Item 2: Properties

The Company currently leases five buildings (51,851; 52,464; 15,392; 76,379; and 58,000 square feet) in Sunnyvale, California pursuant to a lease which expires in March 2012. Under the terms of the lease, the lessor will construct a sixth building (58,000 square feet) which the Company will lease commencing approximately December, 1997 through March, 2012. These buildings are used as the Company's headquarters and include development, engineering, production, marketing, and administrative offices.

The Company leases a 15,250 square foot building in Herndon, Virginia pursuant to a lease which expires in October 1998. This building houses a small development facility and marketing and administrative offices.

The Company leases a 6,300 square foot building in Jessup, Maryland pursuant to a lease which expires in September 1996. This building also houses a small development facility and marketing and administrative offices. The Company is presently reviewing alternatives with respect to renewing the Maryland lease.

In addition, the Company also leases two warehouses (19,835 and 5,900 square feet) for use as storage facilities. Both leases expire in 1998.

The Company's business requires that it maintain at each of its offices a facility clearance sponsored and approved by the United States government. This approval could be suspended or revoked if the Company is found not to have complied with security regulations applicable to such facilities. Any revocation of such approval, and any suspension of such approval that materially delayed the Company's delivery of its products to customers would materially adversely affect the Company's results of operations. Although the Company has adopted policies directed at assuring its compliance with relevant regulations, there can be no assurance that the approved status of the Company's facilities will continue without interruption.

Item 3: Legal Proceedings

In April 1994, the Company was served with a subpoena by the Department of Defense Office of Inspector General (OIG) in connection with approximately six contracts, several of which had been audited by the Defense Contract Audit Agency (DCAA) the previous year. As is routine in such matters involving government contracts, the OIG referred the matter to another government agency which also had contracts with the Company. Shortly thereafter, this second agency issued a request for information related to nine additional contracts. To date, the Company has not received any allegations of wrong-doing from the OIG or the other agency.

At the request of the Board of Directors, the Company initiated its own review of the contracts in conjunction with its legal counsel. Further review of the contracts in question and related contracts through April 1995 indicated the Company was not compliant with Public Law 87653, Truth in Negotiations Act, which requires disclosure of all actual costs available on the date of cost certification on certain contracts performed during the 1989 and 1990 timeframe. These findings have resulted in a voluntary disclosure to the government which is expected to result in a downward price adjustment on certain contracts. In June 1995, the Company announced it was taking a charge against the third quarter operating results in anticipation of a settlement with the government on the subject contracts. The charge resulted in a reduction of the third quarter's operating income of $1.2 million. While management believes this charge is adequate to cover all related risks, the government has not concluded its investigation or agreed to a settlement with the Company. There can be no assurances the Company will not be required to take additional charges in connection with this matter in future periods. However, management believes that any such charges would not have a material effect on the operating results and financial condition of the Company.

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

Not applicable.

Item 5: Executive Officers of the Registrant

Set forth below is certain information with respect to age and background foe each of the remaining officer of the Company.

NameAgePosition
Gary L. Yancey50President and Chairman of the Board
E. Keith McNett55Vice President--Strategic Systems Division
Brian M. Offi42Vice President--Finance and Chief Financial Officer
Mary Rogge49Secretary
Ken Snow55Vice President--Operations Division

Gary L. Yancey, a co-founder of the Company, has served the Company as President and Chairman of the Board since the Company's incorporation in January 1984. Prior to co-founding the Company, he was employed for 10 years by ARGOSystems, a manufacturer of electronic reconnaissance systems.

E. Keith McNett joined the Company in 1985 as a member of the technical staff. He was appointed Director of Engineering in 1987 and elected Vice President in February 1989.

Brian M. Offi joined the Company in October 1990 as Chief Financial Officer and was elected Vice President--Finance in May 1991. From May 1987 to October 1990, he served as Chief Financial Officer of S-Tron, Inc., a manufacturer of life-support equipment worn by military personnel.

Mary Rogge joined the Company in 1986 as an executive secretary reporting to the President and was elected Secretary of the Company in March 1988.

Ken Snow joined the Company in January 1990 as a senior staff engineer. He was promoted to the position of Deputy Director of Engineering in 1991. In October of 1994 he became the Director of the Operations Division and in March 1995 he was elected Vice President of Operations.