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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                    FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

            FOR THE TRANSITION PERIOD FROM ____________ TO ____________.

                        COMMISSION FILE NUMBER 000-26227

                                 LITRONIC INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                              <C>
                    DELAWARE                                        33-0757190
(STATE OR OTHER JURISDICTION OF INCORPORATION OR       (I.R.S. EMPLOYER IDENTIFICATION NO.)
                  ORGANIZATION)

   17861 CARTWRIGHT ROAD, IRVINE, CALIFORNIA                          92614
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)
</TABLE>

      (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (949) 851-1085

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                  COMMON STOCK
                                (TITLE OF CLASS)

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

     Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ ]

     The aggregate market value of the registrant's voting stock held by
nonaffiliates was approximately $68,718,197 on March 15, 2000, based upon the
closing sale price of such stock on March 15, 2000.

     Number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date:

     As of March 15, 2000:

        Common Stock: 9,741,986 Shares

     DOCUMENTS INCORPORATED BY REFERENCE.  List hereunder the following
documents if incorporated by reference, and the part of the Form 10-K (e.g.,
Part I, Part II, etc.) into which the document is incorporated: (1) any annual
report to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933:
Portions of the registrant's proxy statement related to the 2000 Annual Meeting
of stockholders is incorporated by reference into Part III of this Form 10-K.

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                                     PART I

ITEM 1. BUSINESS

INTRODUCTION

     For purposes of this Annual Report on Form 10-K, references to "we," "us,"
"our," "Litronic" and the "Company" shall mean or refer to Litronic Inc. In
addition, unless the text indicates otherwise, the term "Litronic" refers to
Litronic Inc. and its subsidiaries.

     This Annual Report on Form 10-K contains certain statements which are not
historical in nature, and are intended to be, and are hereby identified as,
"forward-looking statements" for purposes of the safe harbor provided by Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements are principally contained in the sections entitled "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and include, without limitation, statements relating to (i)
anticipated trends in our financial condition and results of operations
(including expected changes in our gross margin and general, administrative and
selling expenses); (ii) our ability to finance our working capital requirements;
(iii) our business strategy for expanding our presence in the Internet data
security market; and (iv) our ability to distinguish ourselves from our current
and future competitors. These forward-looking statements are based largely on
our current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from these forward-looking statements.
Important factors to consider in evaluating such forward-looking statements
include (i) the shortage of reliable market data regarding the Internet data
security market; (ii) changes in external competitive market factors or in our
internal budgeting process which might impact trends in our results of
operations; (iii) unanticipated working capital or other cash requirements; (iv)
changes in our business strategy or an inability to execute our strategy due to
unanticipated changes in the proposal management and contract support services
markets; and (v) various other factors that may prevent us from competing
successfully in the marketplace. In light of these risks and uncertainties, many
of which are described elsewhere in this document, there can be no assurance
that the actual results will not differ materially from such forward-looking
statements contained herein.

     When used in this report, the words "anticipate," "believe," "intends,"
"estimate," and "expect" and similar expressions as they relate to us or our
management are intended to identify such forward-looking statements. We caution
readers that forward-looking statements, including without limitation, those
relating to our future business prospects, revenues, working capital, liquidity,
and income, are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward-looking
statements, due to several important facts herein identified, among others, and
other risks and factors identified from time to time in our reports with the
Securities and Exchange Commission.

OVERVIEW

     Litronic Inc. provides professional Internet data security services and
develops and markets software and microprocessor-based products which serve to
secure electronic commerce and communications over the Internet and other
communications networks based on Internet protocols. Our primary technology
offerings utilize a computer security technology known as public key
infrastructure, or PKI, which is the standard technology for securing
Internet-based commerce and communications. PKI helps ensure the integrity and
privacy of information being transmitted and verifies the identity, authenticity
and authority of the sender and the recipient of that information. In June 1999,
we acquired Pulsar Data Systems, Inc., or Pulsar, a network solutions company
that specializes in deploying large-scale network solutions to organizations
primarily in the government sector.

INDUSTRY BACKGROUND

  Internet Data Security Market

     Consumers, government agencies and corporations are increasingly relying
upon the Internet and Internet protocol-based networks to conduct electronic
commerce and communications. The increasing proliferation

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of, and reliance upon, shared electronic data has caused data security to become
a paramount concern of businesses, government, educational institutions and
consumers. Our data security products provide a solution for entities and
consumers seeking to provide protection for their proprietary data.

  Increased Need for Internet Data Security

     In addition to protecting against unauthorized access to proprietary
information, data security affects an enterprise's ability to conduct electronic
commerce. An increasing number of companies are enjoying dramatic growth in
their online customer base and revenue as consumers execute an increasing number
of transactions over the Internet. The Internet's ease of use, 24-hour
availability, speed of delivery, global reach and ability to simplify product
and vendor comparisons are fueling this growth. However, consumer concerns about
the trustworthiness and security of the Internet have been one of the main
impediments to even faster growth of electronic commerce and other
communications. Hacking tools, such as password guessing and address spoofing
programs, are freely available on the Internet and bulletin board systems.
Merchants and consumers need assurances that consumers making electronic
purchases are correctly identified and confirmed and that the confidentiality of
information such as credit card and bank account numbers are maintained.

     We believe that continued expansion of electronic commerce will require the
implementation of improved PKI security measures which will irrefutably verify
the identity of a party over the Internet and ensure that the information being
transmitted between that party and the other party is kept private. We also
believe the security required to fuel this continued expansion of electronic
commerce and communication will be provided through the continued advancement in
PKI mathematical formulas referred to as algorithms. Algorithms enable digital
document signing and encryption of proprietary data.

  Requirements for End-to-End Data Security

     Today's client operating systems and Internet protocol-based networks often
lack basic security and key Internet security features such as data privacy and
integrity, identification, authentication, non-repudiation, and auditing.

     End-to-end data security concerns can be addressed by a variety of means.
Traditionally, enterprises relied heavily on passwords to restrict access to
proprietary information and materials. However, because of the risk of loss or
theft, more advanced protective measures have been developed to include
combinations of passwords and tokens with message encryption and personal
identification devices. Regardless of the form of the data security device, the
level of security provided is evaluated based on a set of fundamental
principles, which include the following:

     - Identification and Authentication. Verifies the identity of the
       authorized users to prevent unauthorized access to proprietary
       information and resources.

     - Confidentiality. Involves the encryption of data transmissions so that
       only the intended recipient can access the information to ensure privacy.

     - Data Integrity. Ensures that data is not compromised or manipulated.

     - Non-repudiation. Prevents the sender of data transmissions from
       disclaiming or repudiating authorship so that the sender cannot deny the
       occurrence of the transaction.

     - Audit Control. Retraces information access and facilities use over a
       particular time period at a systems administration level so an enterprise
       can monitor and record authorized and unauthorized user activity.

     - Secured System Administration. Maintains and controls corporate intranets
       centrally through file encryption, password maintenance, audit control,
       certificate and cryptographic key management and device accessibility
       control.

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     The process of implementing Internet and Internet protocol-based network
solutions requires specialized skills lacking in most corporate information
technology departments. We provide the technology, products and services
necessary for most companies to implement or manage their data security
infrastructure.

  Cryptographic Technologies

     Cryptography is the process of encoding and decoding electronic messages
using mathematical algorithms, or ciphers, to enable the confidential
transmission of electronic messages to authorized persons. Digital cryptography
is performed using a combination of symmetric ciphers and asymmetric ciphers to
achieve each of the basic data security elements of identification and
authentication, confidentiality, integrity and non-repudiation. Symmetric
ciphers are commonly referred to as symmetric-key or secret-key cryptography and
asymmetric ciphers are commonly referred to as asymmetric-key or public-key
cryptography.

     Both symmetric-key and asymmetric-key cryptography use an encrypting and a
decrypting key. The decrypting key is a user's unique number that is input to
the mathematical algorithm, or the cipher, used to encrypt or decrypt the
message. In symmetric-key cryptography, the encrypting key and the decrypting
key, which is secret, are identical. Thus, to transmit a message, a secure key
exchange must be performed so that the key can be shared with the recipient of
the message. In asymmetric-key cryptography, the encrypting key, a public key,
and the decrypting key, a secret key, are different and thus the public key can
be distributed to authorized recipients without risk of security breach. Because
asymmetric cryptography allows for wide distribution of the encrypting key, it
permits secure communication among a large group of people without requiring
manual distribution of the key. Additionally, asymmetric-key cryptography relies
on the generation of digital certificates that can be used to provide the user
authentication, data integrity and non-repudiation elements of the information
security system. However, public-key cryptography requires the use of extremely
complicated ciphers, so that encryption of large messages is relatively slow
when compared to encryption using secret-key cryptography. Thus, asymmetric-key
cryptography is commonly used to protect symmetric keys and symmetric-key
cryptography is commonly used for bulk encryption.

  Identification and Authentication

     Authentication of a user's identity is generally accomplished by passwords.
Because passwords are vulnerable to decoding or observation and subsequent use
by unauthorized persons, they are less secure than if used with tokens. Tokens
are small devices ranging from simple credit card-like objects, rings, proximity
cards and plastic keys to more advanced secure tokens, including smartcards, PKI
cards and PCMCIA cards. For greater protection, two-factor identification and
authentication is implemented by combining tokens with a password or personal
identification number to verify authentication of the user. For added security,
three factor authentication which consists of token, password and biometric
comparisons, can be implemented.

     PKI cards are credit card-sized semiconductor plastic cards that contain an
embedded microprocessor, memory, a secure operating system and the user's secret
key, password and digital certificates. PKI cards have significant advantages
because of their ability to perform basic cryptographic functions on the card
itself rather than on the computer, thus reducing the risk that a breach of
security on the computer will lead to the unauthorized release of proprietary
information. Through the use of PKI cards, e-mail messages, purchase orders,
credit card numbers, videoclips, data inquiries and other confidential
transmissions are secured as they are sent and therefore can be opened only by
the intended recipient.

     PCMCIA cards are parallel computer peripherals similar in size to a credit
card, though thicker, which contain multiple microprocessor chips. PCMCIA cards
have greater storage capacity, higher data exchange rate and greater processing
power than conventional smartcards and therefore are capable of performing
advanced cryptographic functions that cannot be performed on a conventional
smartcard. These advanced functions allow for use of more powerful algorithms
and thus provide for a greater overall level of security through the use of
PCMCIA cards.

     We are currently leading a joint effort with Atmel Corporation under a
contract with the National Security Agency to develop Forte, an ultra fast
32-bit microprocessor. We are embedding the Forte chip into our new Forte smart
card, which we expect will be the world's fastest and most cryptographically
advanced
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PKI card. We expect that Forte will provide PCMCIA level performance at a price
competitive with advanced smartcards. Further, Forte is being designed to be
International Standards Organization compliant and therefore able to be used in
conventional reader/writers.

  PKI Digital Certificates

     The basic element of PKI, a cutting-edge development in the information
security field, is the digital certificate. Digital certificate technology
provides a highly advanced form of authentication and secure key exchange. PKI
digital certificates are specially prepared software files through which the
sender can digitally sign a message with a unique identification code. The
recipient of the message can authenticate the identity of the sender and verify
the integrity of the data through the use of a trusted third party known as a
certificate authority by obtaining the sender's public key from the certificate
digitally signed by the certificate authority. Furthermore, the uniqueness of
the certificates provides for non-repudiation, which prevents the sender from
denying that it sent the message. Such an ability for non-repudiation is not
available with less sophisticated techniques. With the development of
secure-token technology, digital certificates can now be incorporated into
smartcards, PKI cards and PCMCIA cards to provide an information security system
that provides two-factor identification and authentication or three-factor
identification and authentication with the incorporation of biometric
technology.

     Biometric technology utilizes fingerprints or other unique characteristics
of an individual to serve as a digital identification. The use of digital
certificates is expanding rapidly across the Internet. In fact, several states
now consider digital signatures contractually binding and there is a growing
acceptance within the federal government to effectuate transactions through the
use of digital certificates.

  Systems Integration and Networking Solutions Industry

     In recent years, there has been an increasing demand for open system
approaches designed to create interoperability among commercial off-the-shelf
computer software and hardware products manufactured by different suppliers. In
addition, excessive development costs and the rapid pace of technological change
have led both governmental and commercial customers to demand more flexible
systems created by adapting readily-available commercial off-the-shelf software
and hardware.

     The emergence of the rapidly developing Internet protocol-based network
technologies in the 1990s has further fueled the demand for network computer
systems. Although information technologies, secure data transmissions, and data
encryption have long been in use in the military intelligence arena, recent
technological advancements in computer hardware and software have now made these
applications economically viable for use by private companies. This has given
rise to the need for specialized expertise in the areas of local and wide area
network design and installation, network management and operation and network
security, using new and complex information technology hardware and software
products. Typically, the design and implementation of these systems in both
commercial enterprises and government agencies also involves the resale of the
hardware and software required for the system to the customer.

PRODUCTS AND SERVICES

  Internet Data Security Products

     Our Internet data security products provide the highest level of
commercially-available security for secure e-mail, secure file transport, file
protection, remote access, authentication and authorization in an open
multi-platform standards-based framework. The foundation of our Internet data
security products is our extensive cryptographic library and device drivers
supporting numerous different operating system platforms and token management
systems which enable users to seamlessly integrate token-based security
enhancements into existing networking environments or into newly designed and
implemented networks. Our products can also be used by software developers to
add token-based information security to applications such as browsers,
firewalls, e-mail systems, database management systems and other client/server
applications. Our data security products are designed with an open architecture,
so they can operate independently of:

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     - algorithms -- our security products are designed to use different suites
       of algorithms depending upon the application requirements, for example,
       military or banking and finance.

     - platforms -- our security products may be used with many different
       computer types and operating systems, for example, Windows, and UNIX.

     - applications -- our security products may be used with various software
       applications, for example, e-mail, e-commerce, database systems or word
       processors.

     - tokens -- our security products function with various types of tokens,
       for example, software tokens, smartcards and PC cards.

     As a result of this open architecture, these products are compatible with
virtually all commonly used network hardware. Algorithm independence allows our
products to be tailored to numerous encryption algorithms through software
selection. As a result, our libraries, drivers and security devices are
compatible with a variety of encryption algorithms, and popular software
applications and operating systems. We develop and embed these cryptographic
technologies in a multitude of devices and tokens, including smartcards, PKI
cards, PCMCIA cards, embedded industry standard architecture, or ISA, and
peripheral component interconnect, or PCI, bus cards. We are also working with
other companies to implement use of PCMCIA cards, PKI cards and smartcards to
support biometric technologies such as fingerprint and voice recognition. These
products provide the added protection of a security token utilizing public-key
cryptography, key exchange techniques and electronic signatures on most popular
operating systems and hardware platforms. In addition, our technologies permit
functions to be scaled as performance and pricing requirements dictate.

  Internet Application Software

     NetSign and NetSign PRO. These products are software adapters that
integrate smartcards and digital certificate technology to enhance security in
software systems designed to provide electronic commerce, e-mail, Internet
access, file access and world-wide-web browsers such as Netscape Communicator
and Microsoft Explorer. NetSign and NetSign PRO software products are bundled
with a smartcard reader/writer and smartcards. NetSign PRO has the added
security feature of file encryption capabilities and other security utilities.

     ProFile Manager. ProFile Manager is a complete, stand-alone, PKI lifecycle
management solution. ProFile Manager provides for token-based security systems
management from initialization to secure archive and recovery. For the recovery
of token-based information, ProFile Manager provides an optional integration
with a secured database of private keys and other user identification
information and the use of third-party certificate authorities. ProFile Manager
integrates with NetSign, NetSign PRO and other token-enabled products to provide
a complete solution for an enterprise's security needs, including secure
Internet access, digitally signed and encrypted e-mail, desk-top file encryption
and secure remote network access.

  Internet Cryptographic API Developer Toolkits

     CryptOS SDK and CryptOS SDK+. CryptOS SDK products are cryptographic APIs
that allow application developers to use off-the-shelf or custom application
software to integrate smartcard technology into existing systems, thus adding
hardware-strength security to software-only systems. CryptOS SDK is bundled with
a smartcard reader/writer and smartcards. CryptOS SDK+ has additional tools for
Java programming.

     Maestro. Maestro is a multi-protocol cryptographic library that enables
software developers to incorporate secure token-based, symmetric-key and
asymmetric-key cryptography into their application software. Maestro is a
multi/concurrent access, cross-platform system that supports multiple types of
tokens such as smartcards, PCMCIA cards and cryptographic algorithms. Coupled
with token reader/writers, Maestro supports devices over commonly used
interfaces, including keyboard, serial, small computer system interface, or
SCSI, parallel port and universal serial bus. Maestro currently supports two
commonly used cryptographic interface protocols. We are developing additional
protocol adapters to expand the functionality of Maestro. Maestro is compatible
with Windows 95, 98 and NT operating systems as well as all popular UNIX
platforms
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  Security Tokens

     ISO Smartcards. We offer a family of off-the-shelf International Standards
Organization, or ISO, standard smartcards ranging from storage-only cards to
cards containing cryptographic capabilities.

     Moniker, PC-Cryptocard. We also offer Moniker, a Fortezza standard PCMCIA
card. The Fortezza standard PCMCIA cards are commonly used by the Department of
Defense, as well as by other governmental and commercial entities.

     Forte smart card. We are in the process of developing a next generation PKI
card, the Forte smart card, in cooperation with Atmel Corporation. Forte is an
ultra fast 32-bit microprocessor which is being designed with a high speed
universal serial bus interface in addition to the ISO interface. Forte is also
to be designed with a larger storage capacity and processing speed than existing
smartcards. The Forte smart card is expected to be manufactured in the U.S. and
we anticipate shipments to begin in mid-2000.

     Other Tokens. Because our products are open-architecture, open-platform,
open-token, algorithm and API-independent, we offer third-party tokens, such as
PCMCIA cards, smartcards, rings, proximity cards and plastic keys and other
commercially available tokens, for use with our reader/writers and application
software.

  Token Reader/Writers

     A token reader/writer is a hardware component that electronically reads the
content of a smartcard, PCMCIA card, or PKI card. We manufacture several
different types of reader/writers. Following is a brief description of their
features.

