ELEXSYS INTERNATIONAL, INC.



                               [GRAPHIC OMITTED]


                               1996 ANNUAL REPORT


<PAGE>

Elexsys  International,  Inc. is one of the country's  leading  manufacturers of
high performance  medium and high density  backpanel  assemblies & sophisticated
subsystem  assemblies.   In  addition,   the  Company  is  one  of  the  leading
manufacturers  of high technology  circuit  boards.  The Company offers advanced
inter-connect   solutions   for  the   telecommunications,   datacommunications,
computer,  industrial,  medical and instrumentation markets. 

         As of September 30, 1996,  Elexsys had 9,300,810 shares of common stock
outstanding.  Elexsys is traded on the Nasdaq  National  Market System under the
symbol ELEX.

<PAGE>

<TABLE>
<CAPTION>
                                                                     PRIMARY EARNINGS       STOCKHOLDERS'          
   NET SALES                GROSS MARGIN          NET INCOME            PER SHARE              EQUITY               TOTAL ASSETS
   $000,000                      %                $000,000                  $                 $000,000                $000,000


[GRAPHIC OMITTED]        [GRAPHIC OMITTED]     [GRAPHIC OMITTED]    [GRAPHIC OMITTED]     [GRAPHIC OMITTED]       [GRAPHIC OMITTED]


    <S>                      <C>                   <C>                  <C>                   <C>                      <C>
    94--95.7                 94--7.7               94--2.6              94--.54               94--6.1                  94--37.0 
    95--104.0                95--15.2              95--5.1              95--.57               95--13.9                 95--45.1 
    96--126.9                96--18.3              96--8.5              96--.89               96--24.6                 96--62.1 
                                                                                                                       

</TABLE>

<PAGE>

                              TO OUR SHAREHOLDERS

Fiscal  1996 -- our second  year of renewed  profitability  from  operations  --
showed Elexsys  International  forging ahead soundly.  Our strategy of expanding
the  breadth  and scope of the  products  and  services  we offer is being  well
received by the markets we serve. IN RECENT YEARS, MAJOR ELECTRONICS OEMS -- OUR
TARGET  CUSTOMERS  --  HAVE  BEEN  OUTSOURCING   INCREASING   AMOUNTS  OF  THEIR
MANUFACTURING  AND ASSEMBLY NEEDS. For the fiscal year ended September 30, 1996,
compared to fiscal  1995,  net sales  increased  22% to $127  million  from $104
million.  Net income  grew 67% to $8.5  million  from $5.1  million  and primary
earnings per share were up 56% to $0.89 from $0.57. Our operating margin for the
year was 8.0%  compared  to 5.1% for fiscal  1995.  Net  income for fiscal  1995
included  a gain  of $1.8  million  due to the  early  extinguishment  of  debt.
Excluding  the gain,  net income  would have been $3.3  million and earnings per
share would have been $0.37.

         For the fourth  quarter of fiscal  1996  compared to the same period in
fiscal 1995, net sales grew 20% to $36.8 million while net income  decreased 25%
to $2.3  million and  earnings  per share were down 25% to $0.24 (on 9.6 million
shares compared to 9.4 million shares for the prior period).

           Compared  to the third  quarter of fiscal  


                                        2
<PAGE>

1996,  fourth  quarter  net sales  increased  19% while net income  grew 15% and
earnings per share increased 20%.

         The  increase in orders from the third  quarter of fiscal  1996,  which
included a broad range of new customers,  and heightened overall  performance in
the fourth  quarter  resulted  from an  improved  sales mix and higher  capacity
utilization  than  earlier in the year when  inventory  adjustments  and product
transitions  combined  to reduce  orders on a  temporary  basis from some of our
largest customers.


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

                                   REVENUES BY
                                 MARKET SEGMENT

                                  53% TELECOM
            [GRAPHIC OMITTED]     13% COMPUTER             
                                  22% DATACOM
                                  12% INDUSTRIAL

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


         Overall, the revenue mix improved.  Orders for higher-margin  backpanel
and subsystem  assembly products met our growth  expectations as we continued to
focus on our goal of  achieving  more  than 50% of  revenues  from our  assembly
operations.  We  also  worked  successfully  to  requalify  Elexsys  with  major
cus-tomers in the telecommunications, datacommunications, industrial and medical
market  segments for business that had been lost previously due to the inability
to service  these  customers in past years.  Today,  Elexsys is again  receiving
preferred supplier  designations from several major customers.  The expansion of
our customer base, including new and renewed relationships, is a clear indicator
of the vigor and  effectiveness of our turnaround  efforts for the Company begun
in October  1994.  We 


                                       3
<PAGE>

have increased revenues from backpanel and subsystem  assemblies as a percentage
of net sales during fiscal 1996. We also have improved  product  turnaround time
and yields significantly, placing Elexsys' quality among industry leaders.

         We believe  outsourcing by OEMs,  particularly in the large and growing
telecommunications and datacom-munications markets, is a dynamic opportunity for
Elexsys  both  in  the  United  States  and  overseas.   OEMs  utilize  contract
manufacturing  for  several  key  reasons:  design  expertise,  reduced  capital
investment  requirements,  focused  resources,  access to leading  manufacturing
technology,  and improved inventory  management and purchasing power. To capture
our  fair  share  of this  potential,  we  have  made  broad-spectrum  "one-stop
outsourcing"  the  cornerstone  of our strategy  for growth. 

         We are using our proven,  high-technology manufacturing and engineering
capabilities  to further  expand into the rapidly  growing  outsourcing  market,
providing complex press-fit backpanels,  surface-mount back-panel assemblies and
subsystems utilizing our internal high technology circuit board capability.


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

                               MAJOR CUSTOMERS BY
                                 MARKET SEGMENT

             TELECOMMUNICATIONS                 INDUSTRIAL/MEDICAL
             Northern Telecom                   GE
             Tellabs                            Seimens
             Telco                              Rockwell
             DSC                                Honeywell
             Qualcom                            Fisher Controls
             Reltec                             Picker
             Lucent Technologies, Inc.          Genrad


             DATA COMMUNICATIONS                COMPUTERS
             DEC                                Tandem
             Tandem/UB networks                 DEC
             AT&T Paradyne                      Motorola
             Cascade                            Harris
             NET                                Silicon Graphics, Inc.

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

         We are also seeking to diversify our customer base. During fiscal 1996,
the Company manufactured and sold its products to 385 customers,  principally in
North America and Europe.  


                                       4
<PAGE>

         To support our broad marketing thrust, late in the fiscal year we moved
our Sunnyvale  headquarters  office and back-panel  operations to a much larger,
75,000-square-foot  facility in San Jose, California.  Midway through the fiscal
year, we acquired Anetec  Technologies,  a contract  manufacturer  supplying SMT
assembly services on a consignment  basis.  This acquisition  enabled Elexsys to
seamlessly  absorb a  significant  increase  in orders in the  active  backpanel
market  segment.  Anetec will be absorbed into the backpanel  assembly  division
during 1997.  We will continue to offer a prototype  consignment  service to our
major  customers  on a  limited  basis.  WE ARE  STRUCTURING  ELEXSYS  TO BE THE
PREMIER,  ONE-STOP  OUTSOURCING OPTION FOR ELECTRONICS OEMS REQUIRING  SUBSYSTEM
ASSEMBLIES.    Value-added   contract   manufacturing,   which   accounted   for
approximately  $41.5  billion in 1995,  is  estimated to be growing at an annual
rate of 21% and exceed $100 billion by the year 2000. Increasingly,  OEMs -- our
blue-chip customers -- are relying on independent  manufacturers such as Elexsys
rather than on captive  production with many OEMs having  discontinued their own
production since 1990.

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

                                 THE VERTICALLY
                              INTEGRATED SOLUTION

                                [GRAPHIC OMITTED]

                  STATE OF THE ART SYSTEM ASSEMBLY CAPABILITY

             o State of the Art Manufacturing SMT & Pressfit
               Backpanel Assembly
             o High Tech Printed Circuit Board Manufacturing Capability
             o Materials Procurement Group
             o Superior Design Services
             o Subsystem Assembly Capability
             o Advanced Test Capability
             o System Integration Capability

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

         The  electronics  industry is  undergoing  fundamental  change with the
ability to innovate,  and be first to market 


                                       5
<PAGE>

with a cost effective  product both being critical to the success of OEMs today.
This puts an intensified demand on suppliers who are providing increasing design
and  systems  content  to OEMs.  We have  configured  a supply  system  with key
engineering and manufacturing  resources at strategic locations in North America
and the United  Kingdom  focused on  delivering  quick-turn  prototypes  for new
products,  which are  subsequently  followed  with  deliveries  of high  quality
products on a timely basis. All plants have ISO 9002 certification.

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

                           USA AND EUROPEAN OPERATIONS

                                                   New Hampshire
                                                   Nashua

                                                                U.K.
                               [GRAPHIC OMITTED]                Peterborough 
                                                                England      
               California
               Fremont                                      
               Irvine                              Texas
               Mountain View                       Plano
               San Jose

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

         The path we are  following is wholly  dependent  upon the expertise and
wisdom of our  management  and  employees  and their ability to work together in
order to provide the timely response we promise to our customers. At Elexsys, we
have continued through fiscal 1996 to expand our  infrastructure  and to broaden
our management team.  Recognizing his keen contribution to our building process,
the Board of Directors  named W. F. "Barry" Hegarty in January 1996 as President
of the Company in addition to his role as Chief Operating Officer.

         For the future, we believe Elexsys has bright  prospects,  particularly
with  the  strategy  we have  articulated  and  have  now  largely  implemented.
Outsourcing presents a dynamic opportunity for the Company in the 


                                       6
<PAGE>

United States, Europe and Asia. OUR BUSINESS IS FOCUSED ON MAJOR GROWTH MARKETS,
PARTICULARLY  TELECOMMUNICATIONS,  DATACOMMUNICATIONS,  INDUSTRIAL,  MEDICAL AND
COMPUTER BOTH IN THE U.S. AND OVERSEAS. Elexsys enjoys world-class manufacturing
capabilities,   sells  into  rapidly  expanding  markets,   and  has  a  growing
international presence. Our customer strategy is focused on timeliness, which is
a key component of value in our business,  on premium service for all customers,
and on top quality that exceeds our customer expectations.

