GENRAD INC, 10-K, 2000-03-31

GENRAD INC
10-K, 2000-03-31
INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED JANUARY 1, 2000

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

COMMISSION FILE NO. 1-8045

GENRAD, INC.

(Exact name of registrant as specified in its charter)

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

<TABLE>
<S> <C>
MASSACHUSETTS 04-1360950
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)

7 TECHNOLOGY PARK DRIVE
WESTFORD, MASSACHUSETTS 01886-0033
(Address of principal executive offices) (Zip Code)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 589-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Common Stock, $1.00 par value New York Stock Exchange
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

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

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

The aggregate market value of shares of Common Stock held by non-affiliates
of the registrant as of March 24, 2000 was $444,582,661. 29,887,910 shares of
the Common Stock of GenRad, Inc., $1.00 par value, were outstanding on
March 24, 2000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement of GenRad, Inc. for the Annual Meeting of
Shareholders to be held on May 11, 2000 (the "2000 Proxy Statement"), which will
be filed with the Securities and Exchange Commission within 120 days after the
close of the Company's fiscal year ended January 1, 2000, are incorporated by
reference into Part III.

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PART I

ITEM 1. BUSINESS

GenRad, Inc. ("GenRad" or "the Company"), which commenced operations in
1915, is a leading global manufacturing solutions company. GenRad designs,
manufactures and markets integrated hardware and software solutions that enable
the successful manufacture, test and service for microprocessors and other
electronic devices and components. The Company operates primarily in the United
States, Western Europe and Southeast Asia through its three business segments,
Electronic Manufacturing Solutions ("EMS"), Advanced Diagnostic Solutions
("ADS") and GR Software ("GRS") (each of which is further described below). The
Company's three business segments each aggregate similar classes of products.
The Company's EMS business segment includes primarily products used in the
manufacture, test and inspection of printed circuit boards while the Company's
ADS business segment includes diagnostic systems used primarily by the
transportation industry. GR Software includes the Company's software product
line, which is comprised of the TRACS-Registered Trademark-, CimBridge-TM-,
SFDM-TM- and SFLM-TM- products, all of which are utilized by GenRad's customers
to optimize their manufacturing processes. Summarized financial information with
respect to each of the Company's business segments is included in Note 13 to the
Company's consolidated financial statements included in Item 8 of this Annual
Report on Form 10-K.

ELECTRONIC MANUFACTURING SOLUTIONS

GenRad's EMS business segment focuses on the integration of hardware and
software for process control in the manufacture of printed circuit boards,
emphasizing inspection technologies. EMS provides its customers with
leading-edge, cost effective solutions used to collect data about their
manufacturing process and provide reliable, timely and useful information which
can be used to optimize manufacturing processes.

GenRad's EMS business is headquartered in Westford, MA and consists of the
following product offerings, which collectively make up the EMS product class.

BOARD TEST The TestStation and GR228X i Series families of production test
solutions are optimized to test, inspect and report defects that can occur in
the manufacturing of printed circuit boards (PCB's). These advanced board test
solutions provide precise fault diagnosis, utilizing test and inspection
technologies, on the most demanding of PCB's. GenRad's board test solutions are
recognized for delivering the highest fault coverage and highest throughput in a
production test environment. These systems sell for prices ranging from $50,000
to over $1,000,000.

GENEVA-REGISTERED TRADEMARK- TEST AND MEASUREMENT SOLUTIONS
Geneva-Registered Trademark- is a combined hardware and software functional test
and measurement system that uses the industry standard VXIbus for instrument
control. GenRad's extensions add a scanner bus above the instruments to solve
the signal interconnect problems not addressed by VXI. The company has a patent
for this VXIScan architectural extension. The Geneva-Registered Trademark-
architecture is capable of addressing the needs of a wide range of functional
test and measurement solution applications, including solutions used in the
telecom, datacom and medical market segments. These systems sell for prices
ranging from $100,000 to $500,000.

VIPER-REGISTERED TRADEMARK- PROCESS INSPECTION SOLUTIONS
Viper-Registered Trademark- Process Inspection Solutions are low-cost test and
inspection solutions designed to provide real-time, closed-loop feedback
regarding process variations and faults on a printed circuit board manufacturing
line. This solution is ideally suited for companies that manufacture price
sensitive products (i.e. consumer). To accommodate the local markets GenRad
serves throughout the world, this system is offered with standard vacuum fixture
compatibility, a Press Down Unit and an in-line configuration at prices ranging
from $25,000 to $125,000.

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PILOT-TM- GenRad's Pilot solution is a "fixtureless' test solution designed
to test and inspect populated printed circuit boards by utilizing both "flying'
and fixed probes to gain access to the components under test. This test
technology is ideal for verifying prototypes and initial production runs, which
are typically small in quantity and utilize boards with limited test point
access, and for use as a diagnostic tool to augment the functional testing of
printed circuit board assemblies. This system is ideally suited for companies
striving to reduce their new products' time-to-production schedule as well as
eliminating the fixture costs and development times that are associated with
traditional board test products. This system sells for prices ranging from
$200,000 to $300,000.

INTEGRATED CUSTOMER SERVICES ("ICS") ICS provides programming services,
fixture development and on-site training and support to owners of in-circuit and
functional testers throughout the United States and Europe. Fixtures, which
match the test device with the device under test, are generally custom designed
(both hardware and software) and range in price from $7,500 to $90,000.

ADVANCED DIAGNOSTIC SOLUTIONS

GenRad's ADS business segment is a global leader in developing and marketing
diagnostic information solutions comprised of hardware, software and services
which optimize the manufacturing and service capabilities of transportation and
equipment companies. ADS's solutions, which generally include complex electronic
diagnostic solutions, are used by its customers to maximize manufacturing
efficiencies at time of product build as well as to maintain efficient and
effective service operations throughout the product's life. Because of the
complexity of ADS' products, ADS is able to develop long-term partnering
relationships with its customers thereby allowing a range of implementation
approaches resulting in customer driven solutions which may include hardware,
software and consultative support. ADS is headquartered in Manchester, England
with development and service centers in Detroit, MI and Ismaning, Germany as
well as a worldwide product support network.

GRSOFTWARE

GenRad's GRS business segment was expanded during 1998 with the Company's
acquisition of Industrial Computer Corporation ("ICC"), a privately held
manufacturing execution systems company with operations in Atlanta. Upon
acquisition, the Company combined the operations of ICC with its existing
manufacturing software development, sales and support groups, which included the
TRACS-Registered Trademark- and CimBridge-TM- products, to form GRS. During
1999, GRS introduced Shop Floor Line Manager-TM- ("SFLM"), a product providing
virtual line monitoring ability to manufacturers. GRS develops and markets
product solutions and services to companies wishing to achieve and maintain
control over manufacturing processes. GRS's flagship product, Shop Floor Data
Manager-TM- ("SFDM"), manages a business's process information necessary to
manufacture products according to plan. SFDM, along with TRACS and CimBridge,
enable the shop floor to remotely, or on-site, manage the operations and to
communicate, at varying levels, with a Company's ERP systems to have a real time
direct impact on a business's manufacturing operations. GRS is headquartered in
Atlanta, GA with technology development and support centers in Portland, OR,
Aberdeen, Scotland and Zurich, Switzerland.

PRINCIPAL MARKETS AND CUSTOMERS

The principal markets for GenRad's product and service offerings include,
but are not limited to, original equipment manufacturers of electronics and
electronic components and peripherals, contract electronics manufacturers and
transportation and telecommunications companies. Management believes that these
industries will continue to be a significant revenue source for the Company.
These markets are characterized by rapid technological change, an increased
demand for specific feature requests by customers, evolving industry standards,
and frequent new product introductions. The introduction of products embodying
new technology or the emergence of new industry standards or practices could
render the Company's existing products obsolete or otherwise unmarketable.
Future operating results are

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dependent upon the Company's ability to develop, design, manufacture and market
technologically innovative products that meet customer needs. During 1999, one
customer, Ford Motor Company ("Ford") accounted for 31% of consolidated
revenues.

During 1998, the Company began substantial work under a multi-year hardware,
software and services contract with Ford. Pursuant to the agreement, the Company
has undertaken to provide customers of Ford with diagnostic tools designed to
enable Ford's dealers to test and diagnose problems with electrical systems in
Ford vehicles. The Company derived approximately $65.9 million during 1999
related to shipments of units to Ford and expects to derive the same in 2000.
The loss of this contract or any deterioration in the Company's relationship
with Ford could have a material adverse effect on the Company's results of
operations, financial position and cash flow.

SALES, SUPPORT AND DISTRIBUTION

GenRad sells and supports its products primarily through its own sales and
support organizations. The Company maintains sales offices and support centers
in the United States, Mexico, the United Kingdom, Germany, France, Switzerland,
Italy, Singapore and Malaysia. GenRad also contracts with independent
representatives throughout the world to provide sales and support services,
primarily in areas not covered directly by a GenRad sales and support center.

SUPPLIERS

GenRad purchases certain materials and components used in the manufacture of
product from various single sources, primarily United States companies. GenRad's
purchasing strategy is to develop supportive supplier partnerships to leverage
core competencies by driving material through a preferred supplier base
committed to excellence through continuous improvement. The Company has
developed alternative sources of supply for most materials and components;
however, certain microcomputers, microprocessors, general-purpose digital
computers and custom semiconductor devices are available only from a limited
number of suppliers worldwide. Management does not believe that the loss of any
one of its primary materials or components suppliers would have a material
adverse effect on its results of operations, financial position or cash flow.

FOREIGN OPERATIONS

GenRad's operations abroad consist of selling, marketing, distributing and
servicing products and providing other types of customer support services such
as software development. GenRad is subject to the usual risks of international
trade, including unfavorable economic conditions, political instability,
restrictive trade policies, controls on funds transfers and foreign currency
fluctuations. Financial information concerning GenRad's foreign operations is
included in Note 13 to the Company's consolidated financial statements included
in Item 8 of this Annual Report on Form 10-K.

BACKLOG

Backlog, represented by those orders received which are backed by a purchase
order, at the end of fiscal 1999 was approximately $30.9 million as compared to
approximately $21.6 million at the end of fiscal 1998. Most orders are filled
within three months of receipt. The Company believes that a substantial portion
of the fiscal 1999 backlog will be recognized as revenue during the first
quarter of its 2000 fiscal year. Although orders are subject to cancellation,
GenRad's experience has been that losses resulting from cancellations are not
material.

COMPETITIVE CONDITIONS

Competition, from both domestic and foreign competitors, remains intense
across all business segments. Certain of the Company's competitors are
substantially larger companies with greater resources.

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For example, the Company competes with Agilent Technologies, Inc. and Teradyne
Corporation in its EMS business and with Hewlett-Packard and Siemens A.G. in its
ADS business. Typically, GenRad meets competition by carefully selecting its
markets and by developing its products to meet the needs of each group of
customers. Primary competitive factors are product performance, customer
specific applications engineering, customer support services and pricing. The
EMS market is subject to rapid change, and success is dependent on the
development of new technologies and products. A key competitive advantage for
GenRad is the Company's broad and integrated product family and its extensive
hardware and software capabilities.

RESEARCH AND DEVELOPMENT

GenRad's expenditures for the development of new products and services, and
the improvement of existing products and services, were approximately
$20.0 million in fiscal 1999, $19.0 million in fiscal 1998 and $19.9 million in
fiscal 1997. The expenditures were primarily for staffing and related expenses
for software development in the GRS and EMS segments and redesign of electronic
manufacturing systems and advanced diagnostic solutions and software products.

PATENTS AND TRADEMARKS

GenRad seeks patents in the United States and appropriate foreign countries
for significant technological inventions. GenRad also owns patents, copyrights,
trademarks and proprietary information, some of which are considered to be
valuable assets. In the opinion of management, no individual patent, copyright,
trademark or proprietary information is material to the business as a whole.

ENVIRONMENT

GenRad's manufacturing facilities are subject to numerous laws and
regulations designed to protect the environment. GenRad does not anticipate that
compliance with such laws or regulations presently in effect will adversely
affect its capital expenditures, earnings or competitive position. GenRad does
not expect to make any material expenditures for environmental control
facilities in the current fiscal year.

EMPLOYEES AND EXECUTIVE OFFICERS

GenRad had 1,296 employees, including contract employees, on January 1, 2000
and 1,270 employees on January 2, 1999. None of GenRad's employees are covered
by collective bargaining agreements, and GenRad believes relations with its
employees are good.

<TABLE>
<CAPTION>
NAME AGE OFFICE
- ---- -------- ------------------------------------------
<S> <C> <C>
James F. Lyons............................ 65 Chairman and Chief Executive Officer
John Downing.............................. 40 Vice President, Global Sales
Paul Geere................................ 45 President, Advanced Diagnostic Solutions
Lori B. Hannay............................ 43 Vice President, Information Services and
Corporate Operations
Stephen K. Holford........................ 54 President, GR Software
Brian C. Quirk............................ 41 Vice President, Global Manufacturing
Michael W. Schraeder...................... 43 President, Electronic Manufacturing
Solutions
Walter A. Shephard........................ 46 Vice President, Chief Financial Officer
and Secretary
</TABLE>

All officers are elected by the Board of Directors (the "Directors").
Elected officers hold office until the first meeting of the Directors following
the Annual Meeting of Shareholders (the "Annual Meeting") and thereafter until a
successor is duly elected and qualified. There are no family relationships among
the officers and/or directors.

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James F. Lyons was elected Chairman and CEO in January 2000. He joined
GenRad as President and Chief Executive Officer, in July 1993. From
January 1992 until July 1993, Mr. Lyons served as President and Chief Executive
Officer of Harry Gray Associates, a global investment and management
organization specializing in acquisitions and leveraged buyouts.

John Downing was appointed Vice President, Global Sales in April 1998. From
1996 to 1998, Mr. Downing served as Vice President, North American Sales. From
1995 to 1996, he served as the Northern Regional Sales Manager. From 1988 to
1995, he oversaw major account sales. Mr. Downing joined GenRad in 1980.

Paul H. Geere was elected President, Advanced Diagnostic Solutions in
May 1998. From May 1996 to May 1998, Mr. Geere served as Vice President,
Managing Director, Advanced Diagnostic Solutions. From September 1995 to
May 1996 he was Managing Director of GenRad's Advanced Diagnostic Solutions
business unit, located in Stockport, England. From January 1995 to
September 1995, Mr. Geere worked as a Management Consultant for Coopers &
Lybrand in its London office.

Lori B. Hannay was elected Vice President, Information Services and
Corporate Operations in November 1998. From November 1996 to May 1998, she was
GenRad's Vice President, Human Resources. From November 1994 to November 1996
she served as the Company's Director of Compensation and Benefits. From
July 1990 to November 1994 Ms. Hannay was Corporate Secretary and Vice President
of Human Resources for First Inter-Bancorp.

Stephen K. Holford was appointed President, GR Software in May 1999. From
February 1999 to April 1999, Dr. Holford was Vice President and Chief Operating
Officer, GR Software. From April 1998 to February 1999, he served as Vice
President and General Manager, Product Operations, Electronic Manufacturing
Systems. From February 1998 to April 1998 he held the position of Vice President
and General Manager, Functional Test in EMS and from December 1997 to
February 1998 Dr. Holford was Vice President, Executive Staff.

Brian C. Quirk was appointed Vice President, Global Manufacturing in June of
1999. From January of 1998 to June of 1999 Mr. Quirk served as Vice President of
Manufacturing for GenRad's Electronic Manufacturing Solutions business unit.
From May of 1996 to January of 1998 he was Director of Manufacturing and
Materials Manager. Prior to that he served GenRad in a variety of manufacturing
capacities. Mr. Quirk joined GenRad in 1995.

Michael W. Schraeder was elected President, Electronic Manufacturing
Solutions in March 1998. From November 1996 to March 1998, Mr. Schraeder was
Vice President, Worldwide Sales and Service. From March 1995 to November 1996,
he served as Vice President, Sales and Service for the Americas Region. From
April 1992 to February 1995, Mr. Schraeder held the position of Eastern Regional
Sales Manager and from April 1991 to March 1992, he was District Sales Manager
for the Southeastern Region. Mr. Schraeder joined GenRad in 1979.

Walter A. Shephard was elected Vice President, Chief Financial Officer and
Secretary in November 1998. From May 1998 to November 1998, Mr. Shephard held
the position of Vice President and Chief Operating Officer for Worldwide
Financial Operations. From July 1997 to May 1998, he served as Treasurer and
Vice President, Investor Relations. From February 1991 to August 1997
Mr. Shephard was Treasurer and Clerk. Prior to that he served the Company in a
variety of finance positions. Mr. Shephard joined GenRad in 1983.

ITEM 2. PROPERTIES

In March 1999, the Company entered into a 7 year lease for research and
development and office space located in Atlanta, Georgia. The facility will
serve primarily as a development center and sales office, along with certain
administrative functions for GenRad's GRS business segment. The facility
includes 26,500 square feet of office space.

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In July 1996, the Company entered into a 15 year lease for two adjoining
properties located in Westford, Massachusetts. These leased facilities include
130,000 square feet of prime office space used for the Company's corporate
headquarters, research and development and general business offices and 100,000
square feet used for manufacturing for the EMS business unit.

In October 1996, the Company's European subsidiary entered into a 15-year
lease commitment at the Orion Business Park located in Manchester, England. The
facility, encompassing 75,000 square feet, is primarily used for administrative
and engineering office space for the ADS business unit.

In addition, GenRad engages in research, design, manufacturing or marketing
operations in leased facilities in eight states in the United States and in
seven foreign countries. In the opinion of management, all of GenRad's
properties are well maintained and the current facilities are adequate for its
present needs.

