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, 1997

                                       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.)

   50  Enterprise  Center,  Middletown,  RI                       02842
    (Addressof 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 13, 1998,  the aggregate  market value of the voting stock held
by  non-affiliates  of the  Registrant  was  $23,096,539  based  upon a total of
5,599,161 shares held by non-affiliates  and the last sale price on that date of
$4.125.  As of  March  13,  1998,  the  number  of  shares  outstanding  of  the
Registrant's common stock was 7,086,648.


                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Company's  definitive Proxy Statement  relating to the 1998
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, 1997.





                               INDEX TO FORM 10-K



                                      PART I                                Page

Item 1.  Business .........................................................   3
Item 2.  Properties .......................................................  11
Item 3.  Legal Proceedings ................................................  11
Item 4.  Submission of Matters to a Vote of Security Holders ..............  11

                                     PART II

Item 5.  Market for the Registrant's Common Equity and Related Stockholder
           Matters .......................................................   11
Item 6.  Selected Financial Data .........................................   11
Item 7.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations .........................................   13
Item 8.  Financial Statements and Supplementary Data .....................   16
Item 9.  Changes and Disagreements with Accountants on Accounting and
           Financial Disclosure ..........................................   16


                                    PART III

Item 10. Directors and Executive Officers of the Registrant ..............   17
Item 11. Executive Compensation ..........................................   17
Item 12. Security Ownership of Certain Beneficial Owners and Management ..   17
Item 13. Certain Relationships and Related Transactions ..................   17

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .  17


Safe Harbor 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 50 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 utilizes its  proprietary  fiber  optic,  autocalibration  and fluxgate
sensor  technologies to produce  navigation and mobile satellite  communications
systems  for  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.  In 1997 the Company  acquired  the assets of the
fiber optic sensor group ("FOG") of the Andrew  Corporation  in order to enhance
the capabilities of its existing sensor systems.

     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"), and as turnkey systems 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 airtime 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
operate 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 airtime charges of approximately  $5.00 per minute.  INMARSAT
MINI-M  service was introduced in 1997 to expand  INMARSAT  coverage by offering
smaller  lower cost  services,  using a 10-inch  antenna  and  mobile  terminals
costing $7,000 to $8,000 and with airtime charges of $2.70 to $3.00 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,  and  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 $5,500
to $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.  Their large  size,  high cost,  and
difficulty  of  miniaturization  have  restricted  use of passive  stabilization
systems.  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 200
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.

     TracVision II. The Company's TracVision II is the smallest fully stabilized
satellite   television  system  available.   Measuring  under  twenty-inches  in
diameter,  TracVision  II's  compact  design is  suitable  for boats as small as
thirty-five  feet.  Using a  three-axis  digital  gyro sensor and a new pedestal
design,  TracVision II measures  every  movement of the vessel (turn,  pitch and
roll) and  moves  the  antenna  in  exactly  the  opposite  direction  to remain
locked-on  the  satellite  signal.  TracVision  II is sold as a turnkey  system,
including DIRECTV and USSB service activation.  TracVision II enables commercial
and  recreational  vessels to receive up to 200  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 fifty to
one hundred miles offshore.

     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.

     Tracphone 50. The Company's  turnkey  INMARSAT mini-M  satellite  telephone
system, incorporating an 11 1/2-inch high-gain antenna mounted on an ASAP system
and a Thrane and Thrane satellite  transceiver and handset is sold in the global
marine market under the Company's Tracphone 50 brand. The Tracphone 50 system is
intended  to  provide   affordable   INMARSAT   mini-M  voice  ,  fax  and  data
communications  for  users  anywhere  in the  world.  The  Company  markets  the
Tracphone  50  jointly  with  Station  12,  a  member  of the KPG  Group  of the
Netherlands.  Station 12 provides all voice,  fax and data services as well as a
wide  variety of value  added  services  on a global  basis.  Sataion 12 via one
access code offers all INMARSAT  services from two land earth  stations in Brum,
the  Netherlands  and  Yamaguchi,  Japan.  The list price of the Tracphone 50 is
approximately  $8,000  and  Station 12  airtime  ranges  from $2.30 to $3.30 per
minute.

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
Azimuth  Gyro  compass,  its Quadro line of  integrated  marine  instrumentation
systems,  its TACNAV and TACNAV Light tactical navigation systems and its family
of fiber optic gyro sensors.

         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.

    Fiber Optic Sensors.  On October 30, 1997 the Company acquired the assets of
the sensor products group of Andrew Corporation.  This acquisition  provided the
Company  with a set of  proprietary  fiber optic  gyroscopic  sensors  that will
extend the accuracy and  performance  range of the Company's  existing  fluxgate
based  product  offerings.  A Fiber  Optic  Gyroscope  ("FOG")  sensor is a true
single-axis rotational rate sensor with no moving parts, resulting in long life,
stable  operation,  and lack of sensitivity to rotation or acceleration in other
axes. The FOG's excellent resolution,  threshold and dynamic range combined with
resistance to shock and vibration  solves a wide variety  systems needs over the
wide range of operating conditions.  The Company offers a variety of FOG systems
at  various  prices,  offering  OEM  customers  a range of cost and  performance
options suitable to their applications.

    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, Boaters'
World 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
both OEM  manufacturers  of  satellite  telephone  transceivers  and as  turnkey
systems  directly to  end-users  through  the  Company's  world-wide  network of
technical  dealers  and  distributors.  FOG  products  are sold  directly to OEM
customers through the same distribution system that the Company utilizes to sell
its commercial sensors. 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 12% and 27% of net sales
in 1997  and  1996.  Sales of  TACNAV  systems  to  General  Motors  Corporation
accounted for  approximately 8%, 14% and 13% of the Company's net sales in 1997,
1996 and 1995,  respectively,  and sales of TACNAV  systems to the Government of
Sweden accounted for  approximately  13%, 14% and 25% of the Company's net sales
in 1997, 1996 and 1995. 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 23%, 21% and 37%, respectively, in 1997, 1996 and 1995. Revenues
from combined sales of military  navigation  systems and related customer funded
research and development constituted 56%, 41% and 52% of the Company's total net
sales in 1997,  1996 and 1995,  respectively.  Revenues  from sales of satellite
communications systems,  including  antenna-aiming systems sold to OEM customers
as well as complete satellite  communications systems,  represented 21%, 38% and
11% of the Company's total net sales in 1997, 1996 and 1995, respectively. Sales
of the recently acquired FOG sensors were not material in 1997.

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's sales  estimates  have fallen well below
expectations.  The  Company  does not  anticipate  that AMSC will  exercise  the
reorder  option.  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.
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 was applied to the
purchase  price of the last of the 5,000  units  originally  covered by the AMSC
Agreement.  The  Company  delivered  the last of the 5,000  units in the  second
quarter of 1997.

