SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                 --------------

                                   Form 10-KSB

                                   (Mark One)
    [ X ] Annual report under Section 13 or 15 (d) of the Securities Exchange
                          Act of 1934 [No fee required]

                  For the fiscal year ended January 3, 1998, or

   [ ] Transition report under Section 13 or 15 (d) of the Securities Exchange
                          Act of 1934 [No fee required]

             For the transition period from _________ to __________


                         Commission file number 0-11880

                            HYTEK MICROSYSTEMS, INC.
                 (Name of small business issuer in its charter)

               California                             94-2234140
       (State or other jurisdiction of            (I.R.S. Employer
        incorporation or organization)           Identification No.)

    400 Hot Springs Road, Carson City, Nevada             89706
    (Address of principal executive offices)           (Zip Code)

         Issuer's telephone number, including area code: (702) 883-0820

    Securities registered pursuant to Section 12(b) of the Exchange Act: None

       Securities registered pursuant to Section 12(g)of the Exchange Act:

                           Common Stock, no par value
                                (Title of Class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 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  ______

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will 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-KSB or any
amendment to this Form 10-KSB. [ X ]

Revenues of the Issuer for the most recent fiscal year ended
January 3, 1998 were:  $9,020,000.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant  (based on the  average of the bid and asked  prices  reported on the
Over the  Counter  bulletin  board of the  National  Association  of  Securities
Dealers, Inc.) on March 16, 1998 was approximately  $4,429,578.  For purposes of
such  calculation,  shares of Common  Stock held by each  executive  officer and
director  and by each  person  who owns more than 5% of the  outstanding  Common
Stock have been  excluded in that such  persons may be deemed to be  affiliates.
This   determination  of  affiliate  status  is  not  necessarily  a  conclusive
determination for other purposes.

As of March 16,  1998,  the issuer had  outstanding  2,944,758  shares of Common
Stock, no par value.

                    DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Company's  definitive  Proxy  Statement  for its Annual  Meeting of
Shareholders to be held on May 15, 1998 (the "Proxy Statement") are incorporated
by reference into Part III of this Annual Report on Form 10-KSB.

<PAGE>



                                    PART I
                                    ------

ITEM 1.  DESCRIPTION OF BUSINESS.
         -----------------------

         Hytek   Microsystems,   Inc.   ("Hytek"  or  the  "Company")   designs,
manufactures,  markets and sells custom and standard hybrid microcircuits. These
microcircuits  utilize  thick film  technology  and  consist of  conductive  and
non-conductive  inks that are bonded onto a substrate  and  interconnected  with
various subminiature  electronic  components to form a hybrid  microcircuit.  In
addition  to  custom   thick  film  hybrid   microcircuits,   the  Company  also
manufactures  delay lines,  thermo-electric  cooler  controllers and laser diode
driver standard products.

Net revenues in 1997  increased 4% from 1996 levels.  The Company had net income
of  $1,662,000  in 1997 as compared  to net income of  $1,927,000  during  1996.
During 1997, the Company  increased  total assets by $2.9 million and added $1.4
million to working capital.  See "Management's Discussion and Analysis or Plan
of Operation" in Part II, Item 6 hereof.

Hytek was  incorporated as a California  corporation on January 4, 1974.  Unless
the context  otherwise  requires,  the terms "Hytek" and the "Company"  refer to
Hytek Microsystems, Inc. See Note 1 of Notes to Financial Statements.

This Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange Act of 1934.  Actual results could differ  materially  from
those  projected in the  forward-looking  statements  as a result of a number of
risks and  uncertainties,  including,  but not limited to, the risk  factors set
forth below and  elsewhere  in this Report.  See  "Management's  Discussion  and
Analysis or Plan of  Operation--Factors  Affecting  Future Results." The Company
has  attempted  to identify  forward-looking  statements  by placing an asterisk
immediately  following  the sentence or phrase  containing  the  forward-looking
statement(s).  Statements  made  herein are as of the date of the filing of this
Form 10-KSB  with the  Securities  and  Exchange  Commission,  and should not be
relied upon as of any  subsequent  date.  The Company  expressly  disclaims  any
obligation to update information presented herein, except as required by law.