         We intend to forge  ahead in fiscal 1997 by  continuing  to enhance our
technology leadership,  capitalize on our international  presence, add even more
higher added-value  products,  and provide our customers with the best solutions
tailor made to their particular requirements.

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

             MILAN MANDARIC

             [GRAPHIC OMITTED]


                                              [GRAPHIC OMITTED]

                                              W. F. "BARRY" HEGARTY

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

         We want to thank our customers  and  suppliers for their  confidence in
our products,  and our employees for their loyalty,  commitment and performance.
We also thank our  shareholders  for their  support  through  the years and look
forward to reporting  continued  progress  and  increased  shareholder  value in
fiscal 1997.

/s/ Milan Mandaric                           /s/ Barry Hegarty   
    MILAN MANDARIC                               W.F."BARRY" HEGARTY 
    Chairman of the Board and CEO                President and COO   


                                       7
<PAGE>

           MANAGEMENT'S DISCUSSION AND ANALYSYS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

The  following  discussion  should  be read in  conjunction  with  the  Selected
Financial  Data and the  Consolidated  Financial  Statements  and Notes  thereto
contained  elsewhere  within  this  Annual  Report.  Except  for the  historical
information contained herein, the following discussion contains  forward-looking
statements  that involve risks and  uncertainties.  The actual future results of
the Company could differ  materially  from those  discussed  here.  Factors that
could cause or contribute to such differences  include,  but are not limited to,
those  discussed in this section and those  discussed in the Company's Form 10-K
for the year ended September 30, 1996.

                RESULTS OF OPERATIONS FISCAL 1996 TO FISCAL 1995

NET SALES
Net sales  increased  22 percent  from fiscal  1995.  The  increase in net sales
resulted from an increase in demand for the Company's subsystems (backpanels and
card  cage)  assemblies  and  circuit  board  products  from  new and  recurring
customers,  five months of sales from the Company's  recent  acquisition  of the
assets of Anetec Technologies (Anetec) in Fremont,  California and a full year's
sales from the United Kingdom circuit board operation. The increase in net sales
was  partially  offset by lower  pricing  for circuit  boards due to  previously
announced  softness in the industry during the third quarter of fiscal 1996. The
Company had unused  capacity in its circuit  board and  assembly  operations  of
approximately  35  and  50  percent   respectively,   allowing  the  Company  to
substantially  increase its sales in its  existing  facilities.  Going  forward,
management  expects  subsystems'  sales to be  approximately 50 to 60 percent of
sales by the end of fiscal year 1997.

GROSS MARGIN
Gross margin as a percentage of net sales increased from 15.2 percent for fiscal
1995 to 18.3 percent for fiscal  1996.  The  increase is  attributable  to lower
fixed and labor costs per unit shipped for circuit board products  mainly due to
an increase in units shipped diluting fixed costs as well as improving operating
efficiencies.  The  increase in gross  margin was also  driven by reduced  labor
costs  as a  percentage  of net  sales  for  assemblies  due to  improvement  in
operating  efficiencies.  The increase in gross margin was  partially  offset by
start-up  costs at our Plano,  Texas  operations  and a  softness  in demand for
circuit  boards  at our  Peterborough,  England  operations  creating  operating
inefficiencies.  Going forward, further improvement in gross margins will depend
on product mix,  capacity  utilization  mainly at our start-up  operations,  the
ability to continue to improve  operating  efficiencies as sales  increase,  and
further cost reductions.

OPERATING EXPENSES
Operating  expenses  increased 24.3 percent from fiscal 1995. As a percentage of
net sales,  operating  expenses  increased slightly from 10.1 percent for fiscal
1995 to 10.3  percent for fiscal 1996.  The  increase in  operating  expenses in
absolute  dollars is  attributable  to higher salary costs  associated  with new
additions  to the  executive  staff  and  additional  sales  and  administrative
personnel to support the growth,  recruiting and relocation costs related to the
hiring of new executives,  advertising  costs,  costs  associated with improving
information  systems,  investor  relations  costs, a full year of United Kingdom
costs,  and  higher  than  expected  legal  fees,   partially  offset  by  lower
commissions and lower research and development costs.


                                       8
<PAGE>

INTEREST EXPENSE
Interest expense decreased 18.3 percent from fiscal 1995 and was attributable to
the  elimination  of interest  obligations  from the  exchange of certain of the
Company's 5 1/2 percent Convertible  Subordinated Debentures due 2012 during the
second  quarter  of  fiscal  year  1995  (See  Note 13 of Notes to  Consolidated
Financial Statements) and to lower short term borrowings during the fiscal year.
The  decrease  in  interest  expense was  partially  offset by interest  expense
incurred by the Company's United Kingdom subsidiary.

PROVISION FOR INCOME TAXES
In fiscal  1996,  the  Company  provided  $202,000  for income  taxes.  This tax
provision  primarily relates to federal alternative minimum tax and state taxes,
partially  offset by a tax benefit in the United  Kingdom  due to net  operating
losses.  As of  September  30,  1996,  the  Company  has a  net  operating  loss
carryforward  for  federal  income tax  purposes  of  approximately  $24,416,000
expiring in various  amounts  between 2006 and 2008,  which net  operating  loss
carryforwards  could  offset  100  percent of taxable  income  for  regular  tax
purposes.  However, the Internal Revenue Code of 1986 contains limitation on the
utilization of net operating loss  carryforwards  if a "change of ownership," as
described in Section 382 of the Internal Revenue Code,  occurs.  In light of the
substantial  accumulation  of common stock by Mr. Milan  Mandaric  during fiscal
1994 and fiscal 1995, a modest  change in ownership of the Company could trigger
such  limitations.  If such limitations  were triggered,  it is possible the net
operating  loss  carryforwards  could  expire prior to  utilization.  The United
Kingdom  subsidiary  is  taxed at the  prevailing  corporate  tax  rates in that
country and has approximately $672,000 in net operating loss carryforwards. (See
Note 8 of Notes to Consolidated Financial Statements.)

                RESULTS OF OPERATIONS FISCAL 1995 TO FISCAL 1994

NET SALES
Net sales  increased  8.7 percent  from fiscal  1994.  The increase in net sales
resulted  from an increase in demand for the Company's  circuit  board  products
from the  Company's  recurring  customer  base and five months of sales from the
Company's  recent  acquisition in the United Kingdom.  The increase in net sales
was partially offset by lower sales for the Company's backpanel product line due
to changes in product mix.

GROSS MARGIN
Gross margin as a percentage of net sales  increased from 7.7 percent for fiscal
1994 to 15.2 percent for fiscal  1995.  The  increase is  attributable  to lower
fixed and variable  costs per unit shipped for the circuit  board  product line,
partially  offset by higher direct material costs in the backpanel  product line
due to changes in product mix. The  improvement  in fixed and variable costs per
unit  shipped  for the  Company's  circuit  board  product  line is  related  to
improvement in operating efficiencies, product mix and cost reductions.

OPERATING EXPENSES
Selling,  general and administrative  (SG&A) expense was approximately  equal to
fiscal 1994 in absolute  dollars.  As a percentage of net sales,  SG&A decreased
from 10.6  percent  for fiscal 1994 to 9.8  percent  for fiscal  1995.  SG&A was
approximately  constant in absolute  dollars as a consequence  of a reduction in
legal and  consulting  fees and lower wages and  salaries,  partially  offset by
increased  costs due to commissions to  manufacturers'  representatives,  profit
sharing  costs  and five  months of the  United  Kingdom  subsidiary's  selling,
general and  administrative  costs.  The reduction in legal and consulting  fees
were  associated  with the  elimination  of certain  legal and  consulting  fees
incurred  


                                       9
<PAGE>

in fiscal 1994 related to matters associated with the credit-line agreement. The
decrease in lower  wages and  salaries  is  attributable  to the October 3, 1994
announced  downsizing of operations,  partially offset by reorganizing the sales
and  technical  team.  The  decrease  in SG&A as a  percentage  of net sales was
attributable to increased sales.

         Research  and  development  expenditures  decreased  45 percent  during
fiscal 1995 compared to fiscal 1994.  The decrease in  expenditures  is directly
attributable  to lower  labor and  benefit  costs of  engineers  related to past
restructuring by the Company.

         At  the   beginning  of  fiscal  1995,   the   Company's   balance  for
restructuring reserve was $861,000. For the fiscal year, the Company reduced its
restructuring  reserve by $846,000  mainly  through  severance pay to executives
with agreements.  As of September 30, 1995, there was no remaining  balance,  as
all costs associated with these agreements were paid during fiscal 1995.

INTEREST INCOME AND INTEREST EXPENSE
Interest  income  decreased  100 percent  from fiscal  1994.  The  decrease  was
primarily due to a reduction in interest bearing investments held by the Company
during fiscal 1995  compared to fiscal 1994 as  investments  were  liquidated to
fund purchase of capital equipment. Interest expense decreased 13.2 percent from
fiscal 1994 and was  attributable  to the  elimination  of interest  obligations
through two  exchanges of the Company's 5 1/2 percent  Convertible  Subordinated
Debentures due 2012 (the Debentures)  during the last quarter of fiscal 1994 and
the  second  quarter  of  fiscal  1995  (See  Note 13 of Notes  to  Consolidated
Financial  Statements)  partially  offset by  interest  expense  incurred by the
company's  United Kingdom  subsidiary  and an increase in short-term  borrowings
from the Company's asset-based lender during fiscal 1995.

PROVISION FOR INCOME TAXES
In fiscal 1995, the Company provided $220,000 for income taxes related primarily
to alternative minimum tax and foreign income tax. As of September 30, 1995, the
Company  reported a net  operating  loss  carryforward  for  federal  income tax
purposes of approximately  $32,385,000  expiring in various amounts between 2006
and 2008. The United Kingdom  subsidiary has no available tax loss carryforwards
and is taxed at the prevailing corporate tax rates in that country.  (See Note 8
of Notes to Consolidated Financial Statements).