     Serial and Keyboard Port Smartcard and PKI Card Reader/Writers. We sell our
reader/writers as a security product component or bundled with other products
such as ProFile Manager, NetSign and/or CryptOS SDK to provide token-based data
security solutions.

     We manufacture and sell compact, hand-held smartcard reader/writers that
interface through the RS-232 serial port of a PC or workstation. The Series 210
and 220 reader/writers are compatible with Windows 95/98/2000/NT and UNIX
operating systems. The Series 220 reader/writer can optionally be connected
through the keyboard port which provides the added security of a protected
personal identification number, or PIN, path. With a protected PIN path, the
password authentication is intercepted by the reader/writer thus preventing a
hacker from implanting an unauthorized program in the PC to intercept the
password. We offer a Series 230 reader/writer which is integrated into a
keyboard, and also offer a Series 410 reader/writer which connects to a computer
through its PCMCIA slot.

     ARGUS 300. The ARGUS 300 consists of a tamper-resistant ISA or PCI board
and external reader/writer and is connected to the keyboard. The ARGUS 300
incorporates DES encryption technologies and offers additional security features
such as boot protection, electronic commerce security and protected PIN path
directly through the board rather than through an external device that might be
tampered with by an unauthorized user. The ARGUS 300 is validated for electronic
signature by the National Institute of Standards and Technology, or NIST, the
U.S. Treasury Department and General Accounting Office.

     PCMCIA Client Reader/Writer. We offer a series of single and dual-socket
PCMCIA card reader/writers for both internal and external application, that
interface via various ports such as SCSI, ISA bus, PCI bus, universal serial bus
and parallel port. These reader/writers incorporate our proprietary device
drivers which provide the interface between the reader/writer and its
application software such as Maestro and third-party application software.

     CipherServer. We offer a reader/writer that contains sockets for up to
eight PCMCIA cards, is used on the enterprise's server side and incorporates the
device drivers and other technologies of our other PCMCIA readers. CipherServer
interfaces with the host server to enable the host server to provide
rapid/simultaneous processing of cryptographic functions received from numerous
clients.

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  Other Custom-Designed Security Products

     Managed Firewall and Virtual Private Networks Solutions. Through our Pulsar
operations, we offer secure architecture based firewall and virtual private
networks gateway technology using intrusion detection software for high data
capacity and scalable security solutions. These software and hardware systems
provide for multi-user remote administration, and integrated management of
multiple security policies and firewalls.

     Network Security and Management Tools. Our network security and management
tools are a scalable, comprehensive collection of network security and
management solutions assembled into an integrated security suite of hardware and
software. The tools include a multi- tiered approach to virus protection
covering the client, server and Internet gateway through a combination of
encryption, firewall and virtual private networks technologies. These tools
protect networking systems against attacks, and compromise and loss, while
maintaining the integrity of business functions and data. These products ensure
full network performance with a proactive approach by fixing problems, planning
growth and optimizing functionality and reliability.

     Professional Data Security Services. Through our Pulsar operations, we
offer networking solutions with a particular emphasis on designing, developing,
implementing, supporting and maintaining networks that provide for a high level
of data security. Pulsar develops and implements complete turn-key networks or
enhances or expands existing networks, as the customer requires. These services
include:

     - strategic consulting, including site risk and requirements analysis and
       design;

     - custom design and development;

     - project management;

     - construction, installation and implementation;

     - on-site or remote system support, maintenance and repair; and

     - on-site system management.

     Our Pulsar operations approach the design and development of solutions for
customers by evaluating their existing infrastructure, architecture and
technologies to optimize the performance of their existing system and augment
their systems as necessary to meet their changing requirements. Project
responsibilities typically require the integration of access control, intrusion
detection and biometric validation.

     Because of Pulsar's services in designing and implementing security
systems, our services will address the networking and data security needs of our
customers, including: Internet access and security; secured intranet/extranet
capabilities; enterprise security procedures and administration; secured
critical private network and remote dial-in network capabilities; secured
distributive applications; open-systems migration of data; information security
communication services; and artificial intelligence technologies.

     Pulsar provides network solutions through the implementation of the latest
technologies, including high speed baseband and broadband media, fiber optics,
hard wired connect systems, and wireless and satellite transmission systems.
Pulsar also provides information technology outsourcing services for customers,
including ongoing management of network systems. Pulsar delivers professional
services on either fixed-price delivery or time-based delivery modes through its
data security group, which provides consulting and integration services, and its
enterprise information group, which provides network design, implementation and
management, legacy systems migration, and systems configuration and evaluation.

     Our Pulsar staff provides Internet enterprise network consulting services;
network management services and remote computing.

  Product Reselling

     Pulsar focuses on the reseller market, primarily in the government
information technology segment, to sales of specialized computer and network
security products and customized configurations of these products. Examples of
these specialized computer and network security products include:

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     - Intrusion Detection Software -- used to detect unauthorized access, and
       identify the source of the access, within a network. These products
       include Net Ranger and PIX.

     - Firewalls -- custom designed software and hardware configurations
       installed into a network to prevent unauthorized access from outside the
       network. Pulsar offers high-end firewall solutions from leading vendors,
       including Lucent Technologies, Inc., Network Associates, Inc., Cyberguard
       Corporation, Cisco Systems, Inc., and Bay Networks, Inc.

     - Network Hardware Components -- servers, routers, hubs and switches
       configured to the customer's networking requirements. Pulsar offers
       components manufactured by leading vendors, including Cisco Systems,
       Inc., Bay Networks, Inc., Hewlett-Packard Company, Bell Computers,
       International Business Machines Corp., Lucent Technologies, Inc. and Sun
       MicroSystems, Inc.

     - Anti-virus Software -- high-end software programs installed at server
       level to prevent viruses from entering the network, and client-level
       software programs to prevent virus corruption to client-server
       applications.

     - Virtual Private Networks -- a secure point-to-point connection over the
       Internet through which encrypted messages can be transmitted to protect
       communications between remote locations.

     - Data Security Products -- access control products, including third-party
       APIs, device drivers, token reader/writers and tokens, and those of
       Litronic.

     - Physical Security Products -- the sale and installation of premises
       security products such as cameras, proximity cards and monitored gates.

     We will, where appropriate, also include our own data security products
within our product configuration solutions.

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CUSTOMERS

     Our customers represent a wide range of commercial enterprises, including
financial, telecommunications, healthcare and information service companies,
airlines, automobile manufacturers, as well as federal, state, local and foreign
government agencies.

     Our customer base includes:

        Federal National Mortgage Association
        Walt Disney Company
        S.W.I.F.T.
        Nippon Telephone and Telecommunications Data Corporation
        VeriSign
        Executive Offices of the President of the United States
        U.S. Army Corps of Engineers
        Lockheed Martin Corporation
        Bank of America, N.A.
        Booz Allen & Hamilton Inc.
        National Security Agency
        Federal Bureau of Investigation
        Deloitte & Touche LLP
        Lucent Technologies, Inc.
        Los Angeles Film Office.

CUSTOMER SERVICE AND SUPPORT

     We believe that customer service and support is critical to retaining
existing customers and attracting prospective customers. Our customer service
and support staff consists of 15 persons, including engineers and technical
support personnel, and works closely with customers and prospective customers to
provide comprehensive service and support for our products and systems.

     We provide enhanced customer support by maintaining a toll-free customer
service line and a two-tier support system. The first tier consists of help desk
support personnel responding to phone and mail requests for service and
accessing customer information and a problem database for solutions. For more
sophisticated problems, second tier support is provided by systems technical
support staff.

SALES AND MARKETING

     We market our products and services through the Internet, our direct sales
forces, third-party distribution channels, including systems-integrators,
value-added resellers and original equipment manufacturers, strategic alliances
and international distributors. We intend to devote significant resources to
marketing and business development activities to expand our business to
additional distribution channels.

  Direct Marketing Effort

     As of March 15, 2000, we employed a direct sales and marketing force of 37
individuals located in offices, with 8 located in our California office, 22 in
our Washington, D.C. office, and 7 in our Atlanta, Georgia office, to market our
products and services to industry and vertical market segments, including
e-commerce, financial, telecommunications, healthcare and information services
companies and federal, state, local and foreign government agencies. Our sales
force is responsible for soliciting prospective customers and providing
technical advice and support with respect to our products and services.
Additionally, we use telemarketing efforts to target commercial accounts and
federal government agencies. We seek to achieve greater vertical market
penetration by using direct sales personnel with significant market expertise,
as well as consultants with established relationships in the commercial
marketplace.

                                       10
<PAGE>   11

  Indirect Marketing Effort

     An important component of our sales strategy is the development of indirect
sales channels such as systems integrators, value-added network service
providers and original equipment manufacturers. Currently, we use these indirect
sales channels to augment the efforts of our direct sales forces.

     We also use the services of third-party consultants with established
relationships and contacts with prospective customers to which we would not
otherwise have access. As part of our expansion strategy, we will seek to
develop relationships with additional third-party sales channels.

  Strategic Alliances

     We plan to increase our vertical market penetration by continuing to
develop strategic alliances with other companies in the data security and
network integration industries. We have developed significant strategic
alliances with companies in an effort to:

     - incorporate our products into third-parties' products;

     - jointly develop products and services;

     - conduct joint research and development efforts;

     - jointly conduct proposals and presentations for products and services and
       reseller arrangements.

     These alliances assist us in expanding our marketing and technical
capabilities and are intended to increase the distribution and market acceptance
of our Internet, intranet and extranet security products and services.

     We believe that strategic alliances allow us to cost-effectively integrate
third-party products into our product offerings to provide our clients with
customized information technology solutions. Our strategic alliances currently
include the following:

     - Microsoft Corporation -- Microsoft considers us a leader in the
       development of innovative security solutions. Consequently, we are taking
       the leading role in developing end-to-end security solutions based on
       smartcards for Windows.

     - Netscape and Microsoft -- we provide enhanced e-mail security features to
       their browser programs through integration of our NetSign product lines.

     - VeriSign -- we have a marketing agreement with VeriSign and act as
       VeriSign's recommended PKI card partner.

     - Atmel Corporation and the National Security Agency -- we have an alliance
       with Atmel Corporation and the National Security Agency in which we are
       jointly developing Forte, an advanced microprocessor, which we are
       embedding in our next generation PKI cards, the Forte PKIcard.

     - RSA Data Security -- we have a distribution license agreement with RSA
       which allows us to incorporate RSA technology into our products.

     - Datacard -- Datacard is a service provider utilizing our PKI Products.

     - SCM Microsystems, Inc. -- we engage in cooperative marketing and selling
       of SCM hardware produced with our software.

     - CyberTrust -- we have a cooperative marketing arrangement utilizing
       profile manager in selected customer solutions.

     Additionally, we have formed alliances with a number of equipment
manufacturers to generate leads for their technology product sales, including
Lucent Technologies, Inc., Photon Vision Systems LLC, Northern Computers, Inc.,
International Business Machines Corp., and Hewlett-Packard Company, who is a
subcontractor on many of our successful bids. These alliances may generate
qualified leads for our sales force to contact and close.
                                       11
<PAGE>   12

  Sales to the Government Information Technology Market

     The government information technology market is generally characterized by
highly-structured procurement rules and procedures, large contracts, a
relatively long sales cycle, significant barriers to entry and low collection
risks. In response to these characteristics and requirements, a number of
avenues, such as GSA schedule contracts, blanket purchase agreements and bidding
procedures, have been developed to access this market.

     The GSA, which is the central procurement agency for the U.S. government,
negotiates schedule contracts. Government agencies and other authorized
purchasers, although not required to do so, may purchase goods and professional
services under GSA schedule contracts at predetermined price ceilings, terms and
conditions. GSA schedule contracts are awarded on the basis of a number of
factors, the most important of which are compliance with applicable government
regulations and the prices of the products to be sold. A blanket purchase
agreement, or BPA, is a simplified but non-mandatory, fixed-price, indefinite
delivery-indefinite quantity, contract for the government to purchase products,
at pre-negotiated terms and conditions. Purchases made under BPAs are often paid
for with a government-issued credit card. Federal government agencies are
authorized to enter into BPAs with GSA schedule holders. The GSA-authorized BPAs
incorporate many terms and conditions of GSA schedule contracts, often at lower
prices than available on the GSA schedules.

     A significant portion of the purchases of computer products and services by
the federal government is made under contracts or purchase orders awarded
through formal competitive bids and negotiated procurements. Substantially all
of these bids are awarded on the basis of a number of factors, including the
best value to the government, which, depending on the bid, can be a combination
of price, technical expertise, and past performance on other government
contracts. Major procurements can exceed millions of dollars in total revenue
for a reseller, span many years, and provide a purchasing vehicle for many
agencies. In addition, networking products are purchased by the federal
government through open-market procurements. These procurements are separate and
apart from GSA schedules, and include simplified acquisition procedures,
requests for quotes, invitations for bids and requests for proposals. Most
purchases in the state and local government market are made through individual
competitive procurements. State and local procurements typically require formal
responses and the posting of bid bonds or performance bonds to ensure complete
and proper service by a prospective bidder. Each state maintains a separate code
of procurement regulations that must be understood and complied with by entities
selling products to the state.

     We are on most government bid lists relevant to our product offerings and
respond with proposals to many bid solicitations each year. In addition, our
marketing employees actively prepare bids for federal, state and local
government agencies for open market procurements.

  Advertising

     Our marketing efforts include maintaining a web site, Internet advertising,
including links with other web sites, direct mail, public relations, events,
sales tools, broadcast messaging, telemarketing and corporate marketing
materials. We believe that our future business activity depends in part on our
marketing and sales through the Internet. Our website describes our business,
products and services.

     Our public relation efforts are designed to target the appropriate press
coverage and consist of press kits, targeted media lists and press releases.
These efforts are designed to complement our sales and marketing efforts.

  Trade Shows and Presentations

     We attend and exhibit our products and services at trade shows in the U.S.
and internationally each year in an effort to increase our market exposure. We
intend to continue to attend trade shows as well as to make joint presentations
with strategic partners to prospective customers relating to products and
services.

                                       12
<PAGE>   13

SUPPLIERS

     Some of the components incorporated into our Internet data security
products are produced by other vendors. We also integrate third-party products
and components into the networks we design and develop for our customers. To
maintain quality control and enhance working relationships, we generally rely on
multiple vendors for these products. However, some of these products are
produced or sold only by a single supplier, thus presenting a risk that they may
not be available on commercially reasonable terms in the future or at all. While
we believe that alternative sources of supply could be obtained, our inability
to develop alternative sources if, and as required, in the future could result
in delays or reductions in product shipments that could adversely affect our
business.

RESEARCH AND DEVELOPMENT

     We conduct extensive research and development efforts which focus on the
development of cryptographic PKI software and hardware products that can be
readily integrated and adapted to the expanding requirements of the Internet,
intranets and extranets. We expect to devote substantial additional research and
development resources to enhance our data security product line.

     Our current research and development efforts include:

     - Expanding Maestro to offer additional application program interfaces,
       including Microsoft's CAPI -- a cryptographic API -- for Windows
       95/98/2000/NT, and adding to the suite of tokens supported by Maestro;

     - Enhancing the capabilities of ProFile Manager to provide certificate
       exchange capabilities with additional third-party certificate authorities
       and increased capability for the PKI enterprise manager;

     - Developing Forte, an advanced 32-bit microprocessor, commonly referred to
       as a RISC processor, which we are embedding in our Forte smart card. We
       expect the Forte smart card will be an ISO standard smartcard with
       greater flexibility and a higher degree of processing power than existing
       PKI cards, due in part to the inclusion of a universal serial bus
       interface on-board the microprocessor chip. Given that Forte is an
       advanced security chip that will provide advanced security features, we
       expect to be able to embed it in a variety of devices, including PC
       mother boards;

     - Developing a series of universal serial bus interface reader/writers;

     - Developing technologies to incorporate biometric technologies into
       Litronic PKI products to provide further advanced identification and
       authentication protection;

     - Expanding the security features of applications programs such as NetSign
       and NetSign PRO; and

     - Developing a version of the ARGUS 300 for the PCI bus while retaining its
       validation by the NIST. The ARGUS 300 is currently an ISA bus security
       product that has been validated by the NIST for a security level approved
       for digital signature operations. Newer computer designs now have the PCI
       architecture. The PCI version of the ARGUS 300 is being designed to
       enable the NIST to extend the certification to the new PCI design without
       a complete new laboratory validation process.

     The process of developing our products and services is extremely complex
and requires significant continuing development efforts. There is a risk that we
will not successfully develop and market new products or product enhancements
that respond to technological change and evolving industry standards and
customer requirements in a timely manner. As of March 15, 2000, our research and
development staff consisted of 57 employees, of whom 34 were engineers.
Approximately 90% of these engineers were engaged principally in the development
of software, including cryptographic libraries and device drivers. We believe
that our ability to attract and retain qualified development personnel is
essential to the continued success of our development programs. The market for
these personnel is highly competitive and our development activities could be
adversely affected if we are unsuccessful in attracting and retaining skilled
technical personnel.

     During the years ended December 31, 1997, 1998 and 1999, our net expenses
for research and development were $1.2 million, $1.3 million and $3.5 million,
respectively.
                                       13
<PAGE>   14

COMPETITION

     We compete in numerous markets, including;

     - Internet and intranet electronic security;

     - access control and token authentication;

     - smartcard-based security applications;

     - electronic commerce applications;

     - systems integration;

     - product reselling; and

     - government information technology markets.

     The markets for our products and services are intensely competitive and are
characterized by rapidly changing technology and industry standards, evolving
user needs and the frequent introduction of new products. We believe that the
principal factors affecting competition in our markets include:

     - product functionality;

     - performance;

     - flexibility and features;

     - use of open standards technology;

     - quality of service and support;

     - company reputation; and

     - price.

     We face significant competition from a number of different sources. Many of
our competitors are more established, benefit from greater name recognition and
have substantially greater financial, technical and marketing resources than we
have. One of our significant competitors is RSA Data Security, which has
recently announced its intention to begin supplying systems software for
security management. Some of our other significant data security competitors
include:

     - International Business Machines Corp.