Backlog

         The  Company's  backlog at December  31, 1997 and 1996 was $3.0 million
and $11.1 million,  respectively. Of the Company's total backlog at December 31,
1997,  approximately  $3.0 million is expected to be shipped  during  1998.  The
Company's total backlog at December 31, 1997 includes $1.4 million  attributable
to orders for  military  navigation  systems and $1.6  million  attributable  to
orders for mobile satellite  communication and FOG products. The Company's total
backlog at December 31, 1996  included $7.7 million  attributable  to orders for
military navigation systems and $3.1 million attributable to orders for the AMSC
mobile satellite communication product.

         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  expenditure  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. The Company has financed virtually all
of the  cost  of  developing  the  Company's  marine  navigation  and  satellite
communications  products.  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
1997, 1996 and 1995 were as follows:


                                                       Year ended December 31,
                                                    1997        1996        1995
                                                  ------      ------      ------
                                                           (in thousands)
Internally funded research and                    $3,175       2,431       1,279
 development
Customer funded research and                         630         869       2,445
 development                                      ------      ------      ------

Total research and development                    $3,805       3,300       3,724
                                                  ======      ======      ======

         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,  and
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, the Company procures certain of such components and services
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.

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  fiber  optic gyro and  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.  Some of the larger  competitors  in the
gyroscopic rate sensor market are Litton  Corporation and Honeywell  Corporation
in the United States, Hitachi Corporation of Japan and Fizoptica of Russia. 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
thirty issued United States patents covering the Company's core sensor and fiber
optic  technologies.  The  Company  intends  to  seek  further  patents  on  its
technology,  if appropriate.  In addition to patents,  the Company registers its
product  brand names and  trademarks in the U.S. and other key markets where the
company does business around the world.  Expiration of the Company's patents and
trade marks range from March 3, 2000 to April 7, 2015.

         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.

         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, 1997, the Company employed 191 full-time  employees,
including 18 in sales and marketing,  42 in engineering,  114 in  manufacturing,
and 17 in general administration and finance. Six of these employees are located
in the Company's European office in Hoersholm, Denmark, twenty-seven are located
in Orland Park,  Illinois and four are located in Saint Petersburg,  Florida. 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 are  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.  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 6,000 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 Company  purchased the larger facility in
May 1996. The Company  relocated  operations  into the larger  facility in 1997.
Subsequent to the relocation of the Company's operations to the larger facility,
the smaller facility became excess capacity.  The Company negotiated a reduction
of the leased space from  approximately  30,000 square feet to 6,000 square feet
and in so doing  paid a  one-time  payment of  $210,000  to modify the  facility
lease.  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.

         The Company utilized approximately $4.0 million dollars of the proceeds
of the initial  public  offering to purchase and  build-out a 75,000 square foot
building  adjacent  to  its  existing  6,000  square  foot  leased  facility  in
Middletown,  Rhode Island in order to  accommodate  its  manufacturing  capacity
requirements and relocate its operations.

         On  October  30,  1997 the  Company  purchased  the  assets  of  Andrew
Corporation's   sensor  products  group.   The  sensor  product  group  occupies
approximately  20,000  square  feet within  Andrew  Corporation's  Orland  Park,
Illinois facility and a 4,756 square foot facility in Saint Petersburg, Florida.
The Saint Petersburg  lease is renewable  annually and expires on July 31, 1998.
The  purchase  agreement  stipulates  that the Company  may, as a  transitionary
expedient,  occupy the space  currently  occupied within  Andrew's,  Orland Park
facility on a rent free basis until January 31, 1998 for the  manufacturing  and
administration  facilities  and  until  April  30,  1998 for the  fiber  drawing
facility.  The Company  may occupy  these  areas  within the Andrew  Orland Park
facility  thereafter,  at a rate of $1.25 per square-foot per month. The Company
is actively relocating the sensor products  operations to a leased facility.  In
January  of  1998  the  Company  entered  into a seven  year a  lease  agreement
beginning in April 1, 1998, to lease approximately  23,000 square feet of space.
Prior to occupying the leased facility the Company is required to participate in
the build-out cost of the facility.  The Company estimates the cost to build out
the facility at approximately  $0.5 million dollars.  The initial annual rent is
$152,121; annual rents thereafter will escalate by 3% each year.

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 13, 1998,  there were 128
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. On
 March 13, 1998 the closing sale price for the Company's Common Stock was $4.13.

                                         1997                     1996
                                        -------                  -------
                                 High          Low           High          Low
                               -------       -------       -------       -------
First quarter                    8.00          6.25          --            --
Second Quarter                  10.00          5.00         10.88          6.50
Third Quarter                    9.50          7.13         11.00          7.25
Fourth Quarter                   8.13          3.75         10.63          7.00


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,
                                                                 -----------------------
                                             1997          1996          1995           1994         1993
                                             ----          ----          ----           ----         ----
                                                          (in thousands, except per share data)
Consolidated Statement of Income Data:
                                                                                          
Net sales                                   $ 25,570       $ 25,687      14,150          8,565       7,149

Cost of goods sold                            14,085         14,607       8,447          5,082       4,046

                                           -----------   ------------  ---------       -------      ------
  Gross profit
                                              11,485         11,080       5,703          3,483       3,103
Operating expenses:
  Research and development                     3,175          2,431       1,279            727         695
   Sales and marketing                         3,738          3,040       2,494          1,652       1,621
   General and administrative                  1,895          1,624       1,058            763         705
                                          -----------   ------------  ------------     ---------     -----
   Operating profit
                                               2,677          3,985           872          341          82
Other (income) deductions:
  Interest (income) expense, net
                                               (327)          (278)            27             60          16
  Other expense (income)
                                                (95)             14            20          (172)          10
  Loss (gain) on currency translation
                                               (138)             50           (4)           (44)         (18)
                                          -----------   ------------  ------------   ------------  ----------
Income before income tax expense
(benefit)                                      3,237          4,199           829            497          74
  Income tax expense (benefit)                                                                          (114)
                                               1,020          1,743         (365)           (48)
                                          -----------   ------------  ------------   ------------  ----------
Net income                                 $             $
                                               2,217          2,456         1,194            545          188
                                          ===========   ============  ============   ============  ==========
Per share information (1):
 Net income per common share - basic       $             $
                                                0.31           0.39          0.25           0.11          0.04
                                          ===========   ============  ============   ============  ===========
 Net income per common share - diluted     $             $
                                                0.30           0.35          0.21           0.09          0.03
                                          ===========   ============  ============   ============  ===========
Weighted average number of shares outstanding:

  Basic                                     7,049          6,370         4,862          4,970          4,970
                                          ===========   ============  ============   ============  ===========

  Diluted                                   7,498          7,055         5,710          5,851          5,851
                                          ===========   ============  ============   ============  ===========



                                                                       December 31,
                                             1997          1996          1995           1994           1993
                                             ----          ----          ----           ----           ----
                                                                   (dollars in thousands)
Consolidated Balance Sheet Data:
                                                                                             
Working capital                             $ 12,410         12,570        3,214          2,110         1,553
                                                                           
Total assets                                  21,805         21,544        7,931          3,644         3,689
                                             
Long-term obligations (2)                          7             61          113            579           433
                                                   
Total shareholders' equity                    19,194          16,563       3,654          2,451         1,906
                                                                                 

(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 6 of notes to consolidated financial statements.