Products and Markets
--------------------

         Products  manufactured  by the Company are sold  primarily  to original
equipment manufacturers (OEMs) serving the oil exploration, military, computing,
telecommunications,  and industrial markets.  Approximately 94% of the Company's
net revenues in 1997 were derived from  products  designed and  manufactured  to
meet a particular customer's specifications. The remaining 6% of net revenues in
1997 were derived from standard products  designed by the Company's  engineering
staff.

         During 1997,  approximately 64% of the Company's  revenues were derived
from   commercial  and  industrial   private  sector  programs  as  compared  to
approximately 76% in 1996. Sales to the military and government sector increased
by approximately $1.2 million to a total of $3.2 million during 1997.

<PAGE>

         From 1987,  when the Company  was  certified  under  MIL-Standard-1772,
through 1994, sales of military and government products increased.  1995 was the
first year that the Company  experienced  a decline in the sale of military  and
government products. Sales to the military and government sector increased again
in both 1996 and 1997. The Company  continues to pursue business in the military
market  and is  actively  seeking  to expand its  customer  base in this  area.*
Offshore  producers  with  significantly  lower  costs  have  in the  past  been
precluded from participating in many U.S. military applications;  however, it is
not certain that this preclusion  will remain in effect in the future.  Military
products  are  subject  to  much  more  stringent  manufacturing  criteria  than
commercial products and have in the past commanded  significantly higher prices.
However,  there is growing  trend in  military  procurement  to buy to the "best
commercial  standards" or "commercial off the shelf" (COTS) criteria,  which may
have a negative  impact on  margins in future  military  business.  The  Company
intends to continue its efforts to remain competitive in the military market. *

     While domestic  defense and military  related  spending  programs have been
reduced over the past several  years,  there  remains a large global  market for
these  products  and systems.  U. S. defense  contractors  are  supplying  these
products to "allied"  nations who continue to build their defense  capabilities.
The Company expects to continue to be an active participant in this market.*

         The commercial  custom hybrid market has historically been an extremely
competitive,   low  margin  arena.   In  many  commercial   applications,   U.S.
manufacturers are competing against offshore  producers that have  significantly
lower  costs.  However,  there are certain  segments of this market that require
high reliability custom hybrid products.  Such high reliability products command
higher prices and margins.  It is in this segment of the commercial market where
the Company has been successful during the past three years.

         Historically,  a substantial  majority of the  Company's  revenues have
been  derived  from  custom  products  that  are  manufactured  to a  customer's
specifications for a unique  application.  This has held true for the past three
years with the custom product  percentage of total revenues  increasing from 88%
in 1995 to 94% in both 1996 and 1997.

           In February  1993,  the Company  announced a new standard  commercial
product, the Thermo-Electric Cooler Controller (TECC), which has applications in
fiber optic communications and various "detector" product markets.  During 1994,
additional  TECC  devices were  designed and  introduced.  These  products  have
received favorable response from the marketplace and have been shipped to a wide
variety of customers.  Further,  during 1995,  the Company  introduced  its High
Speed Laser Diode Driver (HSLDD). The Company has subsequently  introduced three
additional  design  versions of the Laser Diode Driver.  The Company expects the
market for these products to grow as new communications  technologies  develop.*
The Company  continues to support these products in addition to its  established
digital delay line products.

<PAGE>


Hybrid Circuit Technology
-------------------------

         Complex  electrical  circuits  require  the  integration,  in a  single
package, of various resistors,  transistors and other components.  The principal
packaging  technologies  used in producing  electrical  circuits include printed
circuit boards,  integrated  circuits,  thick film hybrid circuits and thin film
hybrid circuits. These technologies are not interchangeable in all applications,
and the extent to which they are interchangeable depends on such requirements as
size, performance, reliability and cost.

         Thick film  hybrid  circuit  technology  is a  subminiature  electronic
packaging  method.  The term "thick film network"  describes a method for screen
printing  conductors,  resistors and capacitors onto a ceramic  substrate.  This
thick film network  becomes a hybrid circuit when  components such as integrated
circuits,  semiconductors,  capacitors and inductors are added to the network in
order to form a functioning electrical circuit.