     - Motorola, Inc.

     - Gem Plus

     - Network Associates, Inc.

     - Secure Computing Corporation

     - Rainbow Technologies, Inc.

     Some of our competitors for systems integration and product reselling
include:

     - BTG, Inc.

     - Inacom Corporation

     - Government Technology Services, Inc.

     In addition there are several smaller or start-up companies with which we
compete from time to time. We also expect that competition will increase as a
result of consolidation in the information security technology and product
reseller industries. We may be unable to compete successfully in the future with
our competitors, which may adversely affect our business.

                                       14
<PAGE>   15

INTELLECTUAL PROPERTY

     We depend substantially on our proprietary information and technologies. We
rely on a combination of trademark, patent, copyright and trade secret laws,
employee and third-party non-disclosure agreements, technical measures and other
methods to protect our software products and other proprietary technologies and
know-how. We also rely on standardized license agreements that are not signed by
the end user to license our products and, therefore, may not always be
enforceable.

     We currently have one patent issued by the U.S. Patent and Trademark
Office, one patent application allowed by and three patent applications pending
with the U.S. Patent and Trademark Office that cover aspects of data security
technology. In addition, we have one patent pending foreign (PCT) patent
application. Prosecution of these patent applications and any other patent
applications that we may subsequently determine to file may require the
expenditure of substantial resources. The issuance of a patent from the filing
of a patent application is a lengthy process. Our technology may become obsolete
while our applications for patents are pending. Further, any pending or future
patent may not be granted, and any future patents may be challenged, invalidated
or circumvented and the scope of any patents may be reduced. The rights granted
to us through our patents may not provide us with any advantages.

     Our technical measures and non-disclosure agreements may not be adequate to
prevent misappropriation or provide any meaningful protection for our
proprietary technology in the event of misappropriation. Further, others may
independently develop substantially equivalent or superior technologies or
duplicate any technology we develop, or our technology may infringe on the
patents, copyrights or other intellectual property rights owned by others.

     We may also be at risk when we enter into transactions in countries where
intellectual property laws are not well developed or are poorly enforced. Legal
protection of our rights may be ineffective in foreign markets, and technology
manufactured or sold abroad may not be protectable in jurisdictions in
circumstances where protection is ordinarily available in the U.S.

     We believe that, due to the rapid pace of technological innovation for
network security products, our ability to establish, and if established,
maintain a position of technological leadership in the industry, is dependent
more upon the skills of our development personnel than upon legal protections
afforded our existing or future technology.

     Because our products are designed with an open architecture and are
algorithm-independent, they can be utilized with a variety of encryption
algorithms. Some algorithms are in the public domain and can be incorporated
into our products at no charge. To the extent that a customer desires to
incorporate a proprietary algorithm into a security solution, we or the customer
must obtain a license from the algorithm owner. Depending on the algorithm and
its owner, the license fee may be a flat fee, a per unit royalty or a
combination of the two.

     We are developing Forte under a task order issued under a contract with
National Security Agency. The contract incorporates the Department of Defense's
standard licenses for technical data and computer software, commonly known as
the data rights clauses. Data rights clauses are only applicable to data or
software actually delivered to the federal government under a contract. If the
data rights clauses were applicable to our agreement with the National Security
Agency to develop Forte, one of the data rights licenses, commonly called a
government purpose rights license, would permit the federal government to create
second sources of supply of the Forte technical data and source code for itself
with out paying us royalties. The government purpose license clause would not
authorize the federal government to create competitors to us in the commercial
market. We do not believe the data rights clauses generally, or the government
purpose license specifically, apply to Forte because our contract with the
National Security Agency does not provide for the delivery of Forte to the
federal government. The task order provides that the National Security Agency
will obtain detailed design information about Forte.

     We own or have rights to trademarks and trade names that we use in
conjunction with the sale and licensing of our products. The following
trademarks mentioned in this annual report are our registered trademarks:
Cyperserver, Maestro, Netsign, Profile Manager and CryptOS. We also own the
trade names
                                       15
<PAGE>   16

Litronic, Pulsar, Pulsar Data and Pulsar Data Systems, Inc. We have applied for
the trademarks for Forte smart card. All other trademarks or trade names
referred to in this prospectus are the property of their owners.

GOVERNMENT REGULATION

     Because we sell our products internationally, we must comply with federal
laws regulating the export of, and applicable foreign government laws regulating
the import of, our products. The U.S. government has recently relaxed the export
restrictions for our NetSign and ProFile Manager products. However, the federal
government may rescind these approvals at any time. Under current regulations
these products can be exported without a license to most countries for use by
banks, healthcare, insurance organizations and overseas subsidiaries of U.S.
companies.

     Additionally, we may apply for export approval, on a specific criteria
basis, for our future products. Government export regulation for security
products is less stringent for products designed for banking and finance,
e-commerce, health, insurance and for use by U.S. subsidiaries. We may not
receive approval to export any future products on a timely basis, on the basis
we request or at all. As a result of government regulation of our products, we
may be at a disadvantage in competing for international sales compared to
foreign companies that are not subject to these restrictions.

EMPLOYEES

     As of March 15, 2000, Litronic employed 136 people, of which 132 were
full-time and 4 were part-time employees, including 62 in product management,
research, development and support, 4 in professional services, 37 in field
operations including sales, marketing and customer management, and 33 in
finance, human resources, business development, legal and administration. Our
employees are not represented by labor unions. We do not expect that any of our
employees will be represented by any labor unions. We consider our relations
with our employees to be good.

ITEM 2. PROPERTIES

     We are headquartered in Irvine, California where we currently lease
approximately 20,702 square feet of office space for our executive offices with
a lease expiring in February 2007. Our new facility has an annual rent of
$423,139 and a lease term of 7 years. The new facility was leased from KRDS, a
related party. In addition, we will conduct a significant portion of our
operations at Pulsar's offices in our 12,700 square foot Lanham, Maryland
facility, which we use as office space for our executive offices and as
warehouse space, under a lease that expires in 2003 with an annual rent of
$111,362. We are also subletting our former headquarters of 12,000 square feet
in Irvine, California. The lease for our former headquarters expires in
September 2001.

ITEM 3. LEGAL PROCEEDINGS

     We are involved from time to time in routine litigation that arises in the
ordinary course of business. We are not currently involved in any litigation
which we believe will have a material impact on our results of operations,
financial condition or liquidity, including the following:

     On January 16, 1998, G2 Resources Inc. (G2) filed a complaint against
Pulsar in the Circuit Court, Fifteenth Judicial Circuit, Palm Beach County,
Florida. G2 claims that Pulsar breached a contract under which G2 agreed to
provide services related to the monitoring of government contracts available for
bid and the preparation and submission of bids on behalf of Pulsar. The contract
provides that Pulsar pay G2 $500,000 in 30 monthly installments of $16,666 and
an additional fee of 2% of the gross dollar amount generated by awards. In its
complaint, G2 alleged that Pulsar failed to make payments under the contract and
claimed damages in excess of $525,000 plus interest, costs and attorneys fees.
In the course of discovery G2 asserted that its losses/costs arising out of its
claim amounted to approximately $10.3 million. Pulsar has asserted that G2
failed to perform the services required under the contract and Pulsar filed a
claim for compensatory damages, interest and attorneys fees against G2.
Classical Financial Services, LLC intervened in the case. Classical claims that
G2 assigned its accounts receivable to Classical under a financing program and
that
                                       16
<PAGE>   17

Pulsar breached its obligations to Classical by failing to make payments under
the contract with G2. Pulsar has asserted defenses to Classical's claim. The
Company believes that the claims of G2 and Classical against Pulsar are without
merit and intends to continue to vigorously defend against the claims. If G2 or
Classical were to prevail in this lawsuit, our business and financial condition
could be materially adversely affected.

     On July 11, 1997, Rudolph Menna filed a complaint against Pulsar and
William W. Davis, Sr. in the U.S. District Court for Northern District of
Georgia, Atlanta Division. Mr. Menna alleged that he was wrongfully terminated
as a Pulsar employee and that Pulsar and Mr. Davis unlawfully discriminated
against him on the basis of race and age. Mr. Menna's complaint sought an
unspecified amount of damages including back pay, front pay, benefits,
compensatory and punitive damages, interest and attorneys fees. Pulsar and Mr.
Davis filed an answer denying the material allegations in the complaint. On
December 6, 1999, we paid Mr. Menna $140,000 and settled any and all claims.

     On April 19, 1999, A&T Marketing Inc. filed a complaint against Pulsar in
the Circuit Court for Prince George's County, Maryland. A&T claims that Pulsar
owes A&T $262,000 plus interest and costs, for software that A&T sold Pulsar in
1998. Pulsar believes it has defenses to A&T's claim and that A&T's claim is
without merit. Pulsar intends to vigorously defend against the claim.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not Applicable.

                                       17
<PAGE>   18

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our Common Stock is listed on the Nasdaq National Market under the symbol
"LTNX." The following table sets forth, for the quarters indicated, the high and
low closing sale prices per share of the Common Stock as reported on the Nasdaq
National Market. The price shown represent quotations by dealers, without retail
markup, markdown or commissions and may not reflect actual transactions.

     On March 15, 2000, the last reported sale price for our Common Stock on the
Nasdaq National Market was $19.0625. As of March 15, 2000, the approximate
number of holders of record of the Common Stock was 34. The Company has not paid
dividends and does not anticipate declaring dividends on its Common Stock in the
foreseeable future.

     High, low and closing prices for the last three quarters are as follows:

<TABLE>
<CAPTION>
                                              HIGH       LOW       CLOSE
                                             ------    -------    --------
<S>                                          <C>       <C>        <C>
Fiscal quarter ended June 30, 1999.......    $11.00    $9.5625    $10.2500
Fiscal quarter ended September 30,
  1999...................................    $ 4.25    $4.0625    $ 4.1562
Fiscal quarter ended December 31,
  1999...................................    $ 8.25    $7.8125    $ 8.0000
</TABLE>

     Sales of Registered Securities and Use of Proceeds. During June 1999, the
Company competed its initial public offering ("the Offering") of 3,700,000
shares of its common stock. The offering date was June 9, 1999. Litronic Inc.'s
stock is publicly traded on the NASDAQ National Market under the symbol "LTNX."

     The lead underwriters in the offering were Bluestone Capital Partners, L.P.
and Pacific Crest Securities Inc. The shares of common stock sold in the
Offering were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (the "Registration Statement") (File No.
333-72151) which was declared effective by the SEC on June 9, 1999.

     A total of 3,700,000 shares of common stock were registered for sale by the
Company under the Registration Statement for an aggregate amount of 40,700,000
(based upon the offering price of $11.00 per share), before deduction of
underwriting discounts, commissions and other expenses. Additionally, the
underwriters had an option to purchase an additional 555,000 shares from the
Company to cover overallotments. None of these shares were sold in the Offering.

     After deducting underwriting discounts and commissions of $3.8 million and
expenses of $1.6 million in connection with the Offering, the Company received
net proceeds from the Offering of $35.3 million. As disclosed in the
Registration Statement, the Company has been and intends to use these proceeds
for reduction of debt, sales and marketing, product development, vendor
settlements and working capital and general corporate purposes.

                                       18
<PAGE>   19

ITEM 6. SELECTED FINANCIAL DATA

     The following table presents selected financial data as of and for each of
the years in the five-year period ended December 31, 1999, derived from the
consolidated financial statements of Litronic. The consolidated financial
statements of Litronic as of, and for each of the five years ended December 31,
1999 have been audited by KPMG LLP, independent certified public accountants.

     The selected financial data should be read in conjunction with the
consolidated financial statements of Litronic as of December 31, 1998 and 1999
and each of the years in the three-year period ended December 31, 1999, the
related notes and the independent auditors' report, appearing elsewhere in this
Annual Report.

     Selected Statements of Operations Data:

<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                        ---------------------------------------------------------
                                          1995        1996        1997        1998       1999(1)
                                        ---------   ---------   ---------   ---------   ---------
                                              (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                     <C>         <C>         <C>         <C>         <C>
Revenues:
     Product..........................  $   1,525   $   7,855   $   8,627   $   5,214   $  29,805
     License and service..............      1,181       1,541       1,539       1,041       1,052
     Research and development.........         --          --   --.......         398         798
                                        ---------   ---------   ---------   ---------   ---------
          Total revenue...............      2,706       9,396      10,166       6,653      31,655
                                        ---------   ---------   ---------   ---------   ---------
Costs and expenses:
     Cost of sales -- product.........        793       4,098       3,211       2,821      26,249
     Cost of sales -- license and
       service........................        465         581         643         950         522
     Selling, general, and
       administrative.................        977       2,052       3,487       2,631       6,865
     Research and development.........        341         725       1,172       1,334       3,532
     Amortization of goodwill and
       other intangibles..............         --          --          --          --       1,448
                                        ---------   ---------   ---------   ---------   ---------
Operating income (loss)...............        130       1,940       1,653      (1,083)     (6,961)
Interest expense, net.................         38          19          42         418         168
                                        ---------   ---------   ---------   ---------   ---------
Earnings (loss) from continuing
  operations before income taxes......         92       1,921       1,611      (1,501)     (7,129)
Provision for (benefit from) income
  taxes...............................          1          29          22         (95)        (43)
                                        ---------   ---------   ---------   ---------   ---------
Earnings (loss) from continuing
  operations..........................  $      91   $   1,892   $   1,589   $  (1,406)  $  (7,086)
                                        =========   =========   =========   =========   =========
Net earnings (loss)...................  $     210   $     906   $  15,334   $  (1,406)  $  (7,086)
                                        =========   =========   =========   =========   =========
Earnings (loss) from continuing
  operations per share: basic and
  diluted.............................  $     .02   $     .49   $     .41   $    (.36)  $   (1.00)
                                        =========   =========   =========   =========   =========
Net earnings (loss) per share: basic
  and diluted.........................  $     .05   $     .23   $    3.96   $    (.36)  $   (1.00)
                                        =========   =========   =========   =========   =========
Shares used in per share computations:
  basic and diluted...................  3,870,693   3,870,693   3,870,693   3,870,693   7,055,882
                                        =========   =========   =========   =========   =========
</TABLE>

---------------
(1) On June 14, 1999, the Company entered into a stock acquisition agreement
    with Pulsar Data Systems, Inc. All outstanding shares of Pulsar were
    exchanged for 2,169,938 shares of the Company's common stock. The
    acquisition was accounted for using the purchase method of accounts, and
    accordingly, the results of operations of Pulsar have been included in the
    Company's consolidated financial statements from June 14, 1999.

                                       19
<PAGE>   20

SELECTED BALANCE SHEET DATA:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                        ---------------------------------------------------------
                                          1995        1996        1997        1998        1999
                                        ---------   ---------   ---------   ---------   ---------
                                                             (IN THOUSANDS)
<S>                                     <C>         <C>         <C>         <C>         <C>
Cash and cash equivalents.............  $      95   $     862   $     490   $     898   $   6,441
Working capital.......................       (372)      1,662         385         758      12,592
Total assets..........................      5,476       7,409       2,347       2,791      51,104
Current installments of long-term
  debt................................        472         545   --.......         580         481
Long-term debt, less current
  installments........................      4,313       4,997       3,506       5,200          --
Total liabilities.....................      6,483       7,510       5,148       6,998       3,171
Total shareholders' equity
  (deficit)...........................     (1,007)       (101)     (2,801)     (4,207)     47,933
</TABLE>

     During the year ended December 31, 1997, Litronic paid a cash dividend of
$9.5 million to its stockholders. No other dividends have been paid during the
periods presented. Our loan agreements restrict our ability to pay cash
dividends.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

     We provide professional Internet data security services and develop and
market software and microprocessor-based products needed to secure electronic
commerce and communications over the Internet and other communications networks
based on Internet protocols. Our primary technology offerings use public key
infrastructure, which is the standard technology for securing Internet-based
commerce and communications. In addition, through our Pulsar subsidiary, we
provide network-based information technology consulting services to commercial
accounts and federal, state and local government agencies. Pulsar also has an
established product reseller business, which focuses on resales to government
agencies, large corporate accounts and state and local governments. We acquired
Pulsar in June 1999 in exchange for 2,169,938 shares of our common stock.

     Before 1990, we were solely a provider of electronic interconnect products
to government and commercial entities. In 1990, we formed its data security
division, which forms the basis of its operations today. The data security
division was engaged primarily in research and development until 1993 when it
began to generate meaningful revenue. In September 1997, we sold our Intercon
division, which consisted of the assets relating to its interconnect operations,
for cash to Allied Signal Inc., a non-related, publicly-traded company. The gain
on sale was $15.0 million, net of tax expense of $241,000. In addition to the
cash proceeds received, the sales agreement provided for our right to receive a
contingent purchase price. Effective November 30, 1997, this right was
distributed pro rata to our stockholders of Litronic. Except for senior
management, these operations were operated independently from our data security
operations. We charged direct costs to the division incurring them. Indirect or
shared costs, such as senior management compensation and benefits, rent,
utilities and costs of tax, legal and other advisory services, were allocated on
the basis of actual usage and head count. Our historical consolidated financial
statements have been restated to reflect the sale of the Intercon division as
discontinued operations.

RESULTS OF OPERATIONS -- COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1998 AND
1999

     Because we acquired Pulsar in June 1999, for the fiscal year ended December
31, 1999, our revenue and expenses include the results of Pulsar's operations
since June 14, 1999. Therefore, revenue and expenses are not comparable from
period to period.

     TOTAL REVENUE. Total revenue decreased 35% from $10.2 million during the
year ended December 31, 1997 to $6.7 million during the year ended December 31,
1998 and increased 376% from $6.7 million during 1998 to $31.7 million during
the year ended December 31, 1999. The decrease from 1997-1998 was primarily

                                       20
<PAGE>   21

attributable to a decrease in sales of the ARGUS 300 products, as described
below. The increase during 1999 was primarily attributable to revenues generated
by Pulsar.

