KVH INDUSTRIES INC \DE\ - 10-K Annual Report

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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 end December 31, 1996

OR

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

For the transition period from ________ to ___________

Commission file number: 0-28082

KVH Industries, Inc.

(Exact name of Registrant as specified in its charter)

Delaware 05-0420589
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
110 Enterprise Center, Middletown, RI 02842
(Address of principal executive offices) (Zip code)

(401) 847-3327
(Registrant's telephone number including area code)

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

Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value, per share.
(Title of Class)

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

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 ( ).

As of March 14, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $23,985,071 based upon a total of
3,620,388 shares held by non-affiliates and the last sale price on that
date of $6.63. As of March 14, 1997, the number of shares outstanding of
the Registrant's common stock was 7,040,920.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive Proxy Statement relating to the 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Report on Form 10-K. The Company anticipates that its definitive Proxy
Statement will be filed with the Securities and Exchange Commission within
120 days after the end of the Company's fiscal year end on December 31,
1996.

INDEX TO FORM 10-K

PART I Page

Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10

PART II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes and Disagreements with Accountants on
Accounting and Financial Disclosure 15

PART III

Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16
Item 13. Certain Relationships and Related Transactions 16

PART IV

Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 16

"SafeHarbor" statement under the Private Securities Litigation Reform Act of
1995
With the exception of historical information, the matters discussed in this
Annual Report on Form 10-K include certain forward looking statements that
involve risks and uncertainties. Among the risks ands uncertainties to
which the Company is subject are the risks associated with managing the
Company's inventory in light of product life cycles and technological
change, the Company's relationship with its significant customers, market
acceptance of new product offerings in the emerging satellite
communications market, reliance on satellite networks, reliance on a
limited number of products, dependence on key personnel and fluctuations in
annual and quarterly performance. As a result the actual results realized
by the Company could differ materially from the statements made herein.
Shareholders of the Company are cautioned not to place undue reliance on
forward looking statements made in the Annual Report on Form 10-K or in any
document or statement referring to this Annual Report on Form 10-K. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Forward Looking Statements."

PART I
Item 1. Business.

Overview

KVH Industries, Inc. ("KVH or the "Company") was organized in Rhode Island
in 1978 and was reincorporated in Delaware on August 16, 1985. The Company's
executive offices are located at 110 Enterprise Center, Middletown, RI and its
telephone number is (401) 847-3327. Unless the context otherwise requires,
references to KVH or the Company include KVH Industries, Inc. and its
subsidiary.

KVH develops, manufactures and markets digital navigation systems and
mobile satellite communication products for use in commercial, military and
marine applications. KVH's digital navigation systems utilize the Company's
proprietary autocalibration and applications software along with its advanced
sensor technology to provide users with accurate, real-time heading, orientation
and position information. In 1993, the Company entered the emerging market for
mobile satellite communications by introducing an active-stabilized
antenna-aiming system that draws upon the Company's proprietary software and
sensor technology. In 1995 the Company introduced TracVision, a complete system
for receiving DIRECTV(R) and USSB satellite television at sea. The Company also
entered into an agreement with American Mobile Satellite Corporation ("AMSC")
under which the Company began to manufacture turnkey mobile satellite telephone
systems in the second half of 1996, for use at sea with AMSC's SKYCELL satellite
communication service.

The Company developed the first commercial digital fluxgate compass in 1982
and rapidly became the leading supplier of digital compass systems for the
marine market. KVH also developed an advanced line of marine instrument systems
that integrate its compass systems with other navigation devices and sensors. In
1988, the Company began to supply militarized versions of its digital compass
systems to the United States Navy. During the Persian Gulf War in 1991, KVH
combined its heading sensor expertise and its proprietary autocalibration
technology to develop its tactical navigation ("TACNAV") systems for use in
military land vehicles, such as armored personnel carriers and tanks, for which
there had previously been no practical, on-board method of navigation. The
United States and a number of foreign military services have now specified KVH's
TACNAV system as standard equipment in a variety of land vehicles.

The Company believes that the recent growth of the satellite communications
industry may represent a significant opportunity to apply the Company's core
technologies. Use of satellite communications systems on a moving vehicle or
vessel requires that a directional antenna be kept accurately pointed at a
geostationary satellite. KVH's software-driven sensor technology has enabled the
Company to develop compact, accurate and affordable antenna-aiming systems and
turnkey satellite communications systems that integrate real-time heading,
orientation and position data in order to maintain a continuous satellite link
by actively aiming an antenna to compensate for platform movement.

KVH sells digital compass and tactical navigation systems directly to the
United States Department of Defense and to the armed forces of other countries
in Europe and the Middle East. KVH systems are also incorporated by major
defense contractors, including United Defense and General Motors Corporation, in
the manufacture of military land vehicles. The Company sells its antenna-aiming
systems and mobile satellite communications systems to original equipment
manufacturers ("OEMs"), including Mitsubishi, Westinghouse and AMSC, and to
end-users through its reseller distribution channel. Satellite Communications

Demand for mobile telecommunications services has grown rapidly in recent
years. Recent technological changes and increased competition have resulted in
lower air time charges, smaller and less expensive mobile communication
transceivers that offer enhanced features and functionality, and a greater range
of communication and information services and providers. These trends have both
encouraged and facilitated more widespread use of mobile communications, and
consumers have increasingly come to expect 24-hour worldwide mobile access to a
broad range of communications, information and entertainment services.

Mobile satellite communications serve markets, such as offshore marine use,
not capable of being addressed by cellular or other similar earth-based
communications services. In satellite communications services, satellites in
geostationary earth orbit provide continuous communications coverage over a wide
geographic area. Early satellite communications systems, employing analog
technology, were used primarily for voice communications. Mobile transceivers
for such systems were large and expensive, requiring an antenna dome four feet
in diameter, and typically selling for $40,000 or more. Usage of such services
was also expensive, with air-time rates ranging from $8.00 to $10.00 per minute.
As a result, use of satellite communications in the marine market historically
was limited to larger commercial vessels and luxury yachts. Recently, the advent
of more powerful satellites, as well as digital transmission and data
compression technologies, has enabled the development of a new generation of
mobile satellite communications services, making satellite communications
practical for a range of smaller vessels, such as work boats, fishing vessels
and recreational craft. These new services include the following:

Worldwide Voice and Data Services. Worldwide mobile communications
capabilities currently are offered principally by the International Maritime
Satellite Organization ("INMARSAT"), a consortium of 79 member countries that
operates a network of geostationary satellites providing worldwide
communications services through mobile terminals on air, sea and land. INMARSAT
M service was introduced in the early 1990s to provide worldwide digital voice,
fax and data communications, using an 18-inch antenna and mobile terminals
costing $20,000 to $25,000, and with air-time charges of approximately $5.00 per
minute.

Regional Voice and Data Services. Regional satellite voice, fax and data
communications systems offered by a number of providers have commenced or are
expected to commence operations in several areas of the world. AMSC has recently
introduced the SKYCELL regional mobile satellite communication service, which
uses a high-powered satellite and spot-beam technology to provide digital voice,
fax and data services to land, air and sea-based customers in a service area
consisting of up to 500 miles off the coast and the entire continental United
States, as far North as the Beijing Sea and South to the Panama Canal. AMSC's
license authorizes it to build, launch and operate three geostationary
satellites. Currently, only one such satellite, launched in April 1995, is
operational.

Regional DBS-TV Services. New satellite and digital compression
technologies have also enabled the development of regional direct broadcast
satellite television ("DBS-TV") services, in which up to 200 channels of laser
disk quality video and CD quality audio are broadcast by satellite to
subscribers who use dish antennas, compact receivers and decoders to receive and
process the signals. A number of providers of such DBS-TV services have
commenced operations in the last several years. These include DIRECTV, a
subsidiary of GM Hughes Electronics, and U.S. Satellite Broadcasting, Inc.
("USSB"). The current service area for DIRECTV and USSB is the continental
United States, United States coastal waters up to 200 miles offshore. Similar
DBS-TV services are being offered by other service providers in the United
States, Central and South America, Japan and Europe, and are expected to be
offered elsewhere. The high-quality picture and sound, broad range of
programming alternatives, and compact size and cost of the DSS in-home system
have helped DBS-TV find rapid acceptance for home use in the United States
consumer market. The same attributes of DBS-TV have opened a new segment of the
marine market, and made the reception of high-quality television broadcasts at
sea practical for a range of smaller commercial and recreational vessels. Mobile
DBS-TV terminals for marine use are currently available for approximately
$8,000. Subscriber fees range from $30 to $70 per month.

Satellite communications technologies generally require an earth-based
antenna to be kept precisely aimed at a geostationary satellite. On mobile
platforms, such as vessels at sea, the antenna platform may be subjected to
rapid acceleration in pitch, roll and yaw axes simultaneously, making it
difficult to keep the antenna precisely aimed. An early approach to antenna
aiming was passive stabilization, which incorporates a set of flywheels that
rely on gyroscopic inertia to keep the antenna stationary in relation to the
earth while the rest of the vessel moves. Use of passive stabilization systems
has been restricted by their large size, high cost, and difficulty of
miniaturization. More recently introduced active-stabilized systems detect
platform motion and actively point the antenna to compensate for it. However,
some active-stabilized systems are subject to inherent design limitations that
result in periodic signal loss and the need for time-consuming signal
reacquisition and have other operational constraints that reduce their ability
to provide on-demand, uninterrupted service.

ASAP. The KVH active-stabilized antenna pedestal system ("ASAP") uses the
KVH digital gyro compass and inclinometer to measure precisely the pitch, roll
and yaw of an antenna platform in relation to the earth. Utilizing the Company's
proprietary stabilization and control software and five on-board
microprocessors, the ASAP system computes the antenna movement necessary to keep
the antenna fixed on its target and transmits precise motor control instructions
to a pair of stepper-motors mounted on the antenna pedestal to aim the antenna.
The ASAP system is smaller, more reliable, lighter and substantially less
expensive than passive-stabilized systems enabling practical and affordable
satellite communications for a broad range of commercial and recreational users.
The ASAP uses a proprietary two axis gimbal joint and a design that incorporates
fewer moving parts than competing active-stabilized systems. The design of the
KVH ASAP eliminates cable wrap and other causes of periodic signal loss common
to other active-stabilized systems. The system also permits rapid initial
acquisition of the satellite signal without operator intervention. OEM prices
for the Company's ASAP systems range from approximately $1,700 to approximately
$3,100.

TracVision. The Company's TracVision product is a complete mobile DBS-TV
receiver system for use by DBS-TV subscribers in the marine market. The
TracVision system includes an ASAP system, a 24-inch diameter carbon-fiber
antenna and 30-inch antenna dome and a DSS(R) digital receiver. TracVision is
sold as a turnkey system, including DIRECTV and USSB service activation.
TracVision enables commercial and recreational vessels to receive up to 175
channels of laser disc quality television, including all major networks,
subscription programming and pay-per-view services and up to 25 CD quality audio
channels, while underway or at anchor anywhere in United States coastal and
inland waters and up to 200 miles offshore. The list price of the Company's
TracVision system, exclusive of the DSS receiver, is $7,995. Typically,
TracVision systems are purchased with multiple DSS receivers to permit
independent viewing at more than one location on the vessel. DSS receivers are
available from the Company, as an authorized RCA distributor, at a
manufacturer's suggested retail price of $495.

