders for its ruggedized computers due in
part to increased competition from manufacturers of "semi-rugged" products
that constrain the pricing of premium, ruggedized products like those
manufactured by Itronix. However, Itronix's results of operations have varied
significantly in the past and may vary significantly in the future, on both a
quarterly and annual basis due to the timing and volume of the orders.

Sales of industrial computing and communications products decreased to
$38.0 million for the three months ended December 31, 1999 as compared to
$46.6 million for the same period a year ago. For the nine months ended
December 31, 1999 sales within this segment increased $40.6 million or 33.9%
to $160.3 million as compared to $119.7 million for the same period a year
ago. The decrease for the quarter was primarily due to shipments of the
Company's ruggedized laptop computers from certain large purchase orders
received during the third quarter of last year. These purchase orders were
received from certain RBOCs for ruggedized laptops as the RBOCs initiated a
program to replace their field-based workforce computing systems with more up-
to-date ruggedized computing solutions. The increase on a fiscal 2000 year-to-
date basis is primarily a result of the high backlog position for products
within this segment at March 31, 1999.

EBIT for the industrial computing and communications products decreased to
$0.6 million for the three months ended December 31, 1999 as compared to $3.1
million for the same period a year ago. For the nine months ended December 31,
1999 EBIT increased $14.3 million to $18.9 million as compared to $4.6 million
for the same period a year ago. The decrease in EBIT for the quarter is
directly related to the sales shortfall; the increase in EBIT for the first
nine months of fiscal 2000 relate to the shipments of orders during the first
two quarters of fiscal 2000 which were included in backlog at March 31, 1999.

The backlog for the Company's industrial computing and communications
products was $54.3 million at December 31, 1999, a decrease of 31.5% from the
fiscal year ended March 31, 1999. The decrease is a result of the one-time
orders received from certain RBOCs during the third and fourth quarters of
fiscal 1999 for the Company's ruggedized laptops. These one-time orders were
initiated by certain RBOCs to replace their field workforce computing systems
with more up-to-date ruggedized computing solutions. Included in the backlog
at December 31, 1999 is approximately $40.9 million relating to maintenance
and service contracts associated with the purchase of the ruggedized laptops
by the RBOCs during the last two quarters of fiscal 1999 and the first quarter
of fiscal 2000.

The results of operations for Itronix are expected to continue to vary
widely because of the relatively small number of potential customers with
large field-service work forces and the irregularity of timing and size of
such customers' orders.

Three and Nine Months Ended December 31, 1999 Compared to Three and Nine
Months Ended December 31, 1998 -- Visual Communications Products

Bookings for the visual communications products increased $2.3 million or
9.6% to $26.1 million for the three months ended December 31, 1999 as compared
to $23.9 million for the same period a year ago. For the nine months ended
December 31, 1999 bookings within this segment increased $4.5 million or 6.2%
to $77.7 million as compared to $73.2 million for the same period a year ago.
Approximately $0.8 million was related to orders received by Sierra.

Sales for the Company's visual communications products increased $1.4
million or 6.0% to $25.3 million for the three months ended December 31, 1999
as compared to $23.9 million for the same period a year ago. For the nine
months ended December 31, 1999 sales for products within this segment
increased $7.7 million or 11.4% to $75.4 million as compared to $67.6 million
for the same period a year ago. The increase is primarily a result of
increased demand for the Company's real-time flight information passenger
video displays as more airlines integrate this product into their in-flight
entertainment systems.

19
<PAGE>

EBIT for the visual communications products decreased to $5.4 million as
compared to $7.9 million for the same period a year ago. For the nine months
ended December 31, 1999 and 1998 EBIT for this segment was $21.1 million and
$21.3 million, respectively. The decrease is due in part to the additional
research and development spending for the development of future products as
well as a change in the mix of products sold creating a lower gross margin.

The backlog for the Company's visual communications products was $32.8
million, an increase of 8.7% from the fiscal year ended March 31, 1999.

Capital Resources and Liquidity

The Company broadly defines liquidity as its ability to generate sufficient
cash flow from operating activities to meet its obligations and commitments.
In addition, liquidity includes the ability to obtain appropriate debt and
equity financing and to convert into cash those assets that are no longer
required to meet existing strategic and financial objectives. Therefore,
liquidity cannot be considered separately from capital resources that consist
of current or potentially available funds for use in achieving long-range
business objectives and meeting debt service commitments.

The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the Merger and from the
funding of working capital and capital expenditures. As of December 31, 1999,
the Company had $566.6 million of indebtedness, primarily consisting of $275.0
million principal amount of the Senior Subordinated Notes, $235.5 million in
borrowings under the Term Loan Facility, and $56.0 million in borrowings under
the Revolving Credit Facility.

Cash Flows. The Company's cash and cash equivalents decreased $31.3 million
during the first nine months of fiscal 2000.

Working Capital. During the first nine months of fiscal 2000, the Company's
working capital decreased net of the purchase accounting effects related to
ADA and Sierra as its operating assets and liabilities used $19.6 million of
cash. Accounts receivable increased, creating a use of cash of $10.3 million
primarily due to the increased sales volume during the quarter. Inventory
levels decreased, creating a source of cash of $6.1 million, due primarily to
improved inventory management throughout the organization. Other current
assets increased, creating a use of cash of $1.0 million. Accounts payable
decreased, creating a use of cash of $8.7 million. Other current liabilities
decreased, creating a use of cash of $5.7 million. The decrease is due in part
to interest payments on debt as well as payment of the deferred purchase prior
to the previous owners of Pacific Systems offset by an increase in deferred
revenue.

