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


 
   Exhibit 11.1

                              KVH INDUSTRIES, INC.
                      COMPUTATION OF NET EARNINGS PER SHARE
                      (in thousands, except per share data)


                                                 Year Ended December 31,
                                              1996         1995         1994

  Net income                                 $2,456         1,194         545
                                            ==========   ==========   ========

  Shares:
  Common stock outstanding,
    beginning of period                        1,601        1,601       1,601

  Conversion of preferred stock                3,260          -           -

  Weighted average common stock
   issued during the period                    1,509           15         -

  Assumed conversion of
   convertible preferred stock                   -          3,245        3,245

  Assumed exercise of
   common stock options                         852         1,015        1,244

  Less:
   Purchase of common stock
   under the treasury stock method             (167)         (189)        (254)
                                            ==========   ==========   =========

 Weighted average number of
  common and common stock equivalent
  shares outstanding                            7,055        5,710       5,851
                                            ==========   ==========   =========

 Net income per common share                 $   0.35         0.21        0.09
                                            ==========   ==========   =========





Exhibit 23.1




                              ACCOUNTANTS' CONSENT


The Board of Directors
KVH Industries, Inc.

     We consent to incorporation of our report dated February 7, 1997,  relating
to the consolidated balance sheets of KVH Industries, Inc., and subsidiary as of
December 31, 1996 and December 1995 and the related  consolidated  statements of
income,  stockholders'  equity,  and cash flows and related schedule for each of
the fiscal years in the three-year  period ended December 31, 1996, which report
on the consolidated financial statements included herein and which report on the
related  schedule  is  included  in  the  Annual  Report  on  Form  10-K  of KVH
Industries, Inc., for the fiscal year ended December 31, 1996.


KPMG PEAT MARWICK LLP


Providence, Rhode Island
March 21, 1997

 


5 Financial Data Schedule December 31, 1996 12-MOS Dec-31-1996 Jan-31-1996 Dec-31-1996 7,005,682 0 6,180,522 49,955 3,242,270 17,557,722 5,539,696 1,658,608 21,553,650 4,987,678 0 0 0 69,932 0 21,553,650 25,687,495 25,687,495 14,607,584 14,607,584 6,881,342 0 15,938 4,198,569 1,742,538 2,456,031 0 0 0 2,456,031 .35 .35