Tracphone. The Company's turnkey AMSC SKYCELL satellite telephone system,
incorporating an 11 1/2 inch high-gain antenna mounted on an ASAP system and a
Mitsubishi satellite transceiver and handset is sold in the marine market under
the Company's Tracphone brand. The KVH Tracphone system is intended to provide
affordable access to voice, fax and data communications for users in the
commercial and recreational marine markets through the AMSC service area. AMSC's
published manufacturer's suggested retail prices for a Tracphone system range
from approximately $5,000 to $6,500.

Navigation Systems

The Company's navigation products consist of its Azimuth and Sailcomp lines
of digital compass systems, its DataScope hand-held compass and rangefinder, its
Quadro line of integrated marine instrumentation systems and its TACNAV tactical
navigation system.

Digital Compass Systems. The Company's digital compass systems utilize its
digital fluxgate heading sensor to sample the surrounding magnetic field and
output precise heading data at rates up to ten times per second. These signals
are relayed to an on-board microprocessor, where sophisticated filtering and
averaging algorithms translate the output to stable heading information, and the
Company's proprietary autocalibration software continuously compensates for the
effects of magnetic interference without the need for operator intervention. In
highly dynamic applications where greater accuracy and fully stabilized heading
output is required, the Company's fluxgate heading sensor is integrated with one
or more of its angular rate gyros and inclinometers. Integration of the output
of multiple sensors through the Company's integration software and
error-correction algorithms is the key to this technology, enabling the Company
to combine a variety of inexpensive sensors to provide three-dimensional error
correction and stabilization capabilities previously available only from more
costly systems. This software-enabled integration of low-cost sensors forms the
basis of KVH's Azimuth Digital Gyro Compass, as well as the sensor system for
its active-stabilized antenna-aiming systems.

KVH adds application-specific software features to its basic compass
systems to provide particular functions appropriate for each of its market
segments. KVH compass systems interface with GPS receivers using
industry-standard protocols and provide accurate heading information to other
instruments. The Company's systems display complex navigation and performance
data in a variety of highly legible graphical formats. The compass display can
be used to report position information from the GPS and to compute and display
steering instructions or time, distance and bearing to a desired location.
Military versions of the Company's digital compass systems include ruggedized
housings, military type connectors and cables, improved shielding against
electromagnetic interference and other features designed to enhance them for the
military environment, including interfacing with the vehicles laser rangefinder,
odometer, and GPS.

DataScope Compass and Rangefinder. KVH's DataScope hand-held compass and
rangefinder combines a 5 x 30 monocular, a digital fluxgate compass, an
electronic rangefinder, a precise quartz crystal clock and a microprocessor in a
simple compact, lightweight unit. The DataScope's patented heads-up display
allows the user to take bearings, calculate the range to the target and record
the time of up to 9 bearings without ever taking his eye from the target. The
DataScope is used in a wide variety of marine, outdoor, military, technical,
sporting and commercial applications.

Quadro Network. The KVH Quadro system is a line of integrated
instrumentation systems for marine navigation. Quadro systems include a central
processing unit, a variety of sensors and multi-function displays, networked
through a single coaxial cable. The central processor integrates data from
multiple sensors, such as a digital compass, boat and wind speed instruments and
GPS, and permits the output to be viewed on remote system displays located
anywhere on the boat. The output of each instrument can be displayed
individually, or computed values based on integration of multiple inputs may be
selected. For example, digital heading, boat speed, and apparent wind velocity
and angle may be combined to calculate true wind speed and direction. Similarly,
digital heading, boat speed and GPS data may be used to calculate the bearing,
time and distance to a selected destination. Programmable multi-function
displays permit the desired output to be presented in alphanumeric or graphical
analog format on any system display. Quadro system output can also be interfaced
with electronic chart plotters, autopilots and other electronic navigation
systems. Remote control keypads permit operation from various positions in the
boat.

TACNAV: KVH's TACNAV system, an interactive, real-time tactical navigation
and targeting system for armored vehicles, has been selected for the United
States Army Bradley Fighting Vehicle, the Canadian Army LAV-25 fleet, the
Swedish Army CV90 fleet and other land vehicles used by the armed forces of
these and a number of other nations. The TACNAV system analyzes and displays
data from its digital heading and orientation sensors and an integrated GPS
system, as well as inputs from multiple other devices such as a vehicle
odometer, turret angle encoder and laser rangefinder. TACNAV's automatic
compensation software solves the problem of providing accurate heading in the
armored vehicle environment where conventional magnetic compasses cannot
operate. KVH's software also integrates GPS and compass data and provides
continuously updated steering instructions. TACNAV calculates the turret azimuth
by combining data from the vehicle's turret angle encoder with vehicle heading
information, which results in improved vehicle orientation and target
acquisition. When further integrated with the vehicle's laser rangefinder,
TACNAV calculates the grid position of the target and can be used for far target
location. By accepting input from the vehicle odometer, TACNAV also provides a
backup for GPS, which may be blocked, either accidentally or by jamming. If GPS
input is unavailable, KVH software seamlessly switches to dead reckoning
navigation from the vehicle's last known GPS location, using heading and
odometer measurements.

The Company's TACNAV systems enable armored crews to maneuver and locate
targets more rapidly and accurately. The ability to maintain accurate
battlefield orientation provides improved situational awareness and assists
crews in distinguishing friendly from hostile forces. The TACNAV system is
available in a variety of configurations, ranging from a simple GPS-compatible
compass system with a single commander's display, to a complete, integrated
system that provides full tactical navigation and targeting capabilities and
includes up to three separate commander's, gunner's and driver's displays.

Embedded Sensors. KVH offers a line of compact, intelligent sensors that
can be readily integrated into a wide variety of applications where accurate,
real-time heading and orientation information is required. The sensors' on-board
microprocessors and proprietary software, industry-standard digital output, low
power consumption and advanced functionality, such as autocompensation
capability, simplify the task of OEM system design, making them a cost-effective
solution in many challenging applications. The Company provides a variety of
digital heading sensors, stabilized gyro compasses, rate sensors, inclinometers,
sensing coils and other standard sensors and sensor systems at various prices,
thus offering OEM customers a range of cost and performance options suitable to
their applications.

Sales and Marketing; Customers

The Company sells its navigation and satellite communications products
through a variety of channels, including a direct sales force and a network of
dealers, value added resellers, distributors and sales representatives. KVH's
commercial and recreational marine navigation products are sold through a dealer
network of more than 250 catalog chain outlets, including West Marine, E&B
Marine and Boat U.S., more than 100 technical marine electronics value added
resellers, and independent sales representatives. KVH's military navigation
products are sold to the armed forces of the United States and other countries,
as well as to OEM manufacturers, by the Company's direct sales force,
distributors and sales representatives. KVH's embedded sensors and sensor
systems are sold by the Company's direct sales force, distributors and sales
representatives to a broad range of OEM manufacturers, such as Lockheed, Harris
and Raytheon. The Company's ASAP antenna-aiming systems are sold directly to OEM
manufacturers of INMARSAT M transceivers, including Scientific-Atlanta, Glocom,
Inc., and Racal Positioning Systems Limited, and to Westinghouse and Mitsubishi,
the OEM manufacturers of AMSC SKYCELL satellite telephone transceivers. KVH
markets its TracVision DBS-TV systems through its existing sales channels for
marine navigation products. The Company sells its Tracphone product directly to
AMSC, for resale by authorized AMSC dealers to SKYCELL subscribers. The
Company's agreements with its dealers, value added resellers, distributors and
sales representatives generally are non-exclusive. The Company's products are
sold in Europe through the Company's KVH Europe subsidiary, located in
Hoersholm, Denmark, and elsewhere in the world through a network of
distributors.

A significant portion of the Company's sales depends on a small number of
customers. Sales to AMSC accounted for approximately 27% of net sales in 1996.
Sales of TACNAV systems to General Motors Corporation accounted for
approximately 21%, 13% and 14% of the Company's net sales in 1994, 1995 and
1996, respectively, and sales of TACNAV systems to the Government of Sweden
accounted for approximately 25% and 14% of the Company's net sales in 1995 and
1996. Sales of TACNAV systems to FMC Corporation amounted to 18% of the
Company's net sales in 1994. Revenues from sales of commercial navigation
products, including digital compass systems and other navigation products for
recreational, commercial and OEM markets, as a percentage of the Company's total
net sales, were 50%, 37% and 21%, respectively, in 1994, 1995 and 1996. Revenues
from combined sales of military navigation systems and related customer funded
research and development constituted 47%, 52% and 41% of the Company's total net
sales in 1994, 1995 and 1996, respectively. Revenues from sales of satellite
communications systems, including antenna-aiming systems sold to OEM customers
as well as complete satellite communications systems, represented 3%, 11% and
38% of the Company's total net sales in 1994, 1995 and 1996, respectively.

Relationship with AMSC

Under an agreement with AMSC (the "AMSC Agreement"), the Company acts as a
systems integrator and manufactures, tests, and ships complete high-gain AMSC
SKYCELL satellite telephone terminals for AMSC. Pursuant to the AMSC Agreement,
AMSC agreed to purchase a minimum of 1,000 baseline telephone systems and 4,000
deluxe systems, for an aggregate order price of $10.2 million. AMSC may, at its
option, purchase up to an additional 15,000 units on substantially the same
terms and conditions. AMSC is required to supply to KVH, at AMSC's expense, the
Mitsubishi telephone transceivers and handsets included in the system. KVH is
required to supply, at its expense, the ASAP system, antenna, baseplate and
antenna dome, and to assemble, test and package the completed system. Completed
Tracphone systems are delivered by KVH to its own warehouse, at which time title
passes to AMSC and the Company invoices AMSC for the full price of the products.
Risk of loss for the products remains in the Company while the products are
stored in the warehouse, but AMSC is required to reimburse KVH for the expense
of insurance to cover such risk of loss. The AMSC Agreement provides that AMSC
dealers and resellers will market the Tracphone product through an AMSC dealer
network, at AMSC's expense. The Company drop ships completed units from its
warehouse to the dealer's customer, is responsible for billing and collecting
from the customer the price specified by the dealer and remits the full amount
to AMSC on a bimonthly basis. AMSC has made an advance payment to the Company of
$2.5 million, which will be applied to the purchase price of the last of the
5,000 units originally covered by the AMSC Agreement, and the Company has
provided a performance bond in that amount to secure delivery of the final
units. The Company delivered 3,500 Tracphone units in 1996 and expects to
deliver the remaining 1,500 units constituting AMSC's minimum purchase
commitment by mid-1997.

Backlog

The Company's backlog at December 31, 1995 and 1996 was $21.5 million and
$11.1 million, respectively. Of the Company's total backlog at December 31,
1996, approximately $11.0 million is expected to be shipped during 1997. The
Company's total backlog at December 31, 1996 includes $7.7 million attributable
to orders for military navigation systems and $3.1 million attributable to
orders for the AMSC mobile satellite communication product. Backlog at December
31, 1995 included $12.1 million attributable to orders for mobile satellite
communication products (including the full $10.2 million value of the AMSC
contract).