ITEM 3. LEGAL PROCEEDINGS

None.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANTS' COMMON STOCK AND RELATED SHAREHOLDER MATTERS

STOCK PRICE INFORMATION

The Company's Common Stock is traded on the New York Stock Exchange under
the symbol GEN. The following table shows the quarterly high and low closing
price for a share of the Company's Common Stock for the Company's 1999 and 1998
fiscal years.

<TABLE>
<CAPTION>
1999 1998
-------------------------- ---------------------------
HIGH LOW HIGH LOW
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
1ST QUARTER........................................ 21 15/16 14 1/8 32 5/8 24
2ND QUARTER........................................ 22 3/8 14 32 15/16 16 5/8
3RD QUARTER........................................ 22 1/8 17 5/16 19 3/4 10 3/8
4TH QUARTER........................................ 19 15/16 15 1/2 18 3/16 10 15/16
</TABLE>

As of March 24, 2000 there were 2,730 stockholders of record holding
29,887,910 shares of the Company's Common Stock.

DIVIDENDS

It is the policy of the Company to retain earnings to support the growth and
expansion of the Company's business. Although the Company has paid dividends in
the past, there are no plans to resume paying dividends in the foreseeable
future. Payment of dividends is restricted by financing agreements to which the
Company is a party.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below are derived from the
consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The consolidated balance
sheet for the Company's 1999 and 1998 fiscal years and the related consolidated
statements of operations and cash flows for the three years ended January 1,
2000 and notes thereto appear elsewhere in this Form 10-K. The data set forth
below should be read in conjunction with "Management's Discussion

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and Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and related notes thereto included elsewhere
in this Form 10-K.

<TABLE>
<CAPTION>
(Dollar and share amounts in thousands): 1999 1998(a) 1997 1996 1995
- ---------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operations:
Total revenue............................. $301,948 $224,789 $236,761 $183,545 $158,753
Gross margin.............................. 135,191 105,912 126,764 96,408 76,822
Operating income (loss)................... 49,102 (14,294) 38,486 25,856 16,369
Net income (loss)......................... $ 47,494 $ (9,068) $ 41,295 $ 27,335 $ 12,271
Net income (loss) per common and common
equivalent share:
Basic..................................... $ 1.66 $ (0.32) $ 1.54 $ 1.22 $ 0.59
Diluted................................... $ 1.60 $ (0.32) $ 1.43 $ 1.11 $ 0.56
</TABLE>

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

(a) Operating income (loss), net income (loss) and net income (loss) per common
and common equivalent share includes the effect of charges related to
acquired in-process research and development totaling approximately
$10.1 million, impairment losses totaling approximately $4.9 million and
restructuring and other charges totaling approximately $13.6 million. Gross
margin includes the effect of one-time charges related to restructuring and
other non-recurring charges totaling approximately $4.9 million.

<TABLE>
<S> <C> <C> <C> <C> <C>
Balance sheet:
Current ratio............................. 2.9 2.5 3.6 2.7 1.7
Total assets.............................. $248,639 $208,225 $178,957 $115,765 $ 87,406
Long-term debt, including current
portion................................. 6,006 8,487 10,953 146 49,073
Stockholders' equity...................... $176,835 $134,031 $115,013 $ 63,680 $(23,238)
Other data:
Number of employees....................... 1,296 1,270 1,388 1,239 1,138
Weighted average common and common
equivalent shares used in computing per
share amounts
Basic................................. 28,669 28,003 26,814 22,488 20,869
Diluted............................... 29,683 28,003 28,788 27,484 21,866
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The matters discussed herein contain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in Item 1
"Business" of this report as well as those discussed in this section and
elsewhere in this Report.

OVERVIEW

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EMS focuses on the integration of hardware and software for process control
in the manufacture of printed circuit boards, emphasizing inspection
technologies. EMS provides its customers with leading-edge, cost-effective
solutions used to collect data about their manufacturing process and provide
reliable, timely and useful information which can be used to optimize
manufacturing processes.

ADS is a global leader in developing and marketing diagnostic solutions
comprised of hardware, software and services which optimize the manufacturing
and service capabilities of leading transportation and equipment companies.
ADS's solutions are used by its customers to maximize manufacturing efficiencies
at time of product build as well as to maintain efficient and effective service
operations throughout the product's life.

GRS was expanded during 1998 with the Company's acquisition of Industrial
Computer Corporation ("ICC"), a privately held manufacturing execution systems
company with operations in Atlanta. Upon acquisition, the Company combined the
operations of ICC with its existing manufacturing software development, sales
and support groups to form GRS. During 1999, GRS introduced Shop Floor Line
Manager-TM- ("SFLM"), a product providing virtual line monitoring ability to
manufacturers. GRS develops and markets product solutions and services to
companies wishing to achieve and maintain control over manufacturing processes.
GRS's flagship product, Shop Floor Data Manager-TM- ("SFDM"), manages a
business's process information necessary to manufacture products according to
plan. SFDM also enables the shop floor to communicate with a Company's ERP
systems to have a real time direct impact on a business's manufacturing
operations.

The fiscal year ended January 1, 2000 includes 52 weeks. The fiscal year
ended January 2, 1999 included 52 weeks, while the fiscal year ended January 3,
1998 included 53 weeks.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage of
net sales represented by certain items in the Company's Consolidated Statement
of Operations.

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total revenue............................................... 100.0% 100.0% 100.0%
Cost of products and services sold.......................... 55.2 52.9 46.5
----- ----- -----
Gross margin................................................ 44.8 47.1 53.5
Selling, general and administrative......................... 21.9 31.1 28.9
Research and development.................................... 6.6 8.4 8.4
Acquired in-process research and development................ -- 4.5 --
Restructuring charges....................................... -- 3.9 --
Loss from impairment of intangible assets................... -- 2.2 --
Arbitration settlement...................................... -- 3.4 --
----- ----- -----
Total operating expenses.................................... 28.5 53.5 37.3
Operating income (loss)..................................... 16.3 (6.3) 16.2
Other expenses.............................................. (0.5) (0.6) (0.3)
Income tax benefit (expense)................................ (0.1) 2.9 1.5
----- ----- -----
Net income (loss)........................................... 15.7% (4.0)% 17.4%
===== ===== =====
</TABLE>

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1999 VS. 1998

ORDERS

Orders for the Company's products and services increased to $311.2 million
for the twelve months ended January 1, 2000 from $221.5 million for the twelve
months ended January 2, 1999. EMS orders totaled $185.1 for the twelve months
ended January 1, 2000 compared to $172.2 million for the twelve months ended
January 2, 1999. ADS orders totaled $102.5 million for the twelve months ended
January 1, 2000 compared to $32.3 million for the twelve months ended
January 2, 1999. GRS orders totaled $23.6 million for the twelve months ended
January 1, 2000 compared to $17.0 million for the twelve months ended
January 2, 1999.

EMS orders increased $12.9 million for the twelve months ended January 1,
2000 compared to the comparable period ended January 2, 1999 due to the
improvement in the economic conditions in which the Company's customers operate,
this was offset by declining demand for the segment's high-end functional test
products during the twelve months ended January 1, 2000. The increase in ADS
orders of $70.2 million for the twelve months ended January 1, 2000 compared to
the comparable period ended January 2, 1999 is primarily attributable to the
launch of the Company's WDS 3500 product for Ford. The increase in GRS orders of
$6.6 million for the twelve months ended January 1, 2000 compared to the
comparable period ended January 2, 1999 is primarily attributable to the
acquisition of Industrial Computer Corporation ("ICC") in April 1998.

North American orders totaled $173.4 million for the twelve months ended
January 1, 2000 compared to $128.6 million for the twelve months ended
January 2, 1999. European orders totaled $116.6 million for the twelve months
ended January 1, 2000 compared to $74.9 million for the twelve months ended
January 2, 1999. Asian orders totaled $21.2 million for the twelve months ended
January 1, 2000 compared to $18.0 million for the twelve months ended
January 2, 1999.

The increase in North American orders of $44.8 million consists of an
increase in order activity related to the launch of the Company's WDS 3500
product for Ford, which totaled $47.6 million in North American orders during
the twelve months ended January 1, 2000. This was offset by a decline of
$2.5 million in order activity for other business in the Company's ADS segment.
EMS' North American orders declined $4.5 million due to the migration of certain
of the Company's contract manufacturing customers to Eastern Europe. These
declines were offset by an increase of $4.2 million in North American orders for
GRS attributable to the acquisition of ICC in April 1998.

European orders increased $41.7 million, primarily attributable to an
increase in ADS European orders of $24.7 million due to the launch of the
Company's WDS 3500 product for Ford, which contributed $22.2 million of orders
in Europe during the twelve months ended January 1, 2000 and an increase in EMS
orders of $14.5 million reflecting the continued migration of certain of the
Company's large contract manufacturers into Eastern Europe and strong European
demand for the segment's products. European orders also reflect an increase of
$2.5 million on incremental business in the Company's ADS segment relating to
certain contracts with European truck manufacturers and a $2.5 million increase
in GRS orders mainly from the acquisition on ICC in April 1998.

REVENUE

Product revenue increased to $232.4 million for the twelve months ended
January 1, 2000 from $159.3 million for the twelve months ended January 2, 1999.
EMS product revenue totaled $145.9 million for the twelve months ended
January 1, 2000 compared to $141.4 million for the twelve months ended
January 2, 1999. ADS product revenue totaled $77.0 million for the twelve months
ended January 1, 2000 compared to $10.0 million for the twelve months ended
January 2, 1999. GRS product revenue totaled $9.5 million for the twelve months
ended January 1, 2000 compared to $7.9 million for the twelve months ended
January 2, 1999.

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The increase in EMS product revenue of $4.5 million is attributable to
increases of $8.8 million related to the Company's high-end in-circuit test
systems and $3.0 million related to the Company's GR Pilot product. This was
offset primarily by declines of $6.2 million in product revenue related to the
Company's functional test products and $0.4 million related to the Company's
low-cost in-circuit test systems.

The increase in ADS product revenue of $67.0 million is primarily
attributable to the launch of the Company's WDS 3500 product for Ford, which
contributed $65.9 million of product revenue during the twelve months ended
January 1, 2000. For the twelve months ended January 1, 2000 the Company shipped
approximately 10,000 WDS 3500 units. The Company expects to continue to derive
significant revenues from Ford related to its WDS 3500 product in 2000 and
beyond. However, the Company does not anticipate a unit count approaching the
unit count during the twelve months ended January 1, 2000 in any one future
twelve month period subsequent to the year 2000. During 1999, the Company and
Ford worked together to time the major regional launches to European and North
American dealers during June, July and September. Subsequent regional market
launches, as well as launches for certain of Ford's subsidiaries and strategic
partners, are planned for the year 2000 beginning in the Spring.

Service revenue increased to $69.6 million for the twelve months ended
January 1, 2000 from $65.5 million for the twelve months ended January 2, 1999.
EMS service revenue totaled $32.3 million for the twelve months ended
January 1, 2000 compared to $34.5 million for the twelve months ended
January 2, 1999. ADS service revenue totaled $25.9 million for the twelve months
ended January 1, 2000 compared to $22.3 million for the twelve months ended
January 2, 1999. GRS service revenue totaled $11.4 million for the twelve months
ended January 1, 2000 compared to $8.7 million for the twelve months ended
January 2, 1999.

The decline in EMS service revenue of $2.2 million is primarily attributable
to declines of $1.6 million and $1.7 million in service revenue related to the
segment's high-end functional test products and its fixture programming
business, respectively. The decrease related to the segment's high-end
functional test systems reflects the overall decrease in demand for these
products and their associated services. The decline in the Company's fixture
programming business reflects the overall decreased demand for these segment's
products driven by customer demands for higher throughput per manufacturing line
and improved worldwide asset management. These decreases are offset by an
increase of $1.1 million of service revenue related to the Company's in-circuit
test products. The increase in ADS service revenues of $3.6 million is due to
$2.0 million of incremental service revenue related to the WDS 3500 product and
$1.6 million of increased business during 1999 in ADS' services. The increase in
GRS service revenue of $2.7 million reflects the acquisition of ICC in
April 1998.

Revenue from international markets increased to $153.7 million, or 50.9% of
revenue, for the twelve months ended January 1, 2000 from $116.3 million, or
51.7% of revenue, for the twelve months ended January 2, 1999. The increase in
international revenue in total reflects the increased revenue in Europe
associated with the Company's launch of the WDS 3500 product for Ford and the
continued expansion of the Company's contract manufacturing customers into
Eastern Europe and Mexico. The percentage decrease resulted from increased
volume of business in North America attributable to the launch of the Company's
WDS 3500 product for Ford during the twelve months ended January 1, 2000.
Revenues from international markets are subject to the risks of currency
fluctuations.

GROSS MARGINS

Product margins were $108.3 million, or 46.6% for the twelve months ended
January 1, 2000 compared to $79.2 million, or 49.7% for the twelve months ended
January 2, 1999. Excluding one-time charges of $4.9 million related to the
discontinuance of certain ADS product offerings ($3.5 million) and the exit from
the hardware portion of the Company's Vision product line ($1.4 million),
product margins for the twelve months ended January 2, 1999 were $84.1, or
52.8%.

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As a percentage of product revenue, product margins declined to 46.6% for
the twelve months ended January 1, 2000 from 52.8%, excluding one-time charges,
for the twelve months ended January 2, 1999. This decrease reflects the
significantly lower margins realized on the WDS 3500 product compared to the
Company's higher margin EMS and GRS products.

The increase in product margins of $24.2 million, excluding one-time charges
during the comparable year ago period, consist of incremental margins of
$8.6 million in the EMS segment, $15.0 million in the ADS segment and
$1.1 million in the GRS segment. The $8.6 million EMS increase is attributable
to improved manufacturing efficiencies affected by management's restructuring
efforts in 1998 and a more favorable product mix. The $15.0 million ADS increase
is due to the launch of the Company's WDS 3500 product with Ford amounting to
$13.1 million in incremental margin as well as an increase of $1.9 million in
the remaining ADS segment. The $1.1 million increase in the GRS segment
primarily relates to increased product sales. These increases were offset by
increased capitalized software amortization costs of $0.5 million during the
twelve months ended January 1, 2000 compared to the twelve months ended
January 2, 1999. The Company anticipates that amortization costs of capitalized
software will increase in fiscal 2000.

Inventory turnover for the twelve months ended January 1, 2000 increased to
2.9 times per year as compared to 2.5 times per year for the twelve months ended
January 2, 1999. The increase is primarily related to increased operating
efficiencies in manufacturing resulting from the Company's restructuring efforts
in 1998, overall improved inventory management and significant turnover related
to the Company's WDS 3500 product. Excluding inventory related to the Company's
contract with Ford, inventory turnover for the twelve months ended January 1,
2000 increased to 3.7 times per year as compared to 3.0 times per year for the
twelve months ended January 2, 1999.

As a percentage of service revenue, service margins decreased to 38.7% for
the twelve months ended January 1, 2000 from 40.8% for the twelve months ended
January 2, 1999. The relatively stable service margins reflects increased
margins in the GRS segment attributable to the acquisition of ICC in
April 1998. This increase is offset by declining margins in the EMS and ADS
segments indicative of the competitive market conditions in the end markets for
EMS and ADS' products.

OPERATING EXPENSES

Selling, general and administrative expenses decreased to $66.0 million, or
21.9% of total revenue for the twelve months ended January 1, 2000 from
$69.8 million, or 31.1% of total revenue for the twelve months ended January 2,
1999. The decrease in selling, general and administrative expenses, in dollars
and as a percentage of total revenue, is attributable to the restructuring
actions management implemented during the second and third quarters of 1998,
accounting for approximately $3.8 million of reduced expenses for the twelve
months ended January 1, 2000. This decrease was offset by approximately $1.2 in
incremental selling, general and administrative expenses resulting from the
acquisition of ICC in April 1998.

During the three months ended January 1, 2000, selling, general and
administrative expenses for the year ended January 1, 2000 were reduced by
approximately $1.8 million related to a reduction in accruals which were
recorded during the nine months ended October 3, 1999. The total of
$1.8 million consists primarily of $1.7 million of management and sales
incentive bonus payments which had been accrued during the nine months ended
October 3, 1999.

The Company purchased non-participating group annuity contracts for a group
of U.S. pension plan participants representing approximately two-thirds of the
remaining liability. The purchase resulted in a gain of $1.2 million during the
three months ended January 1, 2000. This gain is included in selling, general
and administrative expenses in the accompanying financial statements.

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Research and development expenses increased to $20.0 million, or 6.6% for
the twelve months ended January 1, 2000 from $19.0 million, or 8.4% for the
twelve months ended January 2, 1999. In 1999, the primary research and
development projects were for in-circuit and functional test equipment software
systems, design of a next generation in-circuit hardware platform, system
enhancements to support automation capabilities and enhancements to the GRS
suite of products. The Company capitalized $4.8 million and $4.9 million of
software development costs for the fiscal years ended January 1, 2000 and
January 2, 1999, respectively. The majority of costs capitalized in fiscal 1999
related to new EMS and GRS product developments.

Interest expense increased to $1.4 million for the twelve months ended
January 1, 2000 from $1.2 million for the twelve months ended January 2, 1999.
The increase in interest expense was due to increased borrowings on the credit
facility, offset by lower average interest rates on the Company's five-year term
loan.

Other net expenses decreased to $0.2 million for the twelve months ended
January 1, 2000 from $0.5 million for the twelve months ended January 2, 1999.
The decrease relates primarily to the net effect of gains and losses on foreign
currency transactions. Interest income decreased to $0.2 million for the twelve
months ended January 1, 2000 from $0.4 million for the twelve months ended
January 2, 1999 due to lower average cash balances during fiscal 1999.