EXTRAORDINARY GAIN, NET OF EXPENSES AND TAXES
On March 31,  1995,  the Company and Mr.  Mandaric  exchanged  an  aggregate  of
400,000 newly issued shares of common stock for  $4,000,000 of principal  amount
of Debentures. The net gain of $1,833,000 was recorded as an extraordinary item.
The net  gain  included  a  reduction  of debt  issuance  costs  related  to the
Debentures and additional professional fees associated with the transaction. The
transaction included a payment of $18,333 for accrued interest on the Debentures
exchanged. (See Note 13 of Notes to Consolidated Financial Statements.)

                     FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company's future operating results may be adversely  affected by a number of
factors,  including general economic conditions,  foreign competition,  industry
consolidation,  shortages of certain raw  materials,  the  Company's  ability to
develop,  manufacture and sell its products  profitably,  the loss of one of its
primary  customers  and  the  cyclical  nature  of the  business  of some of the
Company's customers.


                                       10
<PAGE>

         The Company participates in a highly competitive industry.  The circuit
board and assembly industry has been characterized by stringent customer demands
for timely deliveries, service and quality of products and by aggressive pricing
practices.  The  Company's  operating  results  could  be  materially  adversely
affected should the Company be unable to meet any one of these customer demands.

                                    INFLATION

Management believes that inflation has not significantly  affected the prices of
the  Company's  products,  the cost of its materials and labor and its operating
costs.

                         LIQUIDITY AND CAPITAL RESOURCES

The Company had cash flows from  operating  activities  of $7.1  million  during
fiscal 1996 compared to $4.4 million  during fiscal 1995.  Higher  positive cash
flow  provided by operating  activities  during fiscal 1996 was primarily due to
improved profitability.

         Cash provided by operating activities of $7.1 million and cash provided
by  financing  activities  of $2.3  million was offset by cash used by investing
activities of $9.2 million.  Cash was provided by financing  activities  through
the increase in short-term  borrowings and long-term debt, and amounts  received
from the exercise of stock options by certain employees,  less cash used for the
repayment of long-term  debt.  Cash from  investing  activities was used for the
purchase  of capital  equipment  of $7.8  million  and for a $1.4  million  cash
payment for the assets of Anetec Technologies. The purchase of capital equipment
was for  normal  replacement,  equipment  for  processes  that the  Company  had
previously outsourced, and equipment to enhance our manufacturing capabilities.

         On November  26,  1996,  the Company  purchased  property  which it had
previously  leased at 41 Simon Street,  Nashua,  New Hampshire for approximately
$2.3  million.  The Company has  received  tentative  approval  for a tax exempt
private  activity bond financing,  at a substantially  lower interest rate, from
the State of New Hampshire to finance this transaction.

         As of September 30, 1996, the Company has short-term borrowings of $6.2
million  under a $15  million  line of  credit  agreement  that was  established
December  17,  1993  and  amended  January  30,  1996.  Under  the  terms of the
agreement,  the  Company's  cash  collections  are  applied  to any  outstanding
borrowings  upon the receipts  clearing the bank.  As of September  30, 1996 the
lender  was in  possession  of  approximately  $896,000  of the  Company's  cash
collections, and accordingly,  such funds have been applied to reduce the amount
outstanding  under the  Company's  line of credit to $5.3  million.  The line of
credit is  collateralized  by substantially all of the Company's assets and will
remain in effect until December 17, 1997. The company was in compliance with all
of the covenants as defined within the agreement.

         At September 30, 1996, the Company's current ratio of current assets to
current  liabilities was 1.5 to 1. In addition,  the Company had $1.1 million in
cash and cash equivalents  which are available for current  operations,  capital
expenditures and other purposes. Management believes that the Company's existing
working  capital,  its remaining  borrowing  capacity,  and funds generated from
operations  will be sufficient to meet  presently  anticipated  working  capital
requirements.


                                       11
<PAGE>

                                  ENVIRONMENTAL

The  Company's   manufacturing   processes  utilize  substantial  quantities  of
chemicals as well as substantial  quantities of water. The Company is subject to
and  believes it is in  substantial  compliance  with  federal,  state and local
environmental  laws and  regulations  regarding  air,  water,  and land use, the
generation, use, storage and disposal of hazardous materials and wastes, and the
operation and closure of manufacturing  facilities at which hazardous  materials
are  used  or  hazardous  wastes  are  generated.  The  Company  has  had no new
environmental matters in the current fiscal year.

         With respect to previously  reported  matters,  the Company is aware of
contamination  of soil and ground water  (principally by metals and solvents) at
two of its former facilities in Northern California. At both of these facilities
the soil has been  remediated  and the  properties  have been  returned to their
owners.  One of the  facilities  is adjacent to an existing  State of California
administered  Superfund  site;  as a result,  it could  become part of a related
State of California administered regional ground water investigation,  although,
the Company does not believe that it bears any  responsibility  for that matter.
At another former facility in Southern California, the Company conducted limited
groundwater sampling in connection with potential sale of the property,  and low
concentrations  of  solvents  were  detected.   Notification  was  made  to  the
appropriate  agencies. At this time, it is not possible to determine whether any
response actions will be needed to be taken; and accordingly,  the likely future
cost to the Company is not yet reasonably estimable.

         The  Company is further  aware of soil and ground  water  contamination
(principally  by metals and solvents) at two currently used  facilities,  one in
Northern California and one in Southern  California,  At its Northern California
facility,  the  Company  is  indemnified  by the former  property  owner who has
acknowledged his obligation.  At its Southern California facility, the Company's
preliminary  estimate of remedial  costs,  expected to be incurred  over five to
seven years, ranges from approximately $880,000 to $1,480,000 (including between
approximately $300,000  and $400,000 estimated  capital  expenditures  for waste
treatment  equipment  acquisitions  and  installation  costs).  At its  Northern
California facility, the Company has implemented and has been in compliance with
recently   reduced   discharge  limits  for  industrial  waste  water  discharge
containing heavy metals.

         As of September  30, 1996,  the Company  believes it has  appropriately
recorded all known costs related to environmental matters, including the minimum
amounts where the estimated costs are within a range, and are primarily  accrued
in other  current  liabilities.  However,  actual future  environmental  related
expenditures are subject to numerous  uncertainties,  including the discovery of
additional  environmental concerns,  further development of cost estimates,  new
and changing  environmental  law and  requirements,  or new  interpretations  of
existing  laws and  requirements.  Accordingly,  there can be no assurance  that
future environmental  related expenditures will not exceed the Company's current
estimates or that they will not have a materially adverse effect on the Company.


                                       12
<PAGE>

<TABLE>
                                                SELECTED CONSOLIDATED FINANCIAL DATA

                                                     ELEXSYS INTERNATIONAL, INC.
<CAPTION>

YEARS ENDED SEPTEMBER 30 (IN THOUSANDS, EXCEPT PER SHARE DATA)             1996         1995         1994         1993          1992
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>          <C>          <C>          <C>      
STATEMENT OF OPERATIONS DATA:
NET SALES                                                             $ 126,906    $ 103,970    $  95,680    $  99,272    $ 101,396
COST OF SALES                                                           103,696       88,137       88,301       98,024      100,864
------------------------------------------------------------------------------------------------------------------------------------
         GROSS PROFIT                                                    23,210       15,833        7,379        1,248          532

OPERATING EXPENSES:
         SELLING, GENERAL AND ADMINISTRATIVE                             12,852       10,154       10,167       10,838        9,593
         RESEARCH AND DEVELOPMENT                                           258          395          718        2,302        2,868
         PROVISION FOR RESTRUCTURING OF OPERATIONS                                                  2,100        3,000
------------------------------------------------------------------------------------------------------------------------------------
                  TOTAL OPERATING EXPENSES                               13,110       10,549       12,985       16,140       12,461
------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS                                            10,100        5,284       (5,606)     (14,892)     (11,929)

OTHER (INCOME) EXPENSE:
         INTEREST EXPENSE                                                 1,442        1,765        2,034        1,856        1,872
         INTEREST INCOME                                                    (14)                      (27)        (417)      (1,127)
------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES                                         8,672        3,519       (7,613)     (16,331)     (12,674)
PROVISION FOR INCOME TAXES                                                  202          220
------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                                   8,470        3,299       (7,613)     (16,331)     (12,674)

EXTRAORDINARY ITEM:
         GAIN FROM EXCHANGE OF CONVERTIBLE SUBORDINATED DEBENTURES
         FOR COMMON STOCK, NET OF EXPENSES                                             1,833       10,167
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)                                                     $   8,470    $   5,132    $   2,554    $ (16,331)   $ (12,674)
====================================================================================================================================
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
         PRIMARY                                                      $     .89    $     .57    $     .54    $   (3.18)   $   (2.46)
         FULLY DILUTED                                                $     .89    $     .56    $     .39    $   (3.18)   $   (2.46)
====================================================================================================================================

WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES:
         PRIMARY                                                          9,553        9,018        6,387        5,133        5,161
         FULLY DILUTED                                                    9,553        9,087        8,769        5,133        5,161
====================================================================================================================================

SEPTEMBER 30 (IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------------------

BALANCE SHEET DATA:
WORKING CAPITAL                                                       $  10,570    $   7,174    $   3,791    $   7,172    $  18,003
TOTAL ASSETS                                                             62,105       45,139       36,983       48,040       65,013
LONG-TERM DEBT                                                            2,448        1,280          406          456          501
CONVERTIBLE SUBORDINATED DEBENTURES                                      12,000       12,000       16,000       32,000       32,000
STOCKHOLDERS' EQUITY (DEFICIT)                                           24,552       13,908        6,085       (1,669)      14,639
====================================================================================================================================


<FN>
                     THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>