Investing Activities. The Company's investing activities totaled $90.0
million for the nine months ended December 31, 1999 in part for the purchase
and replacement of property and equipment. In addition, the Company purchased
the stock of ADA for $81 million and Sierra for $6.3 million.

The Company's capital expenditures during the first nine months of fiscal
2000 were $13.0 million as compared to $7.4 million for the same period last
year. Fiscal 2000 capital expenditures will continue to increase from fiscal
1999 levels and return to or exceed fiscal 1998 levels as the Company replaces
certain of its Enterprise Resource Planning (ERP) systems at the
communications test and industrial computing and communications businesses.
The Company is, in accordance with the terms of the Senior Secured Credit
Agreement, subject to maximum capital expenditure levels.

Debt and Equity. The Company's financing activities generated $42.9 million
in cash during the first nine months of fiscal 2000, due mainly to the
borrowing of debt to fund the acquisition of ADA.

Debt

Principal and interest payments under the new Senior Secured Credit
Agreement and interest payments on the Senior Subordinated Notes represent
significant liquidity requirements for the Company. With respect to the

20
<PAGE>

$260 million initially borrowed under the Term Loan Facility (which is divided
into four tranches, each of which has a different term and repayment
schedule), the Company is required to make scheduled principal payments of the
$50 million of tranche A term loan thereunder during its six-year term, with
substantial amortization of the $70 million tranche B term loan, $70 million
tranche C term loan and $70 million tranche D term loan thereunder occurring
after six, seven and eight years, respectively. The balances of the revolving
credit facility, and tranches A, B, C, and D at December 31, 1999 were $56.0
million, $34.7 million, $66.9 million, $66.9 million, and $66.9 million,
respectively. The $275 million of Senior Subordinated Notes will mature in
2008, and bear interest at 9 3/4% per annum. Total interest expense including
$2.4 million of deferred debt issuance costs amortization was $38.4 million
for the six months of fiscal 2000.

The Company is required, under the terms of its Senior Secured Credit
Facilities, to make a mandatory prepayment and principal reduction in an
amount equal to 50% of the Company's excess cash flow (the "Recapture")
calculated at the end of the Company's fiscal year. The Company was required
to prepay $14.5 million on June 30, 1999 for its excess cash flow calculated
as of March 31, 1999 in accordance with the terms of the Senior Secured Credit
Facilities. The Company elected to use this Recapture as a prepayment of the
mandatory $8 million amortization due in fiscal 2000 which subsequently
reduced the mandatory principal payments to approximately $2.6 million during
fiscal 2000.

The loans under the Senior Secured Credit Agreement bear interest at
floating rates based upon the interest rate option elected by the Company. The
Company's weighted-average interest rate on the loans under the Senior Credit
Agreement was 8.06% per annum for the period April 1, 1999 through December
31, 1999. However, the Company has entered into interest rate swap contracts
which will be effective for periods ranging from two to three years beginning
September 30, 1998 to fix the interest charged on a portion of the total debt
outstanding under the Term Loan Facility. After giving effect to these
arrangements, approximately $220 million of the debt outstanding will be
subject to an effective average annual fixed rate of 5.66%. This average
annual interest rate does not include a margin payable to the lenders
participating in the Senior Secured Credit Facilities.

Future Financing Sources and Cash Flows. The amount under the Revolving
Credit Facility that remained undrawn at December 31, 1999, was $54.0 million.
The Company believes that cash generated from operations, together with
amounts available under the Revolving Credit Facility and any other available
sources of liquidity, will be adequate to permit the Company to meet its debt
service obligations, capital expenditure program requirements, ongoing
operating costs and working capital needs, although no assurance can be given
in this regard. The Company's future operating performance and ability to
service or refinance the Senior Subordinated Notes and to repay, extend or
refinance the Senior Secured Credit Facilities (including the Revolving Credit
Facility) will be, among other things, subject to future economic conditions
and to financial, business and other factors, many of which are beyond the
Company's control.

Covenant Restrictions. The Senior Secured Credit Agreement imposes
restrictions on the ability of the Company to make capital expenditures, and
both the Senior Secured Credit Facilities and the indenture governing the
Senior Subordinated Notes limit the Company's ability to incur additional
indebtedness. Such restrictions, together with the highly leveraged nature of
the Company, could limit the Company's ability to respond to market
conditions, to meet its capital-spending program, to provide for unanticipated
capital investments, or to take advantage of business opportunities.

The Company was in compliance with all its debt covenants at December 31,
1999.

Year 2000

The Company developed and implemented a plan to address year 2000 issues
facing the Company. The Company has not experienced any material adverse
effects as a result of the Year 2000 issue. The Company does not believe that
any failure to be Year 2000 compliant, including in respect of leap year
calculations or other dates, would have a material adverse effect on the
Company.

21
<PAGE>

The Company's historical and estimated costs of remediation have not been
and are not anticipated to be material to the Company's financial position or
results of operations, and will be funded through operating cash flows. Total
costs associated with remediation of Year 2000 issues (including systems,
software, and non-IT systems replaced as a result of Year 2000 issues) are
currently estimated at approximately $2 million to $3 million, of which
approximately $1.8 million has already been incurred. Estimated remediation
costs are based on management's best estimates. There can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those anticipated, particularly if unanticipated Year 2000 issues arise.
The costs do not include estimates for potential litigation. Many commentators
believe that there will be a significant amount of litigation arising out of
Year 2000 readiness issues. Because of the unprecedented nature of this
litigation, it is not possible for the Company to predict the impact of such
litigation.