For the twelve months ended January 1, 2000, the Company recorded a net
income tax expense of $0.3 million. The resulting 1% effective tax rate is
compared to a 42% tax benefit recorded in the twelve months ended January 2,
1999. The Company's low effective tax rate results from the reversal of a
portion of the deferred tax valuation allowance. For the year 2000, the Company
anticipates that its effective tax rate will increase and will approximate the
statutory tax rate in subsequent years.

1998 VS. 1997

ORDERS

Orders for the Company's products and services decreased to $221.5 million
for the twelve months ended January 2, 1999 from $237.0 million for the twelve
months ended January 3, 1998. EMS orders totaled $172.2 million for the twelve
months ended January 2, 1999 compared to $180.6 million for the twelve months
ended January 3, 1998. ADS orders totaled $32.3 million for the twelve months
ended January 2, 1999 compared to $48.3 million for the twelve months ended
January 3, 1998. GRS orders totaled $17.0 million for the twelve months ended
January 2, 1999 compared to $8.1 million for the twelve months ended January 3,
1998. The decrease in orders was due to decreased customer demand.

North American orders totaled $128.6 million for the twelve months ended
January 2, 1999 compared to $126.0 million for the twelve months ended
January 3, 1998. European orders totaled $74.9 for the twelve months ended
January 2, 1999 compared to $89.4 million for the twelve months ended
January 3, 1998. Asian orders totaled $18.0 million for the twelve months ended
January 2, 1999 compared to $21.6 million for the twelve months ended
January 3, 1998.

REVENUE

Product revenue decreased to $159.3 million for the twelve months ended
January 2, 1999 from $179.7 million for the twelve months ended January 3, 1998.
EMS product revenue totaled $141.4 million for the twelve months ended
January 2, 1999 compared to $146.2 million for the twelve months ended
January 3, 1998. ADS product revenue totaled $10.0 million for the twelve months
ended January 2, 1999 compared to $29.3 million for the twelve months ended
January 3, 1998. GRS product revenue totaled $7.9 million for the twelve months
ended January 2, 1999 compared to $4.2 million for the twelve months ended
January 3, 1998.

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The decrease in EMS product revenue of $4.8 million is primarily due to
softening demand for the Company's products, particularly in Europe due to
regional economic conditions during the twelve months ended January 2, 1999. The
decrease in ADS product revenue of $19.3 million is attributable to continued
increased competition for the segment's products and softening demand during the
twelve months ended January 2, 1999. The increase in GRS product revenue of
$3.7 million reflects the acquisition of ICC in April 1998.

Service revenue increased to $65.5 million for the twelve months ended
January 2, 1999 from $57.1 million for the twelve months ended January 3, 1998.
EMS service revenue totaled $34.5 million for the twelve months ended
January 2, 1999 compared to $35.5 million for the twelve months ended
January 3, 1998. ADS service revenue totaled $22.3 million for the twelve months
ended January 2, 1999 compared to $19.2 million for the twelve months ended
January 3, 1998. GRS service revenue totaled $8.7 million for the twelve months
ended January 2, 1999 compared to $2.4 million for the twelve months ended
January 3, 1998.

The decrease in EMS service revenue of $1.0 million is primarily due to
softening demand for the Company's products and services, particularly in Europe
due to regional economic conditions during the twelve months ended January 2,
1999. The increase in ADS service revenue of $3.1 million is attributable to
continued increased competition for the segment's products and softening demand
during the twelve months ended January 2, 1999. The increase in GRS service
revenue of $6.3 million reflects the acquisition of ICC in April 1998.

Revenue from international markets increased to $116.3 million, or 51.7% of
revenue, for the twelve months ended January 2, 1999 from $123.7 million, or
52.3% of revenue, for the twelve months ended January 3, 1998. The decrease in
international revenue in total dollars and as a percentage of total revenue
reflects the softening demand for the Company's products and services in Europe
due to regional economic conditions during the twelve months ended January 2,
1999. Revenues from international markets are subject to the risks of currency
fluctuations.

GROSS MARGINS

Product margins were $79.2 million, or 49.7%, for the twelve months ended
January 2, 1999 compared to $101.2 million, or 56.3% for the twelve months ended
January 3, 1998. Excluding one-time charges of $4.9 million related to the
discontinuance of certain ADS product offerings ($3.5 million) and the exit from
the hardware portion of the Company's Vision product line ($1.4 million),
product margins for the twelve months ended January 2, 1999 were $84.1 million,
or 52.8%.

As a percentage of product revenues, product margins declined to 52.8%,
excluding one-time charges, for the twelve months ended January 2, 1999 from
56.3% for the twelve months ended January 3, 1998. This decrease reflects the
lower unit count in EMS and softening ADS product demand.

The decrease in product margins of $17.1 million, excluding unusual charges
during the twelve months ended January 2, 1999, consist of decreases of
$15.5 million in the EMS segment and $5.3 million in the ADS segment, offset by
a $3.7 million increase in the GRS segment. The decline in EMS margins was
driven primarily by lower than anticipated manufacturing levels, resulting in
increased per unit costs. ADS product margins were negatively affected by
softening demand for the segment's hardware products during 1998. Management has
taken steps to eliminate the excess capacity in manufacturing by downsizing the
headcount to improve product margins. The increase in GRS margins is
attributable to the acquisition of ICC in April 1998.

Inventory turnover for the twelve months ended January 2, 1999 decreased to
2.5 times per year as compared to 3.1 times per year for the twelve months ended
January 3, 1998. The decrease is primarily related to a specific build-up of
work in process inventory related to the Company's contract with the Ford

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Motor Company. Excluding this inventory, inventory turnover for the twelve
months ended January 2, 1999 was 3.0 turns, which is consistent with the
inventory turnover for the twelve months ended January 3, 1998.

Service margins decreased to 40.8% for the twelve months ended January 2,
1999 from 44.9% for the twelve months ended January 3, 1998. The decrease is
primarily due to a service margin decline in ADS as a result of lower margin
contracts. This was partially offset by increased utilization in the EMS service
organization and the favorable inclusion of ICC margins (GRS) commencing in the
second quarter of 1998.

OPERATING EXPENSES

Selling, general and administrative expenses increased to $69.8 million, or
31.1% of total revenue for the twelve months ended January 2, 1999 from
$68.4 million, or 28.9% for the twelve months ended January 3, 1998. The
increase in selling, general and administrative expenses, in dollars and a
percentage of total revenue, is attributable to the inclusion of ICC, which was
acquired in the second quarter of 1998 and accounted for $3.2 million of
incremental expenses. Marketing costs decreased 9.0% in 1998 as compared to 1997
due to the restructuring measures taken by the Company in the second and third
quarters of 1998.

Research and development expenses decreased to $19.0 million, or 8.4% for
the twelve months ended January 2, 1999 from $19.9 million, or 8.4% for the
twelve months ended January 3, 1998. In 1998, the primary research and
development projects were for in-circuit and functional test equipment software
systems, design of a next generation in-circuit hardware platform, system
enhancements to support automation capabilities and enhancements to the GRS
suite of products. The Company capitalized $4.9 million and $0.2 million of
software development costs for the fiscal years ended January 2, 1999 and
January 3, 1998, respectively. The majority of costs capitalized in fiscal 1998
related to new EMS and GRS product developments.

Interest expense increased to $1.2 million for the twelve months ended
January 2, 1999 from $0.8 million for the twelve months ended January 3, 1998.
Interest expense for both years related to a $12 million term loan entered into
on June 26, 1997 for the purchase of furniture and fixtures for the Company's
new corporate headquarters and manufacturing facilities in Westford,
Massachusetts. A full year of interest expense was incurred in fiscal 1998
compared to approximately one half year of interest expense in fiscal 1997.

Other net expenses were $0.5 million for the twelve months ended January 2,
1999 and January 3, 1998. These relate primarily to the net effect of gains and
losses on foreign currency transactions. Interest income decreased to
$0.4 million for the twelve months ended January 2, 1998 from $0.5 million for
the twelve months ended January 3, 1998 due to lower average cash balances
during fiscal 1998.

For the twelve months ended January 2, 1999, the Company recorded a net tax
benefit of $6.5 million. The resulting 42% effective tax benefit is compared to
a 9% tax benefit recorded in the twelve months ended January 3, 1998. The
Company's low effective tax rate in 1998 and 1997 result from the reversal of a
portion of the deferred tax valuation allowance.

IMPAIRMENT LOSS

In fiscal 1996, the Company purchased TTA and Testware. These components
provide custom test programming, text fixture integration and other value-added
services to manufacturers and users of electronic products. Additionally, GenRad
acquired certain assets of Field Oriented Engineering, AG in fiscal 1996,
consisting primarily of the software program known as
TRACS-Registered Trademark- III, which is sold to electronic manufacturing
systems customers. The excess purchase price over the net assets acquired for
these acquisitions was recorded as long-term intangibles, primarily goodwill.

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The historical financial performance of these entities has continued to be
less than anticipated and the businesses have been negatively impacted by the
recent decline in the in-circuit test market. Due to these factors as well as
certain management changes during the second quarter of 1998, the Company
prepared revised projections of future net cash flows relating to these
businesses, which indicated that the businesses would not generate sufficient
net cash flows to realize the carrying value of the intangible assets. This
analysis was performed in accordance with the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Assets to be Disposed Of." As a result, a
$4.9 million impairment loss, representing the net book value of goodwill, was
recorded during the second quarter of 1998 and is included in the accompanying
statement of operations.

ACQUIRED IN-PROCESS DIAGNOSTIC SOFTWARE

On July 2, 1998, the Company acquired the rights to certain diagnostic
software for which technological feasibility had not been established. The
Company plans to use the acquired technology in the development and diagnosis of
increasingly complex mechatronic systems, particularly in vehicle systems. At
the time of the acquisition, the acquired technology had not yet reached
technological feasibility and had no alternative future uses and, accordingly,
the entire purchase price was expensed. The total of $1.7 million is included in
acquired in-process research and development in the accompanying consolidated
financial statements.

RESTRUCTURING AND OTHER CHARGES

During the second and third quarters of 1998, the Company restructured its
operations, which resulted in a workforce reduction of approximately 230
manufacturing and general and administrative employees or 15% of the Company's
workforce. In accordance with EITF 94-3, "Liability Recognition for Certain
Employee Termination Benefits, and Other Costs to Exit an Activity," the Company
recorded a charge for restructuring totaling approximately $6.8 million for
severance costs and post-employment benefits ($5.2 million), write-offs of
certain fixed assets which will no longer be utilized ($1.0 million) and for the
termination fees of certain equipment and real estate leases ($0.6 million).

During the third quarter of 1998, the Company ceased its manufacturing
operations at its Manchester, UK facility. Inventory related to the manufacture
of certain ADS products and the cessation of ADS' contract manufacturing
business totaling $3.5 million was charged to cost of products sold. In
addition, restructuring charges totaling approximately $0.5 million were
recorded related to a workforce reduction of approximately 20 manufacturing
people and certain fixed assets which will no longer be utilized and will be
disposed of in 1999.

During the third quarter, the Company completed an in depth analysis of the
hardware portion of the Vision product line resulting in a decision to exit this
business. This decision was based upon the following: (i) the market for Vision
equipment in PCB manufacturing was not as large as had been previously
estimated, and (ii) the continued research and development investment required
for the existing Vision product was not warranted given the resizing of the
Vision market. Exiting the Vision hardware product line resulted in charges
totaling $2.8 million related to fixed assets which will no longer be utilized
and were disposed of in 1998 and certain excess inventory, inventory purchase
commitments and prepaid royalties. Of the total of $2.8 million, $1.4 million is
recorded in costs of products sold and $1.4 million is recorded as restructuring
charges in the accompanying consolidated financial statements.

During 1999, cash payments and other adjustments totaled approximately
$3.1 million related to the restructuring charges recorded in 1998. The
remaining balance as of January 1, 2000 was $0.4 million.

ARBITRATION SETTLEMENT

On May 27, 1998, William E. Gaines, William E. Masskaker, Frank B. Wingate
and Heritage Investment Limited Partnership ("the plaintiffs") filed a Demand
for Arbitration ("the Demand") with the

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American Arbitration Association in Boston (No. 11 168 00247 98) against the
Company, James F. Lyons and Paul Pronsky, Jr. The claims arose out of the
acquisition of Industrial Computer Corporation ("ICC") by GenRad. The plaintiffs
sought damages totaling $13.6 million, plus costs and attorneys' fees. On
June 18, 1998, the Company filed a response to the Demand and on August 21,
1998, the Company filed an amended response and counterclaims, which arose from
the acquisition of ICC and sought unspecified damages.

On April 7, 1999, the parties agreed to settle all claims arising from the
acquisition of ICC. In connection with the settlement, the Company paid
$7.0 million, net of insurance proceeds of $4.0 million. In 1998, the Company
recorded a charge to operations totaling $7.7 million representing the cost of
the settlement plus costs and attorney fees.

ACQUISITION OF INDUSTRIAL COMPUTER CORPORATION

On April 7, 1998, GenRad acquired all of the then outstanding common shares
of Industrial Computer Corporation ("ICC"), a software company providing
real-time manufacturing execution systems to electronics manufacturers. ICC was
established in 1980 and is located in Atlanta, Georgia. The transaction was
accounted for as a purchase, and accordingly, the purchase price was allocated
to the assets acquired and liabilities assumed based on their respective fair
values. In connection with the acquisition of ICC, 1,237,917 shares of GenRad's
common stock were issued for all of the then outstanding shares of ICC in a
tax-free reorganization. Consideration for the acquisition of ICC totaled
approximately $36.6 million. Direct costs of the acquisition totaled
approximately $1.6 million and consisted primarily of legal fees, accounting
fees and broker fees. Consideration was allocated to the tangible and intangible
assets of ICC as follows: acquired in-process research and development
($8.4 million), developed technology ($11.4 million), goodwill ($17.0 million),
other intangible assets ($1.7 million) and the net assets and liabilities of ICC
(net liability of $0.3 million). The results of ICC are included in the 1998
financial statements beginning from the date of purchase.

The valuation of acquired in-process research and development was based on
management's projections of the after tax net cash flows attributable to the
acquired in-process research and development. Specifically, the valuation
considers the following: (i) a fair market value premise; (ii) comprehensive due
diligence concerning all potential intangible assets including trademarks and
tradenames, patents, copyrights, non-compete agreements, assembled workforce and
customer relationships and sales channel relationships; (iii) the value
contribution of core technology to the acquired in-process technology, with a
view toward ensuring the relative allocations to core technology and acquired
in-process research and development were consistent with the relative
contributions of each to the final product; and (iv) the calculation used to
determine the value allocated to acquired in-process research and development
considered only the efforts completed as of the transaction date and only the
cash flow associated with the product development efforts in-process at the
acquisition date. The charge for acquired in-process research and development
relates to one development project in process at the date of the acquisition
that had not reached technological feasibility, had no alternative future use,
and for which ultimate successful development was uncertain. The conclusion that
the development efforts in-process, or any material sub-component, had no
alternative future use was reached in consultation with engineering personnel
from ICC as well as the Company's valuation advisors.

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acquisition, management believed that the product being developed would become
available for sale late in fiscal 1999. GenRad will begin to benefit from the
acquired in-process research and development once completed product is sold.
Failure to reach successful completion of this project may result in impairment
of the associated capitalized intangible assets, i.e. goodwill and developed
technology, and/or may require the Company to accelerate the time period over
which the intangibles are being amortized, which may have a material adverse
effect on the Company's results of operations and financial condition.

Significant assumptions used to determine the value of the acquired
in-process research and development included several factors. The first was a
forecast of net cash flows that were expected to result from the in-process
development effort using projections prepared by ICC management, portions of
which (1998 and 1999) were provided to GenRad's Board of Directors. Net cash
flow projections included projected revenue growth and trends in profit margins
and selling, general and administrative expense that were consistent with recent
historical trends prior to the acquisition. Second, a percentage complete of 69%
for the project estimated by considering the costs invested to date relative to
the expected total cost of the development effort, supported by the amount of
technological progress completed as of the transaction date relative to the
overall technological achievements required to achieve the intended
functionality of the eventual product. The technological issues were addressed
primarily by engineering representatives from ICC along with the Company's
independent valuation advisors. Third, a 24% discount rate, which represents a
rate equivalent to that which would be employed in a fair value analysis, i.e.,
one that considers all cash flows associated with the project and resulting
product, and therefore represents a blended rate of all the risks associated
with the product. Lastly, a core technology charge reflected as one third of
after tax net income related to the in-process project was utilized. This rate
represents an amount that the Company would be required to pay in royalties
assuming it had licensed the products expected to be derived from the acquired
in-process development efforts.

As of January 1, 2000, the technological feasibility of the project had been
reached with the development effort on-going. No significant departures from the
assumptions included in the valuation have occurred. As of January 1, 2000, the
Company believes that the product will be ready for sale during the summer of
2000.

ACQUISITION OF MANUFACTURING EXECUTION SYSTEMS BUSINESS

On April 9, 1998, GenRad acquired certain assets of the Manufacturing
Execution Systems ("MES") business of Valstar Systems Limited ("Valstar")
located in Aberdeen, Scotland. Valstar's MES component provides integration
services and support and distribution in Europe for ICC's Shop Floor Data
Manager Software.