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

Overview

         KVH  Industries,  Inc.  (the  "Company")  derives its revenues from the
communications and navigation industries.  Stabilized antenna systems for mobile
satellite  applications  such as voice, fax and data transmission and television
reception are primary sources of communications  revenues.  Navigation  revenues
are derived primarily from: positional and heading systems for tactical military
applications in amphibious and land vehicles and for commercial  applications in
land  vehicles;  digital  compasses  and  instrument  systems for  recreational,
commercial and military  applications;  and embedded fiber optic sensors for OEM
applications. The Company's in-house sales and marketing groups have established
a worldwide  network of independent  sales  representatives  and distributors to
market the  Company's  products.  The majority of the Company's  sales,  product
distribution and customer service is conducted at the Company's  headquarters in
Middletown,  Rhode  Island  and the  European  market  is  managed  through  the
Company's subsidiary in Hoersholm,  Denmark. The Company's manufacturing process
consists  primarily of light assembly and final test,  which is conducted at its
facilities in Middletown, Rhode Island, Orland Park, Illinois, and St.
Petersburg, Florida.

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,
                                                1997          1996         1995
                                               100.0%        100.0%       100.0%
Net sales

Gross profit                                    45.0          43.2          40.3

Research and development                        12.4           9.5           9.0
Sales and marketing                             14.6          11.8          17.6
General and administrative                       7.4           6.3           7.5
                                                10.6          15.6           6.2
Operating profit

Interest (income) expense, net                  (1.3)         (1.0)          0.2
Other expense (income), net                     (0.3)          0.0           0.1
(Gain) loss on currency
translation                                     (0.5)          0.2         (0.0)
Income before income tax
(expense) benefit                               12.7          16.4           5.9
                                                (4.0)         (6.8)          2.6
Income tax (expense) benefit
                                                 8.7%          9.6%         8.5%
Net income


Years Ended December 31, 1997 and 1996

         Net Sales.  Net sales decreased  slightly to $25.6 million in 1997 from
$25.7 million in 1996.  Product sales amounted to $24.6 million in both 1997 and
1996 while  customer-funded  research  amounted to $1.0 and $1.1 million in 1997
and 1996  respectively.  Navigation sales grew 28% to $20.3 million in 1997 from
$15.9 million in 1996. Navigation sales increases resulted primarily from a $3.8
million, 40%, increase in navigation defense shipments. Fiber optic sensor sales
resulting  from the October 30, 1997 Andrew  sensor  products  acquisition  also
contributed  $0.4  million to 1997  navigation  revenues.  Communications  sales
amounted  to $5.2  million in 1997,  decreasing  47% from $9.8  million in 1996.
Anticipated decreases in communication  revenues reflected a large non-recurring
OEM sale  amounting to $5.6 million in 1996 that was somewhat  off-set by direct
sales of turnkey mobile satellite  communications systems that increased to just
under $1.0 million in 1997 from $0.1 million in 1996.

         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.
Cost of goods sold includes costs of customer-funded research and development of
$0.6 million in 1997 and $0.9 million in 1996.  Cost of goods sold  decreased to
55% as a percentage  of net sales in 1997 from 57% as a percentage  of net sales
in 1996  resulting  from a 17%  sales  mix  shift to  higher  margin  navigation
products.  Manufacturing  overheads  increased to $2.8 million in 1997 from $1.9
million in 1996 somewhat off-setting the gains in product cost of sales. Factors
contributing to the manufacturing  overhead increase included fiber optic sensor
start-up costs and a one time lease modification charge. The Company anticipates
that cost of goods sold will increase in 1998 as anticipated sales growth shifts
to lower-margin satellite communication and fiber optic gyro products.

         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
in the period that they are incurred.  Research costs  increased to $3.2 million
or 31% in 1997 from $2.4 million in 1996.  Company-funded  product  developments
accounted for $0.6 million of the 1997 increase while fiber optic start-up costs
accounted  for the  remainder of the increase.  Total  research and  development
expenditures,   including   customer-funded  product  development   expenditures
included in cost of goods sold,  were $3.8  million in 1997 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   further   research   to   develop   smaller,
broader-bandwidth, 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,
advertising  and trade shows.  Sales and marketing costs grew to $3.7 million or
23% in 1997 from $3.0 million in 1996. Major factors  contributing to the growth
of sales expenses were staffing,  travel and new production  introduction costs.
The Company  anticipates that sales and marketing expense will increase,  as the
Company  continues to further  penetrate  international  markets,  introduce new
products in 1998 and aggressively promote fiber optic products.

         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. Administrative costs increased
to $1.9 million or 17% from 1996 spending of $1.6 million,  in response to fiber
optic  start-up  costs,   increased   professional   fees  and  staffing  costs.
Administration  is anticipated to increase in 1998 due to the additive effect of
the fiber optic sensor group acquisition.

         Interest  income.  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 in 1997.

         Other (Income)  Expense.  Other income  increased $0.1 million in 1997.
 The additional  income  reflects the award of a new-hire training grant from
 the state of Rhode Island.

         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 $0.1 million and loss of $0.05
million in 1997 and 1996 respectively, reflects changes in the relative strength
of the United States dollar in relation to the Danish krone.

         Income  Tax  Expense  (Benefit).   The  Company's  income  tax  expense
decreased  to $1.0  million in 1997 from $1.7  million in 1996.  The decrease in
income taxes was  attributable to the utilization of state and federal  research
and development and investment tax credits.  The Company's effective tax rate in
1997 was 31.5% as a  percentage  of taxable  income  versus  41.5% in 1996.  The
Company's  effective  tax rate is expected  to increase in 1998 as research  and
other tax credits will diminish in future years.

Years Ended December 31, 1996 and 1995

         Net Sales.  Net sales  increased by 82% to $25.7 million in 1996,  from
$14.2 million in 1995. Product sales amounted to $24.6 million and $10.5 million
in 1996 and 1995 respectively. Customer-funded research amounted to $1.1 million
and $3.7 million in 1996 and 1995  respectively.  Product revenue growth in 1996
resulted  primarily  from a $5.4  million  increase  in sales  of the  Company's
military  TACNAV systems and an $8.3 million  increase in sales of OEM satellite
communication products.  Product sales increases more than offset an anticipated
$2.6  million   decrease  in   customer-funded   research  in  1996.   Decreased
customer-funded  research  reflected the completion of the TACNAV development in
1995.  Major  customers  responsible  for 1996 product sales growth included the
United States military, various other foreign governments and AMSC.