         Theoretically,  hybrid circuit packaging  techniques can be employed in
virtually  any  electronic  application,  but they have various  advantages  and
disadvantages in any given application as compared with alternative  techniques.
In general, the alternative  techniques are printed circuit designs,  integrated
circuits and thin film hybrid technology.

         In those  applications  in which  either  hybrid  circuits  or  printed
circuit boards can be used,  hybrid  circuits often offer the advantages of size
reduction, increased performance, reduced cost and proprietary design.

         Hybrid  circuit   packaging   techniques  are  generally   chosen  over
integrated circuit designs if the circuits are difficult to integrate, or if the
higher cost of an  integrated  circuit is not  warranted.  For example,  circuit
applications  requiring  inductors,  large  capacitors  or devices  from several
semiconductor  technologies  cannot currently be integrated into a silicon chip.
However,  as integrated  circuit  technology  advances  rapidly,  integration is
improving  and the  advantages  of hybrid  technology  have been  eroding  away.
Despite this erosion,  not all applications  have proven adaptable to integrated
circuit technology; therefore; the Company believes that hybrid technology is an
attractive alternative for certain applications.

         While thin film hybrid  technology  allows for greater size  reductions
and more compact circuits than does thick film hybrid  technology,  it is a more
expensive  process and  requires a much  larger  initial  investment  in process
equipment. As a result of these cost differences, there continues to be a market
for hybrid circuits produced with thick film technology.

         All of the microcircuits  currently  produced by Hytek are manufactured
using thick film  hybrid  circuit  packaging  techniques,  including  thick film
screen print, firing and laser trimming,  chip and wire assembly,  and automatic
testing.   The  Company  may,  however,   seek  to  develop  additional  process
technologies  in the  future  that  could  enable  the  Company  to  offer  more
sophisticated circuits than those currently provided by Hytek. *

Product Applications
--------------------

         Custom products  accounted for approximately 94% of the Company's sales
in 1997.  These products serve a variety of applications in the oil exploration,
military,  computing,   telecommunications,   and  industrial  markets.  In  the
production of custom products, the Company generally accepts full responsibility
for  product  design,   having  received  blueprints  and/or  input  and  output
specifications  from the  potential  customer.  In many  cases,  prototypes  are
developed  and  delivered to the  customer,  and are  evaluated by the customer,
before a firm order for  production  quantities is placed.  In the case of a new
custom product, a typical production cycle time from initial customer contact to
shipment of the product in commercial  quantities  would be 20 to 30 weeks.  The
Company places a strong  emphasis on developing a working  relationship  between
its own  engineering  staff and the  engineering  staff of a potential  customer
during the product development phase.

<PAGE>


         Standard products accounted for approximately 6% of the Company's sales
in  1997.  These  products  consist  of  delay  lines,   thermo-electric  cooler
controllers  and laser diode driver  products  produced for  applications in the
military,  computing,  industrial  electronic systems,  telecommunications,  and
automatic test equipment markets.

         Within the primary  markets  served by the  Company' s  customers,  the
following  are some  applications  in which the  Company's  custom and  standard
products are currently being used:

Oil Exploration--seismic data acquisition and geophysical measurement equipment.
---------------

Military--communications,  guidance  systems,  control circuitry and avionics.
--------

Satellite Systems--power monitoring and control circuits.
-----------------

Industrial Electronic Systems--measurement and diagnostics on rotating machinery
-----------------------------

Opto-Electronics--sub-miniature  temperature controls, laser diode drivers for
----------------
     data transmission.

Automatic Test Equipment--integrated circuit test systems.
------------------------

Marketing
---------

         The Company  markets its products in the United States  through its own
sales staff and through independent sales  representatives.  At January 3, 1998,
the Company's direct sales staff consisted of four employees  operating from the
Company's principal office in Carson City. In addition, at such date the Company
had five independent sales representatives  located throughout the United States
and one  independent  representative  located in Israel.  The  Company  also has
distributors in France, Germany, Japan and Sweden.