Consideration paid for Valstar's MES business totaled $3.2 million in cash,
including acquisition costs, funded through internally generated funds. As part
of the acquisition, the Company entered into a two-year consulting and services
agreement with Valstar that includes securing certain Valstar personnel and
other resources to transition the business to GenRad. Of the $3.0 million
purchase price, $2.0 million was paid on April 9, 1998 and $1.0 million was
released from escrow on October 7, 1998 as certain contingencies were achieved.
Direct costs of the acquisition totaled approximately $0.2 million and consisted
primarily of legal and accounting fees.

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LIQUIDITY AND SOURCES OF CAPITAL

SOURCES AND USES OF CASH

Cash and cash equivalents at January 1, 2000 totaled approximately
$7.0 million compared to approximately $13.0 million at January 2, 1999. The
Company's current ratio at January 1, 2000 increased to 2.9 from 2.5 at
January 2, 1999. Net cash provided by operating activities was $23.3 million for
the twelve months ended January 1, 2000 compared to $26.6 million for the twelve
months ended January 2, 1999.

The decrease in net cash provided by operating activities for the twelve
months ended January 1, 2000 is primarily attributable to significant inventory
investments, which used incremental cash of $9.3 million, related to the
Company's contract with Ford and the payment of $7.0 million, net of insurance
proceeds of $4.0 million, related to the settlement of arbitration recorded in
1998. This was offset by increased net income, improved inventory management,
improved payment timing on long-term contracts and better cash management
related to timing of vendor payments.

During the twelve months ended January 1, 2000, the Company's accounts
receivable turnover was approximately 3.4 times per year compared to
approximately 3.8 times per year for the twelve months ended January 2, 1999.
The deterioration in accounts receivable turnover is attributable to customer
demands for more favorable payment terms during 1999 as well as a significant
concentration of receivables with Ford Motor Company. As of January 1, 2000
accounts receivable included $13.0 million of Ford receivables, representing
16.0% of total receivables.

During the twelve months ended January 1, 2000, net cash used in investing
activities was $21.6 million, compared to $24.3 million for the twelve months
ended January 2, 1999. Capital expenditures totaled $16.2 million for the twelve
months ended January 1, 2000 and $15.2 million for the twelve months ended
January 2, 1999. Cash used in the development of certain intangible assets
totaled $4.9 million for the twelve months ended January 1, 2000 compared to
$5.0 million for the twelve months ended January 2, 1999. Cash used in the
acquisition of subsidiaries totaled $0.5 million for the twelve months ended
January 1, 2000 compared to $4.2 million for the twelve months ended January 2,
1999.

The increase in capital expenditures for the twelve months ended January 1,
2000 compared to the twelve months ended January 2, 1999 is attributable to the
Company's new business system implementation. Beginning in 1998, the Company
began efforts to implement SAP R/3-TM- ("SAP"), an enterprise resource planning
system. During the twelve months ended January 1, 2000, total capital
expenditures related to the Company's SAP implementation totaled $7.8 million.
At the end of 1998, the Company had completed Phase I of this project with the
successful implementation of certain modules of the SAP ERP system. During the
three months ended April 3, 1999, the Company began Phase II of this project.
Phase II involves the implementation of certain other modules of SAP, including
sales, manufacturing and distribution related modules and is expected to be
completed in June 2000. Expenditures in 2000 through the targeted go-live date
of July 3, 2000 are expected to approximate $3.0 to $4.0 million. After go-live,
the Company expects to continue to incur certain capital expenditures and
on-going expenses related to the implementation of SAP, however such
expenditures are expected to be significantly less than those made in 1999 and
expected to be made in 2000 through the go-live date.

Cash used for the investment in the development of certain intangible assets
was $4.9 million for the twelve months ended January 1, 2000. This represents
the costs of software capitalized, as well as the direct purchase of certain
intangible assets from third parties.

Net cash used in financing activities was $10.3 million for the twelve
months ended January 1, 2000 compared to $10.1 million for the twelve months
ended January 2, 1999. Cash provided by financing activities has remained
relatively consistent for the twelve months ended January 1, 2000 from the
twelve months ended January 2, 1999, considering additional cash outlays of
$3.8 million related to the Company's stock repurchase plan, offset by
incremental proceeds from employee stock plans of $3.5 million and a reduction
of principal payments on long-term debt of $0.1 million.

18
<PAGE>
STOCK REPURCHASE PROGRAM

During the three months ended July 3, 1998, the Company commenced a stock
repurchase program whereby the Company will purchase, in the open market, shares
of its stock. The Company intends to buy back its stock at times when its market
value presents opportunities to do so. The Company's stock repurchase plan is
intended as a means to partially mitigate the dilutive impact of stock options
and to provide an alternative investment for the Company's excess cash. The Plan
has been funded entirely through operating cash flow, however, the Company may,
if it considers it prudent, utilize its available credit facilities in
connection with its stock repurchase program. During the twelve months ended
January 1, 2000 and January 2, 1999, the Company utilized approximately
$18.7 million and $15.0 million to repurchase 1,032,600 and 1,012,000 shares,
respectively, of its common stock.

CREDIT FACILITY

In March 2000, the Company re-negotiated its existing $50.0 million credit
facility, increasing the total borrowings available to $125.0 million (the "new
line"). The new line is supported by a syndicated group of banks and provides
for up to $75.0 million to be utilized for acquisitions and $50.0 million to be
used for general working capital purposes. The new line requires the Company to
maintain certain financial and operating covenants, as defined, and expires in
March 2004. Borrowings on the line to be utilized for acquisitions are payable
quarterly, while borrowings on the line to be utilized for general working
capital are payable on demand. The line bears interest at the lesser of the
banks' prime rate plus 0.75% or LIBOR plus 1.75%, as determined from time to
time by the banks. Under the terms of the new line, the Company is required to
pay a commitment fee on the unused portion of the line ranging from 0.375% to
0.5% of the total unused portion of the line dependent on the Company's
operating performance.

SUMMARY

The Company's primary source of liquidity has been internally generated
funds. In 2000, the Company anticipates it will fund its working capital and
capital expenditure requirements, make principal and interest payments on its
borrowings and meet its cash obligations from internally generated funds and
from its available credit facility. As the Company continues to invest in new
product developments and enhancements to existing products, it expects research
and development expenditures to continue at approximately the same percentage of
sales as prior fiscal years.

EFFECTS OF INFLATION AND FOREIGN EXCHANGE

Although the Company cannot accurately determine the precise effect of
inflation on its operations, it does not believe inflation has had a material
effect on its revenues or its results of operations. The Company attempts to
mitigate inflationary cost increases by continuously improving manufacturing
methods and technologies. Management does not expect inflation to have a
significant impact on operations in the foreseeable future.

The Company maintains development, sales and support facilities in several
locations worldwide, including, England, France, Germany, Switzerland,
Singapore, and Mexico, among others. A significant amount of the Company's
business is conducted with companies located in these and other countries and
certain transactions may be denominated in currencies other than the US dollar.
As a result, the Company may experience transaction gains and losses as a result
of currency fluctuations. In order to minimize its exposure to loss from changes
in foreign currency exchange rates, the Company mitigates its risk using foreign
currency forward exchange contracts. The Company's currency risk mitigation
strategies are designed to reduce the Company's vulnerability to certain foreign
currency exchange exposures. In executing its strategies, the Company actively
monitors foreign currency exchange rates and executes foreign currency forward
exchange contracts, primarily with financial institutions. These contracts serve
to offset the impact of actual foreign currency changes, e.g., if currency rates
changed with respect to a

19
<PAGE>
certain transaction resulting in a loss to the Company, the forward contract
would be structured to result in a gain, thereby minimizing the actual loss
incurred, if any.

The Company may be subject to losses resulting from unanticipated changes in
foreign currency exchange rates. The market factors that expose the Company in
this regard include economic conditions in which the Company conducts business
as well as the Company's ability to effectively and efficiently engage in
foreign currency forward exchange contracts at competitive rates with financial
institutions or others. The Company expects to continue these or similar
practices in the future to the extent appropriate. Historically, actual results
of the Company's foreign currency risk management procedures have been in line
with management's expectations and have not resulted in significant gains or
losses, however, there can be no assurance that these results will continue in
the future.

FACTORS THAT MAY AFFECT FUTURE RESULTS

This Annual Report may contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results of operations and future
financial conditions may differ materially from those expressed in any such
forward-looking statements as a result of many factors that may be beyond the
Company's control. Factors that might cause such differences include, but are
not limited to, those discussed below.

The Company has experienced and expects to continue to experience
fluctuations in its results of operations, particularly on a quarterly basis.
The Company's expense levels are based, in part, on expectations of future
revenues. If revenue levels in a particular period do not meet expectations, due
to the timing of the receipt of orders from customers, customer cancellations or
delays of shipments, then operating results could be adversely impacted.

The market for the Company's products is characterized by rapid
technological change, an increased demand for specific feature requests by
customers, evolving industry standards, and frequent new product introductions.
The introduction of products embodying new technology or the emergence of new
industry standards or practices could render the Company's existing products
obsolete or otherwise unmarketable. Future operating results are dependent upon
the Company's ability to develop, design, manufacture and market technologically
innovative products that meet customer needs.

Competition in the markets where the Company operates is intense. The
Company continues to invest in manufacturing productivity to try to minimize the
impact of competitive pricing pressures, fluctuations within the Company's
product mix, potential inventory obsolescence exposure and start-up
manufacturing costs for new product introductions.

The Company is dependent upon a number of suppliers for several key
components of its products. The loss of certain of the Company's suppliers,
supply shortages or increases in the costs of key raw materials could have a
material adverse effect on the Company.

THE YEAR 2000 ISSUE

Many computer systems and other equipment with embedded chips or processors
use only two digits to represent the year. Consequently, they may be unable to
process certain dates before, during and after the Year 2000. As a result,
entities are at risk for possible miscalculations or system failures causing
disruptions in their operations. GenRad has evaluated its operations to assess
modifications needed for this issue. A full time project manager position was
established in 1998 to address the Year 2000 issue. In October 1999, GenRad
completed a comprehensive worldwide program that identified and corrected
potential material problems related to the Year 2000 in its products,
information systems, infrastructure and manufacturing facilities.

Costs incurred to date for the Year 2000 issue, primarily related to
software corrections, are approximately $1.4 million with estimated future costs
of $0.1 million. The costs were and will continue to

20
<PAGE>
be funded through internally generated resources, without cannibalizing the
Company's information technology budget or resources, and expensed as incurred
in accordance with EITF 96-14, "Accounting For the Costs Associated with
Modifying Computer Software for the Year 2000." Management believes that its
internal Year 2000 issues were addressed in a manner that prevented such issues
from having a material adverse effect on GenRad results of operations, financial
position or cash flows. However, there can be no assurances that management will
be successful in addressing all its internal Year 2000 issues or that all of the
Company's external interfaces will be successful in addressing their Year 2000
issues. If management or any significant external interface is not successful,
the Company's operating results and financial position could be materially and
adversely impacted. In the worst case, although not anticipated or considered
likely by GenRad management, the Company may not be able to operate
manufacturing facilities or other support functions which would have a material
adverse effect on the Company's financial position and results of operations for
periods subsequent to 1999. Management believes that its contingency plans,
which include the use of alternative manufacturing facilities currently
available to the Company, and business systems, which the Company currently
utilizes, are adequate to mitigate the risk associated with the Company's worst
case scenario.

THE INTRODUCTION OF THE EURO

The Company is aware of and has developed systems designed to handle the
introduction of the Euro as an effective currency in Europe. Although the
Company believes the systems that have been implemented are sufficient for the
Company to be able to process Euro denominated transactions, there can be no
assurances that such systems will actually function as designed. If they do not
so function, GenRad's financial results could be adversely affected. To date,
the Company has not encountered any significant processing issues related to the
introduction of the Euro. The introduction of the Euro has not materially
affected the manner in which the Company conducts its operations, nor has it
required the Company to alter any significant contracts with suppliers and/or
financial institutions.

OTHER FACTORS

Other factors which could impact future results are past and future
acquisitions, strategic alliances, patent or product liability claims in excess
of available insurance coverage, changes in the Company's effective tax rates,
new regulatory requirements, political and economic changes, tariffs, trade
restrictions, transportation delays, foreign currency fluctuations and
inflation.

The Company disclaims any intent or obligation to update any forward-looking
statements that may be included in this report. Additionally, there can be no
assurance that other factors, not included above, could impact future results.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

FINANCIAL INSTRUMENTS

On June 15, 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). This Statement is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000 (December 31, 2000 for the
Company) and 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 currently determining the impact
of the adoption of SFAS 133 to its operating results or financial position.

21
<PAGE>
REVENUE RECOGNITION

In December 1999, the United States Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues,
as well as examples of how the staff applies revenue recognition guidance to
specific circumstances. Registrants may adopt a change in accounting principle
no later than the first quarter of the fiscal year beginning after December 15,
1999 (January 2, 2000 for the Company). In March 2000, SAB 101A was issued by
the SEC delaying the implementation date of SAB 101 for registrants until no
later than the second quarter of the fiscal year beginning after December 15,
1999 (April 2, 2000 for the Company). The Company has determined that SAB 101
will not have a material impact on the Company's financial position and results
of operations.

22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT REPORT

Management is responsible for the preparation and integrity of the
consolidated financial statements appearing in this Annual Report. The financial
statements were prepared in conformity with generally accepted accounting
principles. Management has included in the Company's financial statements,
amounts that are based on estimates and judgement, which they believe are
reasonable under the existing circumstances.

Management believes that its established accounting procedures and related
systems of internal control provide reasonable assurance, at an appropriate
cost/benefit relationship, that assets are safeguarded, that the books and
records properly reflect all transactions, and the policies and procedures are
implemented by qualified personnel.

Our independent accountants, PricewaterhouseCoopers LLP, have audited the
consolidated financial statements. Their audit was conducted in accordance with
generally accepted auditing standards and provides an independent opinion about
fair presentation of the consolidated financial statements. When performing
their audit, PricewaterhouseCoopers LLP considers the Company's internal control
structure to the extent they deem necessary to issue their opinion on the
financial statements. The Board of Directors appoints the independent
accountants; ratification of the appointment is solicited annually from
stockholders.

The Board of Directors, through its Audit Committee, consisting solely of
independent directors of the Company, is responsible for reviewing and
monitoring the Company's financial reporting and accounting practices.
PricewaterhouseCoopers LLP has full and free access to the Audit Committee, and
meets with the Committee, with and without the presence of management.

/s/ WALTER A. SHEPHARD
- ---------------------------
Walter A. Shephard
Vice President,
Chief Financial Officer and Secretary
January 25, 2000

23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of GenRad, Inc.:

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of
GenRad, Inc. and its subsidiaries at January 1, 2000 and January 2, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended January 1, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

<TABLE>
<S> <C>
/s/ PRICEWATERHOUSECOOPERS LLP
-------------------------------------------
PricewaterhouseCoopers LLP
</TABLE>

Boston, Massachusetts
January 25, 2000

24
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Products.................................................. $232,362 $159,290 $179,672
Services.................................................. 69,586 65,499 57,089
-------- -------- --------
Total revenue........................................... 301,948 224,789 236,761
COST OF REVENUE:
Products.................................................. 124,114 80,102 78,515
Services.................................................. 42,643 38,775 31,482
-------- -------- --------
Total cost of revenue................................... 166,757 118,877 109,997
-------- -------- --------
Gross margin................................................ 135,191 105,912 126,764
OPERATING EXPENSES:
Selling, general and administrative....................... 66,047 69,838 68,376
Research and development.................................. 20,042 18,962 19,902
Acquired in-process research and development.............. -- 10,097 --
Restructuring charges..................................... -- 8,753 --
Loss from impairment of intangible assets................. -- 4,906 --
Arbitration settlement.................................... -- 7,650 --
-------- -------- --------
Total operating expenses................................ 86,089 120,206 88,278
-------- -------- --------
Operating income (loss)..................................... 49,102 (14,294) 38,486
OTHER INCOME (EXPENSE):
Interest income........................................... 212 399 530
Interest expense.......................................... (1,374) (1,163) (793)
Other, net................................................ (169) (541) (477)
-------- -------- --------
Total other income (expense)............................ (1,331) (1,305) (740)
-------- -------- --------
Net income (loss) before income taxes....................... 47,771 (15,599) 37,746
Income tax benefit (expense)................................ (277) 6,531 3,549
-------- -------- --------
Net income (loss)........................................... $ 47,494 $ (9,068) $ 41,295
-------- -------- --------
NET INCOME (LOSS) PER SHARE:
Basic..................................................... $ 1.66 $ (0.32) $ 1.54
======== ======== ========
Diluted................................................... $ 1.60 $ (0.32) $ 1.43
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic..................................................... 28,669 28,003 26,814
======== ======== ========
Diluted................................................... 29,683 28,003 28,788
======== ======== ========
</TABLE>

The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.