                                       13
<PAGE>

<TABLE>
                                                CONSOLIDATED STATEMENTS OF OPERATIONS

                                                     ELEXSYS INTERNATIONAL, INC.
<CAPTION>

YEARS ENDED SEPTEMBER 30 (IN THOUSANDS, EXCEPT PER SHARE DATA)                                 1996           1995             1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>             <C>             <C>      
NET SALES                                                                                 $ 126,906       $ 103,970       $  95,680
COST OF SALES                                                                               103,696          88,137          88,301
------------------------------------------------------------------------------------------------------------------------------------
         GROSS PROFIT                                                                        23,210          15,833           7,379

OPERATING EXPENSES:
         SELLING, GENERAL AND ADMINISTRATIVE                                                 12,852          10,154          10,167
         RESEARCH AND DEVELOPMENT                                                               258             395             718
         PROVISION FOR RESTRUCTURING OF OPERATIONS                                                                            2,100
------------------------------------------------------------------------------------------------------------------------------------
                  TOTAL OPERATING EXPENSES                                                   13,110          10,549          12,985
------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS                                                                10,100           5,284          (5,606)
OTHER (INCOME) EXPENSE
         INTEREST EXPENSE                                                                     1,442           1,765           2,034
         INTEREST INCOME                                                                        (14)                            (27)
------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES                                                             8,672           3,519          (7,613)
PROVISION FOR INCOME TAXES                                                                      202             220
------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                                                       8,470           3,299          (7,613)

EXTRAORDINARY ITEM:
         GAIN FROM EXCHANGE OF CONVERTIBLE SUBORDINATED DEBENTURES FOR
         COMMON STOCK, NET OF EXPENSES                                                                        1,833          10,167
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME                                                                                $   8,470       $   5,132       $   2,554
====================================================================================================================================

PRIMARY NET INCOME PER SHARE
         INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                                          $     .89       $     .37       $   (1.28)
         EXTRAORDINARY ITEM                                                                                     .20            1.82
------------------------------------------------------------------------------------------------------------------------------------
                  NET INCOME                                                              $     .89       $     .57       $     .54
====================================================================================================================================

FULLY DILUTED NET INCOME PER SHARE
         INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                                          $     .89       $     .36       $    (.91)
         EXTRAORDINARY ITEM                                                                                     .20            1.30
------------------------------------------------------------------------------------------------------------------------------------
                  NET INCOME                                                              $     .89       $     .56       $     .39
====================================================================================================================================

<FN>
                       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>

                                       14
<PAGE>

<TABLE>
                                                     CONSOLIDATED BALANCE SHEETS

                                                     ELEXSYS INTERNATIONAL, INC.
<CAPTION>


SEPTEMBER 30 (IN THOUSANDS, EXCEPT SHARE DATA)                                                              1996               1995
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                                                                      <C>                <C>   
                                                               ASSETS
CURRENT ASSETS:
         CASH AND CASH EQUIVALENTS                                                                       $ 1,075            $   903
         ACCOUNTS RECEIVABLE, LESS ALLOWANCE FOR DOUBTFUL                                                                  
              ACCOUNTS OF $287 AT SEPTEMBER 30, 1996 AND $458                                                              
              AT SEPTEMBER 30, 1995                                                                       20,463             15,653
         INVENTORIES                                                                                      10,690              7,860
         PREPAID EXPENSES AND OTHER CURRENT ASSETS                                                         1,447                709
------------------------------------------------------------------------------------------------------------------------------------
                  TOTAL CURRENT ASSETS                                                                    33,675             25,125
------------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET                                                                        24,818             18,980
OTHER ASSETS                                                                                               3,612              1,034
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                             $62,105            $45,139
====================================================================================================================================
                                                                                                                           
                                                LIABILITIES AND STOCKHOLDERS' EQUITY                                       
CURRENT LIABILITIES:                                                                                                       
         ACCOUNTS PAYABLE                                                                                $12,629            $ 9,854
         ACCRUED PAYROLL AND RELATED COSTS                                                                 2,611              2,521
         OTHER CURRENT LIABILITIES                                                                         1,321              1,965
         SHORT-TERM BORROWINGS                                                                             5,310              3,248
         CURRENT PORTION OF LONG-TERM DEBT                                                                 1,234                363
------------------------------------------------------------------------------------------------------------------------------------
                  TOTAL CURRENT LIABILITIES                                                               23,105             17,951
------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT                                                                                             2,448              1,280
CONVERTIBLE SUBORDINATED DEBENTURES                                                                       12,000             12,000
                                                                                                                           
STOCKHOLDERS' EQUITY:                                                                                                      
         PREFERRED STOCK, $1.00 PAR VALUE, 1,000,000 SHARES AUTHORIZED                                                     
              NONE ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1996 AND 1995                                                   
         COMMON STOCK, $1.00 PAR VALUE, 20,000,000 SHARES AUTHORIZED, 9,300,810                                            
              SHARES ISSUED AND  OUTSTANDING AT SEPTEMBER 30, 1996 AND 8,960,560                                           
              SHARES ISSUED AND OUTSTANDING AT SEPTEMBER 30, 1995                                          9,301              8,961
         ADDITIONAL PAID-IN CAPITAL                                                                        7,294              5,460
         CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS                                                 (22)               (22)
         RETAINED EARNINGS (DEFICIT)                                                                       7,979               (491)
------------------------------------------------------------------------------------------------------------------------------------
                  TOTAL STOCKHOLDERS' EQUITY                                                              24,552             13,908
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                               $62,105            $45,139
====================================================================================================================================
                                                                                                                           
<FN>                                                                                                                       
                       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</FN>                                                                                                                      
</TABLE>                                  


                                       15
<PAGE>
<TABLE>
                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                     ELEXSYS INTERNATIONAL, INC.

<CAPTION>

                                                                                          CUMULATIVE
                                                                            RETAINED       FOREIGN
                                             COMMON STOCK     ADDITIONAL    EARNINGS       CURRENCY      TREASURY STOCK
                                           ----------------    PAID-IN      (ACCUMU-     TRANSLATION    -----------------
(IN THOUSANDS)                             SHARES    AMOUNT    CAPITAL    LATED DEFICIT)  ADJUSTMENT    SHARES     AMOUNT   TOTAL
------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>     <C>        <C>           <C>              <C>        <C>       <C>       <C>
BALANCE AT SEPTEMBER 30, 1993              5,844   $  5,844   $  4,195      $ (8,177)                   $(709)    $(3,531)  $(1,669)
COMMON STOCK ISSUED IN EXCHANGE                                                          
FOR THE DEBENTURES                         3,200      3,200      2,000                                                        5,200
RETIREMENT OF TREASURY STOCK, AT COST       (709)      (709)    (2,822)                                   709       3,531
NET INCOME                                                                     2,554                                          2,554
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1994              8,335      8,335      3,373        (5,623)                                         6,085
                                                                                         
COMMON STOCK ISSUED IN EXCHANGE                                                          
FOR THE DEBENTURES                           400        400      1,625                                                        2,025
EMPLOYEE STOCK OPTIONS EXERCISED             226        226        462                                                          688
FOREIGN CURRENCY TRANSLATION ADJUSTMENT                                                        (22)                             (22)
NET INCOME                                                                     5,132                                          5,132
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995              8,961      8,961      5,460          (491)          (22)                          13,908
                                                                                         
EMPLOYEE STOCK OPTIONS EXERCISED             230        230        377                                                          607
COMMON STOCK ISSUED FOR PURCHASE OF                                                      
ANETEC TECHNOLOGIES                          110        110      1,457                                                        1,567
NET INCOME                                                                     8,470                                          8,470
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996              9,301   $  9,301   $  7,294      $  7,979         $ (22)                        $ 24,552
====================================================================================================================================
                                                                                     
<FN>
                       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>


                                       16
<PAGE>

<TABLE>
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                     ELEXSYS INTERNATIONAL, INC.
<CAPTION>


YEARS ENDED SEPTEMBER 30 (IN THOUSANDS)                                                      1996             1995             1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>              <C>              <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME                                                                               $  8,470         $  5,132         $  2,554
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
     (USED) PROVIDED BY OPERATING ACTIVITIES NET OF
     EFFECT OF BUSINESS ACQUIRED:
         EXTRAORDINARY ITEM                                                                                 (1,833)         (10,167)
         DEPRECIATION AND AMORTIZATION                                                      5,427            5,325            6,301
         PROVISION FOR RESTRUCTURING OPERATIONS                                                                               2,100
         (INCREASE) DECREASE IN ACCOUNTS RECEIVABLE                                        (4,821)          (5,726)             250
         (INCREASE) DECREASE IN INVENTORIES                                                (3,111)            (143)             932
         (INCREASE) DECREASE IN PREPAID EXPENSES
         AND OTHER CURRENT ASSETS                                                            (827)            (285)             107
         INCREASE (DECREASE) IN ACCOUNTS PAYABLE                                            2,872            2,956           (5,297)
         INCREASE (DECREASE) IN ACCRUED PAYROLL AND RELATED COSTS                              92              429             (847)
         DECREASE IN RESTRUCTURING RESERVE                                                                    (861)          (1,402)
         DECREASE IN OTHER CURRENT LIABILITIES                                               (580)            (110)            (440)
         OTHER                                                                               (421)            (503)             226
------------------------------------------------------------------------------------------------------------------------------------
         NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES                                   7,101            4,381           (5,683)
------------------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF ANETEC TECHNOLOGIES                                                            (1,400)
PURCHASE OF TECHNET LIMITED                                                                                   (560)
PROCEEDS FROM MATURITY OF SHORT-TERM INVESTMENTS                                                                              4,000
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT                                                  (7,848)          (4,683)          (2,660)
PROCEEDS FROM SALE OF PROPERTY, PLANT AND EQUIPMENT                                            27               79               79
------------------------------------------------------------------------------------------------------------------------------------
         NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES                                  (9,221)          (5,164)           1,419
------------------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM ISSUANCE OF DEBT                                                                118
PRINCIPAL PAYMENTS ON DEBT                                                                   (338)            (356)             (45)
PRINCIPAL PAYMENTS ON CAPITAL LEASE OBLIGATIONS                                              (156)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS                                                       606              688
NET CHANGE IN SHORT-TERM BORROWINGS                                                         2,062             (208)           3,456
------------------------------------------------------------------------------------------------------------------------------------
         NET CASH PROVIDED BY FINANCING ACTIVITIES                                          2,292              124            3,411
------------------------------------------------------------------------------------------------------------------------------------
         NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                 172             (659)            (853)
         CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                         903            1,562            2,415
------------------------------------------------------------------------------------------------------------------------------------
         CASH AND CASH EQUIVALENTS, END OF YEAR                                          $  1,075         $    903         $  1,562
====================================================================================================================================

<FN>
SEE NOTES 1, 2 AND 10 FOR SUPPLEMENTAL INFORMATION.
SUPPLEMENT SCHDEULE OF NONCASH FINANCING ACTIVITY:
     IN FISCAL 1995 AND 1994, THE COMPANY EXCHANGED $4,000,000 AND $16,000,000 OF CONVERTIBLE SUBORDINATED DEBENTURES FOR $2,025,000
     AND  $5,200,000 OF COMMON STOCK,  RESPECTIVELY.  IN CONNECTION  WITH THESE  TRANSACTIONS,  ACCRUALS OF $50,000 AND $250,000 FOR
     PROFESSIONAL FEES AND THE WRITE-OFF OF $92,000 AND $383,000 OF DEFERRED DEBT ISSUANCE COSTS, RESPECTIVELY,  WERE NETTED AGAINST
     THE GAIN RECOGNIZED ON THE TWO EXCHANGES.

