ILC TECHNOLOGY, INC.
                    NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
                               February 12, 1997
                             ----------------------

     The 1996 Annual  Meeting of the  Shareholders  of ILC  Technology,  Inc., a
California corporation (the "Company"), will be held on Wednesday,  February 12,
1997, at 2:00 p.m. local time at the principal office of the Company at 399 Java
Drive, Sunnyvale, California, for the following purposes: 

     1.   To elect a Board of four Directors.

     2.   To approve an  amendment to the 1992 Stock Option Plan to increase the
          number of shares of Common Stock reserved for issuance thereunder.

     3.   To approve an amendment to the 1985  Employee  Stock  Purchase Plan to
          increase the number of shares of Common Stock  reserved for  insurance
          thereunder.

     4.   To ratify the appointment of Arthur Andersen LLP as independent public
          accountants of the Company for fiscal 1997.

     5.   To  transact  such other  business  as may  properly  come  before the
          meeting or any  adjournment or  postponement  thereof.  

     These items of business  are more fully  described  in the Proxy  Statement
accompanying this Notice.

     Only  shareholders  of record at the close of business on December 16, 1996
are entitled to notice of and to vote at the meeting.

     A majority of the Company's  outstanding  shares must be represented at the
meeting  (in  person  or by  proxy)  to  transact  business.  To  assure  proper
representation at the meeting, please mark, sign and date the enclosed proxy and
mail it promptly in the enclosed self-addressed envelope. Your proxy will not be
used if you revoke it either before or at the meeting.

Dated:  January 2, 1997



Ronald E.  Fredianelli
Secretary 

IF YOU ARE UNABLE TO BE  PERSONALLY  PRESENT,  PLEASE SIGN AND DATE THE ENCLOSED
PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOUR VOTE IS IMPORTANT.



                                       1

<PAGE>



                              ILC TECHNOLOGY, INC.
                                PROXY STATEMENT
                 INFORMATION CONCERNING SOLICITATION AND VOTING

     The enclosed  proxy is solicited on behalf of the Board of Directors of ILC
Technology,  Inc. (the  "Company") for use at the Annual Meeting of Shareholders
(the "Meeting") to be held Wednesday, February 12, 1997 at 2:00 p.m. local time,
or at any adjournment or postponement  thereof.  The Meeting will be held at the
principal  offices  of  the  Company,  which  are  located  at 399  Java  Drive,
Sunnyvale,  California 94089. The Company's telephone number is (408) 745- 7900.
These  proxy  solicitation  materials  were mailed to  shareholders  on or about
January 2, 1997. 

     Shareholders  of record at the close of business  on December  16, 1996 are
entitled  to notice of, and to vote at,  the  Meeting.  On  December  16,  1996,
4,782,508 shares of the Company's  Common Stock were issued and  outstanding.  A
majority of the shares  issued and  outstanding  as of December 16, 1996 must be
present in person or represented by proxy at the Meeting for the  transaction of
business.  Nominees for election of directors  are elected by plurality  vote of
all votes cast at the  Meeting.  Approval  of the  amendments  to the 1992 Stock
Option Plan and the 1985 Employee  Stock Purchase Plan to increase the number of
shares of Common Stock reserved for issuance and ratification of Arthur Andersen
LLP as the independent  public  accountants  require the  affirmative  vote of a
majority of the shares present at the Meeting in person or by proxy and entitled
to vote.  Abstentions  have the effect of a negative vote, but broker non- votes
do not affect the calculation.  

     For the election of directors,  shareholders may exercise cumulative voting
rights  which  enable  them to cast as many votes as there are  directors  to be
elected,  multiplied by the number of shares held by each shareholder.  All such
votes may be cast for one candidate or may be  distributed  as desired among two
or more candidates.  However, no shareholder shall be entitled to cumulate votes
unless the candidate's name has been placed in nomination  before the voting and
the  shareholder  has  given  notice at the  Meeting  before  the  voting of the
shareholder's intention to cumulate votes. If one shareholder gives such notice,
all  shareholders  may cumulate  their votes and the proxy  holders may vote all
proxies on a cumulative  voting basis. On all other matters,  each share has one
vote.

     Any person may revoke a proxy at any time before its use by  delivering  to
the Company a written  revocation or a duly executed  proxy bearing a later date
or by attending the Meeting and voting in person.

     The cost of this  solicitation  will be borne by the  Company.  These costs
represent  amounts  normally  expended  for a  solicitation  for an  election of
directors.   The  Company  may  reimburse  brokerage  firms  and  other  persons
representing  beneficial  owners of  shares  for their  expenses  in  forwarding
solicitation  material to such beneficial owners.  Proxies may also be solicited
by certain of the Company's directors,  officers and regular employees,  without
additional compensation, personally, by telephone or otherwise.

                                        2




<PAGE>



                      Deadline for Receipt of Shareholder
                       Proposals for 1997 Annual Meeting


     Proposals  of  shareholders  that  are  intended  to be  presented  by such
shareholders at the Company's 1997 meeting of  shareholders  must be received by
the Company no later than September 4, 1997.

                             ELECTION OF DIRECTORS

Nominees

     A board of four  directors is to be elected at the  Meeting.  There will be
two vacancies on the Board. The Company is currently undertaking a search for an
additional  outside  director,  as Wirt D. Walker,  III recently  decided not to
stand for re-election to the Board. Unless marked to the contrary,  all properly
signed and returned proxies will be voted for the election of management's  four
nominees named below,  all of whom are directors of the Company.  If any nominee
is unable or  declines to serve as a director  at the time of the  Meeting,  the
proxies  will be  voted  for any  nominee  designated  by the  present  Board of
Directors to fill the vacancy.  The Company is not aware of any nominee who will
be unable or will decline to serve as a director.  The proxy holders reserve the
right to cumulate  votes for the  election of directors in such a manner as will
assure the election of as many of the nominees listed below as possible, and, in
such event,  the  specific  nominees to be voted for will be  determined  by the
proxy  holders.  The term of office of each  person  elected as a director  will
continue  until the next meeting of  shareholders  or until a successor has been
elected and qualified.

     The names of the nominees and executive officers of the Company and certain
information about them are set forth below.

<TABLE>
<CAPTION>


                                                    Shares of Common Stock
                                                    Beneficially Owned as of
                                                    December 16, 1996(1)
                                                    ------------------------

<S>                              <C>    <C>         <C>             <C> 
Name, Principal Occupation              Director                
 and Directorship                Age    Since       Number          Percent
 ----------------                ---    -----       ------          -------
 
Henry C. Baumgartner............. 64    1967        219,988(2)        4.5%
 Chairman of the Board of the
 Company since July 1996; Chief
 Executive Officer of the Company
 since April 1990; President of the
 Company from April 1990 to July
 1996; Chief Executive Officer and
 Chairman of the Board of the Company
 from November 1986 to April 1990.

Richard D. Capra.................  64    1995          1,250           *
 President and Chief Operating 
 Officer of the Company since July
 1996; President and Chief Executive
 Officer of Philips Lighting Company,
 U.S. from 1983 to 1991; Director of
 Advanced Lighting Technologies

Arthur L. Schawlow...............  75    1984         22,000(4)        *
 Retired in 1991; Professor of 
 Physics at Stanford University
 from 1961 to 1991; Director of the
 Company from 1969 to 1971 and since
 1984; Noble Prize in 1981 for 
 contributions to the development of
 laser spectroscopy.