25
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JANUARY 1, 2000 AND JANUARY 2, 1999

(IN THOUSANDS)

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 6,951 $ 12,998
Accounts receivable, less allowances of $1,487 and $1,538... 81,276 65,490
Inventories................................................. 49,068 32,989
Other current assets........................................ 8,228 7,119
-------- --------
Total current assets.................................. 145,523 118,596
Property and equipment, net................................. 43,194 37,269
Deferred tax asset.......................................... 19,868 15,368
Intangible assets, net...................................... 38,686 35,744
Other assets................................................ 1,368 1,248
-------- --------
$248,639 $208,225
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable...................................... $ 21,841 $ 10,299
Accrued liabilities......................................... 5,921 19,786
Deferred revenue............................................ 9,388 6,789
Accrued compensation and employee benefits.................. 6,750 6,844
Accrued income taxes........................................ 3,760 620
Current portion of long-term debt........................... 2,353 2,425
-------- --------
Total current liabilities............................. 50,013 46,763
-------- --------
LONG-TERM LIABILITIES:
Long-term debt.............................................. 3,653 6,062
Accrued pensions and benefits............................... 9,175 11,488
Future lease costs of unused facilities..................... 3,922 3,854
Deferred revenue............................................ 1,005 962
Other long-term liabilities................................. 4,036 5,065
-------- --------
Total long-term liabilities........................... 21,791 27,431
======== ========
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 60,000 shares authorized; 29,877
and 29,176 issued and outstanding at January 1, 2000 and
January 2, 1999, respectively............................. 29,877 29,176
Additional paid-in capital.................................. 221,854 214,227
Treasury stock, 2,045 and 1,012 shares at January 1, 2000
and January 2, 1999, respectively......................... (29,017) (14,958)
Accumulated deficit......................................... (44,066) (91,560)
Accumulated other comprehensive loss........................ (1,813) (2,854)
-------- --------
Total stockholders' equity.................................. 176,835 134,031
-------- --------
$248,639 $208,225
======== ========
</TABLE>

The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.

26
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998

(IN THOUSANDS)

<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
ADDITIONAL COMPREHENSIVE STOCK-
COMMON PAID-IN TREASURY ACCUMULATED INCOME HOLDERS'
STOCK CAPITAL STOCK DEFICIT (LOSS) EQUITY
-------- ---------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 28, 1996........ $26,048 $163,099 $ -- $(123,787) $(1,680) $ 63,680
Net income.......................... -- -- -- 41,295 -- 41,295
Currency translation adjustment..... -- -- -- -- (190) (190)
--------
41,105
Comprehensive income.............. --
Stock issued under employee stock
plans............................. 1,301 8,121 -- -- -- 9,422
Tax benefit of stock options........ -- 806 -- -- -- 806
------- -------- -------- --------- ------- --------
Balance at January 3, 1998.......... $27,349 $172,026 $ -- $ (82,492) $(1,870) $115,013
Net loss............................ -- -- -- (9,068) -- (9,068)
Currency translation adjustment..... -- -- -- -- (984) (984)
--------
Comprehensive loss................ (10,052)
Stock issued under employee stock
plans............................. 589 6,683 -- -- -- 7,272
Treasury stock purchases............ -- -- (14,958) -- -- (14,958)
Shares issued in connection with
acquisition of ICC................ 1,238 35,358 -- -- -- 36,596
Tax benefit of stock options........ -- 160 -- -- -- 160
------- -------- -------- --------- ------- --------
Balance at January 2, 1999.......... $29,176 $214,227 $(14,958) $ (91,560) $(2,854) $134,031
Net income.......................... -- -- -- 47,494 -- 47,494
Currency translation adjustment..... -- -- -- -- 1,041 1,041
--------
Comprehensive income.............. 48,535
Stock issued under employee stock
plans............................. 587 5,500 4,657 -- -- 10,744
Treasury stock purchases............ -- -- (18,716) -- -- (18,716)
Shares issued in connection with
acquisition....................... 114 1,777 1,891
Tax benefit of stock options........ -- 350 -- -- -- 350
------- -------- -------- --------- ------- --------
Balance at January 1, 2000.......... $29,877 $221,854 $(29,017) $ (44,066) $(1,813) $176,835
======= ======== ======== ========= ======= ========
</TABLE>

The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.

27
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 47,494 $ (9,068) $ 41,295
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 14,928 15,312 9,250
Loss on disposal of property and equipment.............. 116 517 265
Deferred income tax benefit............................. (4,500) (7,500) (5,388)
Lease costs of excess facilities, net................... (35) (985) (843)
Acquired in-process research and development............ -- 8,420 --
Loss from impairment of intangible assets............... -- 4,906 --
Restructuring and non-recurring charges................... -- 6,385 --
(Decrease) Increase resulting from changes in operating
assets and liabilities:
Accounts receivable, net.............................. (17,437) 10,056 (24,941)
Inventory............................................. (17,113) (7,787) (10,185)
Other current assets.................................. (1,159) (2,853) 173
Accounts payable...................................... 11,425 (2,951) 5,689
Accrued liabilities................................... (13,913) 12,817 126
Deferred revenue...................................... 2,705 1,318 (2,057)
Accrued compensation and employee benefits............ (1,602) (68) (600)
Accrued income taxes.................................. 3,513 (463) 332
Other, net............................................ (1,123) (1,441) (153)
-------- -------- --------
Net cash provided by operating activities................. 23,299 26,615 12,963
INVESTING ACTIVITIES:
Purchases of property and equipment....................... (16,241) (15,157) (24,879)
Purchase of subsidiaries.................................. (490) (4,178) --
Development of intangible assets.......................... (4,886) (4,968) --
Proceeds from sale of property and equipment.............. -- -- 2,175
-------- -------- --------
Net cash used in investing activities................... (21,617) (24,303) (22,704)
FINANCING ACTIVITIES:
Principal payments on long-term debt...................... (2,341) (2,433) (1,337)
Borrowings on credit facility............................. 74,110 -- --
Principal payments on credit facility..................... (74,110) -- --
Proceeds from employee stock plans........................ 10,744 7,272 9,423
Purchase of treasury stock................................ (18,716) (14,958) --
Proceeds from issuance of debt............................ -- -- 12,009
-------- -------- --------
Net cash provided by (used in) financing activities..... (10,313) (10,119) 20,095
Effects of exchange rates on cash........................... 2,584 (1,078) 972
-------- -------- --------
(Decrease) Increase in cash and equivalents................. (6,074) (8,885) 11,326
Cash and cash equivalents at beginning of year.............. 12,998 21,883 10,557
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 6,951 $ 12,998 $ 21,883
======== ======== ========
</TABLE>

28
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:

Stock issued in association with the Company's acquisition of Industrial
Computer Corporation in 1998 totaled approximately $36.6 million.

Assets acquired and liabilities assumed upon acquisition of Industrial
Computer Corporation:

<TABLE>
<S> <C>
Accounts receivable......................................... $2,893
Other current assets........................................ 71
Property and equipment...................................... 341
Other assets, net........................................... 83
Accounts payable............................................ 498
Accrued liabilities......................................... 1,272
Accrued compensation and benefits........................... 59
Accrued income taxes........................................ 139
Other long-term liabilities................................. 2,370
</TABLE>

The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.

29
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998

NOTE 1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

DESCRIPTION OF THE BUSINESS

PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. The Company's fiscal year ends on the Saturday
nearest December 31. Fiscal year 1999 ("1999"), which ended on January 1, 2000
and Fiscal year 1998 ("1998"), which ended on January 2, 1999, includes 52
weeks, whereas fiscal year 1997 ("1997"), which ended on January 3, 1998,
included 53 weeks.

ACCOUNTING ESTIMATES

The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses at and during the reporting periods covered
by these consolidated financial statements. Actual results could differ from
those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less to be cash equivalents.

INVENTORY VALUATION

Inventories include material, labor and overhead and are stated at the lower
of cost (first-in, first-out method) or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, generally 3 to 15 years for buildings and
improvements, 3 to 8 years for machinery and equipment and purchased and
internal-use software, and 5 to 7 years for service parts.

INTANGIBLE ASSETS

Goodwill, representing the excess of the purchase price over the fair value
of the net assets of acquired entities, is amortized on a straight-line basis
over the period of expected benefit, generally ten years. Accumulated
amortization on goodwill totaled approximately $3.3 million at January 1, 2000,
$1.4 million at January 2, 1999 and approximately $1.2 million at January 3,
1998.

30
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
The Company capitalizes certain computer software development costs once
technological feasibility is established. Capitalized computer software costs
are amortized over the economic lives of the related products, generally three
years, beginning when the product is available for general release to customers.
Computer software costs capitalized totaled approximately $4.8 million during
1999, $4.9 million during 1998 and $0.2 million during 1997. Accumulated
amortization totaled approximately $2.8 million at January 1, 2000,
$1.9 million at January 2, 1999 and $0.7 million at January 3, 1998.
Amortization expense totaled approximately $0.9 million in 1999, $1.2 million in
1998 and $0.7 million in 1997.

Intangible assets also includes the cost of patents and trademarks acquired,
which are amortized on a straight-line basis over their estimated useful lives,
generally three to five years.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of", the Company records
impairment losses on long-lived assets to be held and used or to be disposed of
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the asset's carrying
amount.

In accordance with SFAS No. 86, "Accounting for Costs of Computer Software
to be Sold, Leased or Otherwise Marketed", the Company records impairment losses
on capitalized computer software costs when indicators of impairment are present
and the estimated value of the assets is less than the assets' carrying amount.

DEFERRED REVENUE

Deferred revenue consists of pre-payments on service contracts to be earned
in the future on noncancelable agreements existing at the balance sheet date.

TREASURY STOCK

Treasury stock is accounted for utilizing the cost method.

REVENUE RECOGNITION

Revenue from product sales is generally recognized upon shipment, provided
the transaction is evidenced in writing, there are no remaining obligations to
the Company and collectibility of the related receivable is probable. Revenue
from service contracts is recognized over the contractual period either as
services are performed for time and materials priced service contracts or using
a percentage-of-completion methodology for fixed price service contracts,
provided the transaction is evidenced in writing.

INCOME TAXES

The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and the tax effect of net operating loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be

31
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

CONCENTRATIONS OF CREDIT RISK

The Company performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral on accounts receivable. The
Company maintains allowances for credit losses and such losses have been within
management's expectations.

FINANCIAL INSTRUMENTS

The recorded amounts of financial instruments, including cash equivalents,
receivables, inventories, accounts payable and accrued liabilities, approximate
their fair market values as of January 1, 2000. The carrying value of long-term
debt generally approximates its fair value as such debt carries a variable rate
which is tied to market rates of interest.

STOCK-BASED COMPENSATION

The Company applies APB Opinion 25 and related interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized under
SFAS 123 for the Company's stock option plans, and footnote disclosure is
provided in Note 8. Statement of Financial Accounting Standards No. 123
("SFAS 123") requires that companies either recognize compensation expense for
grants of stock, stock options, and other equity instruments based on fair
value, or provide pro forma disclosure of net income (loss) and earnings (loss)
per share in the notes to the financial statements.

NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
SFAS No. 128 requires presentation of "basic" earnings per share (which excludes
dilution as a result of unexercised stock options and convertible subordinated
debentures) and "diluted" earnings per share. The Statement was adopted in
fiscal 1997 and all prior periods were retroactively restated. Earnings per
share was calculated in accordance with SFAS No. 128 for 1999, 1998 and 1997 as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC:
Income available to common
stockholders............. $47,494 28,669 $1.66 $(9,068) 28,003 $(0.32) $41,295 26,814 $1.54
EFFECT OF DILUTIVE
SECURITIES:
Assumed exercise of stock
options.................. -- 1,014 -- -- -- 1,974
------- ------ ------- ------- ------- -------
DILUTED:
Income available to common
stockholders and assumed
conversions.............. $47,494 29,683 $1.60 $(9,068) 28,003 $(0.32) $41,295 28,788 $1.43
======= ====== ===== ======= ======= ====== ======= ======= =====
</TABLE>

32
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
FOREIGN CURRENCY

The local currency is the functional currency (primary currency in which
business is conducted) for the Company's subsidiaries with the exception of the
Company's Mexican subsidiary whose functional currency is the U.S. dollar. All
balance sheet accounts of foreign subsidiaries are translated at the current
exchange rates and statement of operations items are translated at the average
exchange rates during the year. Resulting translation adjustments are made
directly to a separate component of stockholders' equity (deficit), accumulated
other comprehensive income (loss). The effect of foreign currency transaction
gains and losses, included in the determination of 1999, 1998 and 1997 results
of operations, was not significant.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to the current
year presentation.

COMPREHENSIVE INCOME

Comprehensive income includes the effect of foreign currency translation
adjustments, which have no income tax impact to the Company.

NOTE 2: ACQUISITIONS

INDUSTRIAL COMPUTER CORPORATION

On April 7, 1998, GenRad acquired all of the then outstanding common shares
of Industrial Computer Corporation ("ICC"), a software company providing
real-time manufacturing execution systems to electronics manufacturers. ICC was
established in 1980 and is located in Atlanta, Georgia. The transaction was
accounted for as a purchase, and accordingly, the purchase price was allocated
to the assets acquired and liabilities assumed based on their respective fair
values. In connection with the acquisition of ICC, 1,237,917 shares of GenRad's
common stock were issued for all of the then outstanding shares of ICC in a
tax-free reorganization. The total consideration for the acquisition of ICC
totaled approximately $36.6 million. Direct costs of the acquisition totaled
approximately $1.6 million and consisted primarily of legal fees, accounting
fees and broker fees. The results of ICC are included in the 1998 financial
statements beginning from the date of purchase.

The purchase price was allocated to the tangible and intangible assets of
ICC as follows:

<TABLE>
<S> <C>
Acquired in-process research and development................ $ 8,420
Goodwill.................................................... 16,982
Developed technology........................................ 11,370
Assembled workforce......................................... 1,280
Tradename................................................... 408
Assets, primarily accounts receivable and property and
equipment................................................. 3,954
Liabilities assumed......................................... (4,215)
-------
$38,199
=======
</TABLE>

33
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 2: ACQUISITIONS (CONTINUED)
The valuation of acquired in-process research and development was based on
management's projections of the after tax net cash flows attributable to the
acquired in-process research and development. Specifically, the valuation
considers the following: (i) a fair market value premise; (ii) comprehensive due
diligence concerning all potential intangible assets including trademarks and
tradenames, patents, copyrights, non-compete agreements, assembled workforce and
customer relationships and sales channel relationships; (iii) the value
contribution of core technology to the acquired in-process technology, with a
view toward ensuring the relative allocations to core technology and acquired
in-process research and development were consistent with the relative
contributions of each to the final product; and (iv) the calculation used to
determine the value allocated to acquired in-process research and development
considered only the efforts completed as of the transaction date and only the
cash flow associated with said completed efforts for one generation of the
product development efforts in-process at the acquisition date. The charge for
acquired in-process research and development relates to one development project
in process at the date of the acquisition that had not reached technological
feasibility, had no alternative future use, and for which ultimate successful
development was uncertain. The conclusion that the development efforts
in-process, or any material sub-component, had no alternative future use was
reached in consultation with engineering personnel from ICC as well as the
Company's valuation advisors.

The in-process project consists of the development of ICC's existing UNIX
based product using an object oriented design and standard programming language
which will provide users of the product the ability to use ICC's Shop Floor Data
Manager ("SFDM") product on varied operating platforms. The primary project
tasks open at the time of acquisition included completion of the design of
certain modules, or objects, which will house the program code, completion of
program code written in the new language and preliminary quality assurance and
testing of the product. At the time of acquisition, additional development
remained on all tasks (management estimated that the project was approximately
69% complete) and costs to complete were estimated to total approximately
$928,000. At the time of the acquisition, management believed that the product
being developed would become available for sale late in fiscal 1999. GenRad will
begin to benefit from the acquired in-process research and development once
completed product is sold. Failure to reach successful completion of this
project may result in impairment of the associated capitalized intangible
assets, i.e. goodwill and developed technology, and/or may require the Company
to accelerate the time period over which the intangibles are being amortized,
which may have a material adverse effect on the Company's results of operations
and financial condition.

34
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 2: ACQUISITIONS (CONTINUED)
blended rate of all the risks associated with the product. Lastly, a core
technology charge reflected as one third of after tax net income related to the
in-process project was utilized. This rate represents an amount that the Company
would be required to pay in royalties assuming it had licensed the products
expected to be derived from the acquired in-process development efforts.

The following unaudited pro forma financial information presents the
combined results of operations of GenRad and ICC as if the acquisition had
occurred at the beginning of 1998 and 1997, respectively, after giving effect to
the amortization of goodwill and other intangible assets but excluding the
effects of the charge for acquired in-process research and development. The per
share impact of the acquired in-process research and development charge totals
$(0.30) and (0.28) per share for 1998 and 1997, respectively. This unaudited pro
forma financial information is presented for illustrative purposes only and is
not necessarily indicative of the results of operations that actually would have
been realized had the Company and ICC been a combined company during the
specified periods. Additionally, they are not indicative of the results of
future combined operations.

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revenues................................................ $227,637 $246,844
Net income (loss)....................................... $ (1,634) $ 37,294
Earnings per share:
Basic................................................. $ (0.06) $ 1.33
Diluted............................................... $ (0.06) $ 1.24
</TABLE>

MANUFACTURING EXECUTION SYSTEMS BUSINESS

Total consideration paid for Valstar's MES business was $3.2 million in
cash, including acquisition costs, funded through internally generated funds. As
part of the acquisition, the Company entered into a two-year consulting and
services agreement with Valstar that includes securing certain Valstar personnel
and other resources to transition the business to GenRad. Of the $3.0 million
purchase price, $2.0 million was paid on April 9, 1998 and $1.0 million was
released from escrow on October 7, 1998 as certain contingencies were achieved.
Direct costs of the acquisition totaled approximately $0.2 million and consisted
primarily of legal and accounting fees.