The Company includes in its backlog only firm orders for which it has
accepted a written purchase order. Many of the Company's orders are subject to
cancellation, generally without penalties. In particular, the Company's military
orders can generally be canceled at any time for the convenience of the
customer, without penalty other than recovery of the Company's actual costs
incurred through the date of cancellation.

The Company's revenue from commercial and recreational marine markets is
derived primarily from sales to nonstocking distributors, retail chains, OEMs
and other resellers who require short lead times for delivery of products to
end-users. The Company manufactures its products based on forecast commercial
and recreational marine orders. Customers may cancel or reschedule orders
without significant penalty and the prices of products may be adjusted between
the time the purchase order is booked into backlog and the time the product is
shipped to the customer. For these reasons, the Company believes that its
backlog in general, and its backlog of commercial and recreational marine orders
in particular, are not necessarily meaningful in predicting the Company's actual
revenue for any future period.

Research and Development

The Company's research and development efforts are focused on the
development of new products based on its core technologies that will have broad
application across its strategic markets, and on improving the performance and
reducing the manufacturing costs of its existing products. A substantial portion
of the Company's research and development expenditures is devoted to basic
research relating to specified core technology development projects.

The Company's research and development activities have historically fallen
into two categories: internally funded research and development and customer
funded research and development. Virtually all of the cost of developing the
Company's marine navigation and satellite communications products has been
financed by the Company. However, much of the funding used to develop KVH's
products for the military navigation market, in which a significant engineering
effort to develop enhanced features requested by the customer is frequently
involved, has been derived from government sources. Development of the Company's
core sensor technology has also been subsidized to a large extent by grants
under the United States government's Small Business Innovative Research ("SBIR")
program. The Company's total expenditures for research and development during
1994, 1995 and 1996 were as follows:

Year ended December 31,
1996 1995 1994
(in thousands)
Internally funded research and
development........................... $2,431 $1,279 $ 727

Customer funded research and
development........................... 869 2,445 1,510
Total research and development........ $3,300 $3,724 $2,237

The Company's future success depends on its ability to achieve
technological advances and incorporate such advances into new products. Advances
in product technology will require continued substantial investment in research
and development. The amount of the Company's customer-funded research and
development has decreased as its military navigation systems have moved from the
development to the production stages. Accordingly, the Company expects to
increase substantially the amounts expended on its own internally funded
research and development. Even if the Company increases its internal funding of
research and development, its total expenditures for research and development
may decrease, due to the expected reduction in customer-funded research and
development. The timely availability of new products in volume and their
acceptance by customers are important to the future success of the Company.
Development and manufacturing schedules for technology products are difficult to
predict, and there can be no assurance that the Company will achieve timely
initial customer shipments of new products. From time to time, the Company or
its competitors may announce new products, capabilities or technologies that may
have the potential to replace or shorten life cycles of the Company's existing
products. No assurance can be given that announcements of currently planned or
other new products will not cause customers to defer purchasing existing Company
products.

Manufacturing

The Company's manufacturing operations consist primarily of final assembly
and testing of products, material and procurement management, quality assurance
and manufacturing engineering. In addition, the Company manufactures certain
subassemblies and components, such as sensor coils. The Company contracts with
third parties for some services, such as the fabrication and assembly of printed
circuit boards, injection-molded plastic parts and machined metal components.

The Company believes that there are a number of acceptable vendors for most
of the components and third-party services used in the manufacture of its
products. However, certain of such components and services are procured by the
Company from a sole source. In some instances the Company may select a single
source, despite the availability of multiple sources, in order to maintain
quality control or to develop a strategic relationship with the supplier. The
Company has in the past experienced delays in production as a result of
insufficient supply or delay in delivery of certain components, production or
quality control difficulties experienced by a sole supplier, or, in one
instance, the failure of a sole supplier to provide an application-specific
integrated circuit designed specifically for use by the Company in one of its
products. Occurrence of shortages, delays or other problems in the future could
result in delay or interruption of the Company's production, which could have a
material adverse effect on the Company's results of operations and damage
customer relationships until an alternative source of supply could be obtained.

The Company applied $2.6 million dollars of the proceeds of the initial
public offering to purchase and equip a 70,000 square foot building adjacent to
its existing 30,000 square foot facility in Middletown, Rhode Island in order to
expand its manufacturing capacity and relocate its operations. Manufacturing
operations were relocated to the new facility in January 1997.

Competition

The Company encounters intense competition in each of its markets. In the
commercial and recreational marine navigation market, the Company's principal
competitors include a large number of domestic and international companies that
manufacture and market stand-alone digital compasses, digital heading sensors
and integrated instrument systems. The Company believes that the principal bases
of competition in the commercial and recreational marine navigation market
include product design and performance; flexibility and ease-of-use; product
quality and the quality of customer support; and reputation of the vendor in the
marine market.

In the market for military land vehicle tactical navigation systems, the
Company competes with a large number of domestic and international companies
that produce dead-reckoning, inertial, GPS-based, or radio-based navigation
systems and systems that provide integrated magnetic heading and GPS navigation
capabilities. Most of these competitors have more experience than the Company in
manufacturing and marketing products for the military marketplace. The Company
believes that the principal bases of competition in the market for military land
vehicle navigation systems are product performance; field reliability; ease and
flexibility of installation, maintenance and field modification; size and weight
of the unit; size and stability of the vendor; and price.

In the mobile satellite antenna-aiming market, the Company faces
competition with its ASAP systems from one principal competitor Sea Tel, Inc.,
that manufactures and markets a broad line of marine satellite communications
and satellite tracking equipment, including antenna systems for INMARSAT and
DBS-TV applications. This competitor has greater experience than the Company in
marketing DBS-TV systems in the marine market and has a larger installed base of
such systems. A second competitor, Datron Systems, Inc. (DTSI), provides a
stabilized antenna design for RV and marine reception of DBS-TV which competes
with the company's turnkey DBS products. The Company also competes with
Westinghouse and a small number of other manufacturers of active stabilized
antenna-aiming systems and may in the future encounter competition from other
manufacturers of satellite communications equipment that may seek to develop
antenna-aiming systems or other mobile satellite communications systems or
equipment. The Company believes that the principal bases of competition in the
satellite communications market are system performance; reliability; antenna
size; cost and customer support.

The Company's embedded sensors compete with products of a large number of
companies that produce magnetic sensors and gyroscopic rate sensors for sale in
the OEM market, as well as certain OEMs, including some of the Company's own
customers, that choose to produce their own sensors for certain OEM
applications. Many of the Company's competitors offer products that, while
providing accuracy and performance inferior to that of the Company's products,
are substantially less expensive.

Many of the Company's competitors are larger and better known than the
Company and have substantially greater research and development, engineering,
manufacturing, marketing and financial resources than does the Company. There
can be no assurance that the Company will be able to compete successfully in the
future, that the Company's products will achieve or maintain future market
acceptance, or that competition will not have a material adverse effect on the
Company's business, financial condition and results of operations.

Intellectual Property

The Company's ability to compete effectively depends to a significant
extent on its ability to protect its proprietary information. The Company relies
primarily on trade secret laws, confidentiality procedures and licensing
arrangements to protect its intellectual property rights. The technology
licenses on which the Company relies include an angular rate gyro license from
Etak, Inc. and a license from Thomson Consumer Electronics, Inc. relating to
certain consumer electronic components. Some of these technology licenses may be
terminated upon short notice, and there can be no assurance that third-party
technology licenses will continue to be available to the Company on commercially
reasonable terms. The loss of or inability to maintain any of these technology
licenses could result in the discontinuation of, or delays or reductions in,
product shipments unless and until equivalent technology is identified, licensed
and integrated or bundled. Any such discontinuation, delay or reduction would
materially adversely affect the Company's business, financial condition and
results of operations. Most of the Company's technology licenses, including
those from Etak, Inc. and Thomson Consumer Electronics, are non-exclusive, and
there can be no assurance that the Company's competitors will not obtain
licenses to, and utilize such technology in competition with, the Company. The
Company also licenses the trademark "DSS" from DIRECTV.

Where appropriate, the Company seeks patent protection. The Company has
four issued United States patents. These patents cover a system for carrying DC
current in the vicinity of a magnetometer without causing magnetic field
interference, which contributes to the accuracy of the Company's digital compass
sensors; the heads-up rangefinder display incorporated in the KVH DataScope; the
ornamental design of the DataScope; and a patent on the two-axis gimbal joint
and related systems that form the basis of the Company's antenna-aiming products
(foreign patent applications also pending for this design). The Company also has
a United States patent application pending relating to a dual-band satellite
communications system.

The Company intends to seek further patents on its technology, if
appropriate. There can be no assurance that patents will issue from any of the
Company's pending or any future applications or that any claims allowed from
such applications will be of sufficient scope or strength, or be issued in all
countries where the Company's products can be sold, to provide meaningful
protection or any commercial advantage to the Company. Also, competitors of the
Company may be able to design around the Company's patents. The laws of certain
foreign countries in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and thus
make the possibility of piracy of the Company's technology and products more
likely.

In addition to patents, the Company's "Azimuth", "Sailcomp", "DataScope",
TracVision", and "Tracphone" brand names are registered trademarks in the U.S.
and other key markets where the company does business around the world.

The Company generally enters into confidentiality agreements with its
consultants, key employees and sales representatives and generally controls
access to and distribution of its technology, software and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. Also, the Company
has delivered certain technical data and information to the United States
government under procurement contracts, and the United States government may
have unlimited rights to use such technical data and information or to authorize
others to use such technical data and information. There can be no assurance
that the United States Government will not authorize others to use such
technical data for purposes competitive with those of the Company. Although the
Company intends to defend its intellectual property, there can be no assurance
that the steps taken by the Company to protect its proprietary information will
be adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology.

The Company is subject to the risk of alleged infringement of intellectual
property rights of others. Although the Company is not currently aware of any
pending or threatened infringement claims with respect to the Company's current
or future products, there can be no assurance that third parties will not assert
such claims or that any such claims will not require the Company to enter into
license arrangements or result in protracted and costly litigation, regardless
of the merits of such claims. No assurance can be given that any necessary
licenses will be available or that, if available, such licenses can be obtained
on commercially reasonable terms. Furthermore, litigation may be necessary to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition or results of operations.

Employees

As of December 31, 1996, the Company employed 148 full-time employees,
including 25 in sales and marketing, 32 in engineering, 79 in manufacturing, and
12 in general administration and finance. Six of these employees are located in
the Company's European office in Hoersholm, Denmark. In addition, the Company
utilizes the services of temporary or contract personnel within all functional
areas to assist on project related activities. The number of such personnel will
vary depending on specific project activity. At December 31, 1996, the Company
employed two temporary or contract engineers. In addition, as of that date,
three outside engineering firms were working for the Company on various
projects. The Company generally enters into non-disclosure agreements with such
temporary or contract personnel or firms with a view to protecting the
confidentiality of its proprietary technology.