Harrison H. Augur................  55     1989        42,000(5)        1.0%
 General Partner of Capital Asset
 Management since June 1987; Executive
 Vice President and Director of Worms
 & Co., Inc. from April 1981 to 
 August 1991.

</TABLE>

                                   3 



<PAGE>


-----------------------------
*        Less than 1%

(1)  The persons named in the table have sole voting and  investment  power with
     respect to all shares of Common Stock  beneficially  owned by them, subject
     to applicable community property laws and the information  contained in the
     footnotes to the table.  

(2)  Includes 121,250 shares subject to outstanding options that are exercisable
     on or before February 14, 1997. 

(3)  These shares are subject to outstanding  options that are exercisable on or
     before February 14, 1997. 

(4)  Includes 10,000 shares subject to outstanding  options that are exercisable
     on or before February 14, 1997.

(5)  Includes 30,000 shares subject to outstanding  options that are exercisable
     on or before February 14, 1997.

 Director Compensation 

     Members of the Board who are not also  officers or employees of the Company
("Outside  Directors")  are  paid an  annual  fee of  $10,000  for  services  as
director.  Such fees are paid  quarterly  and prorated  when a director does not
serve  for a  full  year.  Directors  receive  no  additional  compensation  for
committee participation or attendance at committee meetings. 

     During fiscal 1996, each Outside Director was granted  automatic options to
purchase a total of 5,000  shares of the  Company's  Common Stock at an exercise
price of $11.00 per share.  Dr.  Schawlow  exercised  options to purchase  5,000
shares during fiscal 1996 for a net value  realized of $39,375.  As of September
28, 1996,  options to purchase  60,000 shares were  outstanding to the following
Outside  Directors,  at the weighted average exercise price per share indicated:
Mr. Augur -- 40,000 shares at $6.91 per share; and Dr. Schawlow -- 20,000 shares
at $10.06 per share. 

Board Meetings and Committees 

     The Board of  Directors  held a total of eight  meetings  during the fiscal
year ended September 28, 1996. The Board has two committees: the Audit Committee
and the  Compensation  and  Stock  Option  Committee.  

     The Audit Committee is comprised of Directors  Augur,  Walker and Schawlow.
After the Meeting,  the Audit Committee will be comprised of Directors Augur and
Schawlow. The Audit Committee recommends engagement of the Company's independent
public  accountants  and is primarily  responsible  for  approving  the services
performed by the Company's  independent public accountants and for reviewing and
evaluating  the  Company's  accounting  practices  and its  systems of  internal
accounting  controls.  The Audit  Committee held one meeting during fiscal 1996.
Each  quarter  the  Chairman  of the Audit  Committee  meets with the  Company's
independent public accountants.


     The  Compensation  and Stock  Option  Committee  is  comprised of Directors
Augur, Walker and Schawlow. After the Meeting, the Compensation and Stock Option
Committee will be comprised of Directors  Augur and Schawlow.  The  Compensation
and Stock Option  Committee  recommends the amount and nature of compensation to
be paid to the Company's  Chief  Executive  Officer and reviews and approves the
compensation plan for other corporate officers.  It also reviews the performance
of the Company's  key employees who are eligible for the Company's  Stock Option
Plan and  determines  the number of shares,  if any, to be granted each employee
under such plan and the terms of such grants.  The Compensation and Stock Option
Committee  held three  meetings  during fiscal 1996. No director  attended fewer
than 75% of all meetings of the Board of Directors held during fiscal 1996 or of
all meetings of any  committee  upon which such  director  served  during fiscal
1996. 




                                       4

<PAGE>


                    AMENDMENT OF THE 1992 STOCK OPTION PLAN

     In November 1996, the Board of Directors  adopted a resolution,  subject to
shareholder approval,  approving an amendment to the Company's 1992 Stock Option
Plan  (the  "Option  Plan") to  increase  the  number of shares of Common  Stock
issuable thereunder by 175,000 shares to 575,000 shares. Before giving effect to
the proposed amendment, 8,749 shares of Common Stock were available for issuance
under the Option Plan.

     Approval of the amendment to the Option Plan requires the affirmative  vote
of a  majority  of the shares  present at the  Meeting in person or by proxy and
entitled to vote. The Board of Directors  recommends that  shareholders vote for
the amendment to the Option Plan. The essential  features of the Option Plan are
summarized below.

     The purpose of the Option Plan is to advance the  interests  of the Company
by giving the  Company's  employees  and  Outside  Directors  incentive  through
ownership  of the  Company's  Common  Stock to  continue  in the  service of the
Company  and  thereby  to  help  the  Company  compete  effectively  with  other
enterprises for the services of qualified individuals. Options granted under the
Option  Plan may be either  "incentive  stock  options"  within  the  meaning of
Section 422 of the Internal  Revenue Code of 1986, as amended (the  "Code"),  or
nonstatutory stock options.

Administration

     The  Option  Plan is  administered  by the  Compensation  and Stock  Option
Committee of the Board of  Directors  (the  "Committee").  In addition to having
general  supervisory  and  interpretive  authority  over the  Option  Plan,  the
Committee  determines,  upon the recommendation of management and subject to the
terms and limits of the Option Plan, the employees, if any, to whom options will
be granted,  the time at which options are granted, the number of shares subject
to each option and the terms and conditions of exercise of options.

Eligibility

     All employees  (including officers and directors who are also employees) of
the Company and its subsidiaries are eligible to receive incentive stock options
under the Option  Plan.  Nonstatutory  stock  options  may be granted  under the
Option Plan to employees and directors of the Company. Participants are selected
by the Committee  upon the  recommendation  of  management.  Nonstatutory  stock
options are also granted under the Option Plan to all Outside Directors pursuant
to the  automatic  grant  program.  As of September  28, 1996,  618 persons were
eligible to receive options under the Option Plan, of which seven were executive
officers of the Company, 608 were non-executive officer employees and three were
Outside Directors.

     Under the  terms of the  Option  Plan,  the  aggregate  fair  market  value
(determined  at the date of the option grant) of the stock with respect to which
incentive  stock  options  are  exercisable  for the first time by any  employee
during any calendar year may not exceed  $100,000 and no participant can receive
options to purchase  more than a total of 100,000  shares of Common  Stock under
the Option Plan in any calendar year.

     The Option  Plan  provides  for an  automatic  grant  program  for  Outside
Directors,  whereby each year, each Outside Director is automatically  granted a
new ten-year nonstatutory stock option to purchase 5,000 shares of Common Stock,
which is  exercisable  in cumulative  annual  increments of 25% beginning on the
first anniversary of the date of grant. See "Option Plan Benefits."