         In  addition  to this  marketing  organization,  the  Company  uses its
technical engineering staff to assist in its marketing effort. In this marketing
effort,  the  Company  first  seeks to  identify  product  types with  component
functions  that can be well  served  utilizing  hybrid  circuit  packaging.  The
Company then identifies and contacts the manufacturers or proposed manufacturers
of the particular  product types. The initial contact is usually made by a sales
representative  for the geographic  area. If the proposed sale involves a custom
product,  the Company's in-house design and engineering staff supports the sales
effort.  In addition,  senior  members of management of the Company are directly
involved in the marketing and sales activities of the Company.

<PAGE>

         The Company has  identified  certain  existing  customers  who it feels
offer greater  potential for increased  levels of future  business.  The Company
strives to  maintain a higher  level of contact and  customer  support for these
"key accounts".

         The  Company's  Carson  City,  Nevada  facility  is   MIL-Standard-1772
certified and qualified.  This certification is a prerequisite to participate in
certain  military  contracts,  and is  subject  to  periodic  audits by the U.S.
government.  Loss of the  MIL-Standard-1772  certification would have a material
adverse impact on the Company's business prospects and financial condition.


Customers
---------

         During 1997, the Company's five largest customers  accounted for 81% of
the Company's net revenues. Those customers were Chesapeake Sciences Corporation
(53%), TRW, Inc. (15%), Eaton Corporation (6%), Litton Applied Technology,  Inc.
(4%) and Boeing Co.(McDonnell Douglas) (3%). The Company currently anticipates a
continuing business  relationship with all of these customers in the future. * A
large portion  (60%) of the  Company's  backlog of orders for 1998 and beyond is
attributable to Chesapeake Sciences  Corporation.  Any lengthy disruption in the
supply of materials for the Chesapeake Sciences program would have a significant
negative effect on revenues and earnings.  Any delay in scheduled  shipments to,
or cancellation of orders by Chesapeake, would have a material adverse effect on
the Company's  business,  results of operations  and  financial  condition.  See
"Factors Affecting Future Results", in Part II, Item 6 hereof.

Manufacturing
-------------

         Each hybrid product  produced by the Company passes through a number of
complex processes,  each of which requires a high degree of skill and precision.
Occasionally  in the  past,  the  Company  has  experienced  isolated  technical
manufacturing  problems  that have  resulted  in a material  negative  impact on
quarterly  results,  such as the  bonding  problem  encountered  on the  "ANDVT"
program  in the first  quarter of 1993.  While the  Company  has taken  steps to
improve its  manufacturing  processes and  equipment,  any future  manufacturing
problems on major  customer  programs  could have a material  adverse  effect on
operating results.

         The hybrid manufacturing process begins with a blueprint, which, in the
case of a custom  product,  is  produced  by,  or with the  assistance  of,  the
customer.  This blueprint is the basis for an engineering print that the Company
produces, which in turn serves to provide a set of artwork for each product. The
artwork  consists  of up to 20  photographic  negatives,  one for each  layer of
imprint on the substrate  described below. The artwork is then  photographically
reduced  and used to generate  stainless  steel  screens,  which are used in the
printing process.

         The  screens  are used to  print on  substrates,  which  are  generally
miniature ceramic wafers.  Metallic  conductive and  non-conductive  inks (thick
films) are printed on the substrates.  Those films, when fired, will conduct and
resist the flow of electric  current.  The drying or firing  process is achieved
using  temperature-controlled  furnaces,  typically  operating  in the  range of
525(degree) Celsius to 935(degree)  Celsius.  Each printing must be fired before
the next one is started.

<PAGE>

         After printing,  resistance values are adjusted by high precision laser
trimming.  Laser cuts are made in the  resistive  films to alter the  resistance
value, using computer-controlled  laser equipment.  During the trimming process,
the   electrical    characteristics   are   simultaneously   re-tested   against
specification before the substrate is passed to assembly.