     During 1997, 45%, 20%, and 19% of revenue was generated from sales to U.S.
Army Corps of Engineers, Lockheed Martin Corporation and the National Security
Agency, respectively. During 1998, 44%, 20% and 17% of revenue was generated
from sales to Lockheed Martin Corporation, the National Security Agency and the
U.S. Army Corps of Engineers, respectively. During 1999, 31% and 12% of revenue
was generated from sales to the United States Immigration and Naturalization
Service, and the United States Department of State, respectively. Sales to
federal government agencies accounted for approximately 84%, 81% and 78% of
sales during 1997, 1998 and 1999, respectively.

     PRODUCT REVENUE. Product revenue decreased 40% from $8.6 million during
1997 to $5.2 million during 1998 and increased 472% from 1998 to $29.8 million
during 1999. The decrease from 1997 to 1998 was primarily attributable to
reduced sales of our ARGUS 300 products to the U.S. Army Corps of Engineers as a
result of the substantial completion of our contract to deliver this product.
The increase during 1999 was primarily attributable to revenues generated by
Pulsar, amounting to $26.5 million.

     LICENSE AND SERVICE REVENUE. License and service revenue decreased 32% from
$1.5 million during 1997 to $1.0 million during 1998 and increased 1% from $1.0
million during 1998 to $1.1 million during 1999. The decrease in 1998 as
compared to 1997 was primarily attributable to reduced service revenue from the
National Security Agency as a result of its determination that it would no
longer pay for Litronic-provided support services for the Defense Messaging
System and the subsequent decline in support requests from users of Litronic's
support services. There was no significant change in 1999 as compared to 1998.

     RESEARCH AND DEVELOPMENT REVENUE. Research and development revenue
represents amounts earned under a contract with the National Security Agency for
the design of a microprocessor meeting minimum specifications established by the
National Security Agency. We have contracted with others to perform aspects of
the project. All related project costs are expensed as research and development
as incurred. Regardless of the results of the development efforts the amounts
received from the National Security Agency are nonrefundable. The related
research and development costs are not separately identifiable. Therefore, the
corresponding costs of the entire development effort are included in research
and development expenses.

     Research and development revenue during 1998 was $398,000, whereas no
research and development revenue was earned during 1997. Research and
development revenue increased 101% from $398,000 during 1998 to $798,000 during
1999. The increase from 1998 to 1999 was primarily attributable to a greater
portion of contract revenues being earned in 1999 than were earned in 1998. The
contract that resulted in research and development revenue was completed in 1999
and no further research and development revenue is currently anticipated under
this contract.

     PRODUCT GROSS MARGIN. Product gross margin decreased as a percentage of net
product revenue from 63% during 1997 to 46% during 1998 and decreased to 12%
during 1999. The decrease from 1997 to 1998 was primarily attributable to
reduced sales under the CEFMS contract, which had higher margins, and increased
sales of low margin pass-through products to the National Security Agency. The
decrease from 1998 to 1999 was primarily attributable to the mix of low-margin
versus high-margin products sold during 1999. During 1999 network deployment
products represented 88% of product revenue as compared to data security
products that represented 12% of product revenue. Margins from the sale of
network deployment products are significantly lower than the margins from the
sale of data security products.

     LICENSE AND SERVICE GROSS MARGIN. License and service gross margin
decreased as a percentage of license and service revenue from 58% during 1997 to
9% during 1998 and increased to 50% during 1999. The decrease from 1997 to 1998
was primarily attributable to higher compensation costs associated with the
reduction of support services revenue under the Defense Messaging System
contract. The increase from 1998 to 1999 was primarily attributable to the
Company's ability to reduce the underutilized labor cost that had resulted in
lower gross margins in the prior year.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 25% from $3.5 million during 1997 to $2.6
million during 1998 and increased 161% from 1998 to $6.9 million
                                       21
<PAGE>   22

during 1999. The decrease from 1997 to 1998 was primarily attributable to
nonrecurring bonuses of $1.0 million paid in 1997 to stockholder employees
following the sale of the Intercon division. The increase from 1998 to 1999 was
primarily attributable to the additional selling, general and administrative
expenses associated with Pulsar. As a percentage of revenue, selling, general
and administrative expenses increased from 34% during 1997 to 40% during 1998
and decreased to 22% during 1999. The percentage increase from 1997 to 1998 was
primarily attributable to the decrease in total revenue during 1998 and the
percentage decrease from 1998 to 1999 was primarily attributable to the revenues
generated by Pulsar during 1999.

     RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 14% from $1.2 million during 1997 to $1.3 million during 1998 and
increased 165% from 1998 to $3.5 million during 1999. The increase from 1997 to
1998 was primarily attributable to increased costs associated with ongoing
research and development efforts. The increase from 1998 to 1999 was primarily
attributable to significant increased staffing related to product development,
including development efforts related to the Forte microprocessor, Maestro,
ProFile Manager, NetSign and token reader/writers. As a percentage of revenue,
research and development expenses increased from 12% during 1997 to 20% during
1998 and decreased to 11% during 1999. The percentage increase from 1997 to 1998
was primarily attributable to the decrease in total revenue and the percentage
decrease from 1998 to 1999 was primarily attributable to the revenues generated
by Pulsar.

     AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. The amortization of
goodwill and other intangibles recorded during 1999 was attributable to the
acquisition of Pulsar. The amortization recorded during the year ended December
31, 1999 of $1.4 million relates to the period June 14, 1999 through December
31, 1999.

     We are in the process of completing the integration of Pulsar, which we
expect to complete in 2000. After the integration is completed, we plan to fully
analyze the recoverability of the goodwill and other intangibles relating to the
acquisition of Pulsar based on the cash flows being generated by Pulsar. Such an
analysis could result in the conclusion that the cash flows of Pulsar will not
fully support the recoverability of the goodwill and other intangibles. If such
a conclusion is reached, we will consider various options regarding the Pulsar
operations, including a restructuring or sale of some or all of Pulsar's
operations. In addition, such a conclusion could possibly result in an
impairment charge relating to some or all of the carrying value of the goodwill
and other intangibles related to the Pulsar acquisition.

     INTEREST EXPENSE, NET. Interest expense, net, increased 895% from $42,000
during 1997 to $418,000 during 1998 and decreased 60% from 1998 to $168,000
during 1999. The increase in interest expense from 1997 to 1998 was attributable
to increased levels of borrowings required for operations. The decrease from
1998 to 1999 was primarily attributable to the reduction of borrowing that
resulted when proceeds from our initial public offering were used to extinguish
outstanding debt obligations.

     INCOME TAXES. The provision for state income taxes was $22,000 for 1997.
For 1998, Litronic had a benefit of $95,000 as a result of losses from
continuing operations before income taxes of $1.5 million. For 1999 the tax
benefit of $43,000 was primarily attributable to prior year tax refunds received
that exceeded amounts recorded as receivable in prior years.

     BACKLOG. At December 31, 1997 total backlog was $1.1 million, including
$466,000 attributable to Lockheed Martin Corporation and $578,000 attributable
to the National Security Agency. At December 31, 1998, total backlog was
$717,000, including $109,000 attributable to Lockheed Martin Corporation and
$596,000 attributable to the National Security Agency. At December 31, 1999
total backlog was $366,000. Orders are subject to cancellation in certain
circumstances, and backlog may therefore not be indicative of future operating
results.

LIQUIDITY AND CAPITAL RESOURCES

     In June 1999, we completed our initial public offering of common stock. The
net proceeds of the offering were $35.3 million.

     In June 1999 we also entered into a three-year agreement with Fidelity
Funding permitting borrowings under a new $20.0 million secured revolving line
of credit facility commencing on June 14, 1999. The agreement provides for an
annual interest rate of prime plus .625%; a pledge of substantially all of our
personal
                                       22
<PAGE>   23

and real property as collateral. Although the credit facility is for borrowings
up to $20.0 million, under the terms of the agreement the amount of borrowing
available to the Company is subject to a maximum borrowing limitation based on
eligible collateral. Eligible collateral consists of 85% of eligible accounts
receivable plus the lesser of (a) 50% of the value of eligible on-hand inventory
or (b) $1.0 million. As a result, the amount actually available to the Company
at any particular time may be significantly less than the full $20.0 million
credit facility due to the maximum borrowing limitation calculation.

     Our debt facilities contain covenants and restrictions, including
maintenance of minimum tangible net worth and working capital, prohibition of
payment of dividends, and a requirement that net profit for each of the calendar
quarters for 1999 and 2000 shall not exceed a negative $1,500,000, and the net
profit for each calendar quarter thereafter shall equal or exceed $500,000. At
December 31, 1999 we were in compliance with or had waivers for these covenants.
It may be necessary for us to seek waivers from the lender for future covenant
violations that may occur. Although we feel the likelihood of obtaining such
waivers is good, there is no guarantee that such waivers, if needed, will be
provided.

     During the twelve months ended December 31, 1999 cash used in operations
was $11.5 million primarily due to a net loss of $7.1 million, an increase in
accounts receivable of $1.5 million and decreases in accounts payable of $4.0
million and accrued liabilities of $0.6 million. The larger amount of cash used
in operations, as compared to $1.7 million in 1998, reflects increased
expenditures related to Pulsar.

     During the twelve months ended December 31, 1999, cash used in investing
activities was $894,000 versus $118,000 in 1998. This increase is primarily due
to restricted cash relating to the line of credit and purchases of property and
equipment in 1999.

     During the twelve months ended December 31, 1999, cash provided by
financing activities was $17.9 million, consisting primarily of net proceeds
from the initial public offering of $35.3 million, and borrowings of $27.0
million under bank and other borrowing agreements. These were partially offset
by repayments of $44.4 million under bank borrowing agreements.

     We believe that the current availability under our $20.0 million revolving
line of credit and existing cash and cash equivalents will be sufficient to
satisfy our contemplated cash requirements for at least the next 12 months,
including planned capital expenditures of approximately $1.2 million and an
increase in rent expense of approximately $100,000 per year following the
February 2000 relocation of our California headquarters.

     Although we believe that we have sufficient capital to fund our operations
for at least the next 12 months, our future capital requirements may vary
materially from those now planned. The amount of capital that we will need in
the future will depend on many factors including, but not limited, to:

     - the market acceptance of our products and services

     - the levels of promotion and advertising that will be required to launch
       new products and services and attain a competitive position in the market
       place

     - research and development plans

     - levels of inventory and accounts receivable

     - technological advances

     - competitors' responses to our products and services

     - relationships with partners, suppliers and customers

     - our projected capital expenditures

     In addition, we may require additional capital to accommodate planned
growth, hiring, infrastructure and facility needs or to consummate acquisitions
of other businesses, products or technologies.

                                       23
<PAGE>   24

RISK FACTORS

     BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR
INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION
TO THE OTHER INFORMATION IN THIS REPORT AND OUR OTHER FILINGS WITH THE SEC. THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR
COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCUR, THAT COULD SERIOUSLY HARM OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN SUCH CASE, THE MARKET PRICE FOR
OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT

  WE HAVE A HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES.

     Even with the proceeds of our initial public offering, we may not become
profitable or significantly increase our revenue. We incurred net losses of $1.4
million and $7.1 million for the years ended December 31, 1998 and 1999,
respectively.

  OUR INABILITY TO INTEGRATE, OR IMPLEMENT OUR PLANS FOR, THE OPERATIONS OF
  PULSAR MAY ADVERSELY AFFECT OUR BUSINESS.

     Our failure to successfully integrate, or implement our plans for, the
operations of Pulsar would significantly diminish the value of the Pulsar
acquisition. Moreover, integration of the Pulsar acquisition may place strain on
our managerial and financial resources, which could, in turn, adversely affect
our business. To achieve the full benefits of the Pulsar acquisition, we will
need to:

     - integrate our administrative, financial and engineering resources and
       coordinate our marketing and sales efforts;

     - roll out our data security products to Pulsar's existing client base;

     - successfully complete the implementation of Pulsar's recent shift in
       product reselling focus;

     - expand Pulsar's professional service offerings; and

     - increase sales of Pulsar's products and professional services.

We may not be able to successfully implement any of these plans. If we are not
able to implement these plans we will consider various options regarding the
Pulsar operations, including a restructuring or sale of some or all of Pulsar's
operations.

  THE GOODWILL AND OTHER INTANGIBLES ACQUIRED IN THE PULSAR ACQUISITION MAY HAVE
  AN ADVERSE IMPACT ON OUR OPERATING RESULTS AND THE MARKET PRICE OF OUR COMMON
  STOCK.

     Approximately $34.7 million, or 68%, of our consolidated assets as of
December 31, 1999, consisted of intangible assets, including goodwill, arising
from the acquisition of Pulsar. This amount, the components of which will be
amortized over 10 to 15 years, constitutes a non-cash, non-tax deductible
expense in each amortization period that will reduce net income or increase net
loss for that period. The reduction in our net earnings or an increase in our
net loss resulting from the amortization of goodwill and other intangibles may
have an adverse impact on our operating results and the market price of our
common stock. There is also a risk that we may never realize the value of our
intangible assets.

     We plan to periodically analyze the recoverability of the goodwill and
other intangibles relating to the acquisition of Pulsar based on the cash flows
being generated by Pulsar. Such an analysis could result in the conclusion that
the cash flows of Pulsar will not fully support the recoverability of the
goodwill and other intangibles. If such a conclusion is reached, we will
consider various options regarding the Pulsar operations, including a
restructuring or sale of some or all of Pulsar's operations. In addition, such a
conclusion could

                                       24
<PAGE>   25

possibly result in an impairment charge relating to some or all of the carrying
value of the goodwill and other intangibles related to the Pulsar acquisition.

  A DEFAULT UNDER OUR SECURED CREDIT ARRANGEMENTS COULD RESULT IN A FORECLOSURE
  OF OUR ASSETS BY OUR CREDITORS.

     All of our assets are pledged as collateral to secure portions of our debt.
This means that if we default on our secured debt obligations our indebtedness
could become immediately due and payable and the lenders could foreclose on our
assets. From time to time we have been in violation of financial covenants under
our existing credit arrangements and have had to negotiate with our lenders for
waivers or forbearance agreements for these violations.

  THE TERMS OF OUR LOAN AGREEMENTS COULD LIMIT OUR ABILITY TO IMPLEMENT OUR
  BUSINESS STRATEGY.

     The terms of our loan agreements with our credit providers could limit our
ability to implement our strategy. In addition to substantially prohibiting us
from incurring additional indebtedness, our loan agreements with these creditors
limit or prohibit us from:

     - declaring or paying cash dividends;

     - making capital distributions or other payments to stockholders;

     - merging or consolidating with another corporation; or

     - selling all or substantially all of our assets.

  WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A SMALL NUMBER OF
CUSTOMERS AND, THEREFORE, THE LOSS
  OF EVEN ONE OF THESE CUSTOMERS COULD SIGNIFICANTLY AND NEGATIVELY IMPACT OUR
OPERATING RESULTS.

     We depend on a limited number of customers for a substantial portion of our
revenue and many of our contracts with our significant customers are short-term
contracts. The nonrenewal of any significant contract upon expiration, or a
substantial reduction in sales to any of our significant customers, would
adversely affect our business unless we were able to replace the revenue we
received from these customers. For the year ended December 31, 1999, we derived
43% of our consolidated revenue from two customers.

  DOING BUSINESS WITH THE U.S. GOVERNMENT ENTAILS MANY RISKS WHICH COULD
  ADVERSELY AFFECT US.

     Sales to U.S. government agencies accounted for 91% of our consolidated
revenue for the year ended December 31, 1999. Our sales to these agencies are
subject to risks, including:

     - early termination of our contracts;

     - disallowance of costs upon audit; and

     - the necessity to participate in competitive bidding and proposal
       processes, which is costly, time consuming and may result in unprofitable
       contracts.

     In addition, the government may be in a position to obtain greater rights
with respect to our intellectual property than we would grant to other entities.
Government agencies also have the power, based on financial difficulties or
investigations of its contractors, to deem contractors unsuitable for new
contract awards. Because we engage in the government contracting business, we
have been and will be subject to audits and may be subject to investigation by
governmental entities. Failure to comply with the terms of any of our
governmental contracts could result in substantial civil and criminal fines and
penalties, as well as our suspension from future government contracts for a
significant period of time, any of which could adversely affect our business.

  IF USE OF THE INTERNET AND OTHER COMMUNICATIONS NETWORKS BASED ON INTERNET
  PROTOCOLS DOES NOT CONTINUE TO GROW, DEMAND FOR OUR PRODUCTS MAY NOT INCREASE.

     Increased demand for our products depends in large part on the continued
growth of the Internet and Internet protocol-based networks and the widespread
acceptance and use of these mediums for electronic commerce and communications.
Because electronic commerce and communications over these networks are

                                       25
<PAGE>   26

evolving, we cannot predict the size of the market and its sustainable growth
rate. A number of factors may affect market size and growth rate, including:

     - the use of electronic commerce and communications may not increase, or
       may increase more slowly than we expect;

     - the Internet infrastructure and communications services to support
       electronic commerce may not be able to continue to support the demands
       placed on it by continued growth; and

     - the growth and reliability of electronic commerce and communications
       could be harmed by delays in development or adoption of new standards and
       protocols to handle increased levels of activity or by increased
       governmental regulation.

  IF PKI TECHNOLOGY IS COMPROMISED, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.

     Many of our products are based on PKI technology. The security afforded by
this technology depends on the integrity of a user's private key, which depends
in part on the application of algorithms, or advanced mathematical factoring
equations. The occurrence of any of the following could result in a decline in
demand for our data security products:

     - any significant advance in techniques for attacking PKI systems,
       including the development of an easy factoring method or faster, more
       powerful computers;

     - publicity of the successful decoding of cryptographic messages or the
       misappropriation of private keys; and

     - government regulation limiting the use, scope or strength of PKI.

  IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS AND SERVICE
  OFFERINGS COULD BECOME OBSOLETE.

     If we are unable to modify existing products and develop new products that
are responsive to changing technology and standards and meet customer needs in a
timely and cost effective manner, our business could be adversely affected. The
markets we serve are characterized by rapidly changing technology, emerging
industry standards and frequent introduction of new products. The introduction
of products embodying new technologies and the emergence of new industry
standards may render our products obsolete or less marketable. The process of
developing our products and services is extremely complex and requires
significant continuing development efforts.

  IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS, OUR ABILITY TO
  DEVELOP AND MARKET OUR PRODUCTS WOULD BE ADVERSELY AFFECTED.

     The loss of any of our existing strategic relationships, or the inability
to create new strategic relationships in the future, could adversely affect our
ability to develop and market our products. We depend upon our partners to
develop and market products and to fund and perform their obligations as
contemplated by our agreements with them. We do not control the time and
resources devoted by our partners to these activities. These relationships may
not continue or may require us to spend significant financial, personnel and
administrative resources from time to time. We may not have the resources
available to satisfy our commitments, which may adversely affect our strategic
relationships. Further, our products and services may compete with the products
and services of our strategic partners. This competition may adversely affect
our relationships with our strategic partners, which could adversely affect our
business.

  WE DEPEND ON KEY MANAGEMENT PERSONNEL.

     Our success will depend largely on the continuing efforts of our executive
officers and senior management. Our business may be adversely affected if the
services of any of our key personnel become unavailable to us. There is a risk
that these individuals will not continue to serve for any particular period of
time. While we have obtained key person life insurance policies on the lives of
our current chief executive officer and
                                       26
<PAGE>   27

president, each in the amount of $3.0 million, these amounts may not be
sufficient to offset the loss of their services.

 THERE IS SIGNIFICANT COMPETITION IN OUR INDUSTRY FOR HIGHLY SKILLED EMPLOYEES
 AND OUR FAILURE TO ATTRACT AND RETAIN TECHNICAL PERSONNEL WOULD ADVERSELY
 AFFECT OUR BUSINESS.

     We may not be able to successfully attract or retain highly skilled
employees. Our inability to hire or retain highly qualified individuals may
impede our ability to develop, install, implement and service our software and
hardware systems, customers and potential customers or efficiently conduct our
operations, all of which may adversely affect our business. The data security
and networking solution industries are characterized by a high level of employee
mobility, and the market for highly qualified individuals in the
computer-related fields is intense. This competition means there are fewer
highly qualified employees available to hire and the costs of hiring and
retaining these individuals are high. Even if we are able to hire these
individuals, we may be unable to retain them. Furthermore, there is increasing
pressure to provide technical employees with stock options and other equity
interests, which may dilute earnings per share.

  POTENTIAL PRODUCT DEFECTS COULD SUBJECT US TO CLAIMS FROM CUSTOMERS.

     Products as complex as those we offer may contain undetected errors or
result in failures when first introduced or when new versions are released.
Despite our product testing efforts and testing by current and potential
customers, it is possible that errors will be found in new products or
enhancements after commencement of commercial shipments. The occurrence of
product defects or errors could result in adverse publicity, delay in product
introduction, diversion of resources to remedy defects, loss of or a delay in
market acceptance or claims by customers against us, or could cause us to incur
additional costs, any of which could adversely affect our business.

 WE MAY BE EXPOSED TO POTENTIAL LIABILITY FOR ACTUAL OR PERCEIVED FAILURE TO
 PROVIDE REQUIRED PRODUCTS OR SERVICES.

     Because our customers rely on our products for critical security
applications, we may be exposed to potential liability claims for damage caused
to an enterprise as a result of an actual or perceived failure of our products.
An actual or perceived breach of enterprise network or data security systems of
one of our customers, regardless of whether the breach is attributable to our
products or solutions, could adversely affect our business reputation.

     Furthermore, our failure or inability to meet a customer's expectations in
the performance of our services, or to do so in the time frame required by the
customer, regardless of our responsibility for the failure, could:

     - result in a claim for substantial damages against us by the customer;

     - discourage customers from engaging us for these services; and

     - damage our business reputation.

     In addition, as a professional services provider, a portion of our business
involves employing people and placing them in the workplace of other businesses.
Therefore, we are also exposed to liability for actions taken by our employees
while on assignment.

  PROBLEMS RELATING TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS.

     Many currently installed computer systems, software programs, and embedded
data chips are programmed using a 2-digit date field and are therefore unable to
distinguish dates beyond the 20th century. A failure to identify and correct any
mission-critical internal or third party year 2000 processing problem could have
a material adverse operational or financial consequence to us.

     Thus far, we have had no significant problems related to year 2000 issues
associated with the computer systems, software, and other property and equipment
we use. In addition, we have not experienced significant year 2000 issues among
our suppliers that have resulted in a negative impact on our business. However,
we
                                       27
<PAGE>   28

cannot guarantee that the year 2000 problem will not adversely affect our
business, operating results or financial condition at some point in the future.

  WE FACE INTENSE COMPETITION FROM A NUMBER OF SOURCES.

     The markets for our products and services are intensely competitive and, as
a result, we face significant competition from a number of different sources. We
may be unable to compete successfully as many of our competitors are more
established, benefit from greater name recognition and have substantially
greater financial, technical and marketing resources than we have. In addition,
there are several smaller and start-up companies with which we compete from time
to time. We also expect that competition will increase as a result of
consolidation in the information security technology and product reseller
industries.

 THIRD PARTIES COULD OBTAIN ACCESS TO OUR PROPRIETARY INFORMATION OR
 INDEPENDENTLY DEVELOP SIMILAR TECHNOLOGIES BECAUSE OF THE LIMITED PROTECTION
 FOR OUR INTELLECTUAL PROPERTY.

     Our business, financial condition and operating results could be adversely
affected if we are unable to protect our intellectual property rights.
Notwithstanding the precautions we take, third parties may copy or obtain and
use our proprietary technologies, ideas, know-how and other proprietary
information without authorization or independently develop technologies similar
or superior to our technologies. In addition, the confidentiality and
non-competition agreements between us and our employees, distributors, and
clients may not provide meaningful protection of our proprietary technologies or
other intellectual property in the event of unauthorized use or disclosure.
Policing unauthorized use of our technologies and other intellectual property is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. Furthermore, the laws of other jurisdictions may afford little
or no effective protection of our intellectual property rights.

  WE MAY FACE CLAIMS OF INFRINGEMENT OF PROPRIETARY RIGHTS.

     There is a risk that our products infringe the proprietary rights of third
parties. In addition, whether or not our products infringe on proprietary rights
of third parties, infringement or invalidity claims may be asserted or
prosecuted against us and we could incur significant expense in defending them.
If any claims or actions are asserted against us, we may be required to modify
our products or seek licenses for these intellectual property rights. We may not
be able to modify our products or obtain licenses on commercially reasonable
terms, in a timely manner or at all. Our failure to do so could adversely affect
our business.

 OUR EFFORTS TO EXPAND INTERNATIONAL OPERATIONS ARE SUBJECT TO A NUMBER OF
 RISKS.

     We are currently seeking to increase our international sales. Our inability
to maintain or to obtain federal or foreign regulatory approvals relating to the
import or export of our products on a timely basis could adversely affect our
ability to expand our international business. Additionally, our international
operations could be subject to a number of risks, any of which could adversely
affect our future international sales, including:

     - increased collection risks;

     - trade restrictions;

     - export duties and tariffs; and

     - uncertain political, regulatory and economic developments.

     Our ability to produce the Forte PKI card on a timely and cost-effective
basis depends on the availability of a computer chip from a third-party
supplier, with whom we do not expect to maintain a supply agreement.

     Any inability to receive adequate supplies of Atmel Corporation's specially
designed Forte microprocessor would adversely affect our ability to complete and
sell the Forte PKI card. We do not anticipate maintaining a supply agreement
with Atmel Corporation for the Forte microprocessor. If Atmel were unable to
deliver the Forte microprocessor for a lengthy period of time or terminated its
relationship with us, we
                                       28
<PAGE>   29

would be unable to produce the Forte PKI card until we could design a
replacement computer chip for the Forte microprocessor. We anticipate this would
take substantial time and resources to complete.

 SMALL NUMBER OF STOCKHOLDERS, INCLUDING OUR OFFICERS AND DIRECTORS, WILL HAVE
 THE ABILITY TO CONTROL STOCKHOLDER VOTES.

     Kris Shah and members of his family, William W. Davis, Sr. and Lillian A.
Davis presently beneficially own, in the aggregate, approximately 61.3% of our
outstanding common stock. These stockholders, if acting together, would have the
ability to elect our directors and to determine the outcome of corporate actions
requiring stockholder approval, irrespective of how other stockholders may vote.
This concentration of ownership may also have the effect of delaying or
preventing a change in control.

  THERE ARE LAWSUITS PENDING AGAINST US WHICH COULD ADVERSELY AFFECT OUR
BUSINESS IF THEY ARE RESOLVED AGAINST PULSAR.

     Lawsuits are pending against Pulsar which, if resolved against Pulsar,
could materially and adversely affect our business and financial condition. See
"Item 3 -- Legal Proceedings."

  OUR STOCK PRICE IS EXTREMELY VOLATILE.

     The trading price of our common stock is highly volatile as a result of
factors specific to us or applicable to our market and industry in general.
These factors, include:

     - variations in our annual or quarterly financial results or those of our
       competitors;

     - company issued earnings announcements that vary from consensus analyst
       estimates;

     - changes by financial research analysts in their recommendations or
       estimates of our earnings;

     - conditions in the economy in general or in the information technology
       service sector in particular;

     - announcements of technological innovations or new products or services by
       us or our competitors; and

     - unfavorable publicity or changes in applicable laws and regulations, or
       their judicial or administrative interpretations, affecting us or the
       information technology service sectors.

     In addition, the stock market has recently been subject to extreme price
and volume fluctuations. This volatility has significantly affected the market
prices of securities issued by many companies for reasons unrelated to the
operating performance of these companies. In the past, following periods of
volatility in the market price of a company's securities, some companies have
been sued by their stockholders. If we were sued, it could result in substantial
costs and a diversion of management's attention and resources, which could
adversely affect our business.

 WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION AND
 COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.

     Our certificate of incorporation and bylaws contain provisions that may
deter a takeover or a change in control or prevent an acquisition not approved
by our board of directors, or that may adversely affect the price of our common
stock.

 THE NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE AND THE EXISTENCE OF REGISTRATION
 RIGHTS COULD DEPRESS THE MARKET FOR OUR COMMON STOCK.

     The possibility that a substantial number of additional shares of common
stock may become tradable in the public market in the future may adversely
affect prevailing market prices for our common stock and could impair our
ability to raise capital through the sale of equity securities. The shares that
are restricted from trading, pursuant to agreement with the underwriter in our
initial public offering, will become available for sale in June 2000 and over
succeeding months. We cannot predict the effect, if any, that sales of these
additional securities or the availability of these additional securities for
sale will have on the market prices prevailing
                                       29
<PAGE>   30

from time to time. In addition, the representatives of the underwriters in our
initial public offering have also been granted registration rights commencing in
June 2000 providing for the registration under the Securities Act of the
securities issuable upon exercise of the representatives' warrants. The exercise
of these rights could result in substantial expense to us. Furthermore, if the
representatives exercise their registration rights, they will be unable to make
a market in our securities for up to nine days before the initial sales of the
warrants until the discontinuation of sales. If the representatives cease making
a market, the market and market prices for the securities may be adversely
affected and the holders of these securities may be unable to sell them.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We entered into an agreement with Fidelity Funding permitting us to borrow
under a $20 million secured revolving line of credit facility in June 1999.
Under the agreement, we are subject to an annual interest rate of the prime rate
plus 0.625%. An increase in the prime rate can adversely affect our ability to
draw against this line of credit. Future operating results could also be
adversely affected by increases in interest rates that occur while significant
borrowings are outstanding. We had outstanding borrowings of $312,000 related to
this line of credit at December 31, 1999. A 10% change in the underlying prime
rate would result in an approximately $7,000 change in the annual amount of
interest paid on such debt.

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Reference is made to the financial statements included in this Report at
pages F-1 through F-20.

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURE

     Not Applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item is incorporated herein by this
reference to the section entitled "Election of Directors" in our definitive
Proxy Statement for our 2000 Annual Meeting of Stockholders involving, among
other things, the election of directors. We will file such Proxy Statement with
the Securities and Exchange Commission not later than 120 days after the close
of our fiscal year ended December 31, 1999.

ITEM 11. EXECUTIVE COMPENSATION.

     The information required by this item is incorporated herein by this
reference to the section entitled "Executive Compensation" in our definitive
Proxy Statement for our 2000 Annual Meeting of Stockholders involving, among
other things, the election of directors. We will file such Proxy Statement with
the Securities and Exchange Commission not later than 120 days after the close
of our fiscal year ended December 31, 1999.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required by this item is incorporated herein by this
reference to the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in our definitive Proxy Statement for our 2000 Annual
Meeting of Stockholders involving, among other things, the election of
directors. We will file such Proxy Statement with the Securities and Exchange
Commission not later than 120 days after the close of the our fiscal year ended
December 31, 1999.

                                       30
<PAGE>   31

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by this item is incorporated herein by this
reference to the section entitled "Executive Compensation --Certain
Transactions" in our definitive Proxy Statement for our 2000 Annual Meeting of
Stockholders involving, among other things, the election of directors. We will
file such Proxy Statement with the Securities and Exchange Commission not later
than 120 days after the close of our fiscal year ended December 31, 1999.

                                    PART IV

ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a)(1) Financial statements
          The financial statements listed in the accompanying index to
     consolidated financial statements and financial statement schedules are
     filed or incorporated by reference as part of this annual report.

        (2) Financial statement schedules
          The financial statement schedule listed in the accompanying index to
     consolidated financial statements and financial statement schedules is
     filed as part of this annual report.

        (3) Exhibits
          The exhibits listed in the accompanying index to exhibits are filed or
     incorporated by reference as part of this annual report.

     (b)    Reports on Form 8-K
          None.

                                       31
<PAGE>   32

                                   SIGNATURES

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

Dated: March 30, 2000                     LITRONIC INC.

                                          By:          /s/  KRIS SHAH
                                            ------------------------------------
                                            Kris Shah
                                            Chief Executive Officer

     Pursuant to the requirements of the Securities Act of 1934, this report is
made by the following persons on behalf of the Registrant and in the capacities
indicted.

<TABLE>
<CAPTION>
                    NAME                                       TITLE                        DATE
                    ----                                       -----                        ----
<S>                                              <C>                                   <C>
/s/  KRIS SHAH                                   Chairman of the Board and Chief       March 30, 2000
---------------------------------------------    Executive Officer (Principal
Kris Shah                                        Executive Officer)

/s/  ROY LUNA                                    Chief Financial Officer (Principal    March 30, 2000
---------------------------------------------    Financial Officer and Principal
Roy Luna                                         Accounting Officer)

/s/  WILLIAM D. DAVIS, SR.                       President, Chief Operating Officer    March 30, 2000
---------------------------------------------    and Director
William D. Davis, Sr.

/s/  MARK GEMBICKI                               Director                              March 30, 2000
---------------------------------------------
Mark Gembicki

/s/  MATTHEW MEDEIROS                            Director                              March 30, 2000
---------------------------------------------
Matthew Medeiros
</TABLE>

                                       32
<PAGE>   33

                         LITRONIC INC. AND SUBSIDIARIES

  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................  F-2
Consolidated Balance Sheets as of December 31, 1998 and
  1999......................................................  F-3
Consolidated Statements of Operations for the years ended
  December 31, 1997, 1998 and 1999..........................  F-4
Consolidated Statements of Shareholders' Equity (Deficit)
  for the years ended December 31, 1997, 1998 and 1999......  F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1997, 1998 and 1999..........................  F-6
Notes to Consolidated Financial Statements..................  F-7
Schedule II - Valuation and qualifying accounts.............  S-1
</TABLE>

                                       F-1
<PAGE>   34

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Litronic Inc.:

     We have audited the accompanying consolidated financial statements of
Litronic Inc. and subsidiaries as of December 31, 1998 and 1999 and for each of
the years in the three-year period ended December 31, 1999 as listed in the
accompanying index. In connection with our audit of the financial statements, we
also have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule 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, the consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of Litronic
Inc. and subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

                                          /s/ KPMG LLP

Orange County, California
March 24, 2000

                                       F-2
<PAGE>   35

                         LITRONIC INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                                ------------------
                                                                 1998       1999
                                                                -------    -------
<S>                                                             <C>        <C>
                                      ASSETS
Cash and cash equivalents...................................    $   898    $ 6,441
Restricted cash.............................................         --        612
Accounts receivable (net of allowance for doubtful accounts
  of $14 and $390 as of December 31, 1998 and 1999,
  respectively).............................................        740      7,141
Inventories.................................................        533        796
Other current assets........................................        385        703
Note receivable -- related party............................         --         70
                                                                -------    -------
          Total current assets..............................      2,556     15,763
Property and equipment, net.................................        235        646
Goodwill and other intangibles, net.........................         --     34,695
                                                                -------    -------
                                                                $ 2,791    $51,104
                                                                =======    =======

                  LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current installments of long-term debt......................    $   580    $   481
Accounts payable............................................        456      1,250
Accrued liabilities.........................................        762      1,440
                                                                -------    -------
          Total current liabilities.........................      1,798      3,171
Long-term debt, less current installments...................      5,200         --
                                                                -------    -------
          Total liabilities.................................      6,998      3,171
Shareholders' equity (deficit):
  Preferred stock, $0.01 par value.
     Authorized 5,000,000 shares; no shares issued or
      outstanding...........................................         --         --
  Common stock, $0.01 par value.
     Authorized 25,000,000 shares; issued and outstanding
      3,870,693 shares at December 31, 1998 and 9,856,944
      shares at December 31, 1999...........................         39         99
  Additional paid-in capital................................         --     52,812
  Accumulated deficit.......................................     (4,246)    (4,978)
                                                                -------    -------
Total shareholders' equity (deficit)........................     (4,207)    47,933
                                                                -------    -------
Commitments and contingencies (notes 11 and 16)
                                                                $ 2,791    $51,104
                                                                =======    =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-3
<PAGE>   36