                                        5




<PAGE>

Terms of Options

     Each option  granted  under the Option Plan must be  evidenced by an option
agreement between the Company and the optionee and has a term of up to 10 years,
unless  sooner  terminated  in  accordance  with the  Option  Plan or the option
agreement.  Options  granted  pursuant to the Option Plan need not be identical,
but each option is subject to the following terms and conditions:

     (a)  Exercise of Option.  Options are  exercisable  by the optionee in such
          periodic increments and/or at such milestones as the Committee, in its
          sole  discretion,  shall determine on an individual basis with respect
          to each  optionee.  Options are  generally  exercisable  in cumulative
          increments of 25% per year  beginning on the first  anniversary of the
          date of grant. In no event shall an officer or director of the Company
          exercise any option during the six-month period immediately  following
          the grant of such option.  An option is  exercised  by giving  written
          notice of  exercise  to the  Company,  specifying  the  number of full
          shares of Common Stock to be purchased,  and tendering  payment of the
          purchase  price and any applicable  taxes to the Company.  Payment for
          shares issued upon exercise of an option may consist of cash, check or
          delivery  of  a  properly   executed  exercise  notice  together  with
          irrevocable  instructions  to a  broker  to  promptly  deliver  to the
          Company  the  amount  of  sale or loan  proceeds  required  to pay the
          exercise price.

     (b)  Exercise  Price.  The exercise  price is determined by the  Committee,
          provided  that in no  instance  shall such price be less than the fair
          market  value of the Common  Stock on the date the option is  granted.
          The Option Plan defines "fair market value" as the closing sales price
          of the Common Stock of the Company as reported by the Nasdaq  National
          Market on the last market  trading  day before the date of grant.  The
          closing  sales  price of the  Company's  Common  Stock  on the  Nasdaq
          National Market on December 16, 1996 was $11 7/8 per share.  Incentive
          stock  options  granted to  shareholders  owning  more than 10% of the
          combined  voting  power of all the stock of the Company are subject to
          the  additional  restrictions  that the exercise price be no less than
          110% of the fair  market  value on the date of grant and that  options
          expire no later than 5 years from the date of grant.

     (c)  Termination of Employment.  Incentive  stock options granted under the
          Option Plan terminate 30 days after the optionee ceases to be employed
          by the Company  unless (i) the  termination  of  employment  is due to
          permanent  and  total  disability,  in which  case the  option  may be
          exercised at any time within 12 months after termination to the extent
          the  option  was  exercisable  on the  date of  termination;  (ii) the
          optionee dies while employed by the Company,  in which case the option
          may be  exercised  at any time  within  12 months  after  death to the
          extent the option was  exercisable on the date of death;  or (iii) the
          option  by its  terms  specifically  provides  otherwise.  Subject  to
          special rules for incentive  stock options,  the Committee may, in its
          discretion,  extend the period of exercisability of an option after an
          optionee's termination of employment, but in no event shall any option
          be  exercisable  after the  expiration  date set  forth in the  option
          agreement.

     (d)  Expiration of Options.  No option is  exercisable  by any person after
          the expiration of 10 years from the date the option was granted.

     (e)  Nontransferability  of Option.  Options  granted under the Option Plan
          are transferable  only by will or the laws of descent and distribution
          and  are  exercisable  during  the  optionee's  lifetime  only  by the
          optionee or the optionee's guardian or legal representative.

     (f)  Other  Provisions.  The option agreement may contain such other terms,
          provisions and conditions not inconsistent with the Option Plan as the
          Committee may deem necessary or appropriate.


                                       6

<PAGE>


Adjustments Upon Changes in Capitalization

     The Option Plan provides for  adjustments  to be made in the shares subject
to option to give  effect to changes in the  capital  structure  of the  Company
resulting from recapitalizations, stock splits, stock dividends, combinations of
shares,  mergers  or  reorganizations.  Depending  upon the  circumstances,  the
particular  adjustments  may require a change in the  number,  kind and class of
securities  covered by the option and a change in the  exercise  price or prices
thereof to give effect to the purpose and intent of the Option Plan.  The Option
Plan and all options terminate in the event of the dissolution or liquidation of
the Company.

     Corporate  Transactions.  A Corporate  Transaction is defined in the Option
Plan  generally as a merger or asset sale in which the Company does not survive,
or any  reorganization  that results in the transfer of beneficial  ownership of
50% or more of the Company's voting stock  outstanding.  Immediately  before the
effective date of a Corporate  Transaction,  each option  outstanding  under the
Option Plan will  automatically  become exercisable in full unless the option is
either  to be  assumed  by the  successor  corporation  or a parent  thereof  or
replaced by a reasonably  comparable  option to purchase shares of the successor
corporation or parent  thereof,  in connection  with the Corporate  Transaction.
Upon the consummation of any Corporate Transaction, all outstanding options will
terminate, to the extent not previously exercised by the optionees or assumed by
the successor corporation or its parent company.

     Change  in  Control.  Change in  control  is  defined  in the  Option  Plan
generally as a tender or exchange offer that is not recommended by the Company's
Board of Directors for 25% or more of the Company's  voting stock by a person or
related  group of persons other than the Company or an affiliate of the Company,
or a contested election for the Board of Directors that results in a change in a
majority of the Board.  Effective  15 days  following  the  effective  date of a
Change in Control,  each option  outstanding under the Option Plan automatically
becomes  exercisable  in full  and  will  remain  fully  exercisable  until  the
expiration  or sooner  termination  of the option term  specified  in the option
agreement.

     Acceleration of the  exercisability  of options in the event of a Corporate
Transaction  or a Change in Control may have the effect of depressing the market
price of the  Company's  Common  Stock and denying  shareholders  a premium that
might  otherwise be paid for their shares in such a transaction and may have the
effect of  discouraging  a proposal  for  merger,  a  takeover  attempt or other
efforts to gain control of the Company.

Adjustment to Option Rights

     Subject to the general  limitations  of the Option Plan,  the Committee may
adjust the exercise price,  term or any other provision of an option (other than
automatic options granted to Outside  Directors) by canceling and regranting the
option or by amending or  substituting  the  option.  Options  that have been so
adjusted may have higher or lower exercise prices, have longer or shorter terms,
or be subject to  different  rights and  restrictions  than prior  options.  The
Committee  may also  adjust  the number of options  granted  to an  optionee  by
canceling  outstanding  options  or  granting  additional  options.  Except  for
adjustments  necessary to ensure compliance with any applicable state or federal
law,  no such  adjustment  may  impair an  optionee's  rights  under any  option
agreement without the consent of the optionee.

Amendment and Termination of the Option Plan

     The Board may amend the  Option  Plan from time to time or may  suspend  or
terminate the Option Plan. In addition,  to the extent  necessary to comply with
applicable laws or regulations, the Company shall obtain shareholder approval of
any amendment to the Option Plan in such a manner as required.  However, no such
action by the Board or  shareholders  may alter or impair any option  previously
granted under the Option Plan without the consent of the optionee.




                                       7

<PAGE>



     The Option  Plan  terminates  by its terms when all  shares  available  for
issuance under the Option Plan have been issued or in November  2002,  whichever
is  earlier,   subject  to  earlier  termination  by  the  Board  of  Directors.
Notwithstanding  such  termination,  options  granted under the Option Plan will
remain outstanding in accordance with their terms.