         Cost  of  Goods   Sold.   Cost  of  goods   sold   included   costs  of
customer-funded  research  and  development  of $0.9  million  in 1996  and $2.4
million in 1995. Cost of goods sold as a percentage of net sales was 57% and 60%
in 1996 and 1995, respectively. Improved cost of sales resulted primarily from a
product  mix  shift  away  from  lower  margin,   customer-funded  research  and
development sales to higher margin navigation product shipments.

         Research and  Development  Expense.  Research and  development  expense
increased  to $2.4  million  or 90% in 1996,  from  $1.3  million  in 1995.  The
increase  resulted  from new product  development  efforts  associated  with the
Company's   long-term   initiative   to   develop   smaller,   higher-bandwidth,
antenna-aiming  technology to complement  the Company's  existing  communication
products. Total research and development expenditures, including customer-funded
product  development  expenditures  included  in cost of goods  sold,  were $3.3
million in 1996 and $3.7  million in 1995.  The year over year  decline in total
research and development is due to the decline in customer-funded  research from
1995 levels.

         Sales and Marketing Expense.  Sales and marketing expenses grew to $3.0
million or 22% in 1996 from $2.5 million in 1995,  but decreased as a percentage
of net  sales  to  12%  in  1996  from  18% in  1995.  The  dollar  increase  is
attributable  to higher sales  commissions  associated with higher sales volumes
and marketing costs associated with new product introductions. The decrease as a
percentage  of net sales  reflects  the  leveraging  of  relatively  fixed sales
support costs over a larger revenue base.

         General and Administrative Expense.  General and administrative expense
increased  to $1.6  million  or 54% in 1996,  from  $1.1  million  in 1995,  but
decreased  as  a  percentage  of  net  sales  to  6%  from  7%  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 increased  compensation
expense resulting from increases in management incentive payments.  The decrease
as a percentage of net sales  reflects the  leveraging of  administrative  staff
support costs over a larger revenue base

         Interest  Income  Interest  income  reflects  the  interest  earned  by
investing the proceeds of the April 1996 public  offering in Federal  short-term
obligations

         Other (Income) Expense.  Other (income) expense was not material in
 both 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  loss of $50,587 in 1996 and gain of
$4,300 in 1995,  reflect  changes in the strength of the United States dollar in
relation to 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 41.5%.

Liquidity and Capital Resources



                                                          Year ended December 31,
                              --------------------------------------------------------------------------------
                                    1997             Change           1996            Change         1995
                                    ----             ------           ----            ------         ----
                                                              (in thousands)
                                                                                           
 Cash and cash equivalents         $ 4,758           (32%)            7,006            682%           896

 Working capital                  $12,410             (1%)           12,570            291%         3,214



        The Company financed its operations,  technology acquisitions and fixed
asset acquisitions of approximately  $6.0 million dollars through a combination
of funds  generated from  operations,  short-term bank revolving lines of credit
and proceeds from its public  offering.  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 1998. 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.

Other Matters

Recent Accounting Pronouncements

         The Financial  Accounting Standards Board ("FASB") recently issued SFAS
No. 130, "Reporting  Comprehensive Income". This statement establishes standards
for reporting and display of  comprehensive  income and its components in a full
set of  general-purpose  financial  statements.  This statement is effective for
fiscal years beginning after December 15, 1997, and requires  classification  of
the financial statements for earlier periods provided for comparative  purposes.
The effect of the  adoption  of SFAS No. 130 will not have a material  impact on
the Company's financial condition, results of operations or cash flows.

         The Financial  Accounting Standards Board recently issued SFAS No. 131,
"Disclosures  about Segments of and Enterprise  and Related  Information".  This
statement  establishes  standards for the way that public  business  enterprises
report information about operating  segments in annual financial  statements and
requires that those  enterprises  report  selected  information  about operating
segments in interim  financial  reports issued to  shareholders.  This statement
supercedes SFAS No. 14,  "Financial  Reporting for Segments of a Business",  but
retains  the  requirement  to report  information  about major  customers.  This
statement   also  amends   SFAS  No.  94,   "Consolidation   of   Majority-Owned
Subsidiaries".  This statement is effective for financial statements for periods
beginning after December 31, 1997 and requires that comparative  information for
earlier years be restated for comparative  purposes.  The effect of the adoption
of SFAS No.  131 will not have a  material  impact  on the  Company's  financial
condition, results of operations or cash flows.

Year 2000

         The  Company  is in the  process of  selecting  a  replacement  for its
existing  computer  system.  The Company has engaged a consulting firm to advise
the Company regarding the selection and  implementation of a Year 2000 compliant
computer system. The estimated cost of consulting  services,  computer hardware,
training  and  software  is expected to be less than $0.5  million  dollars.  In
addition the Company has identified the need for a chief information officer and
is actively recruiting to fill this position.

Inflation

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

Market Risk Disclosure

         Not applicable.

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 marine  antenna-aiming  products.  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 TracVision II a smaller and less
expensive version of the TracVision, was introduced in September of 1997 and the
TracPhone 50, a smaller,  less  expensive  version of the ASAP line of products,
was  introduced  in  September  of 1997 as a  turnkey  system  offering  airtime
services  provided  by Station 12 with KVH  hardware.  The  Company's  business,
financial  condition and results of operation could be adversely affected if any
of the INMARSAT,  Station 12 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.  The Company experienced a significant growth in military contracts in
1997 and anticipates that these contracts will not reoccur in 1998. As a result,
the Company  anticipates  that product  gross  profits will decline in 1998 from
1997 levels.

         Satellite  communications  technologies  are  changing  rapidly  as new
satellite  systems are placed into service.  The Iridium Low Earth Orbit ("LEO")
system is close to completion, offering handheld products that will compete with
larger,  more costly actively  stabilized antenna systems.  Although LEO service
costs are  anticipated  to be more costly than  Inmarsat  services,  there is no
assurance  that  this  technology  or other  technologies  will not  reduce  the
Inmarsat market share.



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, 1997)
(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                                             20
Consolidated Balance Sheets as of December 31, 1997, and 1996                 21
Consolidated Statements of Income for the years ended December 31, 1997
1996 and 1994                                                                 22
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995
                                                                              23
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995                                              24
Notes to Consolidated Financial Statements                                    25

2. Financial Statement Schedule. See "Independent Auditors Report and
Schedule II - Valuation and Qualifying Accounts" included on pages 36
and 37. 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:

Report on Form 8-K was filed on November 14, 1997. The report contains
the asset purchase agreement between the Company and Andrew Corporation
and a Common Stock Warrant both dated October 30,1997.