35
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 2: ACQUISITIONS (CONTINUED)
The transaction was accounted for as a purchase, and accordingly, the
purchase price was allocated to the intangible assets acquired based on their
respective fair values. The purchase price was allocated to the intangible
assets of Valstar's MES business as follows (in thousands):

<TABLE>
<S> <C>
Goodwill.................................................... $2,100
Customer lists.............................................. 900
Employment contracts........................................ 200
------
$3,200
======
</TABLE>

The acquisition of TTA was for cash and the acquisition of Testware was for
cash and 79,862 shares of the Company's Common Stock. Both acquisitions were
accounted for by the purchase method of accounting. Pro forma results of
operations have not been presented because the effects of the acquisitions were
not significant. The results of TTA and Testware are included in the 1996
financial statements beginning from the date of purchase. The excess purchase
price over the net assets acquired was recorded as goodwill. In 1998, the
Company recorded an approximate $4.9 million impairment loss related to
intangible assets acquired upon the acquisition of TTA, Testware and Field
Oriented Engineering, AG, see Note 3.

In conjunction with the purchase of TTA, the Company agreed to pay to the
sellers for each of fiscal years 1996 through 1999 the greater of $0.5 million
per year, or fifty percent of TTA's profit before taxes in excess of
$0.3 million for the respective years. The minimum obligation of $2.0 million
was recorded at the date of acquisition.

NOTE 3: RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES

During the quarters ended July 4, 1998 ("second quarter") and October 3,
1998 ("third quarter"), respectively, the Company recorded certain restructuring
and other charges totaling approximately $9.8 million and $10.4 million,
respectively. Total charges are summarized as follows (in thousands).

<TABLE>
<CAPTION>
SECOND THIRD
QUARTER QUARTER TOTAL
-------- -------- --------
<S> <C> <C> <C>
Impairment loss................................... $4,900 -- $ 4,900
Acquired in-process diagnostic software........... 1,700 -- 1,700
Restructuring and other charges................... 3,200 10,400 13,600
------ ------- -------
$9,800 $10,400 $20,200
====== ======= =======
</TABLE>

IMPAIRMENT LOSS

In fiscal 1996, the Company purchased TTA and Testware. These companies
provide custom test programming, test fixture integration and other value-added
services to manufacturers and users of electronic products. Additionally, GenRad
acquired certain assets of Field Oriented Engineering, AG in fiscal 1996,
consisting primarily of the software program known as TRACS III, which is sold
to electronic

36
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 3: RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
manufacturing systems customers. The excess purchase price over the net assets
acquired for these acquisitions was recorded as long-term intangibles, primarily
goodwill.

The historical financial performance of these entities has continued to be
less than anticipated and the businesses have been negatively impacted by the
recent decline in the in-circuit test market. Due to these factors as well as
certain management changes during the second quarter of 1998, the Company
prepared revised projections of future operating cash flows relating to these
businesses, which indicated that the businesses would not generate sufficient
operating cash flows to realize the carrying value of the intangible assets.
This analysis was performed in accordance with the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Assets to be Disposed Of." As a result, a
$4.9 million impairment loss, representing the net book value of goodwill, was
recorded during the second quarter of 1998 and is included in the accompanying
statement of operations.

ACQUIRED IN-PROCESS DIAGNOSTIC SOFTWARE

On July 2, 1998, the Company acquired the rights to certain diagnostic
software for which technological feasibility had not been established. The
Company plans to use acquired technology in the development and diagnosis of
increasingly complex mechatronic systems, particularly in vehicle systems. At
the time of the acquisition, the acquired technology had not yet reached
technological feasibility, had no alternative future uses and, accordingly, the
entire purchase price was expensed. The total of $1.7 million is included in
acquired in-process research and development in the accompanying consolidated
financial statements.

RESTRUCTURING AND OTHER CHARGES

During the third quarter of 1998, the Company ceased its manufacturing
operations at its Manchester, UK facility. Inventory related to the manufacture
of certain ADS products and the cessation of ADS' contract manufacturing
business totaling $3.5 million was charged to cost of products. In addition,
restructuring charges totaling approximately $0.5 million were recorded related
to a workforce reduction of approximately 20 people and certain fixed assets
which will no longer be utilized and will be disposed of in 1999.

37
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 3: RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
royalties. Of the total of $2.8 million, $1.4 million is recorded in costs of
products and $1.4 million is recorded as restructuring charges in the
accompanying consolidated financial statements.

During 1999, cash payments and other adjustments totaled approximately
$3.1 million related to restructuring charges recorded in 1998. The remaining
balance as of January 1, 2000 was $0.4 million.

FUTURE LEASE COSTS OF UNUSED FACILITIES

The Company had excess facility reserves of $4.1 million and $4.2 million at
January 1, 2000 and January 2, 1999, respectively. The excess facility reserves
were provided for a facility in Maidenhead, England with a lease expiration date
of 2013. The Company is currently negotiating the extension of this sublease to
include the Company's remaining lease obligation through 2013. As the Company
continues to renegotiate leasing arrangements, the utilization of excess
facility reserves and related cash outflows may differ from the present
estimates.

NOTE 4: DETAILS OF FINANCIAL STATEMENT BALANCES (IN THOUSANDS)

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH AND EQUIVALENTS:
Cash...................................................... $ 6,951 $ 8,859
Money market investments.................................. -- 4,139
------- -------
$ 6,951 $12,998
======= =======
INVENTORIES:
Raw materials............................................. $13,247 $10,316
Work in process........................................... 17,891 13,880
Finished goods............................................ 17,930 8,793
------- -------
$49,068 $32,989
======= =======
OTHER CURRENT ASSETS:
Prepaid expenses.......................................... $ 4,957 $ 1,950
Receivable from Insurance Company......................... -- 4,000
Other current assets...................................... 3,271 1,169
------- -------
$ 8,228 $ 7,119
======= =======
PROPERTY AND EQUIPMENT:
Buildings and leasehold improvements...................... $13,738 $13,932
Machinery and equipment................................... 58,748 48,250
Service parts............................................. 12,459 12,856
------- -------
84,945 75,038
======= =======
Accumulated depreciation and amortization................. (41,751) (37,769)
------- -------
$43,194 $37,269
======= =======
INTANGIBLE ASSETS:
Goodwill.................................................. $22,311 $19,189
Capitalized and purchased computer software............... 11,244 6,487
Developed technology...................................... 11,370 11,370
Assembled workforce....................................... 1,444 1,280
</TABLE>

38
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 4: DETAILS OF FINANCIAL STATEMENT BALANCES (IN THOUSANDS) (CONTINUED)

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Other intangible assets................................... 3,182 3,054
------- -------
49,551 41,380
Accumulated amortization.................................. (10,865) (5,636)
------- -------
$38,686 $35,744
======= =======
ACCRUED LIABILITIES:
Lease costs of unused facilities.......................... $ 170 $ 330
Restructuring reserves.................................... 189 3,222
Other accrued liabilities................................. 5,562 4,850
Accrued arbitration settlement............................ -- 11,384
------- -------
$ 5,921 $19,786
======= =======
ACCRUED PENSION AND BENEFITS:
Accrued U.S. pension...................................... $ 1,795 $ 3,814
Accrued foreign pension................................... 4,526 4,829
Accrued postretirement benefit............................ 2,854 2,845
------- -------
$ 9,175 $11,488
======= =======
</TABLE>

39
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 5: INDEBTEDNESS

CREDIT FACILITY

During 1998, the Company renegotiated its existing $25.0 million credit
facility, increasing the amount of available credit to $50.0 million. The line,
which requires the Company to maintain certain financial and operating
covenants, as defined, expires in July 2001. Borrowings on the line are payable
on demand and bear interest, which is payable quarterly in arrears, at the
lesser of the Bank's prime rate or LIBOR plus a range from 0.75% to 1.50%, as
determined from time to time by the Bank. Under the terms of the credit
facility, the Company is required to pay a commitment fee on the unused portion
of the line from 0.25% to 0.50% of the total unused portion of the line
dependent on the Company's operating performance. At January 1, 2000, no
borrowings were outstanding under the line.

TERM LOAN

On June 26, 1997, the Company entered into a five year term loan totaling
approximately $12.0 million. Proceeds were used primarily for the purchase of
furniture and fixtures for the Company's corporate headquarters and
manufacturing facilities in Westford, Massachusetts. Principal payments total
approximately $0.6 million and are due quarterly in arrears. Interest is payable
quarterly in arrears and is calculated based on LIBOR plus 1.25%. At January 1,
2000, the balance outstanding was approximately $5.8 million, of which
$2.3 million is classified as current. Annual maturities of the term loan for
the four years subsequent to January 1, 2000 are as follows: 2000 and
2001--$2.3 million per year; and 2002--$1.2 million.

INTEREST

Interest paid amounted to $1.2 million in 1999, $0.9 million in 1998 and
$0.5 million in 1997.

NOTE 6: FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The Company operates internationally and is exposed to market risks from
changes in foreign exchange rates. Derivative financial instruments are utilized
by the Company to partially mitigate those risks. The Company does not hold or
issue financial instruments for trading purposes.

The Company enters into foreign exchange contracts to hedge certain
purchases and accounts receivable denominated in foreign currencies (principally
European currencies). The term of the currency derivatives is rarely more than
six months. Market value gains and losses are recognized and the resulting gain
or loss offsets foreign exchange gains or losses on those transactions. The
purpose of the Company's foreign currency hedging activities is to protect the
Company from the risk that the eventual net cash inflows and outflows resulting
from the sale of products to foreign customers and purchases from foreign
suppliers will be adversely affected by changes in exchange rates.

At January 1, 2000, the Company had contracts comprised primarily of
European currencies maturing through May 18, 2000 to sell $40.2 million, net, of
foreign currency at varying rates.

NOTE 7: TREASURY STOCK

The Company commenced a stock repurchase program whereby the Company will
purchase, in the open market, shares of its stock. The Company intends to buy
back its stock at times when its market value presents opportunities to do so.
The Company's stock repurchase plan is intended as a means to partially mitigate
the dilutive impact of stock options and to provide an alternative investment
for the Company's excess cash. The Plan has been funded entirely through
operating cash flow, however, the Company may, if

40
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 7: TREASURY STOCK (CONTINUED)
it considers it prudent, utilize its available credit facilities in connection
with its stock repurchase program. During the twelve months ended January 1,
2000 and January 2, 1999, the Company had utilized approximately $18.7 million
and $15.0 million to repurchase 1,032,600 and 1,012,000 shares, respectively, of
its common stock.

NOTE 8: STOCK PLANS

STOCK OPTION AND RESTRICTED STOCK AWARD PLANS

The Company has three stock option plans: a 1991 plan (amended in 1993,
1994, 1996, 1997 and 1998) for 8,750,000 shares for key employees; a 1991 plan
(amended in 1995 and 1998) for 250,000 shares for non-employee directors, and a
1997 plan for 2,000,000 shares (amended in 1998) for key employees excluding
directors and officers.

In general, option shares granted under these plans are exercisable in
installments based on years of service or stock price. Options under the 1991
and 1997 key employee plans generally become vested over a four-year period and
have a maximum term of ten years.

Options under the non-employee directors plan generally become vested upon
issuance of options and have a maximum term of five years. Stock options issued
under the 1991 plans may be non-qualified stock options, or in the case of the
1991 Plan for key employees, incentive stock options. Stock options issued under
the 1997 plan are non-qualified stock options. Certain stock options were
granted in 1997 with an exercise price below the fair market value of the
underlying stock. This resulted in deferred compensation, which will be
recognized over the future years of service. Compensation expense related to
these grants totaled approximately $0.3 million in 1999, approximately
$0.4 million in 1998 and approximately $0.3 million in 1997. The deferred
compensation balance was $0.7 million at January 1, 2000.

The 1991 Equity Incentive Plan contains provisions for stock options, as
described above, and restricted stock awards. All restricted stock awards are
granted subject to restrictions as to continuous employment, except in the case
of death, permanent disability or retirement. One fourth of the shares vest
annually, commencing with the first anniversary of the date of grant. The cost
of the awards, determined as the fair market value of the shares on the date of
grant, is charged to expense ratably over the vesting period. No restricted
stock awards were issued in 1999, 1998 and 1997.

Stock option activity is summarized below (thousands of shares):

<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- ---------------------
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
TOTAL AVERAGE TOTAL AVERAGE TOTAL OPTION
SHARES OPTION PRICE SHARES OPTION PRICE SHARES PRICE
-------- ------------ -------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPTIONS:
Outstanding at beginning of year........... 6,238 $15.53 5,043 $12.88 4,043 $ 8.88
Granted.................................... 859 19.98 2,251 21.16 2,593 16.19
Exercised.................................. (781) 11.24 (487) 10.98 (1,175) 6.40
Cancelled.................................. (512) 21.37 (569) 18.24 (418) 12.82
----- ------ ----- ------ ------ ------
Outstanding at End of Year................. 5,804 $16.38 6,238 $15.53 5,043 $12.88
===== ===== ======
Options exercisable........................ 2,888 2,325 1,896
===== ===== ======
Options available for future grants........ 973 885 517
===== ===== ======
</TABLE>

41
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 8: STOCK PLANS (CONTINUED)
The following table summarizes information about the stock options
outstanding at January 1, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 1/01/00 LIFE PRICE AT 1/01/00 PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 1.00 - $ 2.63........................... 15 4.4 $1.11 15 $1.12
$ 3.50 - $ 7.63........................... 690 3.9 4.96 690 4.96
$ 8.25 - $10.63........................... 397 5.6 8.44 390 8.40
$11.94 - $14.50........................... 624 7.0 13.10 320 13.09
$14.75 - $18.38........................... 2,434 7.9 16.80 1,006 16.66
$18.81 - $25.00........................... 966 8.1 20.14 323 20.75
$26.31 - $27.25........................... 58 6.7 27.02 27 26.89
$28.94 - $30.00........................... 620 8.5 29.37 117 29.17
----- -----
5,804 2,888
===== =====
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

Under the Company's Employee Stock Purchase Plan, eligible employees may
invest up to 10% of their base salary in shares of the Company's Common Stock.
The purchase price of the shares is 85% of the fair market value of the stock on
the offering commencement date or the offering termination date (typically three
months after commencement date), whichever is lower. At January 1, 2000, there
were 2,462,000 shares authorized under the Plan. During the fiscal years ended
January 1, 2000, January 2, 1999 and January 3, 1998, the Company issued 84,000,
85,000 and 87,000 shares under the Plan, respectively. At January 1, 2000, there
were 1,704,000 shares available for future issuance.

STOCK BASED COMPENSATION

Had compensation cost been determined based on the fair value of the options
at the grant dates for awards in 1999, 1998 and 1997 on a basis consistent with
the provisions of SFAS No. 123, the Company's net income and earnings per share
on a fully diluted basis would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net income (loss)-as reported................... $47,494 $ (9,068) $41,295
Net income (loss)-pro forma..................... 35,558 (19,747) 33,700
Basic earnings (loss) per share-as reported..... 1.66 (0.32) 1.54
Diluted earnings (loss) per share-as reported... 1.60 (0.32) 1.43
Basic earnings (loss) per share-pro forma....... 1.24 (0.71) 1.25
Diluted earnings (loss) per share-pro forma..... 1.20 (0.71) 1.21
</TABLE>

42
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 8: STOCK PLANS (CONTINUED)
The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected life (years)............................... 6 6 6
Interest rate....................................... 5.7% 5.5% 6.6%
Volatility.......................................... 55.0% 60.0% 66.2%
Dividend yield...................................... 0% 0% 0%
Fair value of options granted at fair market
value............................................. $10.08 $12.62 $11.10
Fair value of options granted below fair market
value............................................. -- -- $ 9.55
</TABLE>

DIRECTOR RESTRICTED STOCK PLAN

In 1994, the Company adopted the 1994 Director Restricted Stock Plan
(amended in 1996 and 1998), which contains provisions for restricted stock
awards. Up to 100,000 shares of the Company's Common Stock may be issued under
the Plan. On August 31 of each year, while the Plan is in effect, each eligible
non-employee director is granted a restricted stock award of 2,500 shares of the
Company's Common Stock. The awards are subject to certain restrictions that
generally prohibit the transfer of any shares except upon the director's death
or disability, upon the director's resignation with the consent of the Board of
Directors, upon a change in control of the Company as defined under the Plan, or
prior to the third anniversary of the award with certain restrictions remaining
through the fifth anniversary. During 1999, 1998 and 1997, the Company granted
restricted stock awards for 15,000, 17,500 and 17,500 shares, respectively.
Compensation expense related to these awards was not significant in 1999, 1998
and 1997. At January 1, 2000 there were 21,500 shares available for future
issuance.