     THE COMPANY PURCHASED $1,034,000 OF EQUIPMENT UNDER CAPITAL LEASES DURING FISCAL 1996.

             THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>

                                       17
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           ELEXSYS INTERNATIONAL, INC.


                                       1

                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS
Elexsys  International,  Inc., (the "Company"),  is one of the country's leading
manufacturers of high performance  medium and high density backpanel  assemblies
and sophisticated  subsystem assemblies.  In addition, the Company is one of the
leading  manufacturers  of high technology  circuit  boards.  The Company offers
advanced inter-connect solutions for the telecommunications, datacommunications,
computer,  industrial,  medical and  instrumentation  markets.  The consolidated
financial  statements  include the  accounts of the Company and its wholly owned
subsidiaries.  All significant intercompany  transactions and balances have been
eliminated in consolidation.

ACCOUNTING PERIOD
For  convenience of  presentation,  the Company has indicated its fiscal year as
ending on September 30. The Company actually utilizes a fifty-two or fifty-three
week fiscal year ending on the Saturday  nearest to September 30, which, for the
fiscal years ended in 1996,  1995 and 1994,  was September 28,  September 30 and
October 1, respectively.

USE OF ESTIMATES
The  preparation of the  consolidated  financial  statements in conformity  with
generally accepted accounting principles necessarily requires management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting years. Actual results could differ from those estimates.

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes  refunded for each of the three years in
the period ended September 30, 1996 was as follows:

THOUSANDS OF DOLLARS                            1996       1995        1994
----------------------------------------------------------------------------

INTEREST                                   $   1,353   $  2,201   $   1,602
INCOME TAXES (REFUNDED) PAID               $     339   $    158   $     (33)

CASH EQUIVALENTS
The Company  classifies all short-term  investments with original  maturities of
three months or less as cash equivalents.

ACCOUNTS RECEIVABLE
The Company performs  ongoing credit  evaluations of its customers and generally
does not require collateral. The Company maintains credit insurance and reserves
for  potential  credit  losses,  and such losses  have been within  management's
expectations.

INVENTORIES
Inventories are stated at the lower of average cost or market and consist of the
following:

THOUSANDS OF DOLLARS                                       1996        1995
----------------------------------------------------------------------------

INVENTORIES:
  RAW MATERIALS                                        $  5,434     $ 2,843
  WORK IN PROGRESS                                        5,256       5,017
----------------------------------------------------------------------------
TOTALS                                                 $ 10,690     $ 7,860
----------------------------------------------------------------------------

PROPERTY, PLANT AND EQUIPMENT
Property,  plant and equipment are stated at cost less accumulated  depreciation
and   amortization.   Depreciation  and  amortization  are  computed  using  the
straight-line method over estimated useful lives as follows:

                     BUILDINGS AND IMPROVEMENTS -- 30 YEARS
                    MACHINERY AND EQUIPMENT -- 3 TO 10 YEARS
                    LEASEHOLD IMPROVEMENTS -- SHORTER OF THE
                       ESTIMATED USEFUL LIFE OR LEASE TERM

                                       18
<PAGE>

INCOME TAXES
The Company  accounts  for income  taxes under the  provision  of  Statement  of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."

REVENUE RECOGNITION
The Company recognizes revenues upon shipment of related products.

TRANSLATIONS OF FOREIGN CURRENCIES
Assets and liabilities of the Company's United Kingdom subsidiary are translated
into U.S.  dollars  at the  exchange  rates in effect at the end of the  period.
Revenue and expense  accounts are  translated at a weighted  average of exchange
rates which were in effect during the year.  Translation  adjustments that arise
from translating the Company's United Kingdom subsidiary's  financial statements
from the pound sterling to U.S. dollars are accumulated in a separate  component
of stockholders'  equity.  Transaction gains and losses that arise from exchange
rate  changes on  transactions  denominated  in a currency  other than the local
currency are included in results of operations as incurred.  For the years ended
September 30, 1996 and 1995, transaction gains and losses were immaterial.

FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107,  Disclosures About Fair Value of Financial  Instruments,  requires
management  to  disclose  the  estimated   fair  value  of  certain  assets  and
liabilities  defined  by  SFAS  No.  107  as  financial  instruments.  Financial
instruments  are  generally  defined  by SFAS No.  107 as cash or a  contractual
obligation  that both  conveys to one  entity a right to  receive  cash or other
financial  instruments  from another  entity and imposes on the other entity the
obligation to deliver cash or other  financial  instruments to the first entity.
At September 30, 1996,  management  believes that the carrying  amounts of cash,
receivables,  trade payables,  and long term debt  approximate  fair value.  The
carrying  amount of the 5 1/2 percent  Convertible  Subordinated  Debentures due
2012 is $12  million  and  management  believes  that the fair  value  cannot be
determined as the instrument has not been traded during the past year.

NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial  Accounting  Standards Board issued SFAS No. 123,
Accounting  for  Stock-based  Compensation,   which  requires  adoption  of  the
disclosure  provisions no later than years beginning after December 15, 1995 and
the adoption of the  recognition  and  measurement  provisions  for  nonemployee
transactions  no later than after December 15, 1995. The new standard  defines a
fair value method of accounting for stock options and other equity  instruments.
Under the fair value  method,  compensation  cost is  measured at the grant date
based on the fair value of the award and is recognized  over the service  period
which is usually the vesting period.

         Pursuant to the new accounting standard,  companies are encouraged, but
not required,  to adopt the fair value method of accounting  for  employee-based
transactions.  Companies  are also  permitted  to  continue  to account for such
transactions  under Accounting  Principles Board Opinion No. 25,  Accounting for
Stock  Issued to  Employees,  but would be required to disclose in a note to the
financial statements pro forma net income and, if present, earnings per share as
if the  Company  had  applied  the new method of  accounting.  The  Company  has
determined that it will not change to the fair value method and will continue to
use Accounting Principle Board Opinion No. 25 for measurement and recognition of
employee stock-based transactions.


                                       19
<PAGE>

                                       2

                   PROVISIONS FOR RESTRUCTURING OF OPERATIONS

As of  September  30,  1994,  the  actual  losses  incurred  and costs paid were
$924,000 for disposition of excess  equipment,  $584,000 for closure and cleanup
costs for  returning the building to its original  condition,  $579,000 for rent
and other  occupancy  costs  during the  cleanup  period,  $635,000 of wages and
benefits for  severance  pay and wages and benefits  paid to employees to assist
with the cleanup, $194,000 to dispose of excess inventory and $84,000 related to
other  realignment and consolidation  costs. The Chatsworth  building was turned
over to the landlord on April 29, 1994.

         On January 6, 1994,  the Company  announced  the  downsizing of all its
operations.  In connection  with the  downsizing,  the Company  reduced its work
force by  approximately  150 employees and accrued a one-time charge of $600,000
recognized  during the quarter  ended January 1, 1994. As of September 30, 1994,
all costs incurred were paid.

         On October 3, 1994, the Company  announced an additional  downsizing of
its West Coast  operations.  In  connection  with the  downsizing,  the  Company
further  reduced its work force by  approximately  150  employees  and accrued a
one-time charge of $1,500,000  recognized during the quarter ended September 30,
1994. In addition,  the President and Chief Executive  Officer and a Senior Vice
President resigned and the employee stock bonus plan was cancelled.

         As of September 30, 1995, all costs  incurred,  representing  wages and
benefits for severance pay, mainly to executives, were paid.

                                       3

                          PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

THOUSANDS OF DOLLARS                                       1996        1995
----------------------------------------------------------------------------

LAND                                                   $  2,357    $  2,357
BUILDINGS AND IMPROVEMENTS                                1,738       1,939
MACHINERY AND EQUIPMENT                                  70,572      62,790
LEASEHOLD IMPROVEMENTS                                    7,297       6,594
----------------------------------------------------------------------------
                                                         81,964      73,680
LESS ACCUMULATED DEPRECIATION
  AND AMORTIZATION                                      (57,146)    (54,700)
----------------------------------------------------------------------------
                                                       $ 24,818    $ 18,980
----------------------------------------------------------------------------

The Company  had  $1,770,000  of  equipment  leased  under  capital  leases with
accumulated amortization of $157,000 at September 30, 1996.