Year 2000 Risks and Related Plans. While the Company expects to make the
necessary modifications or changes to both its internal IT and non-IT systems
and existing product base in a timely fashion, there can be no assurance that
the Company's internal systems and existing or installed base of products will
not be materially adversely affected by the advent of Year 2000. Certain of
the Company's products are used, in conjunction with products of other
companies, in applications that may be critical to the operations of its
customers. Any product non-readiness, whether standing alone or used in
conjunction with the products of other companies, may expose the Company to
claims from its customers or others, and could impair market acceptance of the
Company's products and services, increase service and warranty costs, or
result in payment of damages, which in turn could materially adversely affect
the Company.

In the event of a failure as a result of Year 2000 issues, the Company
could lose or have trouble accessing accurate internal data, resulting in
incomplete or inaccurate accounting of Company financial results, the
Company's manufacturing operating systems could be impaired, and the Company
could be required to expend significant resources to address such failures. In
an effort intended to minimize potential disruption to its internal systems,
the Company intends to perform additional hard-disk back-up of its rudimentary
systems and critical information in advance of the Year 2000.

Similarly, in the event of a failure as a result of Year 2000 issues in any
systems of third parties with whom the Company interacts, the Company could
lose or have trouble accessing or receive inaccurate third party data,
experience internal and external communications difficulties or have
difficulty obtaining components that are Year 2000 compliant from its vendors.
The Company could also experience a slowdown or reduction of sales if
customers such as telecommunications companies or commercial airlines are
adversely affected by Year 2000 issues.

New Pronouncements

On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." FAS 133 was amended by
Statement of Financial Accounting Standards No. 137 which modified the
effective date of FAS 133 to all fiscal quarters of all fiscal years beginning
after June 15, 2000. FAS 133, as amended, requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
Company is assessing the impact of the adoption of FAS 133 on its results of
operations and its financial position.

Item 3. Quantitative And Qualitative Disclosures About Market Risk

The Company operates both manufacturing facilities and sales offices within
the United States and primarily sales offices outside the United States. The
Company is subject to business risks inherent in non-U.S. activities,
including political and economic uncertainty, import and export limitations,
and market risk related to changes in interest rates and foreign currency
exchange rates. The Company believes the political and economic risks related
to its foreign operations are mitigated due to the stability of the countries
in which its sales offices are

22
<PAGE>

located, as well as the low percentage of overall sales outside the United
States (approximately 14%, 16% and 20% in fiscal 1999, 1998, and 1997,
respectively of consolidated sales relate to foreign sales including exports
from the United States). The Company's principal currency exposures against
the U.S. dollar are in the major European currencies and in Canadian currency.
The Company does not use foreign currency forward exchange contracts to
mitigate fluctuations in currency. The Company's market risk exposure to
currency rate fluctuations is not material. The Company does not hold
derivatives for trading purposes.

The Company uses derivative financial instruments consisting solely of
interest rate swap contracts. The Company's objective in managing its exposure
to changes in interest rates (on its variable rate debt) is to limit the
impact of such changes on earnings and cash flow and to lower its overall
borrowing costs.

The Company currently has three interest rate swap contracts with notional
amounts totaling $220 million which fixed its variable rate debt to a fixed
interest rate for periods of two to three years in which the Company pays a
fixed interest rate on a portion of its outstanding debt and receives three-
month LIBOR. At September 30, 1999, two of the three interest rate swap
contracts had an interest rate higher than the three-month LIBOR quoted by its
financial institutions, as variable rate three-month LIBOR interest rates
declined after the swap contracts became effective. Therefore, the additional
interest expense (calculated as the difference between the interest rate in
the swap contracts and the three-month LIBOR rate) recognized by the Company
during the three and nine months ended December 31, 1999 were $48.0 thousand
and $577.3 thousand, respectively.

At December 31, 1999 all of the swap contracts had fixed interest rates
below the three-month LIBOR quoted by its financial institutions.

The Company has performed a sensitivity analysis assuming a hypothetical
10% adverse movement in the floating interest rate on the interest rate
sensitive instruments described above. The Company believes that such a
movement is reasonably possible in the near term. As of September 30, 1999,
the analysis demonstrated that such movement would cause the Company to
recognize additional interest expense of approximately $1.4 million on an
annual basis, and accordingly, would cause a hypothetical loss in cash flows
of approximately $1.4 million on an annual basis.

23
<PAGE>

PART II. Other Information

Item 1. Legal Proceedings

Litigation. The Company is involved from time to time in routine legal
matters incidental to its business. The Company believes that the resolution
of such matters will not have a material adverse effect on the Company's
financial condition or results of operations.