(c) Exhibit Number         Description                                      Page

   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 No.            Description                                          Page

 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 Venture Partners I
       and certain stockholders of the Company (1)
 10.19 Amendment to Registration Rights Agreement dated
       October 25, 1988 by and 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
 10.34 Andrew Corporation Asset Purchase and Warrant Agreement (3)
 11.1  Computation of Earnings per Share (2)                                  38
 21.1  List of Subsidiaries of the Company (1)
 23.1  Consent of KPMG Peat Marwick LLP                                       39
 27.1  Financial Data Schedule                                                40

(1)      Incorporated  by Reference to Exhibit  Index on Form S-1 filed with the
         Securities and Exchange Commission dated March 28, 1996, Registration
         No. 333-01258.
(2)      Filed by paper with the Securities and Exchange Commission..
(3)      Incorporated by reference to Exhibits 1 & 2 on Form 8-K filed with the
         Securities and Exchange Commission dated November 14, 1997.





                                   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 25, 1998                   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 
     Martin A. Kits van Heyningen  (Chief Executive Officer)      March 25, 1998
    
/s/ Richard C. Forsyth              Chief Financial Officer
     Richard C. Forsyth             (Principal Financial and      March 25, 1998
                                        Accounting Officer)

/s/ Arent H. Kits van Heyningen     Chairman of the Board         March 25, 1998
     Arent H. Kits van Heyningen

/s/ Robert W. B. Kits van Heyningen Director                      March 25, 1998
     Robert W. B. Kits van Heyningen

/s/ Stanley K. Honey                Director                      March 25, 1998
     Stanley K. Honey

/s/ James A. Saalfield              Director                      March 25, 1998
     James A. Saalfield

/s/  Werner Trattner                Director                      March 25, 1998
      Werner Trattner






                          INDEPENDENT AUDITORS' REPORT



Board of Directors and Stockholders
KVH Industries, Inc. and Subsidiary:


We have audited the accompanying  consolidated balance sheets of KVH Industries,
Inc.  and  subsidiary  as of  December  31,  1997  and  1996,  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,  1997.  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, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1997, in conformity with generally accepted accounting principles.




/s/  KPMG Peat Marwick LLP

Providence, Rhode Island
February 3, 1998










                       KVH INDUSTRIES, INC. AND SUBSIDIARY

                           Consolidated Balance Sheets

                           December 31, 1997 and 1996

          Assets (note 5)                                                                    1997             1996
          ---------------                                                                    ----             ----

Current assets:
                                                                                                              
   Cash and cash equivalents                                                            $   4,757,614         7,005,682
   Accounts receivable, less allowance for doubtful accounts
     of $73,909 in 1997 and $49,955 in 1996 (note 11)                                       4,338,992         6,130,567
   Contract receivables                                                                       156,777            29,226
   Costs and estimated earnings in excess of billings
     on uncompleted contracts                                                                 406,014           835,720
   Inventories (note 3)                                                                     4,751,792         3,242,270
   Prepaid expenses and other deposits                                                        222,015           179,705
   Deferred income taxes (note 9)                                                             387,567           134,552
                                                                                         ------------      ------------
          Total current assets                                                             15,020,771        17,557,722
                                                                                           ----------        ----------

Property and equipment, net (note 4)                                                        5,974,635         3,881,088
Other assets, less accumulated amortization of
   $194,837 in 1997 and $168,859 in 1996                                                      731,000            25,978
Deferred income taxes (note 9)                                                                 78,535            88,862
                                                                                        -------------     -------------

                                                                                         $ 21,804,941        21,553,650
                                                                                           ==========        ==========

     Liabilities and Stockholders' Equity

Current liabilities:
   Current installments of obligations under capital leases (note 6)                            7,278            57,676
   Accounts payable                                                                         1,618,295         1,031,309
   Accrued expenses (note 7)                                                                  960,488         1,371,193
   Customer deposits (note 11)                                                                 25,068         2,527,500
                                                                                        -------------       -----------
          Total current liabilities                                                         2,611,129         4,987,678

Obligations under capital leases, excluding current installments (note 6)                          -              3,341
                                                                                               ------       -----------

          Total liabilities                                                                 2,611,129         4,991,019
                                                                                          -----------       -----------

Stockholders' equity (note 8):
   Preferred stock, $.01 par value.  Authorized 1,440,390 shares;
     none issued.                                                                                  -                 -
   Common stock, $.01 par value.  Authorized 7,490,582 shares;
     issued 7,086,046 shares in 1997 and 6,993,246 in 1996                                     70,860            69,932
   Additional paid-in capital                                                              15,298,558        14,884,806
   Retained earnings                                                                        3,824,394         1,607,893
                                                                                          -----------       -----------

          Total stockholders' equity                                                       19,193,812        16,562,631
                                                                                           ----------        ----------

Commitment and other information (notes 6 and 10)
                                                                                         $ 21,804,941        21,553,650
                                                                                           ==========        ==========


See accompanying notes to consolidated financial statements.










                       KVH INDUSTRIES, INC. AND SUBSIDIARY

                        Consolidated Statements of Income

                  Years ended December 31, 1997, 1996 and 1995



                                                                           1997              1996             1995
                                                                           ----              ----             ----

                                                                                                           
Net sales (note 11)                                                     $ 25,570,347       25,687,495        14,150,147
Cost of goods sold                                                        14,085,463       14,607,584         8,446,728
                                                                          ----------       ----------         ---------

           Gross profit                                                   11,484,884       11,079,911         5,703,419

Operating expenses:
   Research and development                                                3,175,181        2,430,755         1,278,841
   Sales and marketing                                                     3,738,605        3,039,483         2,494,071
   General and administrative                                              1,895,031        1,624,270         1,058,073
                                                                         -----------      -----------       -----------

           Operating profit                                                2,676,067        3,985,403           872,434

Other deductions (income):
   Interest income                                                          (336,157)        (293,494)          (23,761)
   Interest expense                                                            8,893           15,938            51,507
   Other expense (income)                                                    (95,083)          14,303            20,385
   Loss (gain) on foreign currency translation                              (138,272)          50,087            (4,300)
                                                                        ------------    -------------    --------------

           Income before income tax expense (benefit)                      3,236,686        4,198,569           828,603

Income tax expense (benefit) (note 9)                                      1,020,185        1,742,538          (364,995)
                                                                         -----------      -----------      ------------

           Net income                                                  $   2,216,501        2,456,031         1,193,598
                                                                         ===========      ===========       ===========

Per share information (notes 8 and 13):
   Net  income per common share - basic                             $          0.31              0.39             0.25
                                                                     ===============   ==============    =============
   Net income per common share - diluted                            $          0.30              0.35             0.21
                                                                     ==============    ===============   =============

Weighted average number of shares outstanding:
   Basic                                                                   7,049,125        6,370,272         4,862,450
                                                                         ===========      ===========       ===========
   Diluted                                                                 7,497,695        7,055,309         5,710,177
                                                                         ===========      ===========       ===========



See accompanying notes to consolidated financial statements.