Option Plan Benefits

     Automatic  options are granted to the Outside  Directors  at the meeting of
the Committee held during the Company's third fiscal  quarter.  Under the Option
Plan, each Outside Director after the Meeting,  specifically  Messrs.  Augur and
Schawlow, will receive an automatic grant of options to purchase 5,000 shares of
Common Stock each calendar year.

Federal Income Tax Information

     The following summary is intended only as a general guide as to the federal
income tax consequences under current law with respect to  participation  in the
Option  Plan  and  does  not  describe  all  possible   federal  and  other  tax
consequences of such participation. Furthermore, the tax consequences of options
are complex and subject to change,  and a taxpayer's  situation may be such that
some  variation of the  described  rules  applies.  The summary does not address
other taxes that may affect an optionee  such as state and local  income  taxes,
federal  and  state  estate,  inheritance  and gift  taxes  and  foreign  taxes.
Optionees  should consult with their own tax advisors before the exercise of any
option and before the disposition of any shares acquired upon the exercise of an
option.

     Incentive  Stock  Options.  If an option is treated as an  incentive  stock
option ("ISO"), the optionee does not recognize taxable income upon its grant or
incur tax on its  exercise  (unless the  optionee is subject to the  alternative
minimum tax  described  below).  If the optionee  holds the stock  acquired upon
exercise  of an ISO ("ISO  Shares")  for more  than one year  after the date the
option was  exercised  and for more than two years after the date the option was
granted,  the optionee  generally  will realize  long-term  capital gain or loss
(rather than ordinary income or loss) upon  disposition of the ISO Shares.  This
gain or loss will be equal to the  difference  between the amount  realized upon
such  disposition  and the  amount  paid  for the ISO  Shares.  If the  optionee
disposes of ISO Shares before the expiration of either  required  holding period
(a  "disqualifying  disposition"),  then gain realized  upon such  disqualifying
disposition,  up to the  difference  between  the fair  market  value of the ISO
Shares on the date of exercise  (or, if less,  the amount  realized on a sale of
such ISO  Shares)  and the option  exercise  price,  will be treated as ordinary
income.  Any  additional  gain will be long-term  or  short-term  capital  gain,
depending upon the length of time the optionee held the ISO Shares.  The Company
will be entitled to a deduction in connection with the disposition of ISO Shares
only  to  the  extent  that  the  optionee   recognizes  ordinary  income  on  a
disqualifying disposition of the ISO Shares.

     Alternative Minimum Tax. The difference between the exercise price and fair
market  value  of  the  ISO  Shares  on the  date  of  exercise  of an ISO is an
adjustment to income for purposes of the  alternative  minimum tax ("AMT").  The
AMT (imposed to the extent it exceeds the  taxpayer's  regular tax) is 26% of an
individual  taxpayer's  alternative  minimum  taxable income (28% in the case of
alternative  minimum taxable income in excess of $175,000).  Alternative minimum
taxable  income is determined by adjusting  regular  taxable  income for certain
items,  increasing that income by certain tax preference items and reducing this
amount  by the  applicable  exemption  amount  ($45,000  in the  case of a joint
return,  subject to  reduction  in certain  circumstances).  If a  disqualifying
disposition  of the ISO Shares  occurs in the same  calendar year as exercise of
the ISO, there is no AMT adjustment with respect to those ISO Shares. Also, upon
a sale  of ISO  Shares  that  is not a  disqualifying  disposition,  alternative
minimum  taxable income is reduced in the year of sale by the excess of the fair
market  value of the ISO Shares at  exercise  over the  amount  paid for the ISO
Shares.



                                       8

<PAGE>

     Nonstatutory  Stock  Options.  An optionee  does not  recognize any taxable
income at the time a nonstatutory stock option ("NSO") is granted. However, upon
exercise of an NSO,  the  optionee  must  include in income as  compensation  an
amount  equal to the  difference  between the fair market value of the shares on
the date of  exercise  and the amount  paid for that stock upon  exercise of the
NSO. The included  amount must be treated as ordinary income by the optionee and
will be subject to income tax  withholding  by the  Company.  Upon resale of the
shares by the optionee, any subsequent appreciation or depreciation in the value
of the  shares  will be treated as capital  gain or loss.  The  Company  will be
entitled to a deduction in connection  with the exercise of an NSO by a domestic
optionee  to the extent that the  optionee  recognizes  ordinary  income and the
Company withholds tax.


               AMENDMENT OF THE 1985 EMPLOYEE STOCK PURCHASE PLAN
     
     In November 1996, the Board of Directors  adopted a resolution,  subject to
shareholder  approval,  approving an amendment to the  Company's  1985  Employee
Stock  Purchase Plan (the  "Purchase  Plan") to increase the number of shares of
Common Stock  issuable  thereunder  by 50,000 shares to 350,000  shares.  Before
giving  effect to the proposed  amendment,  61,588 shares of Common Stock remain
available  for  issuance  under  the  Purchase  Plan.  

     The Board of Directors  recommends that shareholders vote for the amendment
of the Purchase  Plan.  The Board of Directors  believes  that the Purchase Plan
advances the interests of the Company by assisting the Company in attracting and
retaining  competent  and  motivated  employees  and  by  facilitating  employee
investment in the Company's Common Stock. The essential features of the Purchase
Plan, as amended, are outlined below. 

Description of the Purchase Plan

     General.  The Purchase Plan, which is intended to qualify under Section 423
of the Code, provides for the grant to employees of rights to purchase shares of
the Company's Common Stock. 

     Administration.  The Purchase Plan is administered by the Committee,  which
has final authority for interpretation of any provisions of the Purchase Plan or
of any right to purchase  stock granted under the Purchase  Plan.  All costs and
expenses  associated with the  administration  of the Purchase Plan are borne by
the Company.  In addition,  the Purchase Plan provides  certain  indemnification
provisions.  

     Eligibility.  Employees of the Company (including officers) become eligible
for  participation  in the  Purchase  Plan  after  completing  three  months  of
continuous employment that customarily entails more than twenty hours a week and
more than five months per  calendar  year.  However,  no employee is eligible to
participate  in  the  Purchase  Plan  if,  immediately  after  the  election  to
participate,  such employee would own stock of the Company (including stock such
employee may purchase under outstanding options)  representing 5% or more of the
total combined voting power or value of all classes of stock of the Company.  In
addition, no employee is permitted to participate if under the Purchase Plan and
all similar purchase plans of the Company or its subsidiaries, such rights would
accrue at a rate that  exceeds  $25,000 of the fair  market  value of such stock
(determined  at  the  time  the  right  is  granted)  for  each  calendar  year.

     Participation. The Purchase Plan is implemented by one offering during each
calendar  quarter,  beginning on the first trading day of the quarter and ending
on the  last  trading  day of the  quarter  ("Participation  Period").  Eligible
employees become  participants in the Purchase Plan by executing a participation
agreement  and filing it with the Company no later than the  deadline  stated in
the participation agreement, and if none is stated, then no later than the first
day  of  the  Participation  Period.  By  enrolling  in  the  Purchase  Plan,  a
participant  is deemed to have elected to purchase  the maximum  number of whole
shares of Common  Stock that can be  purchased  with the  compensation  withheld
during the Participation Period. 