On June 27, 1996, Cincinnati Microwave, Inc. ("CMI") filed an action in the
United States District Court for the Southern District of Ohio against the
Company and Whistler Corporation of Massachusetts ("Whistler"), alleging
willful infringement of CMI's patent for a mute function in radar detectors.
In 1994, the Company sold its radar detector business to Whistler. The Company
and Whistler have asserted in response that they have not infringed, and that
the patent is invalid and unenforceable. The Company obtained an opinion of
counsel from Bromberg & Sunstein LLP in connection with the manufacture and
sale of the Company's Whistler series radar detectors and will be offering the
opinion, among other things, as evidence that any alleged infringement was not
willful. On March 24, 1998, CMI, together with its co-plaintiff and patent
assignee Escort, Inc., moved for summary judgment. The Company and Whistler
have opposed the motion for summary judgment. Discovery in this matter closed
on June 20, 1998. On May 27, 1999 Whistler filed a Chapter 11 bankruptcy case
in the United States Bankruptcy Court for the District of Massachusetts. The
case is scheduled for trial in April 2000 and the Company intends to defend
the lawsuit vigorously. The Company does not believe that the outcome of the
litigation is likely to have a material adverse effect on the Company's
financial condition, results of operations or liquidity.

On September 7, 1999, the Company and ADA entered into an Agreement and
Plan of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, a
subsidiary of the Company commenced a cash tender offer to purchase all of the
outstanding shares of ADA's common stock at a price of $5.37 per share.
Following the public announcement of the Merger Agreement, four class action
complaints were filed (three in Superior Court of California in San Diego and
one in Delaware Chancery Court) asserting claims that ADA and certain of its
directors breached their fiduciary duties to ADA's stockholders in connection
with the Merger Agreement, and one of which asserted a claim that the Company
aided and abetted in the ADA's directors' breach of fiduciary duties. In
October, the California actions were consolidated and an amended consolidated
complaint was served on the Company. On October 29, 1999 the Superior Court of
California denied the plaintiff's motion for a preliminary injunction to
enjoin the tender offer by the Company for all ADA's shares and the proposed
merger of ADA with the Company. On December 3, 1999, the California plaintiffs
served a second amended consolidated class action complaint in which they
added claims against, among others, the Company and certain of its officers,
alleging that material information was omitted from the Company's Offer to
Purchase ADA shares, and that certain officers of the Company aided and
abetted the ADA directors in a breach of their fiduciary duties to ADA
stockholders. On January 13, 2000, the Company and certain officers filed a
demurrer seeking judgment on the pleadings. In the Company's opinion, those
lawsuits and four similar lawsuits filed against ADA have no merit and the
Company intends to vigorously defend against them.

Item 2. Changes in Securities and Use of Proceeds

On October 1, 1999, the Company issued 615,384 shares of the Company's
outstanding stock to certain non-employee directors of the Company. As to the
securities sold, the aggregate offering price was approximately $2,000,000 at
$3.25 per share. The securities issued were not registered under the
Securities Act of 1933, as amended (the "Securities Act"). Exemption from
registration was claimed under Section 4(2) of the Securities Act as the
offering was made only to non-employee directors of the Company, all of who
were Accredited Investors pursuant to Rule 501 of Regulation D under the
Securities Act.

Item 4. Submission of Matters to a Vote

None.

24
<PAGE>

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

The exhibit numbers in the following list correspond to the numbers
assigned to such exhibits in the Exhibit Table of Item 601 of Regulation S-K:

10.1 Proof Non-Employee Director Stock Purchase Agreement
27 Financial Data Schedule

(b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K dated November 9, 1999
related to the Company's acquisition of Applied Digital Access, Inc.

25
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

DYNATECH CORPORATION

February 14, 2000 /s/ ALLAN M. KLINE
_____________________________________ _____________________________________
Date Allan M. Kline
Vice President, Chief Financial
Officer and Treasurer

February 14, 2000 /s/ ROBERT W. WOODBURY, JR.
_____________________________________ _____________________________________
Date Robert W. Woodbury, Jr.
Vice President, Corporate
Controller and Principal Accounting
Officer

<PAGE>

FORM OF NON-EMPLOYEE DIRECTOR STOCK SUBSCRIPTION AGREEMENT
----------------------------------------------------------

NON-EMPLOYEE DIRECTOR STOCK SUBSCRIPTION AGREEMENT, dated as of October __,
1999, between Dynatech Corporation, a Delaware corporation (the "Company"), and
the Purchaser whose name appears on the signature page hereof (the "Purchaser").

W I T N E S S E T H:
- - - - - - - - - -

WHEREAS, the Company desires to encourage and enable Directors to acquire a
proprietary interest in the Company;

WHEREAS, it is anticipated that providing such persons with a direct stake
in the Company's welfare will assure a closer identification of their interests
with those of the Company and stockholders, thereby stimulating their efforts on
the Company's behalf and strengthening their desire to remain with the Company;

WHEREAS, the Board of Directors of the Company (the "Board") has adopted
the Dynatech Corporation Directors Stock Purchase Plan (the "Plan") and,
pursuant to the Plan, has granted to the Purchaser the right to purchase the
aggregate number of shares of Common Stock ("Common Stock"), of the Company set
forth on the signature page hereof (each a "Share" and, collectively, the
"Shares") at the purchase price provided for herein; and

WHEREAS, the Purchaser desires to subscribe for and purchase from the
Company the Shares, at a purchase price of $3.25 per share, such price being the
fair market value of a share of Common Stock, as determined in good faith by the
Board on May 18, 1999;

WHEREAS, the Company desires to sell the Shares to the Purchaser on the
terms and subject to the conditions set forth herein;

NOW, THEREFORE, to implement the foregoing and in consideration of the
mutual promises, covenants and agreements contained herein, the parties hereto
hereby agree as follows:

1. Purchase and Sale of Common Stock.
---------------------------------

(a) Purchase of Common Stock. Subject to all of the terms and conditions of
------------------------
this Agreement, the Purchaser hereby subscribes for and shall purchase, and the
Company shall sell to the Purchaser, the Shares, at a purchase price of $3.25
per Share, at the Closing provided for in Section 2(a) hereof. Notwithstanding
anything to
<PAGE>

the contrary, the Company shall have no obligation to sell any Common Stock to
any person who will not be a director of the Company immediately following the
Closing.