         In assembly,  which is  primarily a manual  process,  other  electronic
components,  such  as  integrated  circuits,   semiconductors,   capacitors  and
inductors,  are added to the thick film  substrate,  thus  resulting in a hybrid
circuit.  Positioning  is  critical,  and  the  work  is  primarily  done  under
microscopes.   Wire  bonding,  using  miniaturized  wire,  is  also  done  under
microscopes.  Wire bonding provides the electrical  connection from the attached
components  to the printed  substrate.  The hybrid  circuit is then packaged and
hermetically sealed in metal, ceramic or plastic.

         Much  of  the  Company's  test  equipment  is  automated  and  computer
controlled,  each  unit  being  subjected  to tests  at  various  points  in the
production  process as well as to a final test by the quality  assurance  staff.
Product yield is dependent on environmental control as well as stringent process
and production controls.

         The primary  materials from which the Company  manufactures  its hybrid
products are  resistive  materials  (wire,  alloys and inks),  ceramic bases and
electronic components (primarily integrated circuits, capacitors and inductors).
The raw materials and components  that Hytek  purchases are generally  available
from several sources. Some of the Company's major suppliers include Aegis, Inc.,
Cal-Chip  Electronics,   Inc.,  E.  I.  DuPont,  Electro  Science  Laboratories,
Semi-Films  Inc.,  Harris  Semiconductor,  Inc.  and Micross  Components,  Inc..
Although  the Company has at times  experienced  long lead times with respect to
deliveries  from its vendors,  the Company  believes that  adequate  alternative
sources of supply  are  currently  available  for a  majority  of the  Company's
materials  requirements.  Nevertheless,  any major disruption in the delivery of
raw materials from these suppliers  would have a material  adverse impact on the
Company's future operations.

         Government  regulations  impose various  environmental  controls on the
chemicals  used  in  electronics  manufacturing.  The  Company  employs  various
safeguards to avoid the discharge of harmful  materials into the environment and
believes that its activities conform to present state and federal  environmental
regulations. However, there can be no assurance that the Company will not in the
future be exposed to increased costs relating to required clean-up or compliance
with ever-tightening regulations. The Company complies with new federal labeling
regulations, which took effect in May 1993, regarding the use of Ozone Depleting
Chemicals  (ODCs) as set forth in the  Clean Air Act of 1990.  The new  labeling
requirements  have had only a minor cost  impact on  operations.  At the present
time,  the  Company is not aware of any other  proposed  or  pending  government
regulation  that would have a material  impact on the  operations  or  financial
condition of the  Company.  However,  there can be no assurance  that any future
government  regulation  would  not  have a  material  impact  on  the  Company's
operations or financial condition.

<PAGE>

Engineering and Development
---------------------------

         The growth in sales volume over the past three years has been in custom
hybrid products which require intensive engineering effort from the design phase
through final release to production. As a result, the amount of effort committed
to research and new standard product  development has been minimal over the past
three  years.  During  1997,  the Company  was able to  increase  its efforts in
standard product development as a result of adding additional personnel.

         During  1997  and  1996,  the  Company  spent  $769,000  and  $650,000,
respectively,  on  its  total  engineering  efforts.  Of  these  amounts,  it is
estimated  that  approximately  $115,000  and $65,000  were spent on new product
research and development in 1997 and 1996, respectively.

         The Company's last new standard  product  introduced was the High Speed
Laser  Diode  Driver,  in the spring of 1995.  Sales of this  product  have been
minimal  to date,  which  the  Company  attributes  to the high unit cost of the
device as originally  designed.  As a result , the Company has  re-designed  and
released in 1997, a "cost reduced"  version of the Laser Diode Driver,  which it
hopes will be more suitable for volume  commercial  applications.*  In addition,
two  additional  Laser Diode  Drivers  models were  introduced  in 1997 to cover
expanded power and frequency ranges.

Competition
-----------

         Because of the variety of applications in the markets it serves,  and a
military market that has been diminishing in size, the Company faces significant
competition  from a variety of sources.  Many of the Company's  competitors have
substantially  greater  financial,  marketing,  manufacturing,  engineering  and
management  resources than the Company.  However,  the Company believes that its
smaller size, in some  instances,  provides for greater  flexibility  in meeting
customer  requirements,  and is not  necessarily  detrimental  to the  Company's
competitive position.