                                        4

                           REVOLVING CREDIT AGREEMENT

On December 17, 1993,  the Company  entered  into a revolving  credit  agreement
providing  for  working  capital  advances  up to  $7,500,000  (based on certain
eligible  account  balances  and recent  cash  collections)  and  financing  for
equipment  purchases of up to $2,500,000 from an asset based financing  company.
On January 30, 1996,  the  agreement  was amended to provide for borrowing up to
$15 million.  Cash  borrowings  under the line of credit bear  interest at prime
rate (8 1/4%) plus 3 percent at September 30, 1996 which is payable monthly. The
line of credit is  collateralized  by substantially  all of the Company's assets
and expires December 17, 1997. The credit facility contains covenants  including
the  maintenance  of certain levels of working  capital,  tangible net worth and
certain  financial  ratios.  In addition,  the Company is  restricted  as to the
incurrence  of  additional  indebtedness  and  certain  other  payments.  As  of
September 30, 1996, net borrowings  under this credit  agreement were $5,310,000
and the Company was in compliance with such covenants.


                                       20
<PAGE>

                                        5

                                 LONG-TERM DEBT

Long-term debt consists of the following:

THOUSANDS OF DOLLARS
(EXCEPT PAYMENT AMOUNTS)                                   1996        1995
---------------------------------------------------------------------------

USA SUBSIDIARY:
  CALIFORNIA POLLUTION CONTROL REVENUE 
   BONDS DUE IN VARYING ANNUAL PRINCIPAL
   AMOUNTS RANGING FROM $45,000 TO $85,000 
   THROUGH MARCH 2001, WITH INTEREST
   RATES RANGING FROM 7.0% TO 9.5% AND GUARANTEED
   BY THE SMALL BUSINESS ADMINISTRATION                $    345      $  406
  PROMISSORY NOTE PAYABLE TO ANETEC
   TECHNOLOGIES DUE IN TWO ANNUAL PRINCIPAL
   AMOUNTS OF $500,000 IN MAY, 1997 AND
   MAY, 1998, WITH AN INTEREST RATE OF 8%                 1,000
UNITED KINGDOM SUBSIDIARY:
  NOTES PAYABLE TO AN INVESTOR GROUP DUE IN
   EQUAL, ANNUAL PRINCIPAL AMOUNTS OF
   $97,573 DUE SEPTEMBER 1998, WITH INTEREST
   RATES OF 3% ABOVE THE BANK BASE RATE,
   CURRENTLY 5.75%. THE LOAN IS COLLATERALIZED
   BY THE UNITED KINGDOM SUBSIDIARY'S ASSETS                196         397
  NOTES PAYABLE TO BANK DUE IN VARYING ANNUAL
   PRINCIPAL AMOUNTS RANGING FROM $37,000 TO
   $76,000 THROUGH SEPTEMBER 2008, WITH
   INTEREST RATES OF 2% ABOVE THE BANK BASE
   RATE, CURRENTLY 5.75%. THE LOAN IS
   COLLATERALIZED BY THE UNITED KINGDOM
   SUBSIDIARY'S ASSETS                                      788         812
  CAPITAL LEASE OBLIGATIONS (SEE NOTE 7)                  1,353          28
---------------------------------------------------------------------------
                                                          3,682       1,643
LESS: CURRENT PORTION                                    (1,234)       (363)
---------------------------------------------------------------------------
NET                                                      $2,448      $1,280
---------------------------------------------------------------------------

         The  aggregate  principal   maturities  are  (excluding  capital  lease
obligations)  $775,000,  $687,000,  $101,000,  and  $113,000 in the years ending
September 30, 1997 through 2000, respectively, and $653,000 thereafter.

                                        6

                       CONVERTIBLE SUBORDINATED DEBENTURES

In February 1987, the Company  issued  $32,000,000 of 5 1/2 percent  Convertible
Subordinated  Debentures  due in 2012 (the  "Debentures").  The  Debentures  are
convertible  into  shares  of common  stock at  $39.50  per  share,  subject  to
adjustment  under  certain  conditions.  The  Debentures  are  redeemable by the
Company  at  declining  premiums  prior to March 1, 1997 and  thereafter  at 100
percent of the principal amount.  The Debentures are also redeemable through the
operation of a sinking fund at 100 percent of the principal amount.  Interest is
payable  semi-annually on September 1 and March 1 of each year. Mandatory annual
sinking fund payments, sufficient to retire 5 percent of the aggregate principal
amount of the Debentures  issued,  were to be made on each March 1 commencing in
1997.  As a result of the two exchanges of common stock for  $20,000,000  of the
Debentures,  as  discussed  in Note 13, the Company now has sinking fund credits
available to offset these obligations for twelve and one-half years. The revised
minimum annual sinking fund payments are  $1,600,000,  $1,600,000,  $800,000 and
$8,000,000  for the  years  ending  September  30,  2009,  2010,  2011 and 2012,
respectively.  The Debentures are subordinated to all senior indebtedness of the
Company. At September 30, 1996, senior indebtedness aggregated $8,992,000.



                                       21
<PAGE>

                                        7

                                LEASE COMMITMENTS

The Company leases its several  manufacturing  facilities and certain  equipment
under capital and  operating  leases.  As of September  30, 1996,  the Company's
commitments under its capital and operating leases are as follows:

FISCAL YEAR                                           CAPITAL      OPERATING
(THOUSAND OF DOLLARS)                                  LEASES         LEASES
----------------------------------------------------------------------------

1997                                                   $  476        $2,326
1998                                                      363         1,843
1999                                                      262         1,520
2000                                                      176           978
2001                                                      176           807
THEREAFTER                                                175         1,470
----------------------------------------------------------------------------
TOTAL MINIMUM LEASE PAYMENTS                            1,628        $8,944
----------------------------------------------------------------------------
LESS AMOUNTS REPRESENTING INTEREST                       (275)      
----------------------------------------------------------------------------
PRESENT VALUE OF MINIMUM LEASE PAYMENTS                 1,353       
LESS CURRENT PORTION                                     (459)      
----------------------------------------------------------------------------
LONG-TERM PORTION                                      $  894       
----------------------------------------------------------------------------
                                                   
         The  Company  has options to renew its  facilities  leases,  except the
Irvine,  California  facility whose lease ends January 1999, for various periods
up to ten years at the then  existing  fair market  rental.  Management  expects
that, in the normal course of business, the leases will be renewed. Rent expense
charged to operations for the years ended  September 30, 1996, 1995 and 1994 was
approximately $2,215,000, $1,757,000, and $1,766,000, respectively.

                                        8

                                  INCOME TAXES

The provision for income taxes for 1996 and 1995 consisted of the following (due
to net operating losses, there was no income tax expense in 1994):

THOUSANDS OF DOLLARS                                       1996        1995
----------------------------------------------------------------------------
                                                                    
CURRENT                                                             
  FEDERAL                                                 $  94       $  90
  STATE                                                     208          64
  FOREIGN (BENEFIT)                                        (100)         66
----------------------------------------------------------------------------
  TOTAL CURRENT                                           $ 202       $ 220
----------------------------------------------------------------------------
                                                                
         A  reconciliation  between the statutory  federal  income tax rate as a
percentage of income from continuing operations is as follows:

                                                             1996        1995
-------------------------------------------------------------------------------

FEDERAL STATUTORY TAX RATE                                  35.0%       35.0%
STATE AND LOCAL TAXES                                        1.6%        1.2%
LOSS ON FOREIGN SUBSIDIARY                                   3.4%        1.2%
CHANGE IN VALUATION ALLOWANCE                              (35.9)%     (31.2)%
OTHER                                                       (1.8)%      (2.1)%
-------------------------------------------------------------------------------
EFFECTIVE TAX RATE                                           2.3%        4.1%
-------------------------------------------------------------------------------

         Deferred  income  taxes  reflect the net tax  effects of (i)  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the amounts  used for income tax  purposes and (ii) net
operating  loss and tax credit  carryforwards.  The tax  effects of  significant
items  comprising the Company's  income tax calculation as of September 30, 1996
and 1995 are as follows:


                                       22
<PAGE>

THOUSANDS OF DOLLARS                                        1996        1995
----------------------------------------------------------------------------

DEFERRED TAX LIABILITIES:
  DIFFERENCES BETWEEN BOOK AND
  TAX BASIS OF PROPERTY                                $   (781)   $   (835)
  FOREIGN OPERATIONS                                          0         (40)
DEFERRED TAX ASSETS:                                              
  RESERVES NOT CURRENTLY DEDUCTIBLE                       1,904       1,963
  NET OPERATING LOSS                                     10,048      12,466
  ALTERNATIVE MINIMUM TAX CREDIT                                  
    CARRYFORWARDS                                           330          87
----------------------------------------------------------------------------
                                                         11,501      13,641
VALUATION ALLOWANCE                                     (11,501)    (13,681)
----------------------------------------------------------------------------
NET DEFERRED TAX ASSET/(LIABILITY)                     $      0    $    (40)
----------------------------------------------------------------------------
                                                                  
         Deferred  income  taxes  include the tax impact of net  operating  loss
carryforwards.  As of September  30, 1996,  the Company had net  operating  loss
carryforwards   for  federal,   state,   and  foreign  income  tax  purposes  of
approximately  $24,416,000,   $19,402,000,  and  $672,000,  respectively.  These
carryforwards,  for which future benefit is not assured, expire through 2008. In
accordance  with  the  provisions  of SFAS  No.  109,  a  $11,501,000  valuation
allowance  is  deemed  adequate  for  these  and  other  items  which may not be
realized.

                                        9

                           NET INCOME (LOSS) PER SHARE

For fiscal year 1996 and 1995, primary and fully diluted earnings per share were
computed using the weighted average common and common  equivalent  shares (stock
options)  outstanding during the year and excludes the assumed conversion of the
principal amount of the outstanding  Debentures into common stock as such effect
would have been antidilutive.

         For fiscal 1994,  primary loss per share before  extraordinary item was
computed using the weighted  average common shares  outstanding  during the year
and primary net income per share was computed using the weighted  average common
and common equivalent shares  outstanding,  excluding the assumed  conversion of
the principal amount of the outstanding Debentures into common stock.

         For fiscal 1994, fully diluted loss per share before extraordinary item
was computed  using the weighted  average common shares  outstanding  during the
year  assuming  the  Debentures  were  converted  into  common  shares as of the
beginning of the fiscal year and fully diluted net income per share was computed
using the  weighted  average  common and common  equivalent  shares  outstanding
assuming conversion of the Debentures as of the beginning of the fiscal year.