(b) Consideration. Subject to all of the terms and conditions of this
-------------
Agreement, the Purchaser shall deliver to the Company at the Closing referred to
in Section 2(a) hereof, immediately available funds in the amount of the
aggregate purchase price set forth on the signature page hereof.

2. Closing.
-------

(a) Time and Place. Except as otherwise mutually agreed by the Company and
--------------
the Purchaser, the closing (the "Closing") of the transaction contemplated by
this Agreement shall be held at the offices of Dynatech Corporation, 3 New
England Executive Park, Burlington, Massachusetts 01803 on or about
____________, 1999.

(b) Delivery by the Company. At the Closing, the Company shall deliver to
-----------------------
the Purchaser a stock certificate registered in the Purchaser's name and
representing the Shares, which certificate shall bear the legends set forth in
Section 3(b) hereof.

(c) Delivery by the Purchaser. At the Closing, the Purchaser shall deliver
-------------------------
to the Company the consideration referred to in Section 1(b) hereof.

3. Purchaser's Representations, Warranties and Covenants.
-----------------------------------------------------

(a) Investment Intention. The Purchaser represents and warrants that the
--------------------
Purchaser is acquiring the Shares solely for the Purchaser's own account for
investment and not with a view to or for sale in connection with any
distribution thereof. The Purchaser agrees that the Purchaser will not, directly
or indirectly, offer, transfer, sell, pledge, hypothecate or otherwise dispose
of any of the Shares (or solicit any offers to buy, purchase or otherwise
acquire or take a pledge of any Shares), except in compliance with the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations of the Securities and Exchange Commission thereunder, and in
compliance with applicable state securities or "blue sky" laws. The Purchaser
further understands, acknowledges and agrees that none of the Shares may be
transferred, sold, pledged, hypothecated or otherwise disposed of (i) unless the
provisions of Section 4 shall have been complied with or have expired, (ii)
unless (A) such disposition is pursuant to an effective registration statement
under the Securities Act, (B) the Purchaser shall have delivered to the Company
an opinion of counsel, which opinion and counsel shall be reasonably
satisfactory to the Company, to the effect that such disposition is exempt from
the provisions of Section 5 of the Securities Act or (C) a no-action letter from
the Securities and Exchange Commission, reasonably satisfactory to the Company,

2
<PAGE>

shall have been obtained with respect to such disposition and (iii) unless such
disposition is pursuant to registration under any applicable state securities
laws or an exemption therefrom.

(b) Legends. The Purchaser acknowledges that the certificate or
-------
certificates representing the Shares shall bear the following legends or other
appropriate legends:

"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
PROVISIONS OF A NON-EMPLOYEE DIRECTOR STOCK SUBSCRIPTION AGREEMENT,
DATED AS OF OCTOBER __, 1999, AS THE SAME MAY BE AMENDED FROM TIME TO
TIME, AND NEITHER THIS CERTIFICATE NOR THE SHARES REPRESENTED BY IT
ARE ASSIGNABLE OR OTHERWISE TRANSFERABLE EXCEPT IN ACCORDANCE WITH THE
PROVISIONS OF SUCH NON-EMPLOYEE DIRECTOR STOCK SUBSCRIPTION
AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE ENTITLED TO
THE BENEFITS OF AND ARE BOUND BY THE OBLIGATIONS SET FORTH IN A
REGISTRATION RIGHTS, DATED AS OF MAY 21, 1998, AMONG THE COMPANY AND
CERTAIN STOCKHOLDERS OF THE COMPANY, A COPY OF WHICH IS ON FILE WITH
THE SECRETARY OF THE COMPANY AS THE SAME MAY BE AMENDED FROM TIME TO
TIME."

"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS
AND MAY NOT BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF UNLESS (i) (A) SUCH DISPOSITION IS PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (B) THE HOLDER HEREOF SHALL HAVE DELIVERED TO THE COMPANY AN
OPINION OF COUNSEL, WHICH OPINION AND COUNSEL SHALL BE REASONABLY
SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT SUCH DISPOSITION IS
EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SUCH ACT OR (C) A NO-ACTION
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION, REASONABLY
SATISFACTORY TO COUNSEL FOR THE

3
<PAGE>

COMPANY, SHALL HAVE BEEN OBTAINED WITH RESPECT TO SUCH DISPOSITION AND
(ii) SUCH DISPOSITION IS PURSUANT TO REGISTRATION UNDER ANY APPLICABLE
STATE SECURITIES LAWS OR AN EXEMPTION THEREFROM."

(c) Securities Law Matters. The Purchaser acknowledges receipt of advice
----------------------
from the Company that (i) the Shares have not been registered under the
Securities Act or qualified under any state securities or "blue sky" laws, (ii)
the Shares must be held indefinitely and the Purchaser must continue to bear the
economic risk of the investment in the Shares unless the Shares are subsequently
registered under the Securities Act and such state laws or an exemption from
registration is available, (iii) when and if the Shares may be disposed of
without registration in reliance upon Rule 144 promulgated under the Securities
Act ("Rule 144"), such disposition can be made only in limited amounts in
accordance with the terms and conditions of such Rule, (iv) a restrictive legend
in the form heretofore set forth shall be placed on the certificates
representing the Shares and (v) a notation shall be made in the appropriate
records of the Company indicating that the Shares are subject to restrictions on
transfer set forth in this Agreement and appropriate stop-transfer restrictions
will be issued to the Company's stock transfer agent with respect to the Shares.