The Company believes its future success will depend in large part upon the
continued service of its key technical and senior management personnel and upon
the Company's continuing ability to attract and retain highly qualified
technical and managerial personnel. Competition for highly qualified personnel
is intense, and there can be no assurance that the Company will be able to
retain its key managerial and technical employees or that it will be able to
attract and retain additional highly qualified technical and managerial
personnel in the future. None of the Company's employees is represented by a
labor union. The Company has not experienced any work stoppage and considers its
relationship with its employees to be good.

Government Regulation

The satellite communications industry is heavily regulated. Satellite
communications service providers in the United States such as AMSC must be
licensed by the Federal Communications Commission ("FCC") before they can
provide mobile voice and data services via satellite. The delays inherent in the
governmental approval process may in the future cause the cancellation,
postponement or rescheduling of the installation of satellite communications
systems. The FCC has granted ten year licenses to AMSC for three satellites.
There can be no assurance that such FCC licenses will be extended or that new
licenses will be granted for additional or replacement satellites. FCC licenses
are subject to numerous restrictions, including certain restrictions on foreign
ownership and prohibitions on the assignment or transfer of control of the
license without the prior consent of the FCC. Certain electronic devices must
comply with FCC regulations, including rules governing emission of
electromagnetic interference. Under the terms of the AMSC Agreement, the Company
is required to obtain FCC approval for its proposed Tracphone product pursuant
to such regulations. The Company has no experience in obtaining such approvals
and has not applied for such approval with respect to the Tracphone product, and
there can be no assurance that such approval will be forthcoming. The FCC and
certain international agencies have also enacted regulations or entered into
international agreements regulating and coordinating use of the L-band frequency
spectrum, where the Tracphone product will operate. There can be no assurance
that a sufficient range of the L-band spectrum will remain open to the Company
or its customers. Changes in the regulation of the frequency spectrum or other
regulatory changes could significantly restrict the Company's operations by
restricting development efforts by the Company's customers, making current
products obsolete, or increasing the opportunity for additional competition. The
sale of the Company's TracVision and Tracphone products may be materially and
adversely affected by governmental regulatory policies with respect to satellite
communications, international treaties governing use of the communications
spectrum and orbital location, the imposition of common carrier tariffs or
taxation of telecommunications services. There can be no assurance that the FCC
or other regulatory bodies will not promulgate new regulations that could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company's manufacturing operations are subject to various laws
governing the protection of the environment. These laws and regulations are
subject to change, and such change may require the Company to improve technology
or incur expenditures to comply with such laws and regulation. The Company
believes that it complies in all material respects with applicable environmental
laws and regulations and does not expect that any costs incurred in connection
with complying with such laws or regulations will have a material effect on the
Company's results of operations, financial position or liquidity.

The Company is subject to compliance with the United States Export
Administration Regulations. Because some of the Company's products have military
or strategic applications, some products are on the Munitions List of the
International Trafficking in Arms Regulations ("ITAR") or are subject to a
requirement for an individual validated license from the Department of Commerce
in order to be exported to certain jurisdictions. There can be no assurance that
there will not be changes in the Export Administration Regulations or the ITAR
that restrict the Company's export of its products, and there can be no
assurance that the Company will continue to be able to procure export licenses
for its products under existing regulations. If the Company were restricted from
exporting a significant amount of its products, there could be a material
adverse effect on the Company's operating results and financial condition.

Under the Exon-Florio Amendment to the Defense Production Act of 1950, the
United States President has authority to investigate and unwind any investment
by foreign persons that could result in foreign control of an entity, if the
President determines that foreign control would threaten national security.
Because some of the Company's products are on the Munitions List, there can be
no assurance that the President would not conclude that foreign control of the
Company would affect national security. The prospect of the application of the
President's powers under the Exon-Florio Amendment could have the effect of
deterring transactions that would result in foreign control of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices.

Item 2. Properties.

The Company's executive offices, administration, product development and
manufacturing facilities are housed in two adjacent buildings in Middletown,
Rhode Island containing approximately 30,000 and 75,000 square feet
respectively. The Company occupies the smaller of the two facilities under a
lease that expires in September 1999, while the larger facility was purchased by
the Company in May 1996. The Company relocated its manufacturing operations into
the larger facility in January 1997. The Company is in the process of improving
the portion of the larger facility that is not being utilized for manufacturing
for use as executive offices, administration and product development. The
Company plans to relocate the remainder of its operations into the larger
facility in the second half of 1997. Subsequent to the relocation of the
Company's operations to the larger facility, the smaller facility will be
utilized as a warehouse for the AMSC-owned Tracphone inventory to the extent
that the AMSC inventory is shipped, the space in the smaller facility may become
idle.

Item 3. Legal Proceedings.

In the ordinary course of business, the Company is a party to legal
proceedings and claims. In addition, from time to time, the Company has
contractual disagreements with certain customers concerning the Company's
products and services. In the opinion of the Company's management, none of the
current matters or proceedings, when ultimately concluded, are likely to have a
material adverse effect on the results of operations or financial position of
the Company and its subsidiary taken as a whole.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

The Company's common stock has traded on the NASDAQ National Market under
the symbol KVHI since April 8, 1996. As of March 14, 1997, there were 115
holders of record of the Company's Common Stock. The Company has never declared
or paid any cash dividends on its Common Stock and does not intend to pay cash
dividends on its Common Stock in the foreseeable future. The Company intends to
retain earnings for reinvestment in its business.

The Company's stock commenced trading on April 2, 1996 at $6.50. At the end
of the Company's second quarter on June 30, 1996, the sale price was $9.13. From
July 1, 1996 to September 30, 1996 the high sale price was $11.00 and the low
was $8.00. From October 1, 1996 to December 31, 1996 the high sale price was
$8.25 and the low was $7.00. On March 14, 1996 the closing sale price for the
Company's Common Stock was $6.63.

Item 6. Selected Consolidated Financial Data.

The following selected financial data is derived from the Company's
financial statements. This data should be read in conjunction with Item 8,
Financial Statements and Notes thereto, and with Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations.

Year Ended December 31,
1996 1995 1994 1993 1992
(in thousands, except per share data)
Statement of
Consolidated Operations Data:
Net sales $ 25,687 14,150 8,565 7,149 5,551

Cost of goods sold 14,607 8,447 5,082 4,04 3,458
------- ------ ------ ------ ------
Gross profit 11,080 5,703 3,483 3,10 2,093
Operating expenses:
Research and development 2,431 1,279 727 695 268

Sales and marketing 3,040 2,494 1,652 1,621 1,298

General and administrative 1,624 1,058 763 705 863
-------- ------- ------ ------ ------
Operating profit (loss) 3,985 872 341 82 (336)

Other (income) deductions:
Interest (income) expense, net (278) 27 60 16 (2)

Other expense (income) 14 20 (172) 10 (7)

Loss (gain) on currency
translation 50 (4) (44) (1) 18
-------- ------- ------- ------ ------

Income (loss) before income tax
expense (benefit) 4,199 829 497 74 (345)

Income tax expense (benefit) 1,743 (365) (48) (114) -

Net income (loss) $ 2,456 1,194 545 188 (345)
------- ------- ------- ------ -------

Net income (loss) per common
share $0.35 0.21 0.09 0.03 (0.06)
======= ======= ======== ====== =======

Shares used in computing net
income 7,055 5,710 5,851 5,851 5,851
======= ======= ======== ====== =======
(loss) per share (1)

December 31,
1996 1995 1994 1993 1992
(in thousands)
Consolidated Balance Sheet Data:
Working capital $ 12,570 3,214 2,110 1,553 1,241

Total assets 21,544 7,931 3,644 3,689 3,055

Long-term obligations (2) 61 113 579 433 198

Total shareholders' equity 16,563 3,654 2,451 1,906 1,718

(1) See note 1 of notes to consolidated financial statements for an
explanation of the method of calculation.
(2) Includes obligations under capital leases. See note 5 of notes to
consolidated financial statements.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.

Overview

The Company's primary sources of revenue are: stabilized antenna systems
used in mobile satellite communications applications; military tactical
navigation systems used in armored vehicles for land navigation and related
customer-funded research and development; and digital compasses and instrument
systems used in recreational and commercial marine applications. Marketing of
the Company's products is carried out by the Company's in-house sales and
marketing organizations and supported by a world-wide network of independent
sales representatives and distributors. The Company manages sales, product
distribution and customer service in the European market through its Danish
subsidiary. The remainder of the Company's world-wide markets are served through
the Company's offices in Middletown, Rhode Island. The Company's manufacturing
process consists primarily of light assembly and final test, which is conducted
at its facilities in Middletown, Rhode Island.

A substantial portion of the Company's research and development,
particularly product development relating to its military navigation systems,
has been funded by the Company's customers. Revenue from customer-funded product
development is included in net sales, and the related product development costs
are included in cost of goods sold. Costs of the Company's internally funded
product development efforts are included in the Company's operating expenses as
research and development expense. The Company's gross margins are affected by
the mix of customer-funded and internally funded research and development, since
the inclusion of customer-funded research and development costs in cost of goods
sold has the effect of reducing gross profit. Of the Company's total
expenditures for research and development in 1994, 1995 and 1996,
customer-funded development comprised 68%, 66% and 26%, respectively. The amount
of customer-funded development decreased in 1996, primarily as a result of the
transition in the Company's TACNAV program from the development phase to the
commercial production phase. The Company has substantially increased, and
intends to continue to increase, the amount of its internally-funded research
and development expenditures primarily as a result of entry into the satellite
communications market.

Results of Operations

The following table sets forth, for the periods indicated, certain
financial data as a percentage of total revenues:

Year Ended December 31,
1996 1995 1994
Net sales........................ 100.0% 100.0% 100.0%
Cost of goods sold............... 56.8 59.7 59.3
Gross profit................... 43.2 40.3 40.7
Operating expenses:
Research and development....... 9.5 9.0 8.5
Sales and marketing............ 11.8 17.6 19.3
General and administrative..... 6.3 7.5 8.9
Operating profit............ 15.6 6.2 4.0
Other (income) expense:
Interest (income) expense, net. 0.2 (1.0) 0.7
Other expense (income)......... 0.0 0.1 (2.0)
Loss (gain) on currency
translation...................... 0.2 (0.0) (0.5)
Income before income tax
expense (benefit).. 16.4 5.9 5.8
Income tax (expense) benefit... (6.8) 2.6 0.6
Net income.................. 9.6% 8.5% 6.4 %

Years Ended December 31, 1996 and 1995

Net Sales. Net sales increased by 82%, from $14.2 million in 1995 to $25.7
million in 1996. Product sales amounted to $10.5 million and $24.6 million in
1995 and 1996 respectively, and customer-funded research amounted to $3.7
million and $1.1 million in 1995 and 1996 respectively. Sales growth resulted
from: a $5.4 million increase in sales of the Company's military navigation
systems, an $8.3 million increase in sales of satellite communication products
and a $0.5 million increase in sales of commercial and recreational marine
navigation products. These increases more than offset an expected $2.6 million
decrease in customer-funded research attributable to the completion of the
customer-funded TACNAV research and development in 1995. The military navigation
systems sales increase resulted from shipments of the Company's TACNAV product
to the Swedish military, the Canadian military, the Saudi-Arabian military and
the United States military. The satellite communications sales increase resulted
primarily from $7.8 million of Tracphone product shipments to AMSC.