                       KVH INDUSTRIES, INC. AND SUBSIDIARY

                 Consolidated Statements of Stockholders' Equity

                  Years ended December 31, 1997, 1996 and 1995



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

                                                                                                       
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 transaction                             -            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 common stock, net
  of issuance costs of $1,736,555 (note 8)           -         18,000        9,945,445                -         9,963,445

Conversion of 1,298,182 shares of 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

Net income                                           -             -                -          2,216,501        2,216,501

Issuance of common stock under
   benefit plan                                      -            127           67,404                -            67,531

Exercise of stock options                            -            801          151,913                -           152,714

Issuance of warrants (notes 2 and 8)                 -             -           194,435                -           194,435
                                                    ---           ---     ------------               ---     ------------

Balances at December 31, 1997                     $  -         70,860       15,298,558         3,824,394       19,193,812
                                                    ===        ======     ============         =========       ==========



See accompanying notes to consolidated financial statements.











                       KVH INDUSTRIES, INC. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1997, 1996 and 1995



                                                                            1997              1996              1995
                                                                            ----              ----              ----
Cash flows from operating activities:
                                                                                                           
   Net income                                                            $ 2,216,501        2,456,031         1,193,598
   Adjustments to reconcile net income to net cash provided by
    (used in) operating activities:
   Depreciation and amortization                                             797,761          285,049           143,080
   Provision for doubtful accounts                                               284          (45,000)           39,816
   Provision for deferred taxes                                             (242,688)         315,381          (376,395)
   Decrease (increase) in accounts and contract receivables                1,827,202       (2,932,821)       (2,220,826)
   Decrease (increase) in costs and estimated earnings in excess
     of billings on uncompleted contracts                                    429,706           80,474           (53,698)
   Increase in inventories                                                  (649,213)      (1,489,098)         (819,657)
   Increase in prepaid expenses and other deposits                           (42,310)         (23,030)          (84,253)
   Increase in accounts payable                                              586,986           72,802           551,586
   (Decrease) increase in accrued expenses                                  (554,922)       1,035,297           162,819
   (Decrease) increase in customer deposits                               (2,502,432)        (342,095)        2,835,600
                                                                           ---------     ------------         ---------

          Net cash provided by (used in) operating activities              1,866,875         (587,010)        1,371,670
                                                                           ---------     ------------         ---------

Cash flows from investing activities:
  Acquisition (note 2)                                                    (1,946,026)              -                 -
  Capital expenditures                                                    (2,335,423)      (3,703,327)         (210,801)
                                                                           ---------      -----------        ----------

          Net cash used in investing activities                           (4,281,449)      (3,703,327)         (210,801)
                                                                           ---------      -----------        ----------

Cash flows from financing activities:
   Repayments on note payable to bank                                             -                -           (455,278)
   Repayments of obligations under capital lease                             (53,739)         (52,209)          (10,610)
   Stock option and benefit plan transactions                                220,245          489,106             9,258
   Proceeds from initial public offering (note 8)                                 -         9,963,445                -
                                                                                 ---      -----------               --

          Net cash provided by (used in) financing activities                166,506       10,400,342          (456,630)
                                                                          ----------       ----------        ----------

Net increase (decrease) in cash and cash equivalents                      (2,248,068)       6,110,005           704,239

Cash and cash equivalents at beginning of year                             7,005,682          895,677           191,438
                                                                           ---------     ------------        ----------

Cash and cash equivalents at end of year                                $  4,757,614        7,005,682           895,677
                                                                           =========      ===========        ==========

Supplemental disclosure of cash flow information:
   Cash paid during the year for interest                            $         8,589           15,938            51,507
                                                                        ============    =============       ===========

   Cash paid during the year for income taxes                           $  1,872,049           20,250               250
                                                                           =========    =============     =============



See accompanying notes to consolidated financial statements.







                       KVH INDUSTRIES, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1996 and 1995



(1) Summary of Significant Accounting Policies
   (a) Description of Business
     KVH Industries,  Inc. (the "Company")  develops,  manufactures  and markets
       proprietary  fiber  optic,  autocalibration  and sensor  technologies  to
       produce  navigation  and  mobile  satellite  communications  systems  for
       commercial, military and marine applications.

   (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.

   (g) Other Assets
     Other assets consist of patents,  capitalized costs of workforce  resulting
       from an acquisition  and the  organization  costs incurred to KVH Europe.
       These  costs are being  amortized  on a  straight-line  basis over period
       ranging from five year to twelve years. The Company  continually  reviews
       intangible assets to assess  recoverability from estimated future results
       of operations and estimated future cash flows.






                       KVH INDUSTRIES, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued

   (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 $957,000, $1,050,000 and $3,200,000, respectively, in 1997,
       1996 and 1995,  and related costs  included in cost of goods sold totaled
       approximately   $630,000,   $869,000  and   $2,445,000   in  such  years,
       respectively.

   (k)  Foreign Currency Transaction
     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.

   (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.  As such,  compensation expense would be 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 SFAS
       No. 123, Accounting for Stock-Based Compensation,  which permits 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 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 provisions of SFAS No. 123.








                       KVH INDUSTRIES, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(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
   During 1997 the Company adopted the provisions of SFAS No. 128,  Earnings Per
     Share.  Under the provisions of SFAS 128, basic earnings per share replaces
     primary  earnings  per share and the dilutive  effect of stock  options and
     warrants are excluded  from the  calculation.  Fully  diluted  earnings per
     share are  replaced by diluted  earnings per share and include the dilutive
     effect of stock options and warrants,  using the treasury stock method. All
     prior period  earnings per share data have been  restated to conform to the
     requirements of SFAS 128.

    Areconciliation of the weighted average number of shares outstanding used in
     the  computation of the basic and diluted  earnings per share for the three
     years ended December 31, 1997 is as follows:

                                            1997          1996           1995
                                            ----          ----           ----
     Weighted average shares (basic)      7,049,125    6,370,272       4,862,450
     Effect of dilutive stock options       448,570       685,037        847,727
                                            -------       -------        -------
      Weighted average shares (diluted)   7,497,695    7,055,309       5,710,177
                                          =========    =========       =========

   The net income used in the  calculation  for basic and diluted  earnings  per
     share  calculations  agrees with the net income  appearing in the financial
     statements.

(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.

(2) Acquisition
   OnOctober 30, 1997 the Company purchased certain operating assets and assumed
     certain  liabilities of the Sensor Products Group of the Andrew Corporation
     for approximately  $1.9 million of cash (including  acquisition  costs) and
     warrants to purchase the Company's  common stock,  valued at  approximately
     $194,000.  The assets acquired will provide the Company with the ability to
     produce fiber optic rate sensors that will advance the  Company's  existing
     product  performance  accuracy and range of operation.  The acquisition has
     been  accounted for as a purchase.  The  allocation  of the purchase  price
     resulted in intangibles,  primarily patents and workforce, of approximately
     $731,000 which are being amortized on a straight-line basis over periods of
     5 - 12 years.