                                       9


<PAGE>


     Payroll Deductions. The payroll deductions made for each participant may be
any whole percentage of a participant's  base earnings,  up to a maximum of 10%.
Base  earnings is defined in the Purchase  Plan as all  compensation,  excluding
overtime,  shift differential and all incentive compensation,  sales commissions
and other bonuses.  Payroll  deductions  commence with the first paycheck issued
during the  Participation  Period and are  deducted  from  subsequent  paychecks
throughout the Participation  Period unless changed or terminated as provided in
the Purchase Plan. The  participant may increase or decrease the rate of payroll
withholding  for the next  Participation  Period by  filing a new  participation
agreement on or before the date specified in the participation  agreement and if
none is stated, then no later than the first day of the Participation Period for
which the change is to be effective. The Company maintains a plan account in the
name of each  participant and credits the amount  deducted from  compensation to
such account. 

     Purchase of Stock; Price. As of the last day of each Participation  Period,
each participant's accumulated payroll deductions are applied to the purchase of
whole  shares  of Common  Stock at a price  which is the lower of (i) 85% of the
fair market value per share of the Common Stock on the first  trading day of the
Participation  Period  or (ii) 85% of the fair  market  value  per  share of the
Common Stock on the last trading day during the Participation  Period.  The fair
market  value of the Common  Stock on a given date is defined as the closing bid
price as reported by the Nasdaq National Market.  The closing sales price of the
Company's  Common Stock on the Nasdaq  National  Market on December 16, 1996 was
$11 7/8 per share.  In the event that the  aggregate  number of shares which all
participants elect to purchase during a Participation  Period exceeds the number
of shares  remaining for issuance under the Purchase plan, the available  shares
will  be  divided   ratably  and  any  excess  cash  will  be  refunded  to  the
participants.  Participants  are  notified by  statements  of account as soon as
practicable  following the end of each Participation  Period as to the amount of
payroll deductions,  the number of shares purchased,  the purchase price and the
remaining cash balance of their plan account.  Certificates  representing  whole
shares  are  delivered  to  participants.  

     Withdrawal  From  the  Purchase  Plan.   Participants   may  withdraw  from
participation  in  the  Purchase  Plan  at any  time  up to  the  last  day of a
Participation  Period by filing the prescribed form with the Company. As soon as
practicable after withdrawal,  payroll deductions cease and all amounts credited
to the  participant's  plan account are refunded in cash,  without  interest.  A
participant  who has withdrawn  from the Purchase Plan will be a participant  in
future Participation Periods only if such participant re-enrolls pursuant to the
Purchase Plan. 

     Termination  of  Employment.  Termination  of a  participant's  status as a
full-time or permanent  part-time  employee for any reason,  including death, is
treated as an automatic  withdrawal  from the Purchase Plan. In such event,  the
Company will  distribute  all funds held for the employee to the employee or, in
the case of death, to the person or persons  entitled thereto as provided in the
Purchase Plan. 

     Nontransferability.  The  rights of  interests  of any  participant  in the
Purchase  Plan or in any  shares  or  cash  to  which  such  participant  may be
entitled, shall not be transferable by voluntary or involuntary assignment or by
operation of law, or by any other manner than as permitted by the Code,  by will
or the laws of  descent  and  distribution.  

     Amendment and  Termination of the Purchase Plan. The Board of Directors has
the right to amend,  modify or terminate the Purchase  Plan at any time,  except
that the  approval  of the  holders  of a majority  of the  voting  power of the
Company's  outstanding  Common  Stock is  required  for any  amendment  that (i)
changes the number of shares reserved for issuance under the Purchase Plan; (ii)
changes the  percentage  of fair market value used in the  determination  of the
purchase price under the Purchase Plan; (iii) materially  increases the benefits
accruing to persons  eligible  to  participate  in the  Purchase  Plan;  or (iv)



                                       10

<PAGE>


materially  changes  the  standards  of  eligibility  for  participation  in the
Purchase Plan. Unless sooner terminated, the Purchase Plan will terminate on the
last  day  of  the  fiscal  year  ending in 2010.   

     Adjustments   Upon  Changes  in   Capitalization.   In  the  event  of  any
reorganization,  recapitalization,  stock  split,  reverse  stock  split,  stock
dividend,  combination of shares, merger,  consolidation or other similar change
in the capital  structure of the Company,  the Board of Directors  may make such
adjustment,  if any, as it deems  appropriate  in the number,  kind and purchase
price of the shares  available  for  purchase  under the  Purchase  Plan and the
maximum number of shares a participant  may elect to purchase under the Purchase
Plan in any Participation  Period,  subject to the limitations of Section 423 of
the Code.  

     Federal Income Tax Information 

     The following summary is intended only as a general guide as to the federal
income tax  consequences  under current law with respect to participation in the
Purchase  Plan and  does  not  describe  all  possible  federal  and  other  tax
consequences  of  such  participation.  Furthermore,  the tax  consequences  are
complex and subject to change, and a taxpayer's  situation may be such that some
variation of the  described  rules  applies.  The summary does not address other
taxes that may affect a participant in the Purchase Plan such as state and local
income taxes,  federal and state estate,  inheritance and gift taxes and foreign
taxes. Participants should consult with their own tax advisors regarding the tax
consequences of participation in the Purchase Plan.

     The  Purchase  Plan is intended to qualify as an "employee  stock  purchase
plan"  within  the  meaning of Section  423 of the Code.  Participants  will not
recognize  income for federal income tax purposes  either upon enrollment in the
Purchase Plan or upon the purchase of shares.  All tax consequences are deferred
until a participant sells the shares, disposes of the shares by gift or dies. 

     If shares  are held for more than one year after the date of  purchase  and
more than two years from the beginning of the applicable  Participation  Period,
or if the participant  dies while owning the shares,  the  participant  realizes
ordinary income on a sale (or a disposition by way of gift or upon death) to the
extent of the  lesser of (i) 15% of the fair  market  value of the shares at the
beginning  of the  Participation  Period or (ii) the actual  gain (the amount by
which the market value of the shares on the date of sale,  gift or death exceeds
the purchase  price).  All additional gain upon the sale of shares is treated as
long-term  capital  gain. If the shares are sold and the sale price is less than
the  purchase  price,  there is no  ordinary  income and the  participant  has a
long-term  capital  loss  for the  difference  between  the sale  price  and the
purchase price.

     If the shares are sold or are  otherwise  disposed of  including  by way of
gift (but not  death,  bequest  or  inheritance)  (in any case a  "disqualifying
disposition")  within  either  the  one-year  or the  two-year  holding  periods
described above, the participant realizes ordinary income at the time of sale or
other  disposition,  taxable to the  extent  that the fair  market  value of the
shares at the date of purchase is greater than the purchase  price.  This excess
will constitute  ordinary  income (not currently  subject to withholding) in the
year of the sale or other disposition even if no gain is realized on the sale or
if a gratuitous  transfer is made. The difference,  if any, between the proceeds
of sale and the fair  market  value of the shares at the date of  purchase  is a
capital gain or loss.  Capital gains may be offset by capital losses,  and up to
$3,000 of capital losses may be used annually against ordinary income.