The market for mobile satellite communication products is an emerging
market, and market acceptance of the Company's Tracphone and TracVision products
has been slower than anticipated. The Company's backlog of firm orders for
mobile satellite communication products was $3.1 million as of December 31, 1996
(consisting primarily of the balance of scheduled shipments under the AMSC
contract), compared with $12.0 million at December 31, 1995. Sales of the
Company's existing satellite communications products, particularly its AMSC
Tracphone product, are expected to decline in 1997 compared with 1996. Any
growth in the Company's satellite communication revenues will depend on
commercial acceptance of new products, including a smaller, lower cost
TracVision DBS-TV system and a new INMARSAT satellite telephone system, expected
to be introduced by the Company in the latter part of 1997.

Cost of Goods Sold. The Company's cost of goods sold consists primarily of
direct labor and material, labor and material overhead, other direct costs and
changes in the value of work-in-process inventory from the beginning to the end
of the period. Cost of goods sold also includes costs of customer-funded
research and development of $2.4 million in 1995 and $0.9 million in 1996. Gross
profit increased by 94%, from $5.7 million in 1995 to $11.1 million in 1996. The
Company's gross profit margin (gross profit as a percentage of net sales)
increased from 40% in 1995 to 43% in 1996. The increase in gross profit resulted
primarily from the product mix shift away from lower margin, customer-funded
research and development sales to higher margin product shipments.

Research and Development Expense. Research and development expense consists
primarily of direct labor and material, labor and material overhead and other
direct costs associated with the Company's internally funded product development
efforts. The Company expenses all of its software development costs. Research
and development expense increased 90%, from $1.3 million in 1995 to $2.4 million
in 1996, primarily as a result of product development efforts associated with
the Company's long-term initiative to develop new antenna-aiming technology to
complement the Company's existing TracVision product and the redesign of its
ASAP system for use in its Tracphone product. Total research and development
expenditures, including customer-funded product development expenditures
included in cost of goods sold, were $3.7 million in 1995 and $3.3 million in
1996, reflecting the expected decline in customer-funded research. The Company
anticipates that Company-funded research and development will continue to
increase as the result of introduction of new mobile satellite communication
products.

Sales and Marketing Expense. Sales and marketing expense consists primarily
of salaries and related expenses for sales and marketing personnel, sales
commissions, travel expenses, cooperative advertising, sales literature, media
advertising and trade shows. Sales and marketing expenses increased 22% from
$2.5 million in 1995 to $3.0 million in 1996, but decreased as a percentage of
net sales from 18% in 1995 to 12% in 1996. The dollar increase is attributable
to higher sales commissions associated with higher sales volumes and the
marketing costs associated with new product introductions. The decrease in
percentage of net sales reflects the leveraging of relatively fixed sales
support costs over a larger revenue base. The Company expects that sales and
marketing expense will continue to increase in dollar amount, particularly as
the Company seeks to further penetrate international markets and introduce new
products in 1997.

General and Administrative Expense. General and administrative expense
consists primarily of salaries and related expenses and other costs attributable
to the Company's management, finance, accounting and human resources operations,
as well as legal and other professional services. General and administrative
expense increased 54%, from $1.1 million in 1995 to $1.6 million in 1996, but
decreased as a percentage of net sales from 7% to 6% in such years,
respectively. The dollar increase is attributable primarily to the added costs
associated with becoming a public company, including directors and officers
insurance, legal, accounting and consulting fees and increases in compensation
expense due primarily to increases in management incentive payments. The
percentage decrease reflects the fact that a substantial portion of the
Company's increased revenues in 1996 were attributable to large orders from a
relatively small number of customers, requiring only modest increases in the
Company's administrative and accounting staff.

Interest (Income) Expense. Interest expense, net, consists primarily of
interest on the Company's short-term bank line of credit. Interest income
reflects the interest earned by investing the proceeds of the April 1996 public
offering in Federal short-term obligations. The proceeds of the public offering
in April 1996 fully funded the Company's operating and capital requirements.

Other (Income) Expense. Other (income) expense was immaterial in each year
of 1996 and 1995.

Loss Gain on Foreign Currency Translation. The results of operations of the
Company's foreign subsidiary, KVH Europe, are determined by remeasuring its
foreign currency-denominated operations as if they had taken place in United
States dollars. Gains and losses resulting from this translation are included in
the Company's net income. The translation gain of $4,300 and loss of $50,587 in
1995 and 1996, respectively, primarily reflect changes in the strength of the
United States dollar in relation to the German deutschemark and the Danish
Krone.

Income Tax Expense (Benefit). The Company's income tax expense increased
$2.1 million to $1.7 million in 1996, compared with an income tax (benefit) of
approximately $0.4 million in 1995. The increase was attributable to the
utilization of the Company's net operating loss carryforwards ("NOLs") from
prior years. The Company's effective tax rate in 1996 was approximately 41%. The
Company's effective tax rate is expected to remain relatively constant at the
1996 rate in 1997.

Years Ended December 31, 1995 and 1994

Net Sales. Net sales increased by 65%, from $8.6 million in 1994 to $14.1
million in 1995. Of the total sales for such periods, $6.4 million and $10.4
million, respectively, were attributable to product sales and $2.2 million and
$3.7 million, respectively, were attributable to customer-funded development
programs. Of this growth in net sales, approximately 66% resulted from increased
sales of the Company's military navigation systems, due principally to
commencement of commercial shipments of its TACNAV tactical navigation system
during the fourth quarter of 1995, and to increased customer-funded research and
development primarily relating to the TACNAV product; approximately 22% was due
to increased acceptance of the Company's mobile satellite communications
antenna-aiming products in the OEM market; and approximately 11% was due to
growth in sales of its commercial and recreational marine navigation products.

Cost of Goods Sold. Gross profit increased by 64%, from $3.5 million in
1994 to $5.7 million in 1995. The Company's gross profit decreased from 41% in
1994 to 40% in 1995. The decrease in gross profit resulted primarily from the
terms of sale of the TACNAV systems shipped in the fourth quarter of 1995, which
required the Company to supply certain related equipment (consisting of GPS
receivers and turret angle encoders) not manufactured by the Company at
pass-through prices, aggregating approximately $825,000, that provided lower
margins than those applicable to the Company-supplied components of the system.

Research and Development Expense. Research and development expense
increased 76%, from $727,000 in 1994 to $1.3 million in 1995, primarily as a
result of product development efforts associated with the Company's long-term
initiative to develop new antenna-aiming technology and the introduction of the
Company's TracVision product in 1995, and the redesign of its ASAP system for
use in its Tracphone product. Research and development expense as a percentage
of net sales increased from 8% in 1994 to 9% in 1995. Total research and
development expenditures, including customer-funded product development
expenditures included in cost of goods sold, were $2.2 million in 1994 and $3.7
million in 1995, representing 26% of the Company's net sales in each such year.

Sales and Marketing Expense. Sales and marketing expenses increased 51%
from $1.7 million in 1994 to $2.5 million in 1995, but decreased as a percentage
of net sales from 19% in 1994 to 18% in 1995. The dollar increase is
attributable to growth of the Company's direct sales force from four persons at
December 31, 1994 to eight persons at December 31, 1995 and to higher sales
commissions associated with higher sales volumes. The decrease in percentage is
attributable to the fact that sales volumes increased more rapidly than did
fixed costs associated with the Company's direct sales force and marketing.

General and Administrative Expense. General and administrative expense
increased 39%, from $763,000 in 1994 to $1.1 million in 1995, but decreased as a
percentage of net sales from 9% to 7% in such years, respectively. The dollar
increase is attributable primarily to growth in the Company's administrative
staff to support the higher volume of business activity. The percentage decrease
is primarily attributable to the fact that the Company's revenue in 1995 was
derived from a smaller number of relatively large orders, requiring
proportionately less administrative and accounting support.

Interest (Income) Expense. Interest expense, net, decreased 54%, from
$60,000 in 1994 to $28,000 in 1995, due to the Company's receipt during 1995 of
a $2.5 million dollar advance payment from AMSC, which provided funds for the
Company's operations and enabled the Company to reduce its bank borrowings.

Other (Income) Expense. The Company recognized other income of $172,000 in
1994 compared with other expense of $20,000 in 1995. Other income in 1994
reflects the receipt by the Company of approximately $175,000 in settlement of a
contract dispute.

Gain on Foreign Currency Translation. Gains of $44,000 and $4,000 in 1994
and 1995, respectively, primarily reflect the strength of the United States
dollar in relation to the German deutschemark and the Danish krone.

Income Tax Benefit. The Company's income tax benefit of $365,000 for 1995,
compared with an income tax benefit of $48,000 in 1994, was attributable to the
reduction of the valuation allowance for certain deferred tax assets, arising
primarily out of net operating loss carryforwards ("NOLs") from prior years, as
a result of the increased likelihood of realization of such deferred tax assets.
At December 31, 1995 the Company had NOLs of approximately $1,000,000 available
through 2004 to offset future taxable income for federal and state purposes.

Liquidity and Capital Resources

Year ended December 31,
-------------------------------------------------
1996 Change 1995 Change 1994
(dollars in thousands)
Cash and cash equivalents $ 7,006 682% $ 896 369% $ 191

Working capital $ 12,570 291% $3,214 52% $ 2,110

The Company historically financed its growth through a combination of funds
generated from operations, short-term bank revolving lines of credit and
customer advances. In April 1996, The Company completed an initial public
offering, which resulted in net proceeds to the Company of approximately $9.9
million. The Company believes that existing cash balances, short-term marketable
securities, amounts available under its revolving credit facility and funds
generated from operations will be sufficient to meet anticipated liquidity and
working capital requirements for at least the next 18 to 24 months. If the
Company determines to expand more rapidly, to broaden or enhance its products
more rapidly, to acquire businesses or technologies or to make other significant
expenditures to respond to competitive pressures, then the Company may need to
raise additional funds sooner.

Inflation

The Company believes that inflation has not had a material effect on its
results of operations.

Forward Looking Statements

This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward looking statements that are subject to a
number of risks and uncertainties. Among the important factors that could cause
actual results to differ materially from those anticipated by the statements
made above are the following:

The Company's future growth will depend to a considerable extent on the
expansion of sales of its antenna-aiming products for use in the emerging marine
satellite communications market. To date, the market for mobile satellite
communications products has been limited. The Company's first satellite
communications product, an antenna-aiming system for use with satellites
operated by the International Maritime Satellite Organization ("INMARSAT"), was
introduced in late 1993. The Company's TracVision system for mobile reception of
direct broadcast satellite television services ("DBS-TV") was introduced in late
1995, and the Tracphone mobile satellite telephone system for use with the
SKYCELL voice, fax and data services offered by AMSC was introduced in the
second quarter of 1996. The Company's business, financial condition and results
of operation could be adversely affected if any of the INMARSAT, AMSC or DBS-TV
satellite networks experience operating, financial or regulatory problems, if no
significant maritime market develops for these services, or if the Company's
products do not achieve significant market acceptance in these emerging markets.
Also, if the Company builds inventory in anticipation of potential sales in the
marine satellite communications market, the failure of that market to develop
could result in inventory obsolescence.