         The Company  believes that the hybrid circuit  industry  includes large
OEMs, such as IBM, TRW, Inc. and Western Electric,  that manufacture exclusively
for their own use (so called "captive"  manufacturers),  and other OEMs, such as
Teledyne  Industries,  Inc. and Hughes  Aircraft Co., that  manufacture for both
their own use and for sale to  others.  Some of these  large  "captive"  and OEM
hybrid  manufacturers have curtailed or reduced their internal hybrid operations
and begun to procure their hybrid requirements from outside sources. The Company
believes  that this has led to  increased  opportunities  for the entire  hybrid
circuit industry.

         In addition,  there exists a large number of independent hybrid circuit
manufacturers,  such as the Company,  that  manufacture  exclusively for sale to
others. In past years certain of these manufacturers have left the custom hybrid
arena to specialize in defined markets such as medical or memory hybrids.  These
changes have created additional opportunities for the Company.  Further, over 30
of the known independent manufacturers are certified to MIL-Standard-1772, as is
the Company. The Company's current share of the overall hybrid circuit market is
small but has expanded over the last few years.

<PAGE>

         In those applications where hybrid circuits and integrated circuits are
interchangeable,   hybrid  circuit   manufacturers   often  compete  with  major
integrated circuit manufacturers.

         The primary factors of competition in the markets served by the Company
are product reliability,  timely delivery,  price,  performance and stability of
the manufacturer. The Company believes that it generally competes favorably with
respect  to all of these  factors;  however,  stability  has been a  concern  to
certain of the Company's  customers in past years.  The  improvement in revenues
and  earnings  for the past three  years has  helped  strengthen  the  Company's
stability factor.

Trademarks, Patents and Licenses
--------------------------------

         The Company, at this time, has one registered patent (No. 5,521,933) on
its  Backmatched  Laser Diode  Driver,  which will expire in 2013.  As other new
products are developed,  the Company intends to pursue  trademarks or patents as
appropriate. The Company currently has no trademarks or licenses material to the
conduct of its business.

Employees
---------

         As of January 3, 1998,  the  Company  employed a total of 98  full-time
employees,  of whom 77 were in manufacturing,  4 were in marketing and sales, 15
were in engineering and development and 2 were in administration.  The Company's
success depends in part on its ability to attract and retain skilled  personnel,
for whom there is strong  demand.  None of the  Company's  employees are covered
under a collective bargaining agreement, and the Company has not experienced any
labor strike or related work stoppage.

Government Contracts
--------------------

         During  1997,  the  Company  derived  approximately  36% of  its  total
revenues from government-funded  contracts and subcontracts.  Such contracts and
subcontracts   generally  contain  provisions   allowing   termination  for  the
convenience of the  government.  In the event of such  termination,  the Company
would  generally be entitled to receive a termination  settlement  consisting of
(i) the contract  price for completed  items accepted by the government or prime
contractor  and (ii) the Company's  costs  incurred in the  performance  of work
completed prior to termination,  together with a reasonable profit on such work.
During  1997,  the  Company  experienced  no  such  termination  for  government
convenience.

ITEM 2.  DESCRIPTION OF PROPERTY.
         -----------------------

         The Company  currently  leases a total of  approximately  23,800 square
feet of manufacturing,  engineering and support  facilities in a single building
in Carson City,  Nevada.  The current lease term runs through June 2005, with an
option to extend  for an  additional  five  years.  The  facility  is  currently
operating at approximately 60 to 65% of capacity. The Company believes that this
facility  has  sufficient  additional  manufacturing  capacity to  significantly
increase  production levels with only minor increases in manufacturing  overhead
costs. *

<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.
         ------------------

         During October 1997 a complaint of Discrimination  under Nevada Revised
Statutes  613.330 was filed  against the Company  with the Nevada  Equal  Rights
Commission by a former  employee.  The complaint  claims sexual  harassment  and
retaliatory  termination  and seeks  unspecified  monetary  relief.  The Company
denies this  allegation  and has filed its complete  response to the charge with
the Equal  Rights  Commission.  At the current  time,  the Nevada  Equal  Rights
Commission   has  taken  no  action  with   respect  to  either  the  charge  of
discrimination  or the Company's  response  thereto.  It is not possible at this
early stage of the  proceedings  to predict the  probability  of a favorable  or
unfavorable  resolution of this complaint.  It is the opinion of management that
an unfavorable resolution would not have a material adverse impact on the future
operations or financial stability of the Company.

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

                  The  Company  did not submit any matters to a vote of security
holders during the fourth quarter of the fiscal year ended January 3, 1998.

         EXECUTIVE OFFICERS OF THE COMPANY
         ---------------------------------

         Information  concerning the executive officer of the Company who is not
also a director of the Company is set forth below:

     Jon B. Presnell, age 47, was promoted to the position of Vice-President and
General Manager of Custom Products for the Company in October 1993. Mr. Presnell
has been an employee of the Company since 1980, and served as General Manager of
the Carson City facility from May 1987 through  December 1988. From January 1989
until October 1993,  Mr.  Presnell  served as Director of Sales and Marketing of
the Company.  Prior to joining Hytek, Mr. Presnell was employed as an Electrical
Engineer for Texas Instruments, Inc.


                                PART II
                                -------

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
         ---------------------------------------------------------

         Incorporated  by reference to the table on page F-2 of this Form 10-KSB
entitled "Selected  Quarterly Financial Data (unaudited)" and the text following
such table.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
         ----------------------------------------------------------

          For purposes of this discussion,  all dollar amounts have been rounded
to the nearest $1,000 and all percentages have been rounded to the nearest 1%.

<PAGE>

         This   Management's    Discussion   and   Analysis   contains   certain
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933 and  Section  21E of the  Securities  Exchange  Act of 1934.  Actual
results  could differ  materially  from those  projected in the  forward-looking
statements  as a result of a number of risks and  uncertainties,  including  the
risk factors set forth in "Factors Affecting Future Results" below and elsewhere
in this Report. The Company has attempted to identify forward-looking statements
by placing an asterisk  immediately  following the sentence or phrase containing
the forward-looking  statement(s).  Statements made herein are as of the date of
filing of this Form 10-KSB with the  Securities  and  Exchange  Commission,  and
should not be relied  upon as of any  subsequent  date.  The  Company  expressly
disclaims  any  obligation to update  information  presented  herein,  except as
required by law.

Results of Operations
---------------------

         Net  revenues  in 1997 were  $9,020,000,  a 4%  increase  from 1996 net
revenues  of  $8,641,000.  The  increase  in net  revenues  is  attributable  to
increased  shipments  to new  and  existing  customers  during  1997.  Sales  to
Chesapeake  Sciences  Corp.  ("Chesapeake"),  the  Company's  largest  customer,
decreased by  approximately  $900,000 from the prior year and represented 53% of
the  Company's  net  revenues in 1997 as compared to 62% in 1996.  During  1997,
approximately  64% of the  Company's  net  revenues  were  derived from sales of
products for  commercial  and  industrial  uses (as compared to 76% in 1996) and
approximately   36%  were  derived   from  sales  for  military  or   government
applications  (as  compared  to 24% in  1996).  The  increase  in  sales  to the
government  and military  sector is primarily the result of adding new customers
from this market sector.

         Cost of sales  was  $5,740,000,  or 64% of net  revenues  in  1997,  as
compared to  $5,599,000,  or 65% of net revenues in 1996. The increase in dollar
amount is the  result of the higher  volume of  products  shipped  in 1997.  The
decrease  in cost of sales as a  percentage  of net  revenues is the result of a
decrease in total material  costs and increased  revenues,  partially  offset by
increases in direct labor and manufacturing overhead costs.

         Engineering  and  development  expenses were $769,000 in 1997, or 9% of
net  revenues,  as compared to $650,000,  or 8% of net  revenues,  in 1996.  The
increase in these expenses in 1997 was the result of increased  staffing  levels
required to support new customer  programs  and to increase  efforts on research
and development.

         Selling,  general and administrative  expenses were $826,000,  or 9% of
net revenues,  