     The  Company  will be  entitled  to a  deduction  in  connection  with  the
disposition  of shares  acquired under the Purchase Plan only to the extent that
the participant recognizes ordinary income on a disqualifying disposition of the
shares.  The Company will treat any transfer of record  ownership of shares as a
disposition, unless it is notified to the contrary.



                                       11



<PAGE>




                    RATIFICATION OF APPOINTMENT OF AUDITORS

     The Board of Directors has selected Arthur Andersen LLP, independent public
accountants,  to serve as the auditors  for the Company for fiscal 1997.  At the
Meeting,   the   shareholders   will  be  asked  to  ratify  such   appointment.
Representatives  of Arthur  Andersen  LLP are expected to attend the Meeting and
will be given the  opportunity  to make a  statement  and to answer  appropriate
questions. 

                               EXECUTIVE OFFICERS

     Ronald E. Fredianelli, age 47, has served as Chief Financial Officer of the
Company since April 1990 and as Secretary since 1987. Except for the period from
November 1985 to August 1986 and until he was elected Chief Financial Officer in
1990, Mr.  Fredianelli was the Controller of the Company since August 1979. From
November 1985 to August 1986, he was  Controller of Synergy  Computer  Graphics.

     Felix J.  Schuda,  age 48,  has  served as Chief  Technical  Officer of the
Company since  September 1996 and as a Vice President of the Company since 1981.
He has been  employed  by the  Company in various  engineering  and  engineering
management positions since June 1976.

     Bert E. Smith,  age 48, has served as Vice  President of  Operations of the
Company  since  September  1996.  In February  1996,  he was named  President of
Converter Power, Inc., a wholly owned subsidiary of the Company. From 1984 until
February 1996, he was an independent consultant and from November 1994 until his
appointment as President of Converter Power,  Inc., he served as a consultant to
the Company.  

     John A. Lucero, age 47, has served as Vice President of Marketing and Sales
of the Company  since  September  1996.  He joined the Company in August 1994 as
Director of Sales.  From June 1991 to August  1994,  he was  employed by Crystal
Technology,   Inc.,  an  electro-optics  company,  in  management  positions  in
marketing and operations. 

     Dennis M. Toohey,  age 49, has served as Vice  President  of Logistics  and
Quality of the Company since October 1996.  From May 1995 to September  1996, he
was General Manager of Coils, Inc., an electronic parts  manufacturer.  From May
1993  to May  1995,  he was  employed  by  LeMans  Corporation,  an  auto  parts
distributor,  as Vice President of Operations. From February 1992 to April 1993,
he was Vice  President,  Logistics  at  Harley-Davidson  and from  April 1990 to
February 1992 he was Vice President, Logistics at General Tire/Continental A.G.




                                  12 



<PAGE>



                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     The following table sets forth  information  with respect to each executive
officer  of  the  Company,  each  shareholder  known  by the  Company  to be the
beneficial  owner of more than 5% of the Company's Common Stock and all officers
and  directors  of  the  Company  as a  group.  For  information  regarding  the
beneficial ownership of the Company's Common Stock by each nominee for director,
see  "Election of  Directors--Nominees."  ~ 

<TABLE>

<CAPTION>
                                             Shares of Common Stock  Beneficially
                                             Owned as of December 16, 1996
                                             -----------------------------
<S>                                         <C>                    <C> 

Name                                        Number                 Percent
----                                        ------                 ------

Marvin Schwartz..........................   302,000(1)                6.31%
 Neuberger & Berman
 605 Third Avenue
 New York, New York 10158-3698
Felix J. Schuda..........................    92,984(2)                1.9%
 Vice President-Chief Technical Officer
Ronald E. Fredianelli....................    71,543(3)                1.5% 
 Chief Financial Officer and Secretary
John A. Lucero...........................     6,950(4)                 *
 Vice President, Sales and Marketing
Bert E. Smith............................          -                   -
 Vice President, Operations
Dennis M. Toohey.........................          -                   -
 Vice President, Logistics and Quality
All Officers and Directors as a Group
 (9 persons)                                 456,715(5)               9.2%


</TABLE>

-----------------------------
*        Less than 1%
(1)  The share ownership is as reported on Schedule 13D filed with the 
     Securities & Exchange Commission in July 1996.
(2)  Includes 41,250 shares subject to outstanding options that are exercisable
     on or before February 14, 1997.
(3)  Includes 55,000 shares subject to outstanding options that are exercisable
     on or before February 14, 1997.
(4)  Includes 6,250 shares subject to outstanding options that are exercisable
     on or before February 14, 1997.
(5)  Includes 265,000 shares subject to outstanding options that are exercisable
     on or before February 14, 1997.

                                       13

<PAGE>



                             EXECUTIVE COMPENSATION

     Summary  Compensation  Table The following table shows certain  information
concerning  the  compensation  of each of the Company's  executive  officers for
services  rendered in all  capacities  to the Company for the fiscal years ended
1996, 1995 and 1994.

<TABLE>

<CAPTION>
                                 Annual Compensation
                                 -------------------
  

    
                                                                All Other
Name and Principal Position   Fiscal Year Salary(1)  Bonus(2) Compensation (3)
---------------------------   ---------------------  -------------------------
<S>                           <C>       <C>          <C>         <C>
Henry C. Baumgartner          1996      $175,000     $     -     $2,558         
 Chief Executive Officer      1995       175,000     $26,392      3,021
                              1994       144,462      26,417      2,889

Richard D. Capra (4)          1996        25,385          --         --       
 President and Chief          1995        10,000          --         -- 
 Operating Office

Bert E. Smith (5)             1996       136,314          --         --
 Vice President, Operations   1995        82,180          --         --


Ronald E. Fredianelli (6)     1996       120,000          --      2,215  
 Chief Financial Officer      1995       113,423       19,074     2,262
 and Secretary                1994       101,192       20,913     2,024

Felix J. Schuda               1996       115,000           --     2,100
 Vice President-Chief         1995       105,000       15,893     2,100
 Technical Officer            1994        97,292       20,253     1,946

John A. Lucero (7)            1996        96,442           --     1,919
 Vice President, Sales and    1995        91,642       12,459     1,823   
 Marketing                    1994        10,585           --        --

</TABLE>

(1)  No compensation is paid to officers of the Company for services rendered as
     directors. Dennis M. Toohey, who joined the Company in October 1996 as Vice
     President,  Logistics and Quality,  is compensated at an annual salary rate
     of  $120,000.
(2)  Includes  cash bonuses  paid during the year and cash  bonuses  accrued for
     services rendered during the year.
(3)  Company matching contributions under the Company's Thrift Incentive Savings
     Plan.
(4)  Mr. Capra, who joined the Company in July 1996, is currently compensated at
     an annual salary rate of $200,000.  Amounts for 1995 represent compensation
     for services as a director.
(5)  Mr. Smith,  who joined the Company in February  1996, is  compensated at an
     annual  salary  rate of  $140,000.  Amounts  for  prior  periods  represent
     consulting fees.
(6)  Mr.  Fredianelli  is  currently  compensated  at an annual  salary  rate of
     $130,000. 
(7)  Mr. Lucero  joined the Company in August 1994. He is currently  compensated
     at an annual salary rate of $120,000.