The Company relies upon sales of new products under large contracts to a
small number of customers, and the sales cycles for some of the Company's
products are long and difficult to predict, resulting in variability of a
significant portion of its product revenues. The introduction of new products
involves the identification and qualification of new material and component
vendors. New products may contain undetected component, hardware, software or
mechanical defects or failures when first introduced or may develop defects or
failures after commencement of commercial production or shipments. Any such
delays, defects or failures could cause loss of goodwill with distributors and
with current or potential customers, impair or prevent the market acceptance of
the Company's products and result in lost revenue due to cancellations or
rescheduling of orders or shipments or to product recalls, returns or discounts.
The Company could also incur unexpected and significant costs, including product
redesign costs and costs associated with customer support. The Company's
products are generally sold with a limited warranty against defects in materials
and workmanship, generally for a period of one year but in certain cases for as
long as three to five years. If any of the Company's products were found within
the warranty period to contain such defects, the Company could be required to
repair, replace or refund the purchase price of the defective products. The
occurrence of any of the above risks could have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company derives a substantial portion of its revenues from the armed
forces of the United States and of foreign governments and from contractors that
manufacture military land vehicles for such governments. There can be no
assurance that such governments or their contractors will continue to purchase
the Company's products in similar amounts. Changes in procurement priorities or
significant reductions or delays in procurement of the Company's products by the
United States or any foreign government would have a material adverse effect on
the Company's business, financial condition and results of operations.
Generally, the United States government and its contractors and subcontractors
may terminate their contracts with the Company for cause or for convenience,
upon certain terms and conditions. In many instances, the United States
government or its contractors purchase the Company's products on a
purchase-order basis, without firm commitments. Moreover, even under firm orders
by the United States government or its contractors, funding must nevertheless be
appropriated in the budget process in order for the government to complete the
contract.

Item 8. Financial Statements and Supplementary Data.

The Company's consolidated financial statements and supplementary data,
together with the report of KPMG Peat Marwick LLP, independent auditors, are
included in Part IV of this Report on Form 10-K.

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant.

Reference is made to the information set forth in the definitive Proxy
Statement relating to the 1997 Annual Meeting of Stockholders (to be filed with
the Securities and Exchange Commission within 120 days after December 31, 1996)
(the "Proxy Statement"), under the caption "Directors and Executive Officers".

Item 11. Executive Compensation.

Reference is made to the information set forth in the Proxy Statement under
the caption "Renumerature of Executive Officers and Directors".

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Reference is made to the information set forth in the Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and Management".

Item 13. Certain Relationships and Related Transactions.

None.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) Documents filed as part of this report: Page

1. Financial Statements:

Report of Independent Accountants 19
Consolidated Balance Sheets as of
December 31, 1996, and 1995 20
Consolidated Statements of Income for the years
ended December 31, 1996, 1995 and 1994 21
Consolidated Statement s of Changes in Stockholders'
Equity for the years ended December 31, 1996,
1995 and 1994 22
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 23
Notes to Consolidated Financial Statements 24

2. Financial Statement Schedule. See "Independent Auditors Report and
Schedule II - Valuation and Qualifying Accounts" included on pages 35 and 36.
All other schedules have been omitted since the information is not required to
be presented, or because the information required is included in the
consolidated financial statements or notes thereto.

(b) Reports on Form 8-K:

During the quarter ended December 31, 1996 no reports on Form 8-K were
filed by the Company.

(c) Exhibit Description Page
Number
3.1 Restated Certificate of Incorporation of the Company (1)
3.5 Amended and Restated By-Laws of the Company
10.1 1986 Executive Incentive Stock Option Plan (1)
10.2 Amended and Restated 1995 Incentive Stock Option Plan of the
Company (1)
10.3 1996 Employee Stock Purchase Plan (1)
10.5 Credit Agreement dated September 8, 1993 between the Company and
Fleet National Bank (1)
10.6 $500,000 Revolving Credit Note dated September 8, 1993 between the
Company and Fleet National Bank (1)
10.7 Security Agreement dated September 8, 1993 between the Company and
Fleet National Bank (1)
10.8 Modification to Security Agreement dated May 30, 1994 between the
Company and Fleet National Bank (1)
10.9 Second Modification to Credit Agreement and Revolving Credit Note
dated May 30, 1994 between the Company and Fleet National Bank (1)

Exhibit Description Page
Number
10.10 Second Modification to Security Agreement dated March 17, 1995
between the Company and Fleet National Bank (1)
10.11 Third Modification to Credit Agreement and Revolving Credit Note
dated March 17, 1995 between the Company and Fleet National Bank(1)
10.12 Third Modification to Security Agreement dated December 12, 1995
between the Company and Fleet National Bank (1)
10.13 Fourth Modification to Credit Agreement and Revolving Credit Note
dated December 12, 1995 between the Company and Fleet National
Bank (1)
10.14 Lease dated February 27, 1989 between the Company and Middletown
Technology Associates IV (1)
10.17 Registration Rights Agreement dated May 20, 1986 by and among the
Company and certain stockholders of the Company (1)
10.18 Amendment to Registration Rights Agreement dated January 25, 1988,
by and among the Company, Fleet Venture Resources, Inc., and Fleet
VenturePartners I and certain stockholders of the Company(1)
10.19 Amendment to Registration Rights Agreement dated October 25, 1988
byand among the Company and certain stockholders of the Company(1)
10.20 Amendment to Registration Rights Agreement dated July 21, 1989 by
and among the Company and certain stockholders of the Company (1)
10.21 Third Amendment to Registration Rights Agreement dated November 3,
1989 by and among the Company and certain stockholders of the
Company (1)
10.28 Technology License Agreement dated December 22, 1992 between the
Company and Etak, Inc. (1)
10.29 Agreement dated September 28, 1995 between the Company and Thomson
Consumer Electronics, Inc. (1)
10.30 Agreement dated September 28, 1995 between the Company and Thomson
Consumer Electronics, Inc. (1)
10.31 Agreement regarding Technology Affiliates Program between Jet
Propulsion Laboratory and the Company (1)
10.32 Purchase and Sale Agreement dated March 18, 1996, 50 Enterprise
Center, Middletown, Rhode Island between the Company and SKW Real
Estate Limited Partnership (2)
10.33 Fifth Modification to Credit Agreement and Revolving Note dated
August 8, 1996 between the Company and Fleet National Bank
11.1 Computation of Earnings per Share (2) 37
21.1 List of Subsidiaries of the Company (1)
23.1 Consent of KPMG Peat Marwick LLP 38
27.1 Financial Data Schedule 39

(1) Incorporated by Reference to Exhibit Index on Form S-1 dated March 28,
1996, Registration No. 333-01258.
(2) Filed by paper with the Securities and Exchange Commission..

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

KVH Industries, Inc.

DATE: March 24, 1997 By: /s/ Martin A. Kits van Heyningen
Martin A. Kits van Heyningen
President

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

Signature Title Date

/s/ Martin A. Kits van Heyningen President March 24, 1997
Martin A. Kits van Heyningen (Chief Executive Officer)

/s/ Richard C. Forsyth Chief Financial Officer March 24, 1997
Richard C. Forsyth (Principal Financial and
Accounting Officer)

/s/ Arent H. Kits van Heyningen Chairman of the Board March 24, 1997
Arent H. Kits van Heyningen

/s/ Robert W.B. Kits van Heyningen Director March 24, 1997
Arent H. Kits van Heyningen

/s/ Mark S. Ain Director March 24, 1997
Mark S. Ain

/s/ Michael F. Schiavo Director March 24, 1997
Michael F. Schiavo

/s/ James A. Saalfield Director March 24, 1997
James A. Saalfield

/s/ Werner Trattner Director March 24, 1997
Werner Trattner

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
KVH Industries, Inc.:

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

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of KVH
Industries, Inc. and subsidiary at December 31, 1996 and 1995, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

Providence, Rhode Island
February 7, 1997

KVH INDUSTRIES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 1996 and 1995

Assets 1996 1995

Current assets:
Cash and cash equivalents $ 7,005,682 895,677
Accounts receivable, less allowance
for doubtful accounts
of $49,955 in 1996 and $94,955 in
1995 (note 11) 6,130,567 2,187,916
Contract receivables 29,226 994,056
Costs and estimated earnings in excess
of billings on uncompleted contracts 835,720 916,194
Inventories (note 2) 3,242,270 1,753,172
Prepaid expenses and other deposits 179,705 156,675
Deferred income taxes (note 8) 134,552 515,285
Total current assets 17,557,722 7,418,975

Property and equipment, net (notes 3, 4 and 5) 3,881,088 423,842
Other assets, less accumulated amortization of
$168,859 in 1996 and $129,891 in 1995 25,978 64,946
Deferred income taxes (note 8) 88,862 23,510

$ 21,553,650 7,931,273
Liabilities and Stockholders' Equity

Current liabilities:
Current installments of obligations
under capital leases (note 5) $ 57,676 40,787
Accounts payable 1,031,309 958,507
Accrued expenses (note 6) 1,371,193 335,896
Customer deposits (note 11) 2,527,500 2,869,595
Total current liabilities 4,987,678 4,204,785

Obligations under capital leases, excluding
current installments (note 5) 3,341 72,439

Total liabilities 4,991,019 4,277,224

Stockholders' equity (notes 7 and 13):
Preferred stock (aggregate liquidation
preferences of $4,340,000 at
December 31, 1995). Authorized 1,440,390 shares;
issued 0 shares in 1996 and 1,298,182 in 1995 - 12,982
Common stock, $.01 par value. Authorized
7,490,582 shares;issued 6,993,246 shares in
1996 and 1,615,998 in 1995 69,932 16,160
Additional paid-in capital 14,884,806 4,473,045
Retained earnings (deficit) 1,607,893 (848,138)

Total stockholders' equity 16,562,631 3,654,049

Commitment and other information (notes 5 and 9)
$ 21,553,650 7,931,273

See accompanying notes to consolidated financial statements.

KVH INDUSTRIES, INC. AND SUBSIDIARY

Consolidated Statements of Income

Years ended December 31, 1996, 1995 and 1994

1996 1995 1994

Net sales (note 11) $ 25,687,495 14,150,147 8,564,967
Cost of goods sold 14,607,584 8,446,728 5,081,700

Gross profit 11,079,911 5,703,419 3,483,267

Operating expenses:
Research and development 2,430,755 1,278,841 726,838
Sales and marketing 3,039,483 2,494,071 1,652,374
General and administrative 1,624,270 1,058,073 763,385

Operating profit 3,985,403 872,434 340,670

Other deductions (income):
Interest income (293,494) (23,761) -
Interest expense 15,938 51,507 59,733
Other expense (income) (note 10) 14,303 20,385 (171,435)
Loss (gain) on foreign currency translation 50,087 (4,300) (43,939)

Income before income tax expense
(benefit) 4,198,569 828,603 496,311

Income tax expense (benefit) (note 8) 1,742,538 (364,995) (48,400)

Net income $ 2,456,031 1,193,598 544,711

Per share information (notes 7 and 13):
Net income per common share $ 0.35 0.21 0.09

Weighted average number of
shares outstanding 7,055,309 5,710,177 5,851,315

See accompanying notes to consolidated financial statements.