(d) Compliance with Rule 144. If any of the Shares are to be disposed of
------------------------
in accordance with Rule 144, the Purchaser shall transmit to the Company an
executed copy of Form 144 (if required by Rule 144) no later than the time such
form is required to be transmitted to the Securities and Exchange Commission for
filing and such other documentation as the Company may reasonably require to
assure compliance with Rule 144 in connection with such disposition.

(e) Ability to Bear Risk. The Purchaser represents and warrants that (i)
--------------------
the financial situation of the Purchaser is such that the Purchaser can afford
to bear the economic risk of holding the Shares for an indefinite period and
(ii) the Purchaser can afford to suffer the complete loss of the Purchaser's
investment in the Shares.

(f) Questionnaire. The Purchaser agrees to furnish such documents and
-------------
comply with such reasonable requests of the Company as may be necessary to
substantiate the Purchaser's status as a qualifying investor in connection with
the private offering of shares of Common Stock to the Purchaser. The Purchaser
represents and warrants that all information contained in such documents and any
other written materials concerning the status of the Purchaser furnished by the
Purchaser to the Company in connection with such requests will be true, complete
and correct in all material respects.

(g) Access to Information. The Purchaser represents and warrants that (i)
---------------------
the Purchaser has carefully reviewed the Amended and Restated Offering

4
<PAGE>

Memorandum, dated October 1999, and the other materials furnished to the
Purchaser in connection with the transaction contemplated hereby, (ii) the
Purchaser has been granted the opportunity to ask questions of, and receive
answers from, representatives of the Company concerning the terms and conditions
of the purchase of the Shares and to obtain any additional information that the
Purchaser deems necessary to verify the accuracy of the information contained in
such materials and (iii) the Purchaser's knowledge and experience in financial
and business matters is such that the Purchaser is capable of evaluating the
risks of the investment in the Shares.

(h) Registration; Restrictions on Sale upon Public Offering. The Purchaser
-------------------------------------------------------
shall be entitled to the rights and subject to the obligations created under the
Registration Rights Agreement, dated as of May 21, 1999, among the Company,
Clayton, Dubilier & Rice Fund V Limited Partnership (the "Fund") and certain
stockholders of the Company (the "Registration Rights Agreement"), to the extent
set forth therein, and the Shares shall be considered Registrable Securities
thereunder. The Purchaser agrees that, in the event that the Company files a
registration statement under the Securities Act with respect to an underwritten
public offering of any shares of its capital stock, the Purchaser will not
effect any public sale or distribution of any shares of the Common Stock (other
than as part of such underwritten public offering), including but not limited
to, pursuant to Rule 144 or Rule 144A ("Rule 144A") under the Securities Act,
during the 20 days prior to and the 180 days after the effective date of such
registration statement.

4. Restrictions on Disposition of Shares. For 18 months from the date of
-------------------------------------
this Agreement, neither the Purchaser nor any of the Purchaser's heirs or
representatives shall sell, assign, transfer, pledge or otherwise directly or
indirectly dispose of or encumber any of the Shares to or with any other person,
firm, trust, association, corporation or entity (including, without limitation,
transfers to any other holder of the Company's capital stock, dispositions by
gift, by will, by a corporation as a distribution in liquidation and by
operation of law other than a transfer of Shares by operation of law to the
estate of the Purchaser upon the death of the Purchaser, provided that such
--------
estate shall be bound by all of the provisions of this Agreement), provided that
--------
such restrictions shall not apply to any such disposition of the Shares pursuant
to Section 6 of this Agreement. The restrictions contained in this Section 4
shall terminate in the event that an underwritten public offering of the Common
Stock led by one or more underwriters at least one of which is an underwriter of
nationally recognized standing (a "Public Offering") has been consummated and
shall not apply to a sale to the underwriters as part of a Public Offering. Any
transfer or attempted transfer of the Shares in violation of this Section 4
shall be null and void ab initio, and the Company shall not register, recognize
or give effect to any such transfer or attempted transfer, nor shall the
intended transferee acquire any rights in such Shares. The Purchaser
acknowledges and agrees that the restrictions on transfer of the Shares
contained in this Section 4 relate to special, unique and

5
<PAGE>

extraordinary matters and that a violation of any of the terms of such
restrictions will cause the Company irreparable injury for which adequate
remedies are not available at law. Accordingly, the Purchaser agrees that the
Company shall be entitled to an injunction, restraining order or such other
equitable relief (without the requirement to post bond) as a court of competent
jurisdiction may deem necessary or appropriate to restrain the Purchaser from
committing any violation of the terms of such restrictions. These injunctive
remedies are cumulative and in addition to any other rights and remedies the
Company may have.

5. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to the Purchaser that (a) the Company has been duly incorporated
and is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, (b) this Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid and legally
binding obligation of the Company enforceable against the Company in accordance
with its terms, (c) the Shares, when issued, delivered and paid for in
accordance with the terms hereof, will be duly and validly issued, fully paid
and nonassessable, and free and clear of any liens or encumbrances other than
those created pursuant to this Agreement, or otherwise in connection with the
transactions contemplated hereby and upon his acquisition of the Shares, the
Purchaser will become entitled to the rights and subject to the obligations of a
holder of "Registrable Securities" as set forth in the Registration Rights
Agreement.