                                       14


<PAGE>



Option Grants in Fiscal 1996

     The following table sets forth  information  regarding option grants to the
executive  officers  in  fiscal  1996.  In  accordance  with  the  rules  of the
Securities and Exchange Commission,  the table sets forth the hypothetical gains
or  "option  spreads"  that  would  exist  for the  options  at the end of their
ten-year term.  These gains are based on assumed rates of annual  compound stock
price  appreciation  of 5% and 10% from the date the options were granted to the
end of the option terms. 
<TABLE>

<CAPTION>
                          Option Grants in Fiscal 1996

                                Individual Grants
                                -----------------
                                                                     
                       Name          Percent of                                
                       Number of     Total Options                             
                       Securities    Granted to                                 
                       Underlying    Employees in   Exercise Price   Expiration
                       Options       Fiscal 1996    Per Share         Date
Name                   Granted (1)                                           
----                   -----------   -----------    ---------         ----    
<S>                     <C>              <C>          <C>             <C>    
                                           
Henry C. Baumgartner... 25,000           13%         $ 9.00           11/6/05 
Richard D. Capra....... 55,000           30%          11.25           7/16/06
Bert E. Smith.......... 25,000           13%          10.625          3/28/06 
Ronald E. Fredianelli.. 20,000           11%           9.00           11/6/05
Felix J. Schuda........  5,000            3%           9.00           11/6/05
John A. Lucero.........  5,000            3%           9.00           11/6/05

</TABLE>


<TABLE>

<CAPTION>
                               Potential Realizable Value at Assumed
                               Annual Rates of Stock Appreciation
                                    for Option Terms(2)  
                                    -------------------                    
                                    5%                    10%                  
                                    --                    ---                  
<S>                              <C>                   <C>  
Henry C. Baumgartner..........  $141,501               $358,592  
Richard D. Capra..............   389,129                986,128
Bert E. Smith.................   167,050                423,338  
Ronald E. Fredianelli.........   113,201                286,874
Felix J. Schuda...............    28,300                 71,718  
John A. Lucero................    28,300                 71,718 
</TABLE>

-----------

(1)  The options shown in the table were granted at fair market value and become
     exercisable  in  cumulative  increments  of  25% of the  shares  per  year,
     commencing on the first anniversary of the date of grant. The options shown
     in the table  will  expire  ten years  from the date of grant,  subject  to
     earlier termination upon termination of employment.

(2)  The assumed annual compound rates of stock price  appreciation are mandated
     by the rules of the Securities and Exchange Commission and do not represent
     the Company's estimate or projection of future stock prices.





                                      15

<PAGE>



Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End 
 Option Values

     The following  table shows the number of shares of Common Stock acquired by
the executive  officers  upon the exercise of stock options  during fiscal 1996,
the net value  realized  at  exercise,  the  number  of  shares of Common  Stock
represented  by outstanding  stock options held by each executive  officer as of
September  28, 1996 and the value of such options  based on the closing price of
the Company's Common Stock on September 28, 1996, which was $11.13.
<TABLE>
<CAPTION>

                                                                      Value of
                                                      Number of     Unexercised
                                                    Unexercised    In-the-Money
                                                    Options at      Options at
                                                 at FY-End (#)(1)  FY-End ($)(2)
                                                 ----------------  -------------
                 Shares Acquired  Value Realized   Excerisable/    Exercisable/
Name             of Exercise (#)     ($) (3)      Unexercisable   Unexercisable
----             ---------------     -------      -------------   -------------
<S>                     <C>            <C>     <C>              <C>

Henry C. Baumgartner     --             --     115,000/25,000   $854,625/$53,125
Richard D. Capra         --             --       1,250/58,750      2,031/469
Bert E. Smith            --             --          0/25,000       0/12,500
Ronald E. Fredianelli    --             --       50,000/20,000   345,000/42,500
Felix J. Schuda         1,000        $9,750      40,000/5,000    252,000/10,625
John A. Lucero           --             --        5,000/10,000    18,750/29,375
</TABLE>

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

(1)  Represents the total number of shares subject to stock options held by each
     executive  officer.  These  options  were  granted on various  dates during
     fiscal  years  1987  through  1996 and are  exercisable  on  various  dates
     beginning in 1988 and expiring in 2006.
(2)  Represents the difference  between the exercise price and $11.13,  which is
     the September 28, 1996 closing price.  Stock option  exercise  prices range
     from $2.13 to $11.25.
(3)  Aggregate  market value of the shares  covered by the option at the date of
     exercise, less the aggregate exercise price.

                     COMPENSATION COMMITTEE INTERLOCKS AND
                INSIDER PARTICIPATION IN COMPENSATION DECISIONS

     The  Compensation and Stock Option Committee of the Board of Directors (the
"Committee") is composed of Harrison H. Augur, Chairman,  Arthur L. Schawlow and
Wirt D. Walker. All are independent  outside directors.  Richard D. Capra served
on the  Committee  until  July 1996,  when he was  elected  President  and Chief
Operating Officer of the Company.



                 BOARD COMPENSATION AND STOCK OPTION COMMITTEE
                        REPORT ON EXECUTIVE COMPENSATION

     The  Committee  is  charged  with  the  responsibility  for  reviewing  the
performance   and  approving  the   compensation   of  key  executives  and  for
establishing   general   compensation   policies  and  standards  for  reviewing
management  performance.  The  Committee  also  reviews both  corporate  and key
executive  performance in light of  established  criteria and goals and approves
individual  key executive  compensation.

Compensation  Philosophy

     The  executive  compensation  philosophy  of  the  Company  is  to  provide
competitive  levels of  compensation  that  advance  the  Company's  annual  and
long-term performance objectives,  reward corporate performance,  and assist the
Company in attracting, retaining and motivating highly qualified executives.



                                       16



<PAGE>



     The framework for the  Committee's  executive  compensation  programs is to
establish  base salaries  which are  competitive  and to  incentivize  excellent
performance by providing  executives  with the  opportunity  to earn  additional
remuneration linked to the Company's profitability. The incentive plan goals are
designed to improve the  effectiveness  and  enhance the  efficiency  of Company
operations,   to  provide   savings  for  customers  and  to  create  value  for
shareholders.  It is also the Company's  policy to encourage  share ownership by
executive  officers and Outside  Directors  through the grant of stock  options.

Components of Compensation

     The compensation  package of the Company's  executive  officers consists of
base annual salary,  bonus  opportunities  and stock option grants. 

     At  executive  levels,  base  salaries  are  reviewed  but not  necessarily
increased  annually.  Base  salaries  are fixed at  competitive  amounts paid to
individuals  with  comparable  qualifications,  experience and  responsibilities
engaged in similar businesses as the Company. The Company develops its executive
compensation  data  from a  nationally  recognized  survey  for high  technology
companies of similar size,  industry and location.  Dr.  Schuda's base salary of
$105,000 was increased to $115,000 in October 1995. No other  executive  officer
of the Company received a salary increase in fiscal 1996.  However,  the Company
typically adjusts base salary levels in connection with promotions. Mr. Lucero's
base salary of $95,000 was  increased to $120,000 in August 1996,  in connection
with his appointment as an executive officer of the Company.