NOTE 9: INCOME TAXES

The components of income (loss) before income taxes consist of the following
(in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Domestic........................................ $39,916 $ (72) $38,942
Foreign......................................... 7,855 (15,527) (1,196)
------- -------- -------
$47,771 $(15,599) $37,746
======= ======== =======
</TABLE>

The provision (benefit) for income taxes consists of the following (in
thousands):

<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal................. $2,207 $ 12,302 $319 $ 1,835 $1,088 $ 2,480
Foreign................. 1,429 -- 250 -- 671 --
State................... 1,141 -- 400 -- 80 --
Change in Deferred Tax
Allowance............. -- (16,802) -- (9,335) -- (7,868)
------ -------- ---- ------- ------ --------
$4,777 $ (4,500) $969 $(7,500) $1,839 $ (5,388)
====== ======== ==== ======= ====== ========
</TABLE>

43
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 9: INCOME TAXES (CONTINUED)
A reconciliation of tax on income at the federal statutory rate to the
recorded income tax (benefit) provision is presented below (in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax provision at statutory rate............................. $16,720 $(5,459) $13,211
State income taxes less related federal income tax
benefits.................................................. 741 260 52
Realization of deferred tax assets and other................ (17,819) (7,651) (17,031)
Non-deductible intangibles and other........................ 1,955 6,069 269
Foreign earnings taxed at different rates, including
withholding taxes......................................... (1,320) 250 (50)
------- ------- -------
Recorded income tax (benefit) provision..................... $ 277 $(6,531) $(3,549)
======= ======= =======
</TABLE>

The temporary differences and carryforwards that gave rise to the
significant deferred tax assets and liabilities as of January 1, 2000 and
January 2, 1999 were as follows (in thousands):

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Domestic net operating losses........................... $31,321 $42,346
Research and development tax credits.................... 2,514 6,725
Alternative minimum tax credit.......................... 1,412 762
Foreign net operating losses not yet benefited.......... 2,391 3,923
Inventory valuation reserves............................ 1,413 1,427
Retirement benefit accruals............................. 1,860 2,664
Restructuring reserves, severance and lease costs of
unused facilities..................................... 1,843 2,547
Other reserves.......................................... 1,976 2,173
------- -------
Total deferred tax assets................................. 44,730 62,567
Valuation allowance....................................... (20,142) (44,781)
------- -------
Net deferred tax assets................................... 24,588 17,786
------- -------
DEFERRED TAX LIABILITIES:
Depreciation............................................ (1,331) (1,191)
Other................................................... (3,389) (1,227)
------- -------
Total deferred tax liabilities............................ (4,720) (2,418)
------- -------
Net deferred taxes recorded............................... $19,868 $15,368
======= =======
</TABLE>

Deferred income taxes are provided to reflect the future tax consequences of
differences between the book and the tax basis of assets and liabilities. At
January 1, 2000 and January 2, 1999, the Company had a net deferred tax asset of
$40.0 million and $60.2 million, before valuation allowance, respectively. At
January 1, 2000, $1.8 million of the Company's deferred tax asset was applicable
to net operating losses generated by the disqualified disposition of stock
options. When realized, the related tax benefit will be credited to additional
paid-in capital.

The Company's net deferred tax asset consists primarily of the future tax
benefits from domestic net operating loss carryforwards and other tax credits.
Realization of the net deferred tax asset and future

44
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 9: INCOME TAXES (CONTINUED)
adjustments of the valuation allowance depend on the Company's ability to
generate taxable income during the respective carryforward periods. Under the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", the Company is required to recognize all or a portion of its net
deferred tax asset if it is believed that it is more likely than not that all or
a portion of the benefits of the carryforward losses and tax credits will be
realized. In establishing the valuation reserve, management considers positive
factors, including positive earnings in recent years, and negative factors
including the tax basis losses incurred for eleven consecutive years through
1995; the scheduled expiration of certain tax credit and net operating loss
carryovers; the competitive nature of the industry in which the Company sells
its products and services; and uncertainties relating to the tax jurisdiction in
which income will be generated. Based on all of these factors, primarily the
positive taxable income in 1998, 1997 and 1996, the Company reduced
$16.8 million, $9.3 million and $7.9 million of the valuation allowance during
1999, 1998 and 1997, respectively. Management continues to assess the
realizability of the net deferred tax asset on an ongoing basis, and believes
that it is reasonably possible that an additional portion of the valuation
allowance will be reduced in the near term.

It has been the practice of the Company to reinvest unremitted earnings of
foreign subsidiaries outside the United States. Accordingly, the Company does
not provide for federal income taxes that would result from the remittance of
such earnings.

At January 1, 2000 the Company had, for tax purposes, domestic and foreign
unused net operating loss carryforwards of $89.4 million and $7.9 million,
respectively. Domestic net operating loss carryforwards are available to offset
future income and will begin expiring in 2002 through 2010. In the case of
foreign net operating loss carryforwards, generally in the United Kingdom, such
amounts are available to offset future income indefinitely provided there are no
substantial changes in the manner in which the Company does business in foreign
countries. The Tax Reform Act of 1986 contains provisions that limit the net
operating loss carryforwards available to be used in any given year upon the
occurrence of certain events, including significant changes in ownership
interests.

For tax purposes, the Company has $2.5 million of investment and research
credit carryforwards at January 1, 2000, which will expire beginning in 2000
through 2013.

Net taxes paid were $2.1 million in 1999, $1.1 million in 1998 and
$1.1 million in 1997.

NOTE 10: RETIREMENT BENEFITS

U.S. PENSION PLAN

The Company maintains a noncontributory defined benefit pension plan which
covered substantially all domestic employees. On January 31, 1995, the Company
ceased all benefit accruals under this plan as part of redesigning the Company's
employee benefit plans. The Company's funding policy is to contribute amounts to
the Plan sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional amounts as
the Company determined to be appropriate from time to time.

On December 12, 1997, the Company used plan assets to purchase
non-participating group annuity contracts for a group of participants which
represented approximately one third of the Plan's liability. The purchase
resulted in a $0.9 million gain in the fourth quarter of 1997 utilizing a 7.25%
discount rate, which is included in selling, general and administrative expenses
in 1997.

45
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 10: RETIREMENT BENEFITS (CONTINUED)
In December 1999, the Company utilized plan assets to purchase
non-participating group annuity contracts for a group of participants
representing approximately two-thirds of the remaining plan liability. The
purchase resulted in a gain of $1.2 million in the fourth quarter of 1999
utilizing a 7.5% discount rate, which is included in selling, general and
administrative expenses in 1999.

The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets over the two-year period ending
January 1, 2000, and a statement of the funded status as of January 1, 2000 and
January 2, 1999 (in thousands).

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
BENEFIT OBLIGATION:
Obligation at beginning of year.......................... $ 33,035 $30,743
Interest cost............................................ 2,105 2,088
Actuarial (gain)/loss.................................... (2,664) 1,680
Benefit payments......................................... (1,914) (1,476)
Settlements.............................................. (18,940) --
-------- -------
Obligation at end of year................................ $ 11,622 $33,035
======== =======
FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at beginning of year........... $ 30,169 $28,171
Actual return on plan assets............................. 549 3,481
Benefit payments......................................... (1,914) (1,483)
Settlements.............................................. (18,940) --
-------- -------
Fair value of plan assets at end of year................. $ 9,864 $30,169
======== =======
FUNDED STATUS:
Funded status at end of year............................. $ (1,758) $(2,866)
Unrecognized transition (asset) obligation............... (528) (1,664)
Unrecognized (gain) loss................................. 491 716
-------- -------
Net amount recognized.................................... $ (1,795) $(3,814)
======== =======
</TABLE>

The following table provides the amounts recognized in the statement of
financial position as of January 1, 2000 and January 2, 1999 (in thousands):

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued benefit liability................................. $(1,795) $(3,814)
------- -------
Net amount recognized..................................... $(1,795) $(3,814)
======= =======
</TABLE>

46
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 10: RETIREMENT BENEFITS (CONTINUED)
The following table provides the components of net periodic pension benefit
cost for the plan for fiscal years 1999, 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest cost..................................... $ 2,105 $ 2,088 $ 3,102
Expected return on plan assets.................... (2,623) (2,179) (3,016)
Amortization of transition (asset) obligation..... (277) (277) (410)
------- ------- -------
Net periodic pension benefit cost................. (795) (368) (324)
Settlement (gain) loss............................ (1,223) (76) (925)
------- ------- -------
Net periodic pension benefit cost................. $(2,018) $ (444) $(1,249)
------- ------- -------
</TABLE>

The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% and 6.5% at January 1, 2000 and
January 2, 1999, respectively. There was no rate increase in future compensation
levels to determine the actuarial present value of the projected benefit
obligation at January 1, 2000 and January 2, 1999, as the Company ceased all
benefit accruals on January 31, 1995. The expected long-term rate of return on
plan assets was 9.0% in 1999 and 8.0% in 1998 and 1997. No contributions were
required from the Company for 1999, 1998 or 1997.

DEFINED CONTRIBUTION PLAN

The Company also sponsors a defined contribution plan. The plan covers
employees who work at least 1,000 hours per year and provides for contributions
by the employee between 1% and 15% of an employee's salary, which is capped by
the maximum amount permitted by the Internal Revenue Code. Through July 1, 1998,
the Company had matched 50% of the first 6% of an employee's contributions.
Commencing on July 1, 1998, the Company increased its match to 50% of the first
10% of an employee's contributions. Pension expense recognized for the defined
contribution plan totaled $1.8 million in 1999, $1.5 million in 1998 and
$1.0 million in 1997.

NON-U.S. PLANS

The Company has a defined benefit pension plan for one of its subsidiaries
outside the U.S.

47
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 10: RETIREMENT BENEFITS (CONTINUED)
The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets over the two-year period ending
January 1, 2000, and a statement of the funded status as of January 1, 2000 and
January 2, 1999 (in thousands).

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
BENEFIT OBLIGATION:
Obligation at beginning of year............................. $4,429 $3,688
Interest cost............................................... 230 253
Service cost................................................ 129 136
Actuarial (gain)/loss....................................... (548) 153
Benefit payments............................................ (20) 199
------ ------
Obligation at end of year................................... $4,220 $4,429
====== ======
FUNDED STATUS:
Funded status at end of year................................ $4,220 $4,429
Unrecognized transition (asset) obligation.................. 32 43
Unrecognized (gain) loss.................................... 274 357
------ ------
Net amount recognized....................................... $4,526 $4,829
====== ======
</TABLE>

The following table provides the amounts recognized in the statement of
financial position as of January 1, 2000 and January 2, 1999:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued benefit liability................................... $4,526 $4,829
------ ------
Net amount recognized....................................... $4,526 $4,829
====== ======
</TABLE>

The following table provides the components of net periodic benefit cost for
the plan for fiscal years 1999, 1998 and 1997:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest cost........................................... $230 $253 $232
Service cost............................................ 129 136 98
Amortization of transition (asset) obligation........... (4) (5) (5)
Amortization of net (gain) loss......................... -- (32) (237)
---- ---- ----
Net periodic benefit cost after curtailments and
settlements........................................... $355 $352 $ 88
==== ==== ====
</TABLE>

The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
6.25% and 3.0% at January 1, 2000 and 6.0% and 2.5% at January 2, 1999.

48
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 10: RETIREMENT BENEFITS (CONTINUED)

ACCRUED POSTRETIREMENT BENEFITS

The Company put in place the provisions of Statement of Financial Accounting
Standards No. 106 (SFAS No. 106), "Employer's Accounting for Postretirement
Benefits Other Than Pensions", for its postretirement benefit plan. The Company
provides certain health care and life insurance benefits for retired U.S.
employees. Employees become eligible for these benefits when they reach normal
retirement age while working for the Company. Prior to the adoption of this
Statement, the cost was recognized as claims were paid. The Company's
postretirement benefit plans were modified at the end of 1995 and include a
limit on the cost of the Company's contributions for all retirees. The Plan is
not funded.

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
RECONCILIATION OF BENEFIT OBLIGATION:
Obligation at beginning of year........................... $ 7,873 $ 7,939
Service cost.............................................. 51 41
Interest cost............................................. 504 521
Actuarial (gain)/loss..................................... 271 168
Benefit payments.......................................... (892) (796)
------- -------
Obligation at end of year................................. $ 7,807 $ 7,873
======= =======

RECONCILIATION OF FAIR VALUE OF PLAN ASSETS:
Employer contributions.................................... $ 892 $ 796
Benefit payments.......................................... (892) (796)
------- -------
Fair value of plan assets at end of year.................. $ -- $ --
======= =======

FUNDED STATUS:
Funded status at end of year.............................. $(7,807) $(7,873)
Unrecognized transition (asset) obligation................ 4,495 4,841
Unrecognized (gain)/loss.................................. 458 187
------- -------
Net amount recognized..................................... $(2,854) $(2,845)
======= =======
</TABLE>

49
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 10: RETIREMENT BENEFITS (CONTINUED)
The following table provides the amounts recognized in the statement of
financial position as of January 1, 2000 and January 2, 1999:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued benefit liability................................. $(2,854) $(2,845)
------- -------
Net amount recognized..................................... $(2,854) $(2,845)
======= =======
</TABLE>

The following table provides the components of net periodic benefit cost for
the plans for fiscal years 1999, 1998 and 1997:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost............................................ $ 51 $ 41 $ 72
Interest cost........................................... 504 521 557
Amortization of transition (asset) obligation........... 346 345 346
---- ---- ----
Net periodic benefit cost............................... $901 $907 $975
==== ==== ====
</TABLE>

Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A 1% change in assumed health care
cost trend rates would have the following effects:

<TABLE>
<CAPTION>
1% INCREASE 1% DECREASE
----------- -----------
<S> <C> <C>
Effect on total of service and interest cost
components: Postretirement health care benefit
cost................................................ $ 14 $ (15)
Effect on health care component: Benefit obligation... $201 $(206)
</TABLE>

For measurement purposes, a 7.0%, 7.5% and 8.0% annual rate of increase in
the per capita cost of covered health care benefits was assumed for fiscal 1999,
1998 and 1997, respectively. The Company's annual per capita cost commitment for
retiree medical care is capped at 1995 levels. As a result, the health care cost
trend rate assumption does not have a significant effect on the amounts
reported. The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at January 1, 2000 and 6.5% at
January 2, 1999.

NOTE 11: LEASES

The Company leases certain manufacturing facilities, sales and service
offices and equipment under operating leases. Total rental expense for these
leases amounted to $7.5 million in 1999, $7.0 million in 1998 and $7.1 million
in 1997.

50
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 11: LEASES (CONTINUED)
The future minimum commitments as of January 1, 2000 for noncancelable
operating leases are as follows (in thousands):

<TABLE>
<CAPTION>
REAL ESTATE EQUIPMENT TOTAL
----------- --------- --------
<S> <C> <C> <C>
2000.......................................... $ 6,649 $1,751 $ 8,400
2001.......................................... 6,033 1,222 7,255
2002.......................................... 5,808 422 6,230
2003.......................................... 5,649 199 5,848
2004.......................................... 5,036 174 5,210
Thereafter.................................... 35,985 134 36,119
------- ------ -------
Gross commitment.............................. $65,160 $3,902 $69,062
Less sublease income.......................... (8,875) -- (8,875)
------- ------ -------
Net commitment................................ $56,285 $3,902 $60,187
======= ====== =======
</TABLE>

NOTE 12: CONTINGENCIES

On April 28, 1998, the Company and James F. Lyons, President and Chief
Executive Officer were served with a lawsuit purported to be a class action suit
on behalf of persons who purchased Company stock in the open market over a
specified period of time. The lawsuit, entitled Duck Enterprises, LPV v. GenRad
and James F. Lyons, CA No. 98-10706-PBS, was filed in the United States District
Court for the District of Massachusetts. The complaint specified unspecified
damages, plus costs and attorney's fees. On January 8, 1999 the suit was
dismissed without finding.

On May 27, 1998, William E. Gaines, William E. Masskaker, Frank B. Wingate
and Heritage Investment Limited Partnership ("the plaintiffs") filed a Demand
for Arbitration ("the Demand") with the American Arbitration Association in
Boston (No. 11 168 00247 98) against the Company, James F. Lyons and Paul
Pronsky, Jr. The claims arise out of the acquisition of Industrial Computer
Corporation ("ICC") by GenRad. The plaintiffs sought damages totaling
$13.6 million, plus costs and attorneys' fees. On June 18, 1998, the Company
filed a response to the Demand and on August 21, 1998, the Company filed an
amended response and counter-claims, which arose from the acquisition of ICC and
sought unspecified damages.

On April 7, 1999, the parties agreed to settle all claims arising from the
acquisition of ICC. In connection with the settlement, the Company paid
$7.0 million, net of insurance proceeds, of $4.0 million. In 1998 the Company
recorded a charge to operations totaling $7.7 million representing the cost of
the settlement plus costs and attorney fees.

The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to any such claims will not materially affect
the results of operations or the financial position of the Company.

51
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 13: OPERATING SEGMENTS AND OTHER GEOGRAPHIC INFORMATION

OPERATING SEGMENTS

GenRad maintains three core operating segments, Electronic Manufacturing
Solutions ("EMS"), Advanced Diagnostic Solutions ("ADS") and GR Software
("GRS"). GenRad's EMS segment focuses on the integration of hardware and
software for process control in the manufacture of printed circuit boards,
emphasizing inspection technologies and is headquartered in Westford, MA.
GenRad's ADS segment develops and markets diagnostic solutions comprised of
hardware, software and services which optimize the manufacturing and service
capabilities of transportation and equipment companies. ADS is headquartered in
Manchester, England with development and service centers in Detroit, MI and
Ismaning, Germany. GenRad's GRS segment was expanded during 1998 with the
Company's acquisition of ICC, a privately held manufacturing execution systems
company with operations in Atlanta. Upon acquisition, the Company combined the
operations of ICC with its existing manufacturing software development, sales
and support groups to form GRS. GRS develops and markets product solutions and
services to companies wishing to achieve and maintain control over manufacturing
processes. GRS is headquartered in Atlanta, GA with technology development and
support centers in Portland, OR, Aberdeen, Scotland and Zurich, Switzerland.

GenRad's reportable segments each represent strategic business units that
offer different, yet related, products and services. They are managed
differently because each requires differing technology development, sales
strategies, service capabilities and time to market considerations. Each segment
is led by a chief operating decision maker, who, in coordination with the
Company's Chief Executive Officer and President, utilizes the information
reported below in evaluating results and allocating resources pertaining to
segment operations.

Each segment is evaluated based on contribution margin, or operating income,
derived from transactions with external third parties, i.e. net income (loss)
before interest income and expense, other income (expense) and income taxes.
These segment amounts are determined in accordance with the accounting policies
noted below. Intercompany revenues and expenses are excluded from the
contribution margin, or operating income, utilized by the chief operating
decision makers in determining resource allocation and evaluating performance.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in Note 1.