                                       10

                                  ACQUISITIONS

The Company entered into an Asset Purchase  Agreement dated as of May 3, 1996 to
acquire the assets on Anetec  Technologies,  Inc.,  a company  serving the small
prototype and engineering  marketplace  located in Fremont,  California for $4.4
million,  including  $1.4 million in cash, a  promissory  note in the  principal
amount of $1.0 million,  assumption of capital lease obligation of approximately
$400,000,   and  110,000  shares  of  the  Company's   common  stock  valued  at
approximately  $1.6 million.  The total  purchase  price of  approximately  $4.4
million was allocated to assets acquired representing machinery and equipment of
approximately $2.4 million and goodwill of approximately $2.0 million.

         On April 28, 1995, the Company announced it had acquired  substantially
all the assets of Technet Electronics Limited, a manufacturer of printed circuit
boards located in Great Britain, for approximately  $3,300,000,  which consisted
of $560,000 of cash and assumption of liabilities of  approximately  $2,740,000,
including its current lines of credit.



                                       23
<PAGE>


                                       11


                                  STOCK OPTIONS


In August 1983,  the Company  adopted the 1983 Employee Stock Option Plan ("1983
Plan").  Under the terms of the 1983 Plan,  which was amended in September  1984
and January 1988,  800,000  shares of the Company's  common stock were available
for issuance under option grants to key employees, including officers, at prices
not less than the fair market  value of the stock at the date of grant.  Options
may have a term of up to ten years  from the date of grant and vest at a rate of
20 to 50 percent a year commencing one year from the date of grant.


         In May 1984,  the  Company  adopted  the  Elexsys  International,  Inc.
Non-Qualified Stock Option Plan ("1984 Plan"). Under the terms of the 1984 Plan,
200,000  shares of the Company's  common stock were available for issuance under
option grants to key employees, including officers, who are not directors of the
Company.  The terms and  conditions of the 1984 Plan are similar to those of the
1983 Plan. During the year ended September 30, 1994 both plans expired.


         Option activity for these plans is summarized as follows:


STOCK OPTION ACTIVITY


                                 1983 PLAN                 1984 PLAN
                         ------------------------  ------------------------
                            NUMBER          PRICE     NUMBER          PRICE
                         OF SHARES      PER SHARE  OF SHARES      PER SHARE
----------------------------------------------------------------------------

SEPT. 30, 1993             717,700    $1.25-$3.50    102,000          $3.50
GRANTED                     38,500          $1.25     60,000          $1.25
CANCELLED                 (367,400)   $1.25-$3.50         --
----------------------------------------------------------------------------
                                     
SEPT. 30, 1994             388,800    $1.25-$3.50    162,000    $1.25-$3.50
GRANTED                         --          $1.25         --          $1.25
EXERCISED                 (151,500)   $1.25-$3.50    (33,600)         $3.50
CANCELLED                  (93,550)   $1.25-$3.50   (118,400)   $1.25-$3.50
----------------------------------------------------------------------------
                                     
SEPT. 30, 1995             143,750    $1.25-$3.50     10,000    $1.25-$3.50
GRANTED                         --             --         --
EXERCISED                 (100,500)   $1.25-$3.50         --
CANCELLED                   (1,000)         $3.50         --
----------------------------------------------------------------------------
                                     
SEPT. 30, 1996              42,250    $1,25-$3.50      10,000   $1.25-$3.50
----------------------------------------------------------------------------
                                    

         In March  1994,  the  Company  granted to the Chief  Financial  Officer
options to purchase  10,000  shares of common  stock at an option price of $1.25
per share  under the terms of the 1984 Plan.  In  addition,  options to purchase
87,000 shares of common stock at an option price of $1.25 per share,  which were
previously  intended to be granted to certain employees under the 1983 Plan that
had expired  were instead  granted as separate  non-qualified  stock  options in
April 1994  ("1994  Nonqualified  Options").  The  options  vest at a rate of 50
percent per year commencing November 11, 1994.


         In June 1994, the Company  adopted the Company's  1994 Incentive  Stock
Option Plan ("1994 ISO Plan"), authorizing the issuance of options to purchase a
maximum  aggregate of 500,000 shares of common stock, the 1994 Plan was approved
by the stockholders' of the Company in February 1995. Options may have a term of
up to ten years from the date of grant and vest at a rate of 25 to 33.33 percent
per year.


         Option activity for these plans is summarized as follows:


                        1994 NON QUALIFIED OPTIONS        1994 ISO PLAN
                        -------------------------- -------------------------
                            NUMBER          PRICE     NUMBER          PRICE
                         OF SHARES      PER SHARE  OF SHARES      PER SHARE
----------------------------------------------------------------------------

SEPT. 30, 1993                  --
GRANTED                     87,000          $1.25    235,000          $1.00
----------------------------------------------------------------------------

SEPT. 30, 1994              87,000          $1.25    235,000          $1.00
GRANTED                         --                   357,500    $2.88-$5.19
EXERCISED                  (30,500)         $1.25
CANCELLED                  (22,500)         $1.25   (102,750)   $1.00-$2.88
----------------------------------------------------------------------------

SEPT. 30, 1995              34,000          $1.25    489,750    $1.00-$5.19
GRANTED                         --                        --
EXERCISED                  (33,000)         $1.25    (82,560)    $1.25-5.19
CANCELLED                       --                  (105,390)    $1.00-4.75
----------------------------------------------------------------------------

SEPT. 30, 1996               1,000          $1.25    301,800     $1.00-5.19
----------------------------------------------------------------------------



                                       24
<PAGE>

         In addition,  during the year ended  September  30,  1994,  the Company
granted  options  to  purchase  10,000  shares to a then  member of the Board of
Directors  at an option  price of $1.25 per share and also  granted  options  to
purchase  10,000 shares to a member of the Board of Directors at an option price
of $1.69 share. The options for 10,000 shares at $1.25 were subsequently amended
to provide that to the extent not previously vested,  these options became fully
exercisable  and were exercised  during fiscal 1995. In addition,  this person's
options granted during the year ended September 30, 1993 in the amount of 10,000
shares at the price of $3.50 per share also became  fully  exercisable.  The new
options  granted at $1.69 per share are  exercisable  as follows:  3,400  shares
during the year ending  September 30, 1994,  3,300 shares during the year ending
September 30, 1995, and 3,300 shares during the year ending September 30, 1996.

         In July 1995,  the Board of Directors  adopted the Company's 1995 Stock
Option Plan ("1995 Plan"),  authorizing the issuance of 1,000,000  shares of the
Company's Common Stock.  Options have a term of up to ten years from the date of
grant and vest at a rate of 25 percent a year  commencing one year from the date
of grant. On January 30, 1996, the company's  stockholders approved an amendment
and  restatement  of the  1995  Plan  to  reflect  current  applicable  tax  and
securities requirements and for administrative ease.

         Option activity for this plan is summarized as follows:

                                                            1995 PLAN

                                                      NUMBER           PRICE
                                                   OF SHARES       PER SHARE
-----------------------------------------------------------------------------

SEPT. 30, 1994                                           --
GRANTED                                              82,000     $8.88-$11.25
EXERCISED                                                --
CANCELLED                                                --
-----------------------------------------------------------------------------

SEPT. 30, 1995                                       82,000     $8.88-$11.25
GRANTED                                             733,100     $9.50-$12.75
EXERCISED                                                --
CANCELLED                                          (317,700)     $9.50-12.75
-----------------------------------------------------------------------------

SEPT. 30. 1996                                      497,400      $8.88-12.50
-----------------------------------------------------------------------------

         In January  1996,  the Board of Directors  adopted the  Company's  1996
Non-Employee Director's Stock Option Plan (the "Directors Plan"). The Director's
Plan provides for automatic,  non-discretionary grants of options to purchase an
aggregate of 200,000 shares of the Company's common Stock. During the year ended
September  30, 1996,  options  covering an aggregate of 30,000 shares with a per
share option price between $15.625 and $16.00 of the Company's  Common Stock had
been granted  under the  Director's  Plan.  Options may have a term of up to ten
years from the date of grant and vest at a rate of 25 percent per year.

         On January 30,  1996,  the  Company  adopted  its 1996  Employee  Stock
Purchase Plan  ("Purchase  Plan")  authorizing the issuance of 250,000 shares of
the Company's  Common  Stock.  The  Company's  employees may purchase  shares of
Common  Stock at a price per share that is 85% of the lesser of the fair  market
value as of the beginning or the end of the semi-annual option period.

         At September  30, 1996,  1,855,300  shares of common stock are reserved
for the employee stock  purchase plan and the exercise of stock options  granted
or available for future grant.  57,250 of these shares are exercisable under the
1983 or 1984 Plan or 1994 Non Qualified Options.



                                       25
<PAGE>

                                       12

                              ENVIRONMENTAL MATTERS

The  Company's   manufacturing   processes  utilize  substantial  quantities  of
chemicals as well as substantial  quantities of water. The Company is subject to
and  believes it is in  substantial  compliance  with  federal,  state and local
environmental  laws and  regulations  regarding  air,  water,  and land use, the
generation, use, storage and disposal of hazardous materials and wastes, and the
operation and closure of manufacturing  facilities at which hazardous  materials
are  used  or  hazardous  wastes  are  generated.  The  Company  has  had no new
environmental matters in the current fiscal year.

         With respect to previously  reported  matters,  the Company is aware of
contamination  of soil and ground water  (principally by metals and solvents) at
two of its former facilities in Northern California. At both of these facilities
the soil has been  remediated  and the  properties  have been  returned to their
owners.  One of the  facilities  is adjacent to an existing  State of California
administered  Superfund  site;  as a result,  it could  become part of a related
State of California administered regional ground water investigation,  although,
the Company does not believe that it bears any  responsibility  for that matter.
At another former facility in Southern California, the Company conducted limited
groundwater sampling in connection with potential sale of the property,  and low
concentrations  of  solvents  were  detected.   Notification  was  made  to  the
appropriate  agencies. At this time, it is not possible to determine whether any
response actions will be needed to be taken; and accordingly,  the likely future
cost to the Company is not yet reasonably estimable.