     Incentive  compensation  is  closely  tied  to  the  Company's  success  in
achieving  financial  performance  goals.  Each year the  Committee  approves  a
management  bonus  program  based  upon  performance  objectives  for  executive
officers and other key employees.  Under the program,  a participant may receive
in any year a portion  of a  management  bonus  pool,  which  pool is based on a
percentage of yearly pre-tax profits with no ceiling. The participant's share is
based  on his or her  base  wage  as a  percent  of the  total  salaries  of all
participants during the management bonus period. The participant's  distribution
is then  calculated  in  accordance  with a bonus point  scaling  system tied to
financial  performance goals. In addition,  all employees share in another bonus
program based solely on a percentage of pre-tax profits,  again with no ceiling,
and  distributed  based on a percentage  of base salary.

     The  Company  uses stock  options  both to reward past  performance  and to
motivate future performance,  especially  long-term  performance.  Stock options
typically have been granted to executive officers when the executive first joins
the Company,  in connection with a significant  change in  responsibilities,  to
provide  greater  incentives to continue their  employment with the Company and,
occasionally, to achieve equity within a peer group. The Committee may, however,
grant  additional  stock options to executives for other reasons.  The number of
shares  subject to each stock  option  granted is within the  discretion  of the
Committee and is based on anticipated future  contribution and ability to impact
corporate  results,  past performance or consistency within the executive's peer
group. The Committee  considered these factors, as well as the number of options
held by such executive  officers that would remain unvested at the end of fiscal
1995, in  determining  the number of options to grant to executive  officers for
fiscal 1996.  The  Committee  believes  that  through the use of stock  options,
executive  interests are directly  tied to enhancing  shareholder  value.  Stock
options  are granted at fair  market  value as of the date of grant,  and have a
term of ten  years.  The  options  vest 25% per  year,  beginning  on the  first
anniversary date of the grant. The stock options provide value to the recipients
only when the market price of the  Company's  Common Stock  increases  above the
option  grant  price and only as the  shares  vest and  become  exercisable.

     In November 1996, the Board of Directors  authorized  severance  agreements
for certain key  managers in the event of a change of control of the Company and
subsequent  actual or  constructive  termination of the covered  manager without
cause.  The  severance  pay will be a multiple  of current  base salary (.5 to 3
times,  depending on seniority).



                                       17
  


<PAGE>
                                       




     The  change of  control  severance  agreements  are  intended  to  maintain
management objectivity and continuation during any negotiation process.

Mr. Baumgartner's 1996 Compensation

     The  Committee  makes  decisions  regarding the  compensation  of the Chief
Executive  Officer using the same  philosophy set forth above.  The  Committee's
approach in setting Mr.  Baumgartner's  base  compensation,  as with that of the
Company's other executives, is to be competitive with other companies within the
industry,  taking into  consideration  company size,  operating  conditions  and
compensation philosophy and performance. Mr. Baumgartner's base salary in fiscal
1996 was the same as his base salary in fiscal 1995.  Mr.  Baumgartner's  fiscal
1996  incentive   compensation  was  earned  under  the  same  bonus  plans  and
performance  criteria that were described previously in this report. He received
25,000 stock option grants at $9.00 per share during fiscal 1996.

Compliance  with Section 162(m) of the Internal  Revenue Code

     The Company  intends to comply with the  requirements  of Section 162(m) of
the  Internal  Revenue  Code of 1986 for  fiscal  1997.  The  Option  Plan is in
compliance  with  Section  162(m) by  limiting  the number of shares  subject to
options to be granted  to any  participant.  The  Company  does not expect  cash
compensation  for fiscal  1996 to be  affected  by the  requirements  of Section
162(m).

                           COMPENSATION AND STOCK OPTION COMMITTEE

                           Harrison H. Augur, Chairman
                           Arthur L. Schawlow
                           Wirt D. Walker, III


                                       18


<PAGE>







                               PERFORMANCE GRAPH

     The Securities and Exchange Commission requires that the Company include in
this Proxy Statement a line- graph presentation comparing cumulative,  five-year
shareholder returns on an indexed basis with (i) a broad equity market index and
(ii) either an industry  index or peer group.  The following  graph compares the
percentage  change in the cumulative total  shareholder  return on the Company's
Common  Stock  against the  cumulative  total return of the Standard & Poors 500
Index and the NASDAQ SIC Group 364 (Electric  Lighting and Wiring Equipment) for
a period of five years.  "Total return," for the purpose of this graph,  assumes
reinvestment of all dividends,  if any. The stock price performance shown on the
graph is not necessarily indicative of future price performance.


                Comparison of Five Year Cumulative Total Return*
                 Among ILC Technology, Inc., The S&P 500 INDEX
                            and NASDAQ SIC Group 364


Edgar representation of data points used in printed graphic

<TABLE>
<CAPTION>

          ILC Technology, Inc.      SDAQ SIC Group 364           S&P 500
<S>            <C>                      <C>                       <C>

9-91           100                      100                      100
9-92            84                      111                      118
9-93            84                      125                      145
9-94            64                      130                      170
9-95            80                      169                      212
9-96            79                      203                      216

</TABLE>

     *100  invested  on 9/30/91  in stock or index,  including  reinvestment  of
dividends. Fiscal year ending September 28.


                                       19


<PAGE>


CERTAIN TRANSACTIONS

     In November 1996, the Company entered into Compensation Agreements with ten
of its key  employees,  including  six  executive  officers,  that would provide
severance  benefits  effective  upon a change in  control of the  Company.  Each
agreement  provides  that if, during the two-year  period  following a change in
control of the Company (as defined in the  agreements),  the Company  terminates
the  employee's  employment  without cause (other than for death,  retirement or
disability) or the employee terminates the employee's employment for good reason
(as defined in the  agreements),  the  employee  will receive from the Company a
lump sum  payment as a severance  benefit.  The amount of such  payment  will be
equal to three times the employee's  annual full base salary  (excluding  bonus)
for Messrs.  Baumgartner,  Capra and  Fredianelli,  and two times the employee's
annual full base salary (excluding bonus) for Messrs.  Schuda, Smith and Lucero.
All  Compensation  Agreements  expire in November 1999 if a change in control of
the Company has not  occurred or upon the  employee's  earlier  termination  for
cause or by reason of the employee's death, disability or retirement.


                         COMPLIANCE UNDER SECTION 16(a)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

     Based solely on its review of the copies of forms  furnished to the Company
and written  representations  from its  executive  officers and  directors,  the
Company  believes  that all Section  16(a) filing  requirements  were met during
fiscal  1996,  except that a Form 3 giving an initial  statement  of  beneficial
ownership of equity  securities was filed late by Bert E. Smith, Vice President,
Operations and John A. Lucero, Vice President, Sales and Marketing.


                                 OTHER MATTERS
     
     The  Company  knows of no other  matters to be  submitted  to the  Meeting.
However,  if  any  other  matters  properly  come  before  the  Meeting  or  any
adjournment or postponement thereof, it is the intention of the proxy holders to
vote the shares they represent as the Board of Directors may recommend. 

                                   By Order of the Board of Directors



                                   Ronald E.  Fredianelli,
                                   Secretary  


Dated:  January 2, 1997
Sunnyvale, California

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