KVH INDUSTRIES, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity

Years ended December 31, 1996, 1995 and 1994

Additional Retained Total
Preferred Common Paid-in Earnings Stockholders'
Stock Stock Capital (Deficit) Equity

Balances at
December 31, 1993 $12,982 16,006 4,463,941 (2,586,447) 1,906,482
Net income - - - 544,711 544,711
Balances at
December 31, 1994 12,982 16,006 4,463,941 (2,041,736) 2,451,193
Net income - - - 1,193,598 1,193,598
Stock option
transactions - 154 9,104 - 9,258
Balances at
December 31, 1995 12,982 16,160 4,473,045 (848,138) 3,654,049
Net income - - - 2,456,031 2,456,031
Exercise of stock options
and warrants - 3,274 457,203 - 460,477
Initial public offering
of commonstock, net of
issuance costs of
$1,736,555 (note 7) - 18,000 9,945,445 - 9,963,445
Conversion of 1,298,182
sharesof preferred stock
to 3,245,500 shares of
common stock (12,982) 32,455 (19,473) - -
Issuance of common
stock under benefit
plans - 43 28,586 - 28,629
Balances at
December 31, 1996 $ - 69,932 14,884,806 1,607,893 16,562,631

See accompanying notes to consolidated financial statements.

KVH INDUSTRIES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years ended December 31, 1996, 1995 and 1994

1995 1994 1996
Cash flows from operating activities:
Net income $ 2,456,031 1,193,598 544,711
Adjustments to reconcile
net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 285,049 143,080 130,105
Provision for doubtful accounts (45,000) 39,816 47,801
Provision for deferred taxes 315,381 (376,395) (48,400)
Increase in accounts and
contract receivables (2,932,821) (2,220,826) (51,674)
(Increase) decrease in costs
and estimated earnings in excess
of billings on uncompleted
contracts 80,474 (53,698) 204,521
Increase in inventories (1,489,098) (819,657) (130,241)
(Increase) decrease in prepai
expenses and other deposits (23,030) (84,253) 51,734
(Decrease) increase in accounts
payable 72,802 551,586 (273,230)
(Decrease) increase in accrued
expenses 1,035,297 162,819 44,537
(Decrease) increase in customer
deposits (342,095) 2,835,600 (531,005)

Net cash provided by
(used in) operating activities (587,010) 1,371,670 (11,141)
Cash flows from investing activities:
Capital expenditures (3,703,327) (210,801) (61,496)
Net cash used in investing activities (3,703,327) (210,801) (61,496)

Cash flows from financing activities:
Net borrowings (repayments)
on note payable to bank - (455,278) 55,278
Repayments of long-term debt - - (4,217)
Repayments of obligations
under capital lease (52,209) (10,610) (4,788)
Stock option and benefit
plan transactions 489,106 9,258 -
Proceeds from initial
public offering (note 7) 9,963,445 - -
Net cash provided by (used in)
financing activities 10,400,342 (456,630) 46,273

Net increase (decrease
in cash and cash equivalents 6,110,005 704,239 (26,364)

Cash and cash equivalents
at beginning of year 895,677 191,438 217,802

Cash and cash equivalents
at end of year $ 7,005,682 895,677 191,438

Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 15,938 51,507 59,733
Cash paid during the year
for income taxes $ 20,250 250 250

During 1994, the Company entered into a capital lease for property and
equipment totaling $123,836.

See accompanying notes to consolidated financial statements.

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

- -------------------------------------------------------------------------------
KVH INDUSTRIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 1996, 1995 and 1994

(1) Summary of Significant Accounting Policies
(a) Description of Business
KVH Industries, Inc. (the "Company") develops, manufactures and markets
digital navigation systems and mobile satellite communication products for use
in commercial, military and marine applications. The Company's digital
navigation systems utilize the Company's proprietary autocalibration and
applications software along with its advanced sensor technology to provide users
with accurate, real-time heading, orientation and position information. In 1993,
the Company entered the emerging market for mobile satellite communications by
introducing an active-stabilized antenna-aiming system that draws upon the
Company's proprietary software and sensor technology.

(b) Principles of Consolidation
The consolidated financial statements include the financial statements of
KVH Industries, Inc. and its wholly-owned subsidiary, KVH Europe A/S ("KVH
Europe"). All significant intercompany accounts and transactions have been
eliminated in consolidation.

(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity, at the
purchase date, of three months or less to be cash equivalents.

(d) Revenue Recognition
Revenue is recognized when a product is shipped and services are performed.

Revenues on long-term contracts are recognized using the percentage of
completion method. Under this method, income is recognized as work progresses on
the contracts. The percentage of work completed is determined principally by
comparing the accumulated costs incurred to date with management's current
estimate of total costs to be incurred at contract completion. On certain
contracts where the delivery of equipment is separable from development and
other aspects of the contract, the Company segments the contract and recognizes
revenue on each segment individually. Revisions of costs and income estimates
are reflected in the period in which the facts that require the revisions become
known. If estimated total costs on a contract indicate a loss, the entire amount
of the estimated loss is provided for currently.

(e) Inventories
Inventories of finished goods for sale and raw materials are stated at the
lower of cost or market using the first-in first-out costing method. Work in
process is valued at production cost represented by material, labor and
overhead, and is not recorded in excess of net realizable values.

(f) Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
computed on the straight-line method over the estimated useful lives of the
respective assets. The principal lives, in years, used in determining the
depreciation rates of various assets are: leasehold improvements, ten years;
machinery and equipment, five years; office and computer equipment, five to
seven years and motor vehicles, four years. Amortization of property and
equipment under capital lease is provided using the straight-line method over
the lease terms.

(Continued)

KVH INDUSTRIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(g) Other Assets
Other assets consist of the unamortized portion of organization costs
incurred to form KVH Europe and to acquire the assets and assume certain
liabilities which were contributed to this subsidiary. These costs are being
amortized on a straight-line basis over five years.

(h) Progress Payments
Progress payments received from customers are offset against inventories
associated with the contracts for which the payments were received. Under
contractual arrangements by which progress payments are received from the United
States Government, the United States Government has a lien on the inventories
identified
with related contracts.

(i) Income Taxes
Income taxes are accounted for under 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 operating loss and tax credit 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
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.

(j) Research and Development
Expenditures for research and development, including customer-funded
research and development, are expensed in the year incurred. Revenue from
customer-funded research and development is included in net sales, and the
related product development costs are included in cost of goods sold. Revenues
from customer-funded research and development totaled approximately $1,050,000,
$3,200,000 and $2,200,000, respectively, in 1996, 1995 and 1994, and related
costs included in cost of goods sold totaled approximately $868,000, $2,445,000
and $1,510,000 in such years, respectively.

(k) Foreign Currency Translation
The financial statements of the Company's foreign subsidiary are
re-measured into the United States dollar functional currency for consolidation
and reporting purposes. Current rates of exchange are used to re-measure
monetary assets and liabilities and historical rates of exchange are used for
nonmonetary assets and related elements of expense. Revenue and other expense
elements are re-measured at rates which approximate the rates in effect on the
transaction dates. Gains and losses resulting from this re-measurement process
are recognized currently in the consolidated statements of income.

(Continued)

KVH INDUSTRIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(l) Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Under APB No. 25, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted "Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, which
requires entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure permitted by SFAS No. 123.

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

(n) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived to be Disposed of, on January
1, 1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.

(o) Net Income per Common Share
Net income per common share is computed for each period based upon the
weighted average number of common shares outstanding and dilutive common stock
equivalents. For purpose of this calculation, outstanding convertible preferred
stock, stock options and stock warrants are considered common stock equivalents.
The dilutive effect of stock options and warrants was calculated using the
treasury stock method.

(p) Fair Value of Financial Instruments
The carrying amounts of accounts receivable, contracts receivable, costs
and estimated earnings in excess of billings on uncompleted contracts, accounts
payable, accrued expenses and obligations under capital leases approximate fair
value due to the short maturity of these instruments.

KVH INDUSTRIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(2) Inventories
Inventories at December 31, 1996 and 1995 consist of the following:
1996 1995

Raw materials $ 1,887,634 1,256,401
Work in process 714,346 100,813
Finished goods 640,290 395,958

$ 3,242,270 1,753,172

Project inventories totaling $385,748 and $1,199,750, respectively, in 1996
and 1995 have been offset against related progress payments and included as a
component of costs and estimated earnings in excess of billings on uncompleted
contracts.

(3) Property and Equipment
Property and equipment, net, at December 31, 1996 and 1995 consist of the
following:
1996 1995

Land $ 806,774 -
Building and improvements 1,801,062 -
Leasehold improvements 39,543 39,543
Machinery and equipment 1,667,618 774,971
Office and computer equipment 1,155,750 952,906
Motor vehicles 68,949 68,949

5,539,696 1,836,369
Less accumulated depreciation 1,658,608 1,412,527

$ 3,881,088 423,842

Depreciation for the years ended December 31, 1996, 1995 and 1994 amounted
to $246,081, $104,113 and $91,138, respectively.

(4) Notes Payable to Bank
On August 10, 1993, the Company entered into a Secured Revolving Line of
Credit Agreement (the "Revolving Credit Agreement") with Fleet National Bank
which, as amended through August 8, 1996, provides for borrowings from time to
time of up to $2,500,000 at the bank's prime rate plus 1.25%. Borrowings are
payable upon demand by the bank or the expiration of the Revolving Credit
Agreement, which expires June 30, 1998. Borrowings are secured by substantially
all of the assets of the Company, except for land, building and improvements. As
of December 31, 1996 and 1995, the Company had no borrowings outstanding. The
Revolving Credit Agreement includes financial and other restrictive covenants
relating to the maintenance of or attainment of certain financial criteria and
prohibits the Company from paying cash dividends.

KVH INDUSTRIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(5) Leases
The Company has certain capital and operating leases for facilities,
automobiles, and various equipment. The following is a summary of future minimum
payments under capital leases and under operating leases that have initial or
remaining noncancelable lease terms in excess of one year at December 31, 1996:

Capitalized Operating
Leases Leases
Year ending December 31
1997 $ 61,322 403,583
1998 3,401 416,652
1999 - 318,186

Total minimum lease payments 64,723 1,138,421

Imputed interest (3,706)

Present value of minimum
capital lease payments 61,017

Current portion 57,676

Long-term obligations
under capital leases $ 3,341

Total rent expense incurred under operating leases for the years ended
December 31, 1996, 1995 and 1994 amounted to, $435,124, $412,085 and $394,138,
respectively.

(6) Accrued Expenses

Accrued expenses for the period ended December 31, 1996 and 1995 consist of
the following:

1996 1995

Accrued payroll, bonus and other related
expenses payable $ 529,471 239,028
Federal income tax payable 478,567 -
State income tax payable 180,148 -
Other 183,007 96,868

$1,371,193 335,896

(7) Stockholders' Equity
(a) Sale of Common Stock
On March 28, 1996, the Company's registration statement for an initial
public offering of common stock was declared effective. An aggregate of
1,800,000 shares of common stock were issued by the Company on April 8, 1996 at
an initial public offering of $6.50 per share that resulted in approximately
$9.9 million in net proceeds.