6. Tag-Along Rights. So long as there has not been an underwritten public
----------------
offering of the Common Stock led by at least one underwriter of nationally
recognized standing (a "Public Offering"), the Fund hereby agrees not to make
any sale or transfer of Common Stock owned by the Fund which would constitute a
Qualifying Sale, except pursuant to the following provisions of this Section 6:

(a) At least 30 days prior to making any sale or transfer of Common Stock
which would constitute a Qualifying Sale, the Fund will deliver a written notice
(the "Sale Notice") to the Company and the Purchaser. The Sale Notice will fully
disclose the identity of the prospective transferee and the terms and conditions
of the proposed Qualifying Sale. The Fund agrees not to consummate any such
proposed Qualifying Sale until at least 30 days after the Sale Notice has been
delivered to the Purchaser, unless the Fund has received notice from the
Purchaser indicating whether or not the Purchaser has elected to participate in
such Qualifying Sale and the number of shares to be sold by the Purchaser has
been finally determined pursuant hereto prior to the expiration of such 30-day
period. The Purchaser may elect to participate in the proposed Qualifying Sale
by delivering written notice to the Fund and the Company within 30 days after
receipt of the Sale Notice. If the Purchaser elects to participate in such
proposed Qualifying Sale, the Purchaser will be entitled to sell in such
Qualifying Sale, at the same price and on the same terms as the Fund, a number
of Shares equal to

6
<PAGE>

the product of (i) the quotient determined by dividing (A) the percentage of the
then outstanding Common Stock represented by the shares of Common Stock then
held by the Purchaser by (B) the aggregate percentage of the then outstanding
Common Stock represented by the Common Stock then held by the Fund and the
aggregate Common Stock held by those directors and employees of the Company or a
subsidiary (including the Purchaser) who elect to participate in such proposed
Qualifying Sale pursuant to the terms of their respective agreements and (ii)
the number of shares of Common Stock such transferee has agreed to purchase in
the proposed Qualifying Sale (or, in the case of a Qualifying Sale within the
meaning of clause (ii) of Section 6(b), the Excess Number of shares which such
transferee has agreed to purchase).

(b) The term "Qualifying Sale" shall mean (i) any sale or transfer of
Common Stock proposed to be made by the Fund at any time after the Fund has sold
or transferred in the aggregate at least the Qualifying Number of shares of
Common Stock or (ii) in the event that prior to the sale or transfer by the Fund
of an aggregate of the Qualifying Number of shares of Common Stock, the Fund
proposes to sell or transfer a number of shares of Common Stock which when
combined with any prior sales or transfers of such shares by the Fund exceeds
the Qualifying Number, the sale or transfer of a number of shares (the "Excess
Number") equal to the excess of (A) the sum of any shares previously sold or
transferred by the Fund and the aggregate number of shares proposed to be sold
or transferred in such contemplated sale, over (B) the Qualifying Number of
shares. In determining whether there is a Qualifying Sale, equitable adjustments
shall be made to reflect any stock split, stock dividend, stock combination,
recapitalization or similar transaction. The term "Qualifying Number" shall mean
5,539,539 shares of Common Stock (excluding any sales or transfers by the Fund
to any director or employee of the Company or a subsidiary of the Company).

(c) The obligation of the Fund and the rights of the Purchaser pursuant to
this Section 6 will not apply to any sale or transfer by the Fund pursuant to a
distribution to the public (whether pursuant to a Public Offering or pursuant to
Rule 144 or otherwise (but not pursuant to Rule 144A or any successor
provision). Any shares referred to, or covered by any sale, transfer or
distribution referred to, in the preceding sentence shall not be included in the
computation of Qualifying Sale.

(d) The Fund acknowledges that the Purchaser would be irreparably damaged
in the event of a breach or a threatened breach by the Fund of any of its
obligations under this Section 6 and the Fund agrees that, in the event of a
breach or a threatened breach by the Fund of any such obligation, the Purchaser
shall, in addition to any other rights and remedies available to him or her in
respect of such breach, be entitled to an injunction from a court of competent
jurisdiction (without any requirement to post bond) granting it specific
performance by the Fund of its obligations under this Section 6. In the event
that the Purchaser shall file suit to enforce the covenants

7
<PAGE>

contained in this Section 6 (or obtain any other remedy in respect of any breach
thereof) and prevails in such suit the Purchaser shall be entitled to recover
from the Company the costs incurred by the Purchaser in conducting the suit,
including reasonable attorney's fees and expenses.

7. Miscellaneous.
-------------

(a) Notices. All notices and other communications required or permitted to
-------
be given under this Agreement shall be in writing and shall be deemed to have
been given if delivered personally or sent by certified or express mail, return
receipt requested, postage prepaid, or by any recognized international
equivalent of such mail delivery, to the Company, the Fund or the Purchaser, as
the case may be, at the following addresses or to such other address as the
Company, the Fund or the Purchaser, as the case may be, shall specify by notice
to the others:

(i) if to the Company, to it at:

Dynatech Corporation
3 New England Executive Park
Burlington, MA 01803
Attention: General Counsel
---------

(ii) if to the Purchaser, to the Purchaser at the address set forth on the
signature page hereof.