                       KVH INDUSTRIES, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


(3)   Inventories

   Inventories at December 31, 1997 and 1996 consist of the following:
                                 1997               1996
                             ----------          ----------

Raw materials                $3,242,580           1,887,634
Work in process                 356,211             714,346
Finished goods                1,153,001             640,290
                             ----------          ----------

                             $4,751,792           3,242,270
                             ==========          ==========

     Project inventories  totaling $39,408 and $385,748,  respectively,  in 1997
and 1996 have been offset against  related  progress  payments and included as a
component of costs and estimated  earnings in excess of billings on  uncompleted
contracts.

(4)  Property and Equipment
   Property  and  equipment,  net, at December  31, 1997 and 1996 consist of the
following:

                                                    1997           1996
                                                 ----------     ----------

  Land                                           $  806,774        806,774
  Building and improvements                       3,181,986      1,801,062
  Leasehold improvements                               --           39,543
  Machinery and equipment                         1,838,603      1,667,618
  Office and computer equipment                   2,455,057      1,155,750
  Motor vehicles                                     92,348         68,949
                                                 ----------     ----------

                                                  8,374,768      5,539,696

Less accumulated depreciation                     2,400,133      1,658,608
                                                 ----------     ----------

                                                 $5,974,635      3,881,088
                                                 ==========     ==========

Depreciation  for the years  ended  December  31,  1997,  1996 and 1995
amounted to $771,783,  $246,081  and $104,113, respectively.









                       KVH INDUSTRIES, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued



(5)  Notes Payable to Bank
   OnAugust 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, 1997 and 1996,  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.  The company is in  compliance  with all  covenants
     related to the loan agreement.

(6) 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, 1997:

                                                    Capitalized        Operating
     Year ending December 31                           Leases            Leases

          1998                                        $ 7,284           105,680
          1999                                             -             58,500
                                                          ---          --------

          Total minimum lease payments                  7,284           164,180
                                                                        =======

     Imputed interest                                      (6)

     Present value of minimum capital lease payment   $ 7,278
                                                       =======

   Total rent  expense  incurred  under  operating  leases  for the years  ended
     December  31,  1997,  1996 and 1995  amounted  to,  $433,908,  $435,124 and
     $412,085,  respectively.  In 1997 the Company  reduced the amount of square
     feet under a facility lease from 30,000 to 6,000. The Company paid $210,000
     in the  fourth  quarter  of  1997  to  modify  the  lease  agreement.  As a
     consequence  of reducing  the leased  square  footage the  Company's  lease
     liability decreases to $78,000 and $56,000 in 1998 and 1999 respectively.

(7) Accrued Expenses
   Accrued  expenses for the period ended  December 31, 1997 and 1996 consist of
the following:

                                                        1997              1996
                                                        ----              ----

     Accrued payroll, bonus and other
      related expenses payable                       $ 709,544           529,471
     Federal income tax payable                             -            478,567
     State income tax payable                           57,601           180,148
     Professional fees                                 162,133           106,776
     Other                                              31,210            76,231
                                                      --------         ---------

                                                     $ 960,488         1,371,193
                                                       =======         =========









                       KVH INDUSTRIES, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued





(8) Stockholders Equity
   (a)  Sale of Common Stock
     OnMarch 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.

   (b) Employee's 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
       1997, 1996 and 1995 was $4.12, $1.80 and $0.28 on the date of grant using
       the   Black   Scholes    option-pricing    model   with   the   following
       weighted-average   assumptions:   1997  -  expected  dividend  yield  0%,
       risk-free interest rate 5.36%, expected volatility of 82.71% and expected
       life of 2.56 - 3 years;  1996 -  expected  dividend  yield 0%,  risk-free
       interest  rate of 6.4%,  expected  volatility  rate of 3% and an expected
       life of 4 years; 1995 expected dividend yield 0%, risk-free interest rate
       of 6.1%, expected volatility rate of 3% and an expected life of 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:

                                             1997            1996        1995
                                             ----            ----        ----

   Net income             As reported    $ 2,216,501     2,456,031     1,193,598
                          Pro forma        1,942,467     2,109,142     1,143,211

   Net income per common  As reported         $ 0.30          0.35          0.21
          share-diluted   Pro forma           $ 0.26          0.30          0.20

     Pro forma net income  reflects only options granted in 1997, 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





    At December 31, 1997, warrants, issued in conjunction with an acquisition of
       the Sensor Products Group of the Andrew Corporation (note 2), to purchase
       50,000 common  shares were  outstanding.  Each warrant  allows the holder
       thereof to  acquire  one share of common  stock for a  purchase  price of
       $8.00.  The warrants are exercisable from October 30,1997 through October
       30, 2002.

     The changes in outstanding employee stock options for the three years ended
       December 31, 1997, 1996 and 1995 is as follows:


                                                                                   Number of           Weighted-Average
                                                                                    Shares              Exercise Price

                                                                                                          
     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
       Granted                                                                         66,250                  7.13
       Exercised                                                                      (86,728)                 0.76
       Forfeited                                                                           -                     -
       Expired and canceled                                                           (70,446)                 5.93
                                                                                  -----------                  ----

     Outstanding at December 31, 1997                                                 930,403                $ 4.28
                                                                                   ==========                  ====


     The following table summarizes  information about employee stock options at
December 31, 1997:



                                                                                     Number
                                 Number           Average          Weighted-       Exercisable        Weighted-
           Range of            Outstanding       Remaining          Average           As of            Average
           Exercise Prices      12/31/97           Life         Exercise Price      12/31/97       Exercise Price

                                                                                     
       $0.60 - $0.60             116,165           2.53            $0.60               95,962           $0.60
       $1.70 - $1.70             400,000           2.82            $1.70              306,250           $1.70
       $5.50 - $7.98             174,238           4.05            $7.17               96,364           $7.03
       $8.00 - $9.13             240,000           3.49            $8.26              148,000           $8.42
                                 -------                                              -------

       $0.60 - $9.13             930,403           3.19            $4.28              646,576           $3.87
                                 =======                                              =======



(Continued)








                       KVH INDUSTRIES, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued





     AtDecember 31, 1997,  1996 and 1995 the number of options  exercisable  was
       646,576,  983,828 and  889,049,  respectively  and the  weighted  average
       exercise price of those options was $3.87, $3.83 and $1.11 respectively.

   (c) Employee's 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. During 1997 and 1996, 12,700 and 4,351 shares,
       respectively,  were  issued  under this plan.  As of December  31,  1997,
       132,949 shares were reserved for future issuance under the plan.

(9) Income Taxes
   Income tax expense  (benefit) for the years ended December 31, 1997, 1996 and
1995 are presented below.