                         LITRONIC INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                            -----------------------------------
                                                              1997         1998         1999
                                                            ---------    ---------    ---------
<S>                                                         <C>          <C>          <C>
Revenues:
  Product.................................................  $   8,627    $   5,214    $  29,805
  License and service.....................................      1,539        1,041        1,052
  Research and development................................         --          398          798
                                                            ---------    ---------    ---------
       Total revenues.....................................     10,166        6,653       31,655
                                                            ---------    ---------    ---------
Costs and expenses:
  Cost of sales - product.................................      3,211        2,821       26,249
  Cost of sales - license and service.....................        643          950          522
  Selling, general and administrative.....................      3,487        2,631        6,865
  Research and development................................      1,172        1,334        3,532
  Amortization of goodwill and other intangibles..........         --           --        1,448
                                                            ---------    ---------    ---------
       Total costs and expenses...........................      8,513        7,736       38,616
                                                            ---------    ---------    ---------
       Operating income (loss)............................      1,653       (1,083)      (6,961)
Interest expense, net.....................................         42          418          168
                                                            ---------    ---------    ---------
Earnings (loss) from continuing operations before income
  taxes...................................................      1,611       (1,501)      (7,129)
Provision for (benefit from) income taxes.................         22          (95)         (43)
                                                            ---------    ---------    ---------
Earnings (loss) from continuing operations................      1,589       (1,406)      (7,086)
Discontinued operations:
  Loss from discontinued operations, net of applicable
     income tax benefit of $23 in 1997....................     (1,278)          --           --
  Gain on disposal of discontinued operations, net of
     income tax expense of $241...........................     15,023           --           --
                                                            ---------    ---------    ---------
Net earnings (loss).......................................  $  15,334    $  (1,406)   $  (7,086)
                                                            =========    =========    =========
Earnings (loss) from continuing operations per
  share--basic and diluted................................  $     .41    $    (.36)   $   (1.00)
Discontinued operations, net of applicable income tax
  effect, per share--basic and diluted....................       3.55           --           --
                                                            ---------    ---------    ---------
Net earnings (loss) per share--basic and diluted..........  $    3.96    $    (.36)   $   (1.00)
                                                            =========    =========    =========
Shares used in per share computations--basic and
  diluted.................................................  3,870,693    3,870,693    7,055,882
                                                            =========    =========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-4
<PAGE>   37

                         LITRONIC INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                  NET
                                                 COMMON STOCK     ADDITIONAL                 SHAREHOLDERS'
                                                ---------------    PAID IN     ACCUMULATED      EQUITY
                                                SHARES   AMOUNT    CAPITAL       DEFICIT       (DEFICIT)
                                                ------   ------   ----------   -----------   -------------
<S>                                             <C>      <C>      <C>          <C>           <C>
Balance, December 31, 1996....................  3,871     $39      $    --       $  (140)       $  (101)
Net earnings..................................     --      --           --        15,334         15,334
Cash dividends to shareholders................     --      --           --        (9,534)        (9,534)
Distribution of KRDS, Inc. stock to
  shareholders................................     --      --           --        (8,500)        (8,500)
                                                -----     ---      -------       -------        -------
Balance, December 31, 1997....................  3,871      39           --        (2,840)        (2,801)
Net loss......................................     --      --           --        (1,406)        (1,406)
                                                -----     ---      -------       -------        -------
Balance, December 31, 1998....................  3,871      39           --        (4,246)        (4,207)
Proceeds from sale of common stock, net of
  issuance costs of $5,426....................  3,700      37       35,237            --         35,274
Common stock issued in connection with the
  acquisition of Pulsar.......................  2,170      22       23,848            --         23,870
Change from Subchapter S Corporation to C
  Corporation.................................     --      --       (6,354)        6,354             --
Stock options exercised.......................    116       1           81            --             82
Net loss......................................     --      --           --        (7,086)        (7,086)
                                                -----     ---      -------       -------        -------
Balance, December 31, 1999....................  9,857     $99      $52,812       $(4,978)       $47,933
                                                =====     ===      =======       =======        =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-5
<PAGE>   38

                         LITRONIC INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1997       1998       1999
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>
Cash flows from operating activities:
  Net earnings (loss).......................................  $ 15,334     (1,406)    (7,086)
  Adjustments to reconcile net earnings (loss) to net cash
    provided by (used in) operating activities:
  Depreciation and amortization.............................       129        203      1,803
  Gains on disposal of discontinued operations, net of
    tax.....................................................   (15,023)        --         --
  Cash payments related to discontinued operations..........       152         --         --
  Changes in assets and liabilities:
  Accounts receivable.......................................     1,048        256     (1,496)
  Inventories...............................................       715       (128)       (64)
  Other current assets......................................        13       (249)      (381)
  Accounts payable..........................................      (418)        41     (3,964)
  Accrued liabilities.......................................        92       (465)      (633)
  Other assets..............................................        --         --        332
                                                              --------    -------    -------
         Net cash provided by (used in) operating
          activities........................................     2,042     (1,748)   (11,489)
                                                              --------    -------    -------
Cash flows from investing activities:
  Purchases of property and equipment.......................    (4,919)      (118)      (282)
  Proceeds from disposal of discontinued operations.........    20,567         --         --
  Restricted cash relating to line of credit................        --         --       (612)
                                                              --------    -------    -------
         Net cash provided by (used in) investing
          activities........................................    15,648       (118)      (894)
                                                              --------    -------    -------
Cash flows from financing activities:
  Discontinued operations financing activities..............      (698)        --         --
  Stock options exercised...................................        --         --         82
  Proceeds from sale of common stock, net of issuance costs
    of $5,426...............................................        --         --     35,274
  Proceeds from revolving note payable to bank..............    18,649      6,496     23,837
  Proceeds from related party note payable..................     2,900        600         --
  Proceeds from line of credit..............................        --         --      1,129
  Proceeds from long-term debt..............................     3,038      5,200      1,500
  Principal payments on revolving line of credit and
    long-term notes payable to bank.........................   (18,445)        --         --
  Proceeds from insurance financing.........................        --         --        497
  Repayment of related party note payable...................      (248)    (3,500)        --
  Principal payments on revolving line of credit............    (5,224)    (6,522)   (30,805)
  Repayment on insurance financing..........................        --         --       (329)
  Principal payment on notes payable........................        --         --    (13,259)
  Cash dividends to shareholders............................    (9,534)        --         --
  Cash distribution to shareholders.........................    (8,500)        --         --
                                                              --------    -------    -------
  Net cash provided by (used in) financing activities.......   (18,062)     2,274     17,926
                                                              --------    -------    -------
  Net increase (decrease) in cash...........................      (372)       408      5,543
                                                              --------    -------    -------
Cash and cash equivalents at beginning of year..............       862        490        898
                                                              --------    -------    -------
Cash and cash equivalents at end of year....................  $    490        898      6,441
                                                              ========    =======    =======
Supplemental disclosures of cash flow information:
  Cash paid during the year for:
         Interest...........................................  $    119        418        162
         Income taxes.......................................       204         --          3
                                                              ========    =======    =======
Supplemental disclosure of noncash investing and financing
  activities:
  Liabilities transferred in connection with sale of
    Intercon division (note 3)..............................  $   (366)        --         --
  Mortgage transferred in connection with distribution of
    KRDS, Inc. (note 9).....................................    (3,038)        --         --
</TABLE>

     The Company issued 2,169,938 shares of common stock in connection with the
acquisition of Pulsar. In connection with the acquisition, net assets purchased
were as follows (note 2):

<TABLE>
<S>                                                           <C>         <C>        <C>
Market value of common stock issued.........................  $     --         --     23,870
                                                              ========    =======    =======
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       F-6
<PAGE>   39

                         LITRONIC INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1999
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  General

     Litronic Inc. (through a reorganization with Litronic Industries, Inc., as
described further below) (Litronic or the Company) designs and produces high
grade information security solutions. In addition, the Company also provides
engineering and other services to various government agencies on a time and
material basis. Through its Intercon division (Intercon), which was discontinued
during 1997 (see note 3), Litronic Industries, Inc. provided state-of-the-art
electronic interconnect products for both government and commercial entities. On
December 31, 1997, the Company distributed KRDS, Inc. to the Company's primary
shareholders (note 9).

     Through the acquisition of Pulsar Data Systems, Inc. (Pulsar), the Company
engages in the sale of computer hardware, software, peripheral equipment, and
support services to governmental agencies and commercial enterprises throughout
the United States.

  Public Offering and Reorganization

     In June 1999, Litronic completed an initial public offering of common stock
of Litronic Inc., a newly formed corporation with no operations (the
"Offering"). The Company offered 3,700,000 shares of common stock at a purchase
price of $11 per share, resulting is gross proceeds of $40,700. These proceeds
were offset by issuance costs of $5,426, resulting in net proceeds of $35,274.
Litronic Industries, Inc. also initiated certain events (the "Reorganization")
in connection with the Offering which resulted in it becoming a wholly-owned
subsidiary of Litronic Inc. on June 8, 1999. The Reorganization was accomplished
through a stock-for-stock exchange between Litronic Inc. and Litronic
Industries, Inc. and was accounted for as an "as if pooling of interests" for
entities under common control. Concurrent with the Reorganization, Litronic
Industries, Inc. terminated its Subchapter S status and is subject to federal
and state income taxes. Pursuant to the change from a Subchapter S to a C
corporation, the cumulative loss from inception to June 9, 1999, as a Subchapter
S corporation of $6,354 was transferred from accumulated deficit to additional
paid in capital.

     All of the outstanding shares of Litronic Industries, Inc. were exchanged
for 3,870,693 shares of the Company's common stock. Consequently, as of June 8,
1999, the consolidated group included the operations of Litronic Inc. and its
wholly-owned subsidiary, Litronic Industries, Inc. The prior period financial
statements have been restated to reflect the exchange of these shares.

     The Company also entered into a stock acquisition agreement with Pulsar
which was effected simultaneously with the Offering. All of the outstanding
shares of Pulsar were exchanged for 2,169,938 shares of the Company's common
stock. The acquisition was accounted for using the purchase method of
accounting, and accordingly, the results of operations of Pulsar have been
included in the Company's consolidated financial statements from June 14, 1999.

  Basis of Financial Statement Presentation and Principles of Consolidation

     The consolidated financial statements and related notes presented herein
have been retroactively adjusted to reflect the Reorganization. The capital
structure presented in these financial statements is that of Litronic Inc. All
references herein to "the Company" refer to Litronic Inc. as consolidated with
Litronic Industries, Inc. The consolidated financial statements include the
accounts of Litronic Inc., and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

                                       F-7
<PAGE>   40
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Earnings (Loss) Per Share

     The Company applies Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standard No. (Statement) 128, "Earnings Per Share."
Statement 128 provides for the calculation of basic and diluted earnings (loss)
per share. Basic earnings (loss) per share includes no dilution and is computed
by dividing earnings (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity. Such shares are not included when there is a loss as the
effect would be anti-dilutive.

  Revenue Recognition

     Revenue from product sales, including hardware (with embedded software) and
software, is recognized upon shipment unless contract terms call for a later
date, net of an allowance to cover estimated warranty costs. Customers do not
have the right of return except for product defects, and product sales are not
contingent upon customer testing, approval and/or acceptance. The costs of
providing postcontract customer support are not significant. Revenue under
service and development contracts is recorded as services are rendered. The
Company's revenue recognition policies for software are in compliance with the
American Institute of Certified Public Accountants (AICPA) Statements of
Position (SOP) 97-2, Software Revenue Recognition. In December 1998, the AICPA
issued SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions. SOP 98-9 amends certain paragraphs of SOP 97-2
to require recognition of revenue using the "residual method" under certain
circumstances. The "residual method" established by SOP 98-9 is effective for
fiscal years beginning after March 15, 1999. The adoption of SOP 98-9 did not
have a significant impact on the Company's financial position or results of
operations. Revenue under research arrangements with government agencies is
recorded as revenue as services are rendered or products are shipped.

     Included in research and development revenue for the years ended December
31, 1998 and 1999 is $398 and $798, respectively, related to a contract with the
National Security Agency (NSA). The Company is designing a microprocessor
meeting certain minimum specifications under a contract with the NSA. The
Company has contracted with others to perform certain aspects of the project.
All related project costs are expensed as research and development as incurred.
No other funds received for research and development projects were recorded
during any of the periods presented. The amounts received from the NSA are not
refundable regardless of the results of the development efforts. The related
research and development costs are not separately identifiable, therefore the
corresponding costs of the entire development effort are included in research
and development expenses.

     Revenue from time and material, network deployment service contracts is
recognized on the basis of man-hours incurred plus other reimbursable contract
costs incurred during the period.

     Revenue from network deployment products is recognized upon transfer of
title, generally upon delivery. Product and service revenues from the Company's
electric security systems contracts are recognized in accordance with SOP 81-1,
"Accounting for Performance of Construction-Type and certain production-type
contracts". The Company recognizes this revenue on a percentage of completion
basis, based on estimated labor dollars incurred.

     The Company's revenue recognition policies are in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101.

  Cash and Cash Equivalents

     The Company considers all highly liquid investments with maturities of
three months or less at the date of purchase to be cash equivalents.
                                       F-8
<PAGE>   41
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Inventories

     Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).

  Property and Equipment and Goodwill and Other Intangibles

     Property and equipment are stated at cost. Depreciation of property and
equipment is computed on a straight-line basis over the estimated useful lives
of 2 to 3 years.

     The Company amortizes intangible assets relating to businesses acquired and
costs in excess of the fair value of net assets of businesses acquired
("goodwill and other intangibles") using the straight-line method over the
estimated useful lives of the intangible assets and business acquired.
Amortization of goodwill and other intangibles was $1,448 for the year ended
December 31, 1999.

     Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

     Management is in the process of completing the integration of Pulsar, which
it expects to complete in 2000. After the integration is completed, management
plans to fully analyze the recoverability of the goodwill and other intangibles
relating to the acquisition of Pulsar, based upon the cash flows being generated
by Pulsar. Such an analysis could result in the conclusion that the cash flows
of Pulsar will not fully support the recoverability of the goodwill and other
intangibles. If such a conclusion is reached, management would consider various
options regarding the Pulsar operations, including a restructuring or sale of
some or all of Pulsar's operations. In addition, such a conclusion could
possibly result in an impairment charge relating to some or all of the carrying
value of the goodwill and other intangibles.

  Segment Reporting

     As of January 1, 1998, the Company adopted Statement 131, "Disclosures
about Segments of an Enterprise and Related Information", which requires
entities to report financial and descriptive information about its reportable
operating segments. The Company had historically operated in two business
segments, information security solutions and electronic interconnect products.
On September 30, 1997, the Company sold its Intercon division, which produced
electronic interconnect products. As of December 31, 1998, the Company's
remaining operations pertained only to its information security solution
segment. On June 14, 1999, with the acquisition of Pulsar, the Company expanded
into the network solution business segment (see note 8).

  Accounting for Stock Options

     The Company applies the provisions of Statement 123, "Accounting for
Stock-Based Compensation," which requires entities to recognize as expense over
the vesting period the fair value as of the date of grant of all stock based
awards. Alternatively, Statement 123 allows entities to apply the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, and to provide pro forma net income
and pro forma net income per share disclosures for employee stock option grants
made in 1996 and future years as if the fair-value-based method defined in
Statement 123 had been applied. The Company has elected to apply the provisions
of APB Opinion No. 25, under which compensation expense would be recorded on the
date of grant only if the current market price of

                                       F-9
<PAGE>   42
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the underlying stock exceeded the exercise price, and provide the pro forma
disclosure provisions of Statement 123 in its annual financial statements (see
note 13).

  Fair Value of Financial Instruments

     The Company applies the provisions of Statement 107, "Disclosures about
Fair Value of Financial Instruments." Statement 107 requires all entities to
disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized on the balance sheet, for which it is practicable
to estimate fair value. Statement 107 defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. As of December 31, 1998 and 1999,
management believes the fair value of all financial instruments approximated
carrying value, due to their short term nature.

  Income Taxes

     Prior to June 8, 1999, the Company had elected to be taxed as an S
corporation under the provisions of Section 1362 of the Internal Revenue Code
and used the accrual basis of reporting for income tax purposes. Accordingly,
the Company had not provided for Federal income taxes since the liability was
that of the shareholders. The Company was subject to state income taxes on
earnings before taxes. The provision (benefit) for state income taxes was $22
for continuing operations, $(23) for discontinued operations, and $241 for the
gain on disposal of discontinued operations for the year ended December 31,
1997. The benefit for state income taxes was $95 for continuing operations for
the year ended December 31, 1998.

     On June 8, 1999, the Company reorganized from an S corporation to C
corporation, and in accordance with Statement 109 "Accounting for Income Taxes,"
the Company now provides for federal income tax assets and liabilities.
Statement 109 uses the asset and liability method of accounting for income
taxes, which recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

  Comprehensive Income

     The Company adopted Statement 130, "Reporting Comprehensive Income."
Statement 130 establishes rules for the reporting and display of comprehensive
income and its components. The adoption of Statement 130 had no impact on the
Company's consolidated financial statements as the Company has no transactions,
other than net loss, that would be considered other comprehensive income.

  Use of Estimates

     The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the dates of
the balance sheets and revenues and expenses for the periods. Actual results
could differ from those estimates.

  Reclassifications

     Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements to conform to the 1999 presentation.

                                      F-10
<PAGE>   43
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

 (2) PULSAR ACQUISITION

     The Company entered into a stock acquisition agreement with Pulsar which
was effected simultaneously with the Offering. This acquisition was completed on
June 14, 1999. Litronic acquired all of the outstanding shares of Pulsar in
exchange for 2,169,938 shares of the Company's common stock. The acquisition was
accounted for using the purchase method and, accordingly, the results of
operations of Pulsar have been included in the Company's consolidated financial
statements from June 14, 1999. The excess of the purchase price over the fair
value of the net assets acquired less the liabilities assumed, resulted in a
total of $36.1 million recorded as goodwill and intangible assets, which is
being amortized on a straight-line basis of 10-15 years.

     The purchase price of the Pulsar acquisition of $23,870 or $11 per share
was based on the fair market value of the common stock issued on June 14, 1999
and was allocated as follows:

<TABLE>
<CAPTION>

<S>                                                             <C>
Merger costs................................................    $  (122)
Tangible assets.............................................      6,255
Liabilities and debt assumed................................    (18,406)
Indentifiable intangible assets and goodwill:
  Distribution Channel......................................     12,048
  Customer Base.............................................     12,047
  Goodwill..................................................     12,048
                                                                -------
                                                                 36,143
                                                                -------
Market value of common stock issued                             $23,870
                                                                =======
</TABLE>

     The Company allocated the purchase price to tangible assets, liabilities,
identifiable intangible assets and goodwill based on management's estimates of
the fair value.