52
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 13: OPERATING SEGMENTS AND OTHER GEOGRAPHIC INFORMATION (CONTINUED)
The following table illustrates each segments operating income (loss) for
1999, 1998 and 1997. The amounts provided herein are those utilized by the
respective segments' President in allocating resources and evaluating
performance. GenRad's chief operating decision makers do not utilize, nor does
GenRad maintain, asset information or capital expenditures by segment,
accordingly, such information is not presented herein.

<TABLE>
<CAPTION>
EMS ADS GRS TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999:
Revenue:
Product............................ $145,907 $ 76,971 $ 9,484 $232,362
Service............................ 32,305 25,876 11,405 69,586
-------- -------- ------- --------
Total revenue.................... $178,212 $102,847 $20,889 $301,948
======== ======== ======= ========
Depreciation and amortization........ $ 4,481 $ 1,902 $ 411 $ 6,794
======== ======== ======= ========
Operating income (loss).............. $ 53,636 $ 17,496 $(3,247) $ 67,885
======== ======== ======= ========

1998:
Revenue:
Product............................ $141,388 $ 9,973 $ 7,929 $159,290
Service............................ 34,471 22,314 8,714 65,499
-------- -------- ------- --------
Total revenue.................... $175,859 $ 32,287 $16,643 $224,789
======== ======== ======= ========
Depreciation and amortization........ $ 7,107 $ 1,553 $ 387 $ 9,047
======== ======== ======= ========
Operating income (loss).............. $ 38,061 $ 2,628 $(2,719) $ 37,970
======== ======== ======= ========

1997:
Revenue:
Product............................ $146,170 $ 29,304 $ 4,198 $179,672
Service............................ 35,517 19,204 2,368 57,089
-------- -------- ------- --------
Total revenue.................... $181,687 $ 48,508 $ 6,566 $236,761
======== ======== ======= ========
Depreciation and amortization........ $ 5,096 $ 1,358 $ 83 $ 6,537
======== ======== ======= ========
Operating income (loss).............. $ 54,145 $ 9,174 $(3,175) $ 60,144
======== ======== ======= ========
</TABLE>

53
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 13: OPERATING SEGMENTS AND OTHER GEOGRAPHIC INFORMATION (CONTINUED)
A reconciliation of the totals reported for the operating segments to the
comparable line items in the consolidated financial statements is as follows:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION:
Total for reportable segments................. $ 6,794 $ 9,047 $ 6,537
Corporate depreciation and amortization....... 8,134 6,265 2,713
------- -------- -------
Amount per consolidated financial
statements.................................. $14,928 $ 15,312 $ 9,250
======= ======== =======

OPERATING INCOME (LOSS):
Total for reportable segments................. $67,885 $ 37,970 $60,144
Corporate expenses (a)........................ 18,783 15,994 21,658
Acquired in-process research and
development................................. -- 10,097 --
Impairment loss............................... -- 4,906 --
Restructuring and other charges............... -- 21,267 --
------- -------- -------
Operating income (loss) per consolidated
financial statements........................ 49,102 (14,294) 38,486
Other expenses, net............................. (1,331) (1,305) (740)
------- -------- -------
Income (loss) before income taxes............... $47,771 $(15,599) $37,746
======= ======== =======
</TABLE>

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

(a) Includes amortization of capitalized software, corporate research and
development and other charges.

GEOGRAPHIC DATA

The following table summarizes certain geographic information based on
location of customers for 1999, 1998 and 1997.

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
United States............................... $148,238 $108,479 $113,032
United Kingdom.............................. 42,600 34,704 38,926
Germany..................................... 37,574 14,696 25,002
All other foreign countries................. 73,536 66,910 59,801
-------- -------- --------
Total revenue................................. $301,948 $224,789 $236,761
======== ======== ========
</TABLE>

No other individual countries accounted for greater than 10% of consolidated
revenues.

54
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 13: OPERATING SEGMENTS AND OTHER GEOGRAPHIC INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
JANUARY 1 JANUARY 2
2000 1999
--------- ---------
<S> <C> <C>
LONG-LIVED ASSETS:
United States.......................................... $76,080 $65,844
All foreign countries.................................. 7,168 8,417
------- -------
Total................................................ $83,248 $74,261
======= =======
</TABLE>

SIGNIFICANT CUSTOMERS

During 1999, one customer accounted for 31% of consolidated revenues. No
other customers accounted for greater than 10% of revenues in 1999. During 1998
and 1997, that same one customer accounted for 11% and 10%, respectively, of
consolidated revenues.

NOTE 14: SUPPLEMENTAL INFORMATION (UNAUDITED)

QUARTERLY INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following table summarizes reported quarterly data for 1999, 1998 and
1997.

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 1, 2000
Net sales................................... $53,110 $ 63,618 $109,246 $75,974 $301,948
Gross margin................................ 28,552 30,764 42,501 33,374 135,191
Net income.................................. 10,322 7,960 17,768 11,444 47,494
NET INCOME PER SHARE:
Basic..................................... 0.37 0.28 0.62 0.40 1.66
Diluted................................... 0.35 0.27 0.60 0.39 1.60
YEAR ENDED JANUARY 2, 1999
Net sales................................... $49,072 $ 58,940 $ 60,550 $56,227 $224,789
Gross margin................................ 25,272 28,516 24,467 27,657 105,912
Net income (loss)........................... 8,909 (11,940) (3,919) (2,118) (9,068)
NET INCOME (LOSS) PER SHARE:
Basic..................................... 0.33 (0.42) (0.14) (0.08) (0.32)
Diluted................................... 0.30 (0.42) (0.14) (0.08) (0.32)
</TABLE>

NOTE 15: SUBSEQUENT EVENTS

ACQUISITIONS

In March 2000, the Company acquired all of the assets of Nicolet Imaging
Systems and the outstanding capital stock of Sierra Research Technology
(collectively "NIS") from Thermo Spectra Corporation ("TSC"), a subsidiary of
Thermo Instruments Corporation in exchange for $40.0 million in cash. The NIS
business consists of two additional product suites for GenRad, X-Ray inspection
technologies and repair/re-work equipment with sites in San Diego, California
and Westford, Massachusetts. The transaction will be accounted for as a
purchase.

55
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
(CONTINUED)

NOTE 15: SUBSEQUENT EVENTS (CONTINUED)
In February 2000, the Company made a tender offer for the shares of
Autodiagnos AB ("Autodiagnos"), an automotive aftermarket diagnostics software
and equipment vendor based in Stockholm, Sweden. Autodiagnos maintains sales
offices in England, the Netherlands, Germany and the United States. Total
consideration proposed totals approximately $27.0 million in cash.

LINE OF CREDIT

TREASURY STOCK

On January 31, 2000, the Company's Board of Directors authorized the
repurchase of an additional 2,500,000 shares of its common stock. The total
number of shares authorized for repurchase is 5,000,000, which represents
approximately 17% of the then issued and outstanding shares of common stock.

56
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

57
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under "Executive Officers of GenRad" in Part I of
this report and in Item 1 of the 2000 Proxy Statement is hereby incorporated by
reference.

ITEM 11. EXECUTIVE COMPENSATION

The information set forth under "Compensation of Executives and Directors"
in the 2000 Proxy Statement is hereby incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information set forth under "Certain Shareholders" and "Election of
Directors" in the 2000 Proxy Statement is hereby incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

58
<PAGE>
PART IV

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

(a)(2) The following schedules to the Consolidated Financial Statements of
GenRad, Inc. and Subsidiaries are filed as part of this report:

A. Schedule II & Valuation and Qualifying Accounts

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES

To the Board of Directors of GenRad, Inc.:

Our audits of the consolidated financial statements referred to in our
report dated January 25, 2000 appearing in this Form 10-K also included an audit
of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K.
In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.

<TABLE>
<S> <C> <C>
/s/ PRICEWATERHOUSECOOPERS LLP
-----------------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
</TABLE>

January 25, 2000

59
<PAGE>
All other schedules not listed above are inapplicable or are not required
under Securities and Exchange Commission regulations and therefore have been
omitted.

(a)(3) The following Exhibits are filed as part of this report:

3.1 Articles of Organization of GenRad, Inc. as amended to May 21, 1980,
incorporated by reference to Exhibit 3.1 to the Company's report on
Form 10-K for the year ended January 3, 1981.

3.2 Articles of Amendment to the Articles of Organization of GenRad,
Inc., incorporated by reference to Exhibit 3.1 to the Company's
report on Form 10-K for the year ended December 31, 1983.

3.3 Articles of Amendment to the Articles of Organization of GenRad,
Inc., incorporated by reference to Exhibit 3.1 to the Company's
report on Form 10-K for the year ended January 2, 1988.

10 Lease agreement dated July 26, 1996 between GenRad, Inc. and
Michelson Farm-Westford Technology Park Trust, incorporated by
reference to Exhibit 10 to the Company's report on Form 10-Q for the
quarter ended June 29, 1996.

10.1 Facility agreement dated June 26, 1997 between GenRad Limited and
BankBoston, N.A. London Branch, incorporated by reference to Exhibit
10.1 to the Company's report on Form 10-Q for the quarter ended June
28, 1997.

10.2 Amended and restated revolving credit agreement dated May 6, 1997
between GenRad, Inc. and BankBoston, N.A., incorporated by reference
to Exhibit 10.2 to the Company's report on Form 10-Q for the quarter
ended June 28, 1997.

10.3 Severance Agreement between GenRad, Inc. and Kevin R. Cloutier
effective as of May 9, 1997, incorporated by reference to Exhibit
10.3 to the Company's report on Form 10-Q for the quarter ended
September 27, 1997.

10.4 Severance Agreement between GenRad, Inc. and Paul Geere effective as
of May 9, 1997, incorporated by reference to Exhibit 10.4 to the
Company's report on Form 10-Q for the quarter ended September 27,
1997.

10.5 Severance Agreement between GenRad, Inc. and Lori B. Hannay
effective as of May 9, 1997, incorporated by reference to Exhibit
10.5 to the Company's report on Form 10-Q for the quarter ended
September 27, 1997.

10.6 Severance Agreement between GenRad, Inc. and Sarah H. Lucas
effective as of May 9, 1997, incorporated by reference to Exhibit
10.6 to the Company's report on Form 10-Q for the quarter ended
September 27, 1997.

10.7 Severance Agreement between GenRad, Inc. and James F. Lyons
effective as of May 8, 1997, incorporated by reference to Exhibit
10.7 to the Company's report on Form 10-Q for the quarter ended
September 27, 1997.

10.8 Severance Agreement between GenRad, Inc. and Paul Pronsky, Jr.
effective as of May 9, 1997, incorporated by reference to Exhibit
10.8 to the Company's report on Form 10-Q for the quarter ended
September 27, 1997.

10.9 Severance Agreement between GenRad, Inc. and Michael W. Schraeder
effective as of May 9, 1997, incorporated by reference to Exhibit
10.9 to the Company's report on Form 10-Q for the quarter ended
September 27, 1997.

60
<PAGE>
10.10 Severance Agreement between GenRad, Inc. and Walter A. Shephard
effective as of October 24, 1997, incorporated by reference to
Exhibit 10.10 to the Company's report on Form 10-K for the year
ended January 3, 1998.

10.11 Severance Agreement between GenRad, Inc. and Gary H. Mueller
effective as of October 24, 1997, incorporated by reference to
Exhibit 10.11 to the Company's report on Form 10-K for the year
ended January 3, 1998.

10.12 Agreement dated February 12, 1997 between GenRad Limited and Ford
Motor Company, incorporated by reference to Exhibit 10.12 to the
Company's report on Form 10-K for the year ended January 2, 1999.*

10.13 Settlement agreement and Mutual General Release dated April 7, 1999
between William E. Gaines, William E. Massaker, Frank B. Wingate and
Heritage Investment Limited Partnership and GenRad, Inc., James F.
Lyons and Paul Pronsky, Jr. incorporated by reference to Exhibit
10.13 to the Company's report on Form 10-K for the year ended
January 2, 1999.

21 List of Subsidiaries, attached.

23 Consent of PricewaterhouseCoopers LLP, attached.

27 Financial Data Schedule, attached.

(b) None

(d) See Item 14(a)(1) and (2) above.

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

* The Company has requested confidential treatment of the redacted positions
of this exhibit pursuant to the Rule 24b-2 under the Securities Exchange Act
of 1934, as amended, and has separately filed a complete copy of this
exhibit with the Securities and Exchange Commission.

61
<PAGE>
SIGNATURES

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

<TABLE>
<S> <C> <C>
GENRAD, INC.
(Registrant)

By:
-----------------------------------------
James F. Lyons
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
Date: March 30, 2000
</TABLE>

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES F. LYONS President, Chief Executive
------------------------------------------- Officer and Chairman of March 30, 2000
James F. Lyons the Board of Directors
</TABLE>

(2) Principal financial and accounting officer:

<TABLE>
<C> <S> <C>
/s/ WALTER A. SHEPHARD Vice President, Chief
------------------------------------------- Financial Officer and March 30, 2000
Walter A. Shephard Secretary
</TABLE>

(4) A majority of the Board of Directors:

<TABLE>
<C> <S> <C>
/s/ WILLIAM S. ANTLE III
------------------------------------------- Director March 30, 2000
William S. Antle III

/s/ RUSSELL A. GULLOTTI
------------------------------------------- Director March 30, 2000
Russell A. Gullotti

/s/ LOWELL B. HAWKINSON
------------------------------------------- Director March 30, 2000
Lowell B. Hawkinson
</TABLE>

62
<PAGE>

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES F. LYONS
------------------------------------------- Chairman of the Board of March 30, 2000
James F. Lyons Directors

/s/ WILLIAM G. SCHEERER
------------------------------------------- Director March 30, 2000
William G. Scheerer

/s/ ADRIANA STADECKER
------------------------------------------- Director March 30, 2000
Adriana Stadecker

/s/ ED ZSCHAU
------------------------------------------- Director March 30, 2000
Ed Zschau
</TABLE>

63
<PAGE>
GENRAD, INC. AND SUBSIDIARIES

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------- --------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended January 1, 2000
Deducted from asset accounts:
Allowance for doubtful accounts.................. $ 1,538 $1,061 $ 1,112 $ 1,487
Inventory reserve................................ $ 7,122 $4,005 $ 7,829 $ 3,298
Deferred tax asset valuation allowance........... $44,781 $ -- $24,639 $20,142

Year ended January 2, 1999
Deducted from asset accounts:
Allowance for doubtful accounts.................. $ 1,127 $1,170 $ 759 $ 1,538
Inventory reserve................................ $ 6,013 $8,787 $ 7,678 $ 7,122
Deferred tax asset valuation allowance........... $53,162 $ -- $ 8,381 $44,781

Year ended January 3, 1998
Deducted from asset accounts:
Allowance for doubtful accounts.................. $ 1,431 $ 26 $ 330 $ 1,127
Inventory reserve................................ $ 8,836 $1,406 $ 4,229 $ 6,013
Deferred tax asset valuation allowance........... $66,678 $ -- $13,516 $53,162
</TABLE>

<PAGE>

EXHIBIT 21

GenRad, Inc.

Schedule of Subsidiaries as of January 1, 2000

Subsidiary name State/Jurisdiction of Incorporation
- ---------------------------- -----------------------------------
GenRad Canada Limited Canada

GenRad Asia PTE Limited Singapore

GenRad SA France

GenRad GmbH Germany

GenRad China Limited China

GenRad Benelux B.V. Netherlands

GenRad Europe Limited England

GenRad Limited England

GenRad Holdings Limited England

GenRad Mexico Incorporated Delaware

Mitron Europe Limited England

Mastertech Automotive Ltd. England

All subsidiaries are Consolidated Subsidiaries and do business under their own
name.

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-93701)
and Form S-8 (No. 333-87249), Form S-3 (No. 333-57251, No. 333-09675 and No.
333-19685) and the Registration Statements on Form S-8 (No. 333-69045, No.
333-69049, No. 333-64329, No. 333-43445, No. 2-92800, No. 33-53869, No.
33-53871, No. 33-53867, No. 33-42789, No. 33-52009, No. 33-60153 and No.
333-05235) of our report dated January 25, 2000 appearing in this Form 10-K.
We also consent to the application of such report to the Financial Statement
Schedule for the three years ended January 1, 2000 when such schedule is read
in conjunction with the financial statements referred to in our report. The
audits referred to in such report included this schedule.

PricewaterhouseCoopers LLP

Boston, Massachusetts
March 30, 2000

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 1, 2000 AND THE CONSOLIDATED STATEEMENT
OF OPERATIONS FOR THE YEAR ENDED JANUARY 1, 2000 FOR GENRAD, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JAN-01-2000
<EXCHANGE-RATE> 1
<CASH> 6,951
<SECURITIES> 0
<RECEIVABLES> 82,763
<ALLOWANCES> 1,487
<INVENTORY> 49,068
<CURRENT-ASSETS> 145,523
<PP&E> 84,945
<DEPRECIATION> 41,751
<TOTAL-ASSETS> 248,639
<CURRENT-LIABILITIES> 50,013
<BONDS> 0
0
0
<COMMON> 29,877
<OTHER-SE> 146,958
<TOTAL-LIABILITY-AND-EQUITY> 248,639
<SALES> 232,362
<TOTAL-REVENUES> 301,948
<CGS> 124,114
<TOTAL-COSTS> 166,757
<OTHER-EXPENSES> 86,089
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,374
<INCOME-PRETAX> 47,771
<INCOME-TAX> (277)
<INCOME-CONTINUING> 47,494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,494
<EPS-BASIC> 1.66
<EPS-DILUTED> 1.60

</TABLE>