(iii) if to the Fund, to:

Clayton, Dubilier & Rice
Fund V Limited Partnership
1403 Fulk Road, Suite 106
Wilmington, Delaware 19803
Attention: Brian D. Finn
---------

All such notices and communications shall be deemed to have been received on the
date of delivery if delivered personally or on the third business day after the
mailing thereof. Copies of any notice or other communication given under this
Agreement shall also be given to:

Clayton, Dubilier & Rice, Inc.
375 Park Avenue, 18th Floor
New York, New York 10152
Attention: Joseph L. Rice, III
---------

8
<PAGE>

and

Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention: Franci J. Blassberg, Esq.
---------

The Fund also shall be given a copy of any notice or other communication between
the Purchaser and the Company under this Agreement at its address as set forth
above.

(b) Binding Effect; Benefits. This Agreement shall be binding upon the
------------------------
parties to this Agreement and their respective successors and assigns and shall
inure to the benefit of the parties to the Agreement, the Fund and their
respective successors and assigns. Except as provided in Section 6, nothing in
this Agreement, express or implied, is intended or shall be construed to give
any person other than the parties to this Agreement, the Fund or their
respective successors or assigns any legal or equitable right, remedy or claim
under or in respect of any agreement or any provision contained herein.

(i) Waiver. Any party hereto or beneficiary hereof may by written notice
------
to the other parties (A) extend the time for the performance of any of the
obligations or other actions of the other parties under this Agreement, (B)
waive compliance with any of the conditions or covenants of the other parties
contained in this Agreement and (C) waive or modify performance of any of the
obligations of the other parties under this Agreement, provided that any waiver
of the provision of Section 6 must be consented to in writing by the Fund.
Except as provided in the preceding sentence, no action taken pursuant to this
Agreement, including, without limitation, any investigation by or on behalf of
any party or beneficiary shall be deemed to constitute a waiver by the party or
beneficiary taking such action of compliance with any representations,
warranties, covenants or agreements contained herein. The waiver by any party
hereto or beneficiary hereof of a breach of any provision of this Agreement
shall not operate or be construed as a waiver of any preceding or succeeding
breach and no failure by a party to exercise any right or privilege hereunder
shall be deemed a waiver of such party's or beneficiary's rights or privileges
hereunder or shall be deemed a waiver of such party's or beneficiary's rights to
exercise the same at any subsequent time or times hereunder.

(ii) Amendment. This Agreement may not be amended, modified or supplemented
---------
orally, but only by a written instrument executed by the Purchaser and the
Company, and (in the case of any amendment, modification or supple-

9
<PAGE>

ment to or affecting Section 6 hereof, or that adversely affects the rights of
the Fund hereunder) consented to by the Fund in writing.

(d) Entire Agreement. This Agreement is the entire agreement of the
----------------
parties with respect to the subject matter hereof and supersedes all other prior
agreements, understandings, documents, statements, representations and
warranties, oral or written, express or implied, between the parties hereto and
their respective affiliates, representatives and agents in respect of the
subject matter hereof.

(e) Assignability. Neither this Agreement nor any right, remedy, obligation
-------------
or liability arising hereunder or by reason hereof shall be assignable by the
Company or the Purchaser without the prior written consent of the other parties
and the Fund. The Fund may assign from time to time all or any portion of its
rights under Section 6 hereof to one or more persons or other entities
designated by it.

(f) Applicable Law. This Agreement shall be construed in accordance with
--------------
and governed by the laws of the State of New York, without giving effect to the
conflicts of laws rules thereof to the extent such rules would require or permit
the application of the laws of another jurisdiction, except to the extent that
the corporate law of the jurisdiction of incorporation of the Company
specifically and mandatorily applies.

(g) Section and Other Headings, etc. The section and other headings
-------------------------------
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.

(h) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument.

(i) Delegation by the Board. All of the powers, duties and
-----------------------
responsibilities of the Board specified in this Agreement may, to the full
extent permitted by applicable law, be exercised and performed by any duly
constituted committee thereof to the extent authorized by the Board to exercise
and perform such powers, duties and responsibilities.

10
<PAGE>

IN WITNESS WHEREOF, the Company and the Purchaser have executed this
Agreement as of the date first above written.

DYNATECH CORPORATION

By:
--------------------------------
Name:
Title:

THE PURCHASER

By:
--------------------------------
Name:

Address of the Purchaser:

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

Total Number of Shares
of Common Stock to be
Purchased:

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

Cash Purchase Price:

$
---------------------

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 39,016
<SECURITIES> 0
<RECEIVABLES> 91,248
<ALLOWANCES> 2,435
<INVENTORY> 51,244
<CURRENT-ASSETS> 27,670
<PP&E> 98,811
<DEPRECIATION> 66,030
<TOTAL-ASSETS> 406,997
<CURRENT-LIABILITIES> 139,985
<BONDS> 275,000
0
0
<COMMON> 1,221
<OTHER-SE> (301,551)
<TOTAL-LIABILITY-AND-EQUITY> 406,997
<SALES> 477,125
<TOTAL-REVENUES> 477,125
<CGS> 113,854
<TOTAL-COSTS> 205,900
<OTHER-EXPENSES> 204,995
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,433
<INCOME-PRETAX> 29,682
<INCOME-TAX> 12,812
<INCOME-CONTINUING> 16,870
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,870
<EPS-BASIC> .14
<EPS-DILUTED> .13

</TABLE>