     During the fourth quarter of 1999, the Company recorded approximately $300
of adjustments to goodwill related to the acquisition of Pulsar. The adjustments
were primarily attributable to reductions in certain accounts payable and
accrued liabilities not determined necessary after further investigation,
partially offset by a reduction in the fair value of certain assets as compared
to the amount originally estimated and the settlement of a pre-existing lawsuit
for $140, net of a reimbursement from the former majority shareholder of Pulsar
(see note 16).

     The following unaudited pro forma financial information presents the
combined results of operations of Litronic and Pulsar for 1998 and 1999 as if
the acquisition had occurred as of the beginning of 1998 and 1999, after giving
effect to certain adjustments including amortization of goodwill and other
intangibles, increased interest expense on debt assumed and related income tax
effects. The pro forma financial information does not necessarily reflect the
results of operations that would have occurred had Litronic and Pulsar
constituted a single entity during such periods.

<TABLE>
<CAPTION>
                                                              YEAR ENDED      YEAR ENDED
                                                             DECEMBER 31,    DECEMBER 31,
                                                                 1998            1999
                                                             ------------    ------------
<S>                                                          <C>             <C>
Total revenue..............................................    $ 87,185        $ 49,230
                                                               ========        ========
Net loss...................................................    $(11,659)       $(11,713)
                                                               ========        ========
Net loss per share, basic and diluted......................    $  (1.20)       $  (1.19)
                                                               ========        ========
</TABLE>

     As part of the Pulsar acquisition the Company assumed $12,422 in debt. The
majority of the debt was paid on June 14, 1999. The remaining outstanding debt
was paid in July 1999.

                                      F-11
<PAGE>   44
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

 (3) DISCONTINUED OPERATIONS

     The Company sold its Intercon division on September 30, 1997 for cash to
Allied Signal Inc., a non-related publicly-traded company. The gain on sale was
$15,023, net of tax expense of $241. The results of the Intercon division have
been classified as discontinued operations in the accompanying consolidated
financial statements. Intercon's 1997 revenues through the sale date were
$7,653.

     In addition to the cash proceeds received upon the close of the
transaction, the agreement provided for the right to receive a contingent
purchase price not to exceed $45,400 as well as a "gross-up" payment based upon
the approximate expected tax benefit related to the assets transferred.
Effective November 30, 1997, this right was distributed pro rata to the
Company's shareholders.

     On December 31, 1997, the Company spun-off its subsidiary, KRDS, Inc., to
the Company's shareholders. The results of KRDS, Inc. have been classified as
discontinued operations in the accompanying consolidated financial statements.
For the year ended December 31, 1997, KRDS, Inc.'s revenues were $380.

 (4) INVENTORIES

     A summary of inventories follows:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                              ------------
                                                              1998    1999
                                                              ----    ----
<S>                                                           <C>     <C>
Raw materials...............................................  $239    $190
Work-in-process.............................................    25     136
Finished goods..............................................   269     470
                                                              ----    ----
                                                              $533    $796
                                                              ====    ====
</TABLE>

 (5) PROPERTY AND EQUIPMENT

     A summary of property and equipment follows:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                --------------
                                                                1998     1999
                                                                ----    ------
<S>                                                             <C>     <C>
Leasehold improvements......................................    $ --    $   34
Machinery and equipment.....................................      68        68
Furniture and fixtures......................................     576     1,308
                                                                ----    ------
                                                                 644     1,410
Less accumulated depreciation and amortization..............     409       764
                                                                ----    ------
                                                                $235    $  646
                                                                ====    ======
</TABLE>

                                      F-12
<PAGE>   45
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

 (6) LONG-TERM DEBT

     A summary of long-term debt follows:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                --------------
                                                                 1998     1999
                                                                ------    ----
<S>                                                             <C>       <C>
Notes payable to bank secured by substantially all assets of
  the Company and personal assets of, and a guarantee by,
  the Company's president and majority shareholder, bearing
  interest at 6.6%, paid in June 1999.......................    $5,200    $ --
Revolving note payable to bank (the Revolver) bearing
  interest at prime plus 1.5% (9.75% at December 31, 1998)
  payable in monthly interest-only payments through maturity
  on July 31, 2000; secured by substantially all assets of
  the Company and by personal assets of, and a guarantee by,
  the Company's president and majority shareholder; this
  line was terminated and paid in full in June 1999.........       580      --
                                                                ------    ----
Revolving note payable to bank with maximum availability of
  $20 million, bearing interest at prime plus .625% (9.125%
  at December 31, 1999) payable in monthly interest-only
  payments through maturity on May 10, 2002; secured by
  substantially all assets of the Company and by personal
  assets of, and a guarantee by, the Company's chairman and
  majority shareholder, renewable at the bank's option for
  additional one-year periods...............................        --     312
                                                                ------    ----
Note payable for insurance financing due in nine monthly
  payments beginning July 9, 1999 at an annual percentage
  rate of 5.93%.............................................        --     169
                                                                ------    ----
                                                                 5,780     481
Less current installments...................................       580     481
                                                                ------    ----
                                                                $5,200    $ --
                                                                ======    ====
</TABLE>

     The Company's $20 million revolving credit agreement contains certain
covenants and restrictions, including maintenance of certain financial ratios
and a restriction on future borrowings. The credit agreement also prohibits the
payment of dividends. As of December 31, 1999, the Company was not in compliance
with certain covenants, and has obtained a waiver of these covenants. The
amounts due under this agreement have been classified as current liabilities in
the accompanying balance sheet. As of December 31, 1999, the Company had
available borrowings of $19,688 under the revolving credit agreement.

     At December 31, 1999, the bank required the Company to maintain a $612 cash
deposit at the bank. For balance sheet presentation purposes, the funds have
been reflected as restricted cash, as the Company has no access to the funds.

 (7) ACCRUED LIABILITIES

     A summary of accrued liabilities follows:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                --------------
                                                                1998     1999
                                                                ----    ------
<S>                                                             <C>     <C>
Professional fees...........................................    $350    $  212
Deferred revenue............................................     107        29
Accrued vacation............................................     127       231
Accrued compensation........................................      93       432
Other.......................................................      85       536
                                                                ----    ------
                                                                $762    $1,440
                                                                ====    ======
</TABLE>

                                      F-13
<PAGE>   46
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

 (8) BUSINESS SEGMENTS AND PRODUCT LINES

     The Company historically operated in the information security solutions
segment. In June 1999, with the acquisition of Pulsar, the Company expanded into
the network solutions segment, resulting in the operation of two distinct
business segments. Following are the revenues, costs of sales, and identifiable
assets of these segments for the year ended December 31, 1999. In 1998, the
Company was only in one business segment.

<TABLE>
<CAPTION>
                                             DATA SECURITY PRODUCTS
                                                  AND SERVICES         NETWORK SOLUTIONS MARKET
                                             ----------------------    ------------------------
<S>                                          <C>                       <C>
Revenue....................................          $5,195                    $26,460
Cost of sales..............................          $2,203                    $24,568
Identifiable assets........................          $  798                    $41,684
                                                     ======                    =======
</TABLE>

     As the Chief Operating Decision Maker does not review operating expenses by
segment beyond cost of sales or assets, except as identified, additional segment
information is not available.

     The Company has four distinct product lines and services: network
deployment products, data security products, which consist primarily of readers
and accessories, electric security systems products, electric security systems
services, and license and services. Following is a summary of total products by
product line.

<TABLE>
<CAPTION>
                                                          1997       1998      1999
                                                         -------    ------    -------
<S>                                                      <C>        <C>       <C>
Net revenues:
  Network deployment products..........................  $    --    $   --    $25,976
  Data security products...............................    8,627     5,214      3,563
  License and service..................................    1,539     1,041        834
  Electric security systems:
     Products..........................................       --        --        266
     Services..........................................       --        --        218
                                                         -------    ------    -------
Total net product, license and service revenues........  $10,166    $6,255    $30,857
                                                         =======    ======    =======
</TABLE>

 (9) RELATED PARTY TRANSACTIONS

     At December 31, 1994, the Company had an obligation of $248 to two of the
Company's executive officers for accrued compensation. On January 2, 1995, such
obligation was converted to two unsecured notes payable bearing interest at 8%,
which were due and payable on December 31, 1998. On October 29, 1997, the
principal of $248 and accrued interest amounting to $57 due on the notes was
repaid. The Company incurred interest expense on these notes aggregating $18 in
1997.

     The primary shareholders of Litronic Industries, Inc. formed KRDS, Inc.,
(KRDS) for the sole purpose of purchasing real estate property. The majority of
the property acquired was leased to the Intercon division and the acquirer of
the Intercon division has subsequently executed a continuing lease arrangement
with KRDS. KRDS's only operations consisted of a mortgage obligation, interest,
depreciation and rental income from the Company related to the real estate
property. The operations of KRDS were consolidated with the operations of
Litronic Industries, Inc. through December 31, 1997, when concurrent with the
sale of the Intercon division, the Company distributed KRDS to the Company's
shareholders. As the operations of KRDS were related to the Intercon operations,
the 1997 net income for KRDS of $2 (after intercompany eliminations) is included
in the loss from discontinued operations in the accompanying consolidated
statement of operations.

                                      F-14
<PAGE>   47
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     As a result of the sale of the Intercon division on September 30, 1997, the
Company distributed $9,534 in cash dividends and distributed the common stock of
KRDS to the shareholders of Litronic on a pro rata basis in 1997. The net assets
of KRDS consisted of $8,500 in cash at the time of the distribution.

     On December 31, 1997, the Company entered into two unsecured notes payable
with KRDS in which the Company was extended $900 and $2,000 in working capital
funds and a total of $2,900 was outstanding under these related party notes at
December 31, 1997. In February 1998, the Company entered into a third unsecured
note payable with KRDS under which the Company was extended $600 in working
capital funds. Interest was at 10% for each of the unsecured notes payable and
each of these unsecured notes and accrued interest were paid in full during
1998. The Company incurred $252 of interest expense on these notes in 1998.

     On December 31, 1999, the Company had a note receivable from William Davis,
the former majority shareholder of Pulsar, for $70 (see note 16). In February
2000, KRDS leased a building to the Company for its corporate headquarters. The
lease expires in February 2007 (see note 11). The facility has an annual rent of
approximately $423.

 (10) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

     Financial instruments that potentially subject the Company to concentration
of credit risk are trade receivables. Credit risk on trade receivables is
limited as a result of the Company's customer base and their dispersion across
different industries and geographic regions. As of December 31, 1998 and 1999,
accounts receivable included $308 and $5,386, respectively, due from the U.S.
Government and related agencies. Sales to the U.S. Government and related
agencies accounted for 91% of total revenues for the year ended December 31,
1999.

     The Company had sales to three customers that represented 45%, 20% and 19%
of 1997 total revenue, respectively. The Company had sales to three customers
that represented 44%, 17% and 20% of 1998 total revenue, respectively. The
Company had sales to two customers, which were agencies of the U.S. Government,
that represented 31% and 12% of 1999 total revenue, respectively. No other
customers accounted for more than 10% of total revenue in 1997, 1998 or 1999.
Trade accounts receivable aggregated $493 and $3,378 from the aforementioned
major customers as of December 31, 1998 and 1999, respectively.

 (11) COMMITMENTS

     The Company leases office space under noncancelable operating leases. The
terms of the leases range up to seven years. The following summarizes the future
minimum lease payments under all noncancelable operating lease obligations:

<TABLE>
<S>                                                           <C>
Year ending December 31,
       2000.................................................  $  745
       2001.................................................     717
       2002.................................................     535
       2003.................................................     497
       2004 and thereafter..................................   1,304
                                                              ------
                                                              $3,798
                                                              ======
</TABLE>

Rental expense under noncancelable operating leases was $215, $310 and $434 for
the years ended December 31, 1997, 1998 and 1999, respectively.

     In February 2000, the Company moved the corporate headquarters into a
facility leased from a related party (see note 9). The remaining term on the
previously existing lease extends until September 2001.

                                      F-15
<PAGE>   48
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Therefore, the Company has recognized a net loss on the lease of $129. This loss
has been reduced by probable subleases which the Company anticipates will be
signed in 2000.

 (12) LOSS PER SHARE

     The calculation of diluted net loss per share under Statement 128 excludes
potential common shares if the effect is antidilutive. Potential common shares
are composed of incremental shares of common stock issuable upon the exercise of
stock options and warrants. The following table sets forth potential common
shares that were excluded from the diluted net loss per share calculation for
the years ended December 31, 1997, 1998 and 1999 because they are antidilutive
for the periods indicated:

<TABLE>
<CAPTION>
                                                              1997    1998    1999
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Warrants....................................................  --       --     370
Stock options...............................................  --      281     236
                                                               --     ---     ---
                                                              --      281     606
                                                               ==     ===     ===
</TABLE>

 (13) SHAREHOLDER'S EQUITY

STOCK OPTION PLANS

     Under the Company's 1998 and 1999 Employee Stock Option Plans ("the Plans")
which were established in April 1998 and April 1999, respectively, the exercise
price of options granted will not be less than the fair market value of the
related common stock at the date of grant. The total number of shares of common
stock available for grant under each of the Plans is 600 shares. All stock
options granted have 10 year terms. Unless otherwise provided by the Board of
Directors or a committee of the Board administering the Plan, each option
granted under the 1998 Plan vested on December 31, 1998 as to 10-15%, plus an
additional 2.5% for each year of service with the Company, and 20% each December
31 thereafter until fully vested. Unless otherwise provided by the Board of
Directors, or a committee of the Board administering the Plan, each option
granted under the 1999 Plan vests 20% on each one year anniversary from the date
of grant.

WARRANTS

     Warrants to purchase 370,000 shares of common stock at $18.15 per share
were issued to the underwriters as part of the Company's initial public offering
to purchase. The warrants are exercisable at any time, in whole or in part,
during the four year period commencing on June 9, 2000.

     Following is a summary of stock option transactions:

<TABLE>
<CAPTION>
                                                                           WEIGHTED
                                                              NUMBER       AVERAGE
                                                                OF      EXERCISE PRICE
                                                              SHARES      PER SHARE
                                                              ------    --------------
<S>                                                           <C>       <C>
Options outstanding at December 31, 1997....................    --          $  --
  Granted...................................................   285           0.70
  Cancelled.................................................     4           0.70
                                                               ---
Options outstanding at December 31, 1998....................   281           0.70
  Granted...................................................   124           8.64
  Cancelled.................................................    53           3.66
  Exercised.................................................   116           0.70
                                                               ---
Options outstanding at December 31, 1999....................   236           4.17
                                                               ===
</TABLE>

     As of December 31, 1998 and 1999, the number of options exercisable was 143
and 57, respectively.

                                      F-16
<PAGE>   49
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for its stock options in the consolidated financial statements.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under Statement 123, the Company's net loss
would have been increased to the pro forma amount indicated below.

<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                                  DECEMBER 31,
                                                              ---------------------
                                                               1998        1999
                                                              ------   ------------
<S>                                                           <C>      <C>
Net loss as reported........................................  $1,406      $7,086
Assumed stock compensation cost.............................      16          77
                                                              ------      ------
Pro forma net loss..........................................  $1,422      $7,163
                                                              ======      ======
Pro forma net loss per share-basic and diluted..............  $  .37      $ 1.02
                                                              ======      ======
</TABLE>

     The weighted-average fair value per option granted in 1998 and 1999 was
$0.70 and $3.93, respectively. The fair value of each option grant was estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions in 1998 and 1999: risk-free interest rate of 5.00% and of
5.94%; dividend yield of 0.00%; average expected lives of 6 and 5 years; and
volatility of 0.00% and 1.21%, respectively. The Black-Scholes model, as well as
other currently accepted option valuation models, was developed to estimate the
fair value of freely-tradable, fully-transferable options without vesting
restrictions, which significantly differ from the Company's stock option plans.
These models also require highly subjective assumptions, including future stock
price volatility and expected time until exercise, which greatly affect the
calculated fair value on the grant date.

 (14) EMPLOYEE RETIREMENT SAVINGS PLAN

     Effective January 1, 1998, the Company established a retirement plan, which
is intended to qualify under Section 401(k) of the Internal Revenue Code. Under
the plan, eligible employees are able to contribute up to 20% of their
compensation not to exceed the maximum IRS deferral amount. The Company may also
match employee contributions at its discretion. During 1998 and 1999, the
Company made contributions of $40 and $86 to this plan, respectively.

 (15) INCOME TAXES

     Effective June 9, 1999, the Company became a C corporation as a result of
the Company's initial public offering. Prior to June 9, 1999, the Company had
elected to be taxed as an S corporation under the provision of Section 1362 of
the Internal Revenue Code. Accordingly, prior to June 9, 1999, the Company had
not recorded a provision for Federal income taxes since the liability was that
of the shareholders and the S corporation was subject to a 1.5% California tax
rate on earning before income taxes.

     The provision for (benefit from) income taxes from continuing operations is
comprised of the following for the year ended December 31:

                                      F-17
<PAGE>   50
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         --------------------
                                                         1997    1998    1999
                                                         ----    ----    ----
<S>                                                      <C>     <C>     <C>
Current:
  Federal............................................     --       --      --
  State..............................................     22      (95)    (43)
  Foreign............................................     --       --      --
                                                         ---     ----    ----
          Total......................................     22      (95)    (43)
                                                         ===     ====    ====
</TABLE>

     The 1998 and 1999 tax benefit of $95 and $43, respectively, is entirely
from continuing operations. The 1997 provision from continuing operations is
$22, the 1997 benefit from discontinued operations is $23 and the provision from
the gain on sale of discontinued operations is $241.

     Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax base of existing assets and
liabilities. The significant components of deferred income taxes are as follows:

<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                                -----------------------------
                                                 1997       1998       1999
                                                -------    -------    -------
<S>                                             <C>        <C>        <C>
Deferred tax assets
  Net operating loss carryforward...........    $    --    $    --    $ 1,165
  Credit carryforward.......................         --         --         97
  Accrued expenses..........................         --         --        236
                                                -------    -------    -------
Total deferred tax assets                            --         --      1,498
  Less valuation allowance..................         --         --     (1,498)
                                                -------    -------    -------
  Net deferred tax assets...................    $    --    $    --    $    --
                                                =======    =======    =======
</TABLE>

     The Company has recorded a valuation allowance in the amount set forth
above for certain deductible temporary differences, net operating loss
carryforwards and credit carryforwards where it is more likely than not that the
Company will not receive future tax benefits. The net change in the valuation
allowance for the year ended December 31, 1999 was $1,498. The year 1999 was the
first year that the Company has recorded deferred tax assets, as the Company was
previously an S corporation and thus no deferred tax assets had been recorded
prior to June 9, 1999.

     As of December 31, 1999, the Company has Federal and state net operating
losses (NOL) carryforwards of approximately $3,035 and $1,518, respectively.
These NOL carryforwards will expire through year 2019 for the Federal NOL and
2004 for the state NOLs. Additionally, the Company has Federal and state
research and experimentation (R&E) credit carryforwards of $53 and $44,
respectively. These R&E Credit carryforwards expire through 2019.

     Income tax expense from continuing operations differs from the amount
computed by applying the Federal corporate income tax rate of 34% to income
(loss) before income taxes as follows:

                                      F-18
<PAGE>   51
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31
                                                        ------------------------
                                                        1997      1998     1999
                                                        -----    ------    -----
<S>                                                     <C>      <C>       <C>
Statutory tax rate..................................      34%      (34%)    (34%)
Goodwill amortization...............................      --        --       10%
S corporation not subject to taxes..................     (34%)      34%      --
Change in valuation allowance.......................      --        --       30%
State income taxes, net.............................     1.5%     (1.5%)     (6%)
Research and experimentation credit carryforward....      --        (4%)     --
Other...............................................     (.2%)     (.5%)      1%
                                                         ---     -----      ---
     Effective tax rate.............................     1.3%       (6%)      1%
                                                         ===     =====      ===
</TABLE>

     Subsequent to the initial public offering, the Company had recognized a tax
benefit of $285 in the second quarter ended June 30, 1999. During the fourth
quarter of 1999, the Company determined it was more likely than not that the
Company would not realize the benefit of the net deferred tax asset, and
accordingly, recorded a tax-expense to eliminate the benefit and related
deferred tax asset from the consolidated financial statements in the fourth
quarter of 1999.

 (16) CONTINGENT LIABILITIES

     As the Company provides engineering and other services to various
government agencies, it is subject to retrospective audits which may result in
adjustments to amounts recognized as revenues, and the Company may be subject to
investigation by governmental entities. Failure to comply with the terms of any
governmental contracts could result in civil and criminal fines and penalties,
as well as suspension from future government contracts. The Company is not aware
of any adjustments, fines or penalties which could have a material adverse
effect on its financial position or results of operations.

     The Company had cost reimbursable type contracts with the Federal
Government. Consequently, the Company is reimbursed based upon the direct
expenses attributable to the contract, plus a percentage based upon overhead,
material handling, and general administrative expenses. The overhead, material
handling, and general administrative rates are estimates. Accordingly, if the
actual rates as determined by the Defense Contract Audit Agency are below the
Company's estimates, a refund for the difference would be due to the Federal
Government. It is management's opinion that no material liability will result
from any contract audits.

     On January 16, 1998, G2 Resources Inc. (G2) filed a complaint against
Pulsar in the Circuit Court, Fifteenth Judicial Circuit, Palm Beach County,
Florida. G2 claimed that Pulsar breached a contract under which G2 agreed to
provide services related to the monitoring of government contracts available for
bid and the preparation and submission of bids on behalf of Pulsar. The contract
provides that Pulsar pay G2 $500,000 in 30 monthly installments of $16,666 and
an additional fee of 2% of the gross dollar amount generated by awards. In its
complaint, G2 alleged that Pulsar failed to make payments under the contract and
claimed damages in excess of $525,000 plus interest, costs and attorneys fees.
In the course of discovery G2 asserted that its losses/costs arising out of its
claim amounted to approximately $10.3 million. Pulsar has asserted that G2
failed to perform the services required under the contract and Pulsar filed a
claim for compensatory damages, interest and attorneys fees against G2.
Classical Financial Services, LLC intervened in the case. Classical claims that
G2 assigned its accounts receivable to Classical under a financing program and
that Pulsar breached its obligations to Classical by failing to make payments
under the contract with G2. Pulsar has asserted defenses to Classical's claim.
Pulsar believes that the claims of G2 and Classical against Pulsar are without
merit and intends to continue to vigorously defend against the claims. If G2 or
Classical were to prevail in this lawsuit, the Company's business and financial
condition could be materially adversely affected.

                                      F-19
<PAGE>   52
                         LITRONIC INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Management does not believe that the outcome will have a material impact on its
consolidated financial condition, results of operations or liquidity.

     On July 11, 1997, Rudolph Menna filed a complaint against Pulsar and
William W. Davis, Sr. in the U.S. District Court for Northern District of
Georgia, Atlanta Division. Mr. Menna alleged that he was wrongfully terminated
as a Pulsar employee and that Pulsar and Mr. Davis unlawfully discriminated
against him on the basis of race and age. Mr. Menna's complaint sought an
unspecified amount of damages including back pay, front pay, benefits,
compensatory and punitive damages, interest and attorneys fees. On December 6,
1999, the Company paid Mr. Menna $140,000 and settled any and all claims. The
Company has established a note receivable from William Davis, Sr. and Lillian
Davis, the former owners of Pulsar, for $70,000 (see note 9) as a reimbursement
for a portion of the settlement. The Company included the net lawsuit settlement
in its adjustment to the Pulsar purchase price recorded in the fourth quarter of
1999 (see note 2).

     On April 19, 1999, A&T Marketing Inc. filed a complaint against Pulsar in
the Circuit Court for Prince George's County, Maryland. A&T claims that Pulsar
owes A&T $262,000 plus interest and costs, for software that A&T sold Pulsar in
1998. Pulsar believes it has defenses to A&T's claim and that A&T's claim is
without merit. Pulsar intends to vigorously defend against the claim. Management
does not believe that the outcome will have a material impact on its
consolidated financial condition, results of operations or liquidity.

     The Company is also involved in various routine legal actions arising in
the normal course of business. After taking into consideration legal counsel's
evaluation of such actions, management is of the opinion that any potential
liability arising from these claims against the Company would not be material.

     As of December 31, 1999, Pulsar had not yet filed the Form 5500 Annual
Return/Report for 1997 and 1998 for its Employee Retirement Plan. The Form 5500,
along with the audit report, was due October 15, 1998 and 1999, respectively.
The Company may be assessed penalties by both the Department of Labor and the
Internal Revenue Service for its late filing. The Company believes the
penalties, if any, to be assessed are not be material to the consolidated
financial statements.

                                      F-20
<PAGE>   53

                                                                     SCHEDULE II

                         LITRONIC INC. AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                       ADDITIONS
                                          BALANCE AT   CHARGED TO    ADDITIONS    DEDUCTIONS --
                                          BEGINNING    COSTS AND      DUE TO         AMOUNTS       BALANCE AT
              DESCRIPTION                 OF PERIOD     EXPENSES    ACQUISITION    WRITTEN OFF    END OF PERIOD
              -----------                 ----------   ----------   -----------   -------------   -------------
<S>                                       <C>          <C>          <C>           <C>             <C>
Year Ended December 31, 1997
Allowance for doubtful accounts.........     $--          $ --         $ --           $ --            $ --
                                             ===          ====         ====           ====            ====
Year Ended December 31, 1998
Allowance for doubtful accounts.........     $--          $ 14         $ --           $ --            $ 14
                                             ===          ====         ====           ====            ====
Year Ended December 31, 1999
Allowance for doubtful accounts.........     $14          $327         $194           $145            $390
                                             ===          ====         ====           ====            ====
</TABLE>

                                       S-1
<PAGE>   54

                                    EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT                                                                 PAGE
NUMBER                           DESCRIPTION                           NUMBER
-------                          -----------                           ------
<C>      <S>                                                           <C>
   2     Stock Acquisition Agreement and Reorganization Agreement
         (incorporated by reference to exhibit of the same number
         contained in Registrant's Registration Statement on Form S1
         filed with the Commission on or about February 11, 1999).
   3.1   Certificate of Incorporation, as amended on February 5, 1999
         (incorporated by reference to exhibit of the same number
         contained in Registrant's Registration Statement on Form S1
         filed with the Commission on or about February 11, 1999).
   3.2   Bylaws of the Registrant (incorporated by reference to
         exhibit of the same number contained in Registrant's
         Registration Statement on Form S1 filed with the Commission
         on or about February 11, 1999).
   3.3   Form of Amended and Restated Certificate of Incorporation
         (incorporated by reference to exhibit of the same number
         contained in Registrant's Registration Statement on Form S1
         filed with the Commission on or about February 11, 1999).
   4.1   Registration Rights Agreement (incorporated by reference to
         exhibit of the same number contained in Registrant's
         Registration Statement on Form S1 filed with the Commission
         on or about February 11, 1999).
   4.2   Warrant Agreement (incorporated by reference to exhibit of
         the same number contained in Registrant's Registration
         Statement on Form S1 filed with the Commission on or about
         February 11, 1999).
   4.3   Stock Certificate (incorporated by reference to exhibit of
         the same number contained in Registrant's Registration
         Statement on Form S1 filed with the Commission on or about
         February 11, 1999).
  10.01  Employment Agreement with Kris Shah (incorporated by
         reference to exhibit of the same number contained in
         Registrant's Registration Statement on Form S1 filed with
         the Commission on or about February 11, 1999).
  10.02  Employment Agreement with William Davis (incorporated by
         reference to exhibit of the same number contained in
         Registrant's Registration Statement on Form S1 filed with
         the Commission on or about February 11, 1999).
  10.11  Award Contract between Maryland Procurement Office and
         Litronic Industries, Inc. dated June 27, 1997 (incorporated
         by reference to exhibit of the same number contained in
         Registrant's Registration Statement on Form S1 filed with
         the Commission on or about February 11, 1999).
  10.14  Sublease Agreement between Litronic Industries, Inc. and E.
         I. du Pont de Nemours and Company dated October 20, 1997
         (incorporated by reference to exhibit of the same number
         contained in Registrant's Registration Statement on Form S1
         filed with the Commission on or about February 11, 1999).
  10.16  Lease and Service Agreement between Alliance Business
         Centers and Litronic Industries, Inc. dated January 6, 1999
         (incorporated by reference to exhibit of the same number
         contained in Registrant's Registration Statement on Form S1
         filed with the Commission on or about February 11, 1999).
  10.17  Lease Agreement between Airport Industrial Complex and
         Litronic Industries, Inc. dated December 4, 1997
         (incorporated by reference to exhibit of the same number
         contained in Registrant's Registration Statement on Form S1
         filed with the Commission on or about February 11, 1999).
  10.21  Letter Agreement between Pulsar Data Systems, Inc. and IBM
         Credit Corporation dated February 4, 1998 (incorporated by
         reference to exhibit of the same number contained in
         Registrant's Registration Statement on Form S1 filed with
         the Commission on or about February 11, 1999).
</TABLE>
<PAGE>   55

<TABLE>
<CAPTION>
EXHIBIT                                                                 PAGE
NUMBER                           DESCRIPTION                           NUMBER
-------                          -----------                           ------
<C>      <S>                                                           <C>
  10.22  Revolving Promissory Note from Litronic Industries, Inc. to
         KRDS, Inc. dated February 24, 1998 in the principal amount
         of $600,000 (incorporated by reference to exhibit of the
         same number contained in Registrant's Registration Statement
         on Form S1 filed with the Commission on or about February
         11, 1999).
  10.24  Litronic Industries, Inc. Stock Option Plan dated April 1,
         1998 (incorporated by reference to exhibit of the same
         number contained in Registrant's Registration Statement on
         Form S1 filed with the Commission on or about February 11,
         1999).
  10.25  Litronic Industries, Inc. Stock Option Plan dated February
         9, 1999 (incorporated by reference to exhibit of the same
         number contained in Registrant's Registration Statement on
         Form S1 filed with the Commission on or about February 11,
         1999).
  10.26  Modification dated February 3, 1999 of Original GSA Contract
         GS-35F-4232D dated May 3, 1996 (incorporated by reference to
         exhibit of the same number contained in Registrant's
         Registration Statement on Form S1 filed with the Commission
         on or about February 11, 1999).
  10.27  Deed of Lease Agreement between Pulsar Data Systems, Inc.
         and Massachusetts Mutual Life Insurance Company dated August
         11, 1998 (incorporated by reference to exhibit of the same
         number contained in Registrant's Registration Statement on
         Form S1 filed with the Commission on or about February 11,
         1999).
  10.28  Forbearance Agreement between Pulsar Data Systems, Inc. and
         IBM Credit Corporation dated August 31, 1998 (incorporated
         by reference to exhibit of the same number contained in
         Registrant's Registration Statement on Form S1 filed with
         the Commission on or about February 11, 1999).
  10.29  Business Loan Agreement between Litronic Industries, Inc.
         and BYL Bank Group dated September 29, 1998 (incorporated by
         reference to exhibit of the same number contained in
         Registrant's Registration Statement on Form S1 filed with
         the Commission on or about February 11, 1999).
  10.30  Promissory Note from Litronic Industries, Inc. to BYL Bank
         Group dated September 29, 1998 in the principal amount of
         $3,800,000 (incorporated by reference to exhibit of the same
         number contained in Registrant's Registration Statement on
         Form S1 filed with the Commission on or about February 11,
         1999).
  10.31  Promissory Note from Litronic Industries, Inc. to BYL Bank
         Group dated September 29, 1998 in the principal amount of
         $1,400,000 (incorporated by reference to exhibit of the same
         number contained in Registrant's Registration Statement on
         Form S1 filed with the Commission on or about February 11,
         1999).
  10.32  Amendment to Forbearance Agreement between Pulsar Data
         Systems, Inc. and IBM Credit Corporation dated October 8,
         1998 (incorporated by reference to exhibit of the same
         number contained in Registrant's Registration Statement on
         Form S1 filed with the Commission on or about February 11,
         1999).
  10.33  Promissory Note from Davis Holding Company to Pulsar Data
         Systems, Inc. dated January 1, 1999 in the principal amount
         of $804,342.08 (incorporated by reference to exhibit of the
         same number contained in Registrant's Registration Statement
         on Form S1 filed with the Commission on or about February
         11, 1999).
  10.34  Promissory Note from Davis Holding Company to Pulsar Data
         Systems, Inc. dated January 1, 1999 in the principal amount
         of $543,017.40 (incorporated by reference to exhibit of the
         same number contained in Registrant's Registration Statement
         on Form S1 filed with the Commission on or about February
         11, 1999).
</TABLE>
<PAGE>   56

<TABLE>
<CAPTION>
EXHIBIT                                                                 PAGE
NUMBER                           DESCRIPTION                           NUMBER
-------                          -----------                           ------
<C>      <S>                                                           <C>
  10.37  Dallas Semiconductor Standard Consulting Agreement dated
         February 2, 1999 between Litronic and Dallas Semiconductor
         Corporation (incorporated by reference to exhibit of the
         same number contained in Registrant's Registration Statement
         on Form S1 filed with the Commission on or about February
         11, 1999).
  10.38  Basic Ordering Agreement dated April 16, 1998 between the
         United States of America and Litronic (incorporated by
         reference to exhibit of the same number contained in
         Registrant's Registration Statement on Form S1 filed with
         the Commission on or about February 11, 1999).
  10.39  Nonexclusive Distributor Agreement dated April 27, 1999
         among Litronic and Itochu Techno-Science Corporation and
         Itochu Corporation (incorporated by reference to exhibit of
         the same number contained in Registrant's Registration
         Statement on Form S1 filed with the Commission on or about
         February 11, 1999).
  10.40  Equipment Purchase, Software License and Maintenance
         Agreement dated April 20, 1999 between Bank of America and
         Litronic (incorporated by reference to exhibit of the same
         number contained in Registrant's Registration Statement on
         Form S1 filed with the Commission on or about February 11,
         1999).
  10.41  Nonexclusive reseller agreement dated as of April 1, 1999
         between Litronic and South African Certification Agency
         (incorporated by reference to exhibit of the same number
         contained in Registrant's Registration Statement on Form S1
         filed with the Commission on or about February 11, 1999).
  10.42  Loan and Security Agreement dated as of May 10, 1999 between
         Litronic and Fidelity Funding Inc. (incorporated by
         reference to exhibit of the same number contained in
         Registrant's Registration Statement on Form S1 filed with
         the Commission on or about February 11, 1999).
  10.43  Promissory Note from Litronic Industries, Inc. to BYL Bank
         Group dated May 13, 1999 in the principal amount of $750,000
         (incorporated by reference to exhibit of the same number
         contained in Registrant's Registration Statement on Form S1
         filed with the Commission on or about February 11, 1999).
  10.44  Promissory Note from Litronic Industries, Inc. to BYL Bank
         Group dated March 10, 1999 in the principal amount of
         $750,000 (incorporated by reference to exhibit of the same
         number contained in Registrant's Registration Statement on
         Form S1 filed with the Commission on or about February 11,
         1999).
  10.45  Amendment to Forbearance Agreement between Pulsar Data
         Systems, Inc. and IBM Credit Corporation dated March 8, 1999
         (incorporated by reference to exhibit of the same number
         contained in Registrant's Registration Statement on Form S1
         filed with the Commission on or about February 11, 1999).
  10.46  Amendment to Forbearance Agreement between Pulsar Data
         Systems, Inc. and IBM Credit Corporation dated June 4, 1999
         (incorporated by reference to exhibit of the same number
         contained in Registrant's Registration Statement on Form S1
         filed with the Commission on or about February 11, 1999).
  21     Subsidiaries of the Registrant.
  27     Financial Data Schedule.
</TABLE>