                              Current              Deferred             Total
                             -----------         -----------         -----------
  1997:
  Federal                    $ 1,037,954            (212,586)            825,368
  State                          157,997             (30,102)            127,895
  Foreign                         66,922                --                66,922
                             -----------         -----------         -----------

                             $ 1,262,873            (242,688)          1,020,185
                             ===========         ===========         ===========
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)
                             ===========         ===========         ===========


     (Continued)







                       KVH INDUSTRIES, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued





   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:



                                                                             1997             1996              1995
                                                                             ----             ----              ----

                                                                                                           
     Computed "expected" tax expense                                     $ 1,100,473        1,427,513           281,725
     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)
       Non-deductible expenses                                                26,262           25,025                -
       Utilization of tax credits                                           (215,411)              -                 -
       State income tax expense, net of Federal
         income tax benefit                                                   84,411          233,674            12,562
       Other                                                                  24,450           56,326             2,572
                                                                         -----------       ----------         ---------

           Net income tax expense (benefit)                              $ 1,020,185        1,742,538          (364,995)
                                                                           =========        =========           =======


   The tax  effects  of  temporary  differences  that give  rise to  significant
     portions  of  deferred  tax  assets at  December  31,  1997 and 1996 are as
     follows:


                                                                                               1997               1996
                                                                                               ----               ----

                                                                                                              
     Accounts receivable, due to allowance for doubtful accounts                          $    24,126            25,672
     Inventories, due to valuation reserve                                                    204,451            42,197
     Inventories, due to differences in costing for tax purposes                                4,334             3,050
     Inventories, due to unrealized gain                                                      130,416            42,627
     Property, plant and equipment, due to differences in depreciation                          5,812            25,841
     Accrued warranty costs                                                                    96,963            84,027
                                                                                             --------          --------

       Deferred tax asset                                                                   $ 466,102           223,414
                                                                                              =======           =======


   The  recognition  of the  deferred  tax asset of $466,102 is supported by the
     Company's  expectation  that it will have future taxable income in 1998 and
     beyond in order to realize the benefit of these future tax deductions.

(10) 401(k) Profit Sharing Plan
   The Company  has a 401(k)  Profit  Sharing  Plan (the Plan) 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 plan are discretionary.
     During 1997, 1996 and 1995, the Company did not make any  contributions  to
     the Plan.

(Continued)








                       KVH INDUSTRIES, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued





(11) Business and Credit Concentrations
   InSeptember  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 and the remainder in 1997.

   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 52%, 37% and 52%, of the Company's revenues were derived
     from United  States and foreign  military  and defense  related  sources in
     fiscal 1997, 1996 and 1995, 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  could  have a
     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 31%, 42% and 51% of total revenues in fiscal 1997,
     1996, 1995, 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 12% and 27% of net sales in 1997
     and 1996 respectively.  Sales to the United States Army Tank and Automotive
     Command  accounted for approximately 28% of net sales in 1997. Sales to the
     Government  of  Sweden  accounted  for  approximately  13%  and  14% of the
     Company's net sales in 1997 and 1996 respectively.  Sales to General Motors
     Corporation  of Canada  accounted  for  approximately  14% and 13%,  of the
     Company's net sales in 1996 and 1995 respectively.

(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, 1997,  1996
     and 1995 is as follows:



                                                                            1997              1996              1995
                                                                            ----              ----              ----
                                                                                                        
     Net revenues:
       United States                                                    $ 23,258,557       23,809,807        12,609,029
       Europe                                                              2,311,790        1,877,688         1,541,118
                                                                           ---------      -----------       -----------

                                                                        $ 25,570,347       25,687,495        14,150,147
                                                                          ==========       ==========        ==========

     Operating profit:
       United States                                                   $   2,612,003        3,790,663           720,669
       Europe                                                                 64,064          194,740           151,765
                                                                       -------------       ----------        ----------

                                                                       $   2,676,067        3,985,403           872,434
                                                                         ===========        =========        ==========



     (Continued)








                       KVH INDUSTRIES, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued







                                                                            1997              1996              1995
                                                                            ----              ----              ----
     Identifiable assets:
                                                                                                           
       United States                                                    $ 21,003,039       20,941,403         7,267,604
       Europe                                                                801,902          612,247           663,669
                                                                        ------------     ------------        ----------

                                                                        $ 21,804,941       21,553,650         7,931,273
                                                                          ==========       ==========         =========

   (b) Export Sale Information
     Export sales from the Company's  United States  operations to  unaffiliated
       customers,  located primarily in Europe and Canada, totaled,  $7,813,138,
       $9,051,291 and $5,712,658, respectively, in 1997, 1996 and 1995.

(13) Selected Quarterly Financial Results (Unaudited)  Financial information for
   interim periods was as follows:



                                                           First          Second             Third           Fourth
     1997                                                 Quarter         Quarter           Quarter          Quarter
     -----                                                -------         -------           -------          -------
                                                                                                       
     Net sales                                         $ 5,916,329         5,770,505        7,025,976        6,857,537
     Gross profit                                        2,737,300         2,519,762        3,546,897        2,680,925
     Net income                                            603,989           402,167        1,018,799          191,546
     Earnings per share (a):
       Basic                                       $         0.09              0.06             0.14              0.03
                                                     ============      ============     ============        ==========
       Diluted                                               0.08              0.05             0.14              0.03
                                                      ===========      ============     ============        ==========

     1996
     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
     Net income                                            187,568           320,099          920,513        1,027,851
     Earnings per share (a):
       Basic                                       $         0.04              0.05             0.13              0.15
                                                     ============      ============     ============      ============
       Diluted                                     $         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
     Net income                                            351,084           210,313          174,670           457,531
     Earnings per share (a):
       Basic                                        $        0.07              0.04             0.04              0.09
                                                      ===========      ============     ============      ============
       Diluted                                      $        0.06              0.04             0.03              0.08
                                                      ===========      ============     ============      ============


(a)  Earnings per share are  computed  independently  for each of the  quarters.
     Therefore,  the earnings per share for the four  quarters may not equal the
     annual earnings per share data.







                          INDEPENDENT AUDITORS' REPORT


       The Board of Directors and Shareholders
       KVH Industries, Inc. and Subsidiary:

       Under the date of  February  3, 1998,  we  reported  on the  consolidated
       balance sheets of KVH Industries, Inc., and subsidiary as of December 31,
       1997 and December  31, 1996 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, 1997,  as contained in the
       1997 annual report on Form 10-K for the year 1997. 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 opinion,  such  financial  statement  schedule 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.


       /s/ KPMG Peat Marwick LLP

       Providence, Rhode Island
       February 3, 1998












         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
                                                                          
                     1997                  50              24              -             74
                     1996                  95               -            (45)            50
                     1995                  55              40              -             95


           Deducted from inventory
           for estimated obsolescence
                     1997                  105             556           (150)          511
                     1996                  60              60            (15)           105
                     1995                  54               6              -             60