         The  Company is further  aware of soil and ground  water  contamination
(principally  by metals and solvents) at two currently used  facilities,  one in
Northern California and one in Southern  California,  At its Northern California
facility,  the  Company  is  indemnified  by the former  property  owner who has
acknowledged his obligation.  At its Southern California facility, the Company's
preliminary  estimate of remedial  costs,  expected to be incurred  over five to
seven years, ranges from approximately $880,000 to $1,480,000 (including between
approximately $300,000  and $400,000 estimated  capital  expenditures  for waste
treatment  equipment  acquisitions  and  installation  costs).  At its  Northern
California facility, the Company has implemented and has been in compliance with
recently   reduced   discharge  limits  for  industrial  waste  water  discharge
containing heavy metals.

         As of September  30, 1996,  the Company  believes it has  appropriately
recorded all known costs related to environmental matters, including the minimum
amounts where the estimated costs are within a range, and are primarily  accrued
in other  current  liabilities.  However,  actual future  environmental  related
expenditures are subject to numerous  uncertainties,  including the discovery of
additional  environmental concerns,  further development of cost estimates,  new
and changing  environmental  law and  requirements,  or new  interpretations  of
existing  laws and  requirements.  Accordingly,  there can be no assurance  that
future environmental  related expenditures will not exceed the Company's current
estimates or that they will not have a materially adverse effect on the Company.

                                       13

                               EXTRAORDINARY ITEM

On June 30, 1994 and July 11, 1994, the Company exchanged for $16,000,000 of the
Debentures an aggregate of 3,200,000  newly issued  shares of common stock,  par
value $1.00 per share, with Mr. Milan Mandaric.  The net gain of $10,167,000 was
recorded as an  extraordinary  item.  The net gain  included a reduction of debt
issuance  costs  related to the  Debentures  and  additional  professional  fees
associated with the transaction.  The transaction included a payment of $293,333
for accrued  interest on Debentures  exchanged and  reimbursement of $50,000 for
Mr. Mandaric's professional expenses.

         On  March  31,  1995,  the  Company  exchanged  for  $4,000,000  of its
Debentures  an aggregate of 400,000  newly issued  shares of common  stock,  par
value $1.00 per share,  with Mr. Milan Mandaric.  The net gain of $1,833,000 was
recorded as an  extraordinary  item.  The net gain  included 


                                       26
<PAGE>

a reduction of debt issuance  costs  related to the  Debentures  and  additional
professional  fees associated with the transaction.  The transaction  included a
payment of $18,333 for accrued interest on the Debentures exchanged.

                                       14

                                   OTHER ITEMS

CUSTOMER CONCENTRATION
For  the  year  ended  September  30,  1996,   three  customers   accounted  for
approximately  17 percent,  10 percent and 10 percent of net sales. For the year
ended  September  30, 1995,  three  customers  accounted  for  approximately  24
percent,  12 percent,  and 10 percent of net sales. For the year ended September
30, 1994, one customer accounted for 22 percent of net sales.

EXPORT SALES
For the years ended  September 30, 1996,  1995 and 1994,  export sales accounted
for approximately $17,617,000,  $13,100,000,  and $8,500,000 or approximately 14
percent, 13 percent, and 9 percent of net sales, respectively.

BONUS AND RETIREMENT PLAN
The Company has a  discretionary  profit  sharing bonus plan which  provides for
payment of bonuses to all eligible  employees  based on a formula fixed annually
by the Board of Directors.  The bonus  formula is applied  separately to each of
the Company's  profit  centers.  Bonus expense  relating to the plan amounted to
$219,000  and  $391,000  for the  years  ended  September  30,  1996  and  1995,
respectively. No bonuses were paid for the year ended September 30, 1994.

         In February  1995,  the Company  established  a savings plan  qualified
under Section 401(k) of the Internal Revenue Code.  Employees who have completed
90 days of service are eligible to participate in the Plan. The Company can make
discretionary  contributions  based  on  employee  pre-tax  contributions.   All
contributions to each employee's account vest immediately. No contributions were
made to the Plan by the Company  during the years ended  September  30, 1996 and
1995.

SUBSEQUENT EVENT
On November 26, 1996,  the Company  purchased  property  which it had previously
leased at 21 Simon Street, Nashua, New Hampshire for approximately $2.3 million.
The Company has received  tentative  approval for a tax exempt private  activity
bond financing,  at a  substantially  lower interest rate, from the State of New
Hampshire to finance this transaction.

                                       15

                      QUARTERLY FINANCIAL DATA (UNAUDITED)

THOUSANDS OF DOLLARS          FIRST     SECOND       THIRD     FOURTH
EXCEPT PER SHARE DATA       QUARTER    QUARTER     QUARTER    QUARTER       YEAR
--------------------------------------------------------------------------------

1996
Net sales                  $ 28,910   $ 30,388    $ 30,841   $ 36,766   $126,906
Gross profit                  5,378      5,706       5,529      6,597     23,210
Net income                    2,010      2,229       1,964      2,267      8,470
Net income per
   primary share           $    .21   $    .23    $    .20   $    .24   $    .89

1995
Net sales                  $ 22,753   $ 23,407    $ 27,298   $ 30,512   $103,970
Gross profit                  2,870      1,866       4,288      6,809     15,833
Income (loss) before
   extraordinary item           250       (870)        901      3,018      3,299
Net income                      250        963         901      3,018      5,132
Net income (loss)
   before extraordinary
   item per share          $    .03   $   (.10)   $    .10   $    .32   $    .37
Net income per
   primary share           $    .03   $    .11    $    .10   $    .32   $    .57


                                       27
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

Elexsys International, Inc:

We have audited the consolidated balance sheets of Elexsys  International,  Inc.
(formerly  Diceon  Electronics,  Inc.) and its  subsidiaries as of September 30,
1996  and  1995,  and  the  related   consolidated   statements  of  operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period  ended   September  30,  1996.   These   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

         In our opinion, such consolidated  financial statements present fairly,
in all material respects, the financial position of Elexsys International,  Inc.
and its  subsidiaries  at September 30, 1996 and 1995,  and the results of their
operations  and their cash flows for each of the three years in the period ended
September 30, 1996 in conformity with generally accepted accounting principles.


/s/ Deloitte & Touche LLP

Costa Mesa, California
October 18, 1996
(November 26, 1996 as to the fifth paragraph of note 14)


                          PRICE RANGE OF COMMON STOCK

The Company's common stock was traded in the Nasdaq National Market System under
the Nasdaq symbol DICN from the Company's initial public offering on December 1,
1983  until  December  2,  1993.  At that time the  Company's  common  stock was
delisted  from  Nasdaq's  requirements  for capital and surplus and net tangible
assets.  The Company's  stock was traded on Nasdaq's  Bulletin Board Market from
December 3, 1993 to March 17, 1995.  Between March 20, 1995,and January 24, 1996
the Company's common stock has been traded on Nasdaq's SmallCap Market under the
symbol ELEX.  Effective January 25, 1996, the NASDAQ Stock Market, Inc. approved
the company's common stock for listing on the NASDAQ National Market.  The table
below sets forth the reported closing prices for the quarter  indicated.  Prices
represent  quotations  between dealers  without  adjustments for retail markups,
markdowns or commissions.

         The  Company  had  approximately  549  stockholders  of  record  as  of
September 30, 1996. The Company has not paid cash dividends on its common stock,
and its Board of Directors presently intends to continue this policy in order to
retain earnings for the development of the Company's business.  Accordingly,  it
is anticipated  that no cash dividends will be paid in the  foreseeable  future.
Additionally,  the  Company's  credit  agreements  with its  asset-based  lender
prohibits the payment of cash dividends without such person's consent.

QUARTER ENDED    DEC. 31           MAR. 31          JUNE 30             SEPT. 30
--------------------------------------------------------------------------------
FISCAL 1996
HIGH              18 1/2            16 3/4           15 3/4            11 22/32
LOW                   14            11 5/8            8 1/2                   9

FISCAL 1995
HIGH               4 1/4             5 5/8            7 1/8             15 1/14
LOW               1 5/16             3 5/8          3 11/16               6 7/8


                                       28
<PAGE>

                             CORPORATE INFORMATION

BOARD OF DIRECTORS

Milan Mandaric
Chairman of the Board
Elexsys, International, Inc.

Peter S. Jonas
Private Investor and Business Consultant

Roland G. Matthews
Private Investor

Alan Mendelson
Cooley, Godward, Castro, Huddleson and Tatum

Bradford Jeffries
Cooley, Godward, Castro, Huddleson and Tatum

Roger W. Johnson
Private Investor and Business Consultant

OFFICERS

Milan Mandaric
Chairman of the Board
and Chief Executive Officer

W. F. "Barry" Hegarty
President and Chief Operating Officer

Michael S. Shimada
Vice President Finance, Chief Financial Officer 
and Corporate Secretary

Michael J. Giggey
Vice President, Sale & Marketing


CORPORATE OFFICE
Elexsys International, Inc.
4405 Fortran Court
San Jose, California 95134
(408) 935-6300
fax (408) 942-0249

TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation
Glendale, California  91207

INDEPENDENT AUDITORS
Deloitte & Touche LLP
695 Town Center Drive
Costa Mesa, California  92626

LEGAL COUNSEL
Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306-2155

FORM 10-K
A copy of Elexsys  International,  Inc.'s 10-K as filed with the  Securities and
Exchange  Commission  for the fiscal year ended  September 30, 1996 is available
without charge upon written request to:
Investor Relations
Elexsys International, Inc.
4405 Fortran Court
San Jose, California 95134

COMMON STOCK
The Common Stock of Elexsys International, Inc.
(symbol: ELEX) trades on the Nasdaq Market

CONVERTIBLE DEBENTURES
The Convertible Debentures of Elexsys International, Inc.
(symbol: DICNG) trades over-the-counter on Nasdaq's Bulletin Board Market.


<PAGE>

                        Corporate Logo [GRAPHIC OMITTED]

                                     ELEXSYS
                               INTERNATIONAL INC.