(Continued)

KVH INDUSTRIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(b) Employees Stock Options and Warrants
The Company has a 1986 Executive Incentive Stock Option Plan, a 1995
Incentive Stock Option Plan, and a 1996 Incentive and Non-Qualified Stock Option
Plan (the "Plans").

The Company has reserved 915,000 shares of its common stock for issuance
upon exercise of options granted or to be granted under the Plans. These options
generally vest in equal annual amounts over four years beginning on the date of
the grant. The Plans provide that options be granted at exercise prices not less
than market value on the date the option is granted and options are adjusted for
such changes as stock splits and stock dividends. No options are exercisable for
periods of more than ten years after date of grant.

The per share weighted average fair value of stock options granted during
1996 and 1995 was $1.80 and $.028, respectively, on the date of grant using the
Black Scholes option-pricing model with the following weighted average
assumptions: 1996 - expected dividend yield 0%, risk-free interest rate 6.4%,
expected volatility rate 3% and expected life 4 years; 1995 - expected dividend
yield 0%, risk-free interest rate 6.1%, expected volatility rate 3% and expected
life 2 years.

The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
1996 1995
Net income As reported $ 2,456,031 1,193,598
Pro forma 2,109,142 1,143,211

Net income per As reported $ 0.35 0.21
common share Pro forma 0.30 0.20

Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of 4 years and compensation cost for options granted prior to January 1,
1995, is not considered.

(Continued)

KVH INDUSTRIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

The changes in outstanding options and warrants for the three years ended
December 31, 1996, 1995 and 1994 is as follows:

Number of Weighted Average
Shares Exercise Price

Outstanding at December 31, 1993 534,572 $ 0.60
Granted 27,500 0.60
Exercised - -
Forfeited - -
Expired and canceled (92,188) 0.60

Outstanding at December 31, 1994 469,884 0.60
Granted 796,425 1.22
Exercised (15,430) 0.60
Forfeited - -
Expired and canceled (185,740) 1.60

Outstanding at December 31, 1995 1,065,139 1.11
Granted 362,000 7.91
Exercised (327,400) 0.75
Forfeited (66,080) 0.60
Expired and canceled (12,332) 5.72

Outstanding at December 31, 1996 1,021,327 $ 3.83

At December 31, 1996 the range of exercise prices and the weighted average
remaining contractual life of outstanding options were $0.60 - $9.13 and 4.6
years respectively.

At December 31, 1996, 1995 and 1994 the number of options exercisable was
983,828, 889,049 and 152,760, respectively and the weighted average exercise
price of those options was $3.83, $1.11 and $0.60 respectively.

(c) Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the "ESPP") covers substantially all
employees in the United States and Denmark. The ESPP allows eligible employees
the right to purchase common stock on a semi-annual basis at the lower of 85% of
the market price at the beginning or end of each six-month offering period. As
of December 31, 1996, there were 150,000 shares of common stock reserved for the
ESPP. The first employee stock offering took place in 1996 resulting in the
issuance of 4,351 shares for $28,629.

KVH INDUSTRIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(8) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1996, 1995
and 1994 is presented below.
Total Current Deferred
1996:
Federal $1,062,392 246,986 1,309,378
State 285,148 68,395 353,543
Foreign 79,617 - 79,617

$1,427,157 315,381 1,742,538

1995:
Federal 11,400 (293,253) (281,853)
State - (83,142) (83,142)
Foreign - - -

$ 11,400 (376,395) (364,995)
1994:
Federal - (36,300) (36,300)
State - (12,100) (12,100)
Foreign - - -

$ - (48,400) (48,400)

The actual tax benefit differs from the "expected" tax expense computed by
applying the U.S. Federal corporate tax rate of 34% to income before income
taxes as follows:

1996 1995 1994

Computed "expected" tax expense $ 1,427,513 281,725 168,746
Increase (decrease) in income
taxes resulting from:
Change in beginning of
the year balance of the
valuation allowance for
deferred tax assets
allocated to income tax expense - (661,854) (277,384)
Non-deductible expenses 25,025 - -
Loss from KVH Europe
not recognized for U.S. taxes - - 25,585
State income tax expense,
net of Federal
income tax benefit 233,674 12,562 32,757
Other 56,326 2,572 1,896

Net income tax expense (benefit) $ 1,742,538 (364,995) (48,400)

(Continued)

KVH INDUSTRIES, INC. AND SUBSIDIARY Notes to Consolidated Financial
Statements, Continued

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1996 and 1995 are as follows:

1996 1995
Operating loss carryforwards $ - 400,173
Accounts receivable, due to
allowance for doubtful accounts 25,672 59,022
Inventories, due to
valuation reserve 42,197 38,722
Inventories, due to
differences in costing for
tax purposes 3,050 5,968
Inventories, due to unrealized
gain 42,627 -
Property, plant and equipment,
due to differences in depreciation 25,841 23,510
Accrued warranty costs 84,027 -
Alternative minimum tax
credit carryforwards - 11,400

Net deferred tax asset $ 223,414 538,795

The recognition of the net deferred tax asset of $223,414 is supported by
the Company's expectation that it will have future taxable income in 1997 and
beyond in order to realize the benefit of these future tax deductions.

(9) 401(k) Profit Sharing Plan
The Company has a 401(k) Profit Sharing Plan (the "Plan" 401(k)) for all
eligible employees. All employees with a minimum of one year of service who have
attained age 21 are eligible to participate. Participants can contribute up to
15% of total compensation, subject to the annual IRS dollar limitation.
Participants become fully vested in Company contributions after 7 years of
continuous service. Company contributions to the 401(k) Plan are discretionary.
During 1996, 1995 and 1994, the Company did not make any contributions to the
401(k) Plan.

(10) Other Expense (Income)
In 1994, other income includes $175,000 received by the Company as a
settlement of an order cancellation. The settlement amount reflected the full
amount of the damages assessed by the Company against the customer.

(11) Business and Credit Concentrations

In September 1995 the Company entered into an agreement with AMSC for the
design and manufacture of mobile satellite telephone systems for use at sea. The
agreement provides for AMSC to purchase 5,000 systems, for a total contract
value of $10.2 million. The Company received an advance from AMSC totaling $2.5
million to be applied to the purchase price of the last of the systems covered
by the agreement. The Company shipped approximately 70% of the order in 1996.

The Company derives a substantial portion of its revenues from the armed
forces of the United States and foreign governments. The Company estimates that
approximately 37%, 52% and 47%, of the Company's revenues were derived from
United States and foreign military and defense related sources in fiscal 1996,
1995 and 1994, respectively. Changes in procurement priorities or significant
reductions or delays in procurement of the Company's products by the United
States or any foreign government would have a

(Continued)

KVH INDUSTRIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

material adverse effect on the Company's business, financial condition and
results of operation. A significant portion of the Company's revenues are also
derived from customers outside the U.S. Revenues from foreign customers
accounted for 42%, 51% and 37% of total revenues in fiscal 1996, 1995, 1994,
respectively.

Historically, a significant portion of the Company's sales in any
particular period has been attributable to sales to a limited number of
customers. Sales to AMSC accounted for approximately 27% of net sales in 1996.
Sales to General Motors Corporation accounted for approximately 14%, 13% and
21%, of the Company's net sales in 1996, 1995 and 1994, respectively. Sales to
FMC Corporation accounted for approximately 18% of the Company's net sales in
1994. Sales to the Government of Sweden accounted for approximately 14% and 25%
of the Company's net sales in 1996 and 1995.

Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of trade receivables. The Company
allows customers to purchase products on credit based upon established credit
limits. As December 31, 1996, approximately 65% of trade receivables was
concentrated with one customer.

(12) Segment Reporting
(a) Geographic Information
The Company's operations are located in the United States and Europe.
Inter-region sales are not significant to total revenue of any geographic
region. Information about the Company's operations in different geographic
regions for each of the three-year periods ended December 31, 1996, 1995 and
1994 is as follows:

1996 1995 1994
Net revenues:
United States $ 23,809,807 12,609,029 7,721,039
Europe 1,877,688 1,541,118 843,928

$ 25,687,495 14,150,147 8,564,967

Operating profit (loss):
United States $ 3,790,663 720,669 363,808
Europe 194,740 151,765 (23,138)

$ 3,985,403 872,434 340,670
Identifiable assets:
United States $ 20,941,403 7,267,604 3,186,668
Europe 612,247 663,669 457,632

$ 21,553,650 7,931,273 3,644,300

(Continued)

KVH INDUSTRIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(b) Export Sale Information
Export sales from the Company's United States operations to unaffiliated
customers, located primarily in Europe and Canada, totaled, $9,051,291,
$5,712,658 and $2,354,999, respectively, in 1996, 1995 and 1994.

(13) Selected Quarterly Financial Results (Unaudited)

Financial information for interim periods was as follows:

First Second Third Fourth
1996 Quarter Quarter Quarter Quarter

Net sales $4,780,659 5,113,602 7,147,270 8,645,964
Gross profit 2,088,270 2,284,354 2,918,469 3,788,818
Operating profit 304,193 430,072 1,441,874 1,809,264
Other (income) expense (8,417) (82,023) (65,718) (57,008)
Income tax expense 125,042 191,996 587,079 838,421
Net income $ 187,568 320,099 920,513 1,027,851

Net income per common
share (a) $ 0.03 0.04 0.12 0.14

1995

Net sales $2,767,878 3,080,851 3,278,670 5,022,748
Gross profit 1,230,492 1,188,118 1,353,736 1,931,073
Operating profit 348,441 238,740 202,442 82,811
Other (income) expense (2,643) 28,427 27,772 (9,725)
Income tax (benefit) (b) _-___ __-___ _-___ (364,995)
Net income $ 351,084 210,313 174,670 457,531

Net income per common
share (a) $ 0.06 0.04 0.03 0.08

(a) Net income per common share is computed independently for each of the
quarters based on the weighted average number of common shares and dilutive
common stock equivalents outstanding during the quarter. See Note 1. Therefore,
the aggregate share for the four quarters may not equal the amount calculated
for the full year.

(b) The income tax benefit recorded in the fourth quarter of 1995 reflects
the utilization of a net operating loss carried forward from prior years.

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
KVH Industries, Inc.

Under the date of February 7, 1997, we reported on the consolidated balance
sheets of KVH Industries, Inc., and subsidiary as of December 31, 1996 and
December 31, 1995 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the fiscal years in the
three-year period ended December 31, 1996, as contained in the 1996 annual
report on Form 10-K for the year 1996. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule listed in Item 14(a)(2). This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.

In our option, such financial statement schedules when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

KPMG PEAT MARWICK LLP

Providence, Rhode Island
March 7 1997

SCHEDULE II

KVH INDUSTRIES, INC.

VALUATION AND QUALIFYING ACCOUNTS

Balance at Additions
Beginning of Charged to Deductions Balance at
Description Year Cost or from Reserve End of Year
Expense
(in thousands)
Deducted from accounts
receivable for doubtful
accounts
1994 30 118 (93) 55

1995 55 40 - 95

1996 95 - (45) 50

Deducted from inventory
for estimated warranty
expense
1994 - - - -

1995 - 40 - 40

1996 40 195 (25) 210

Deducted from inventory
for estimated obsolescence
1994 70 31 (47) 54

1995 54 6 - 60

1996 60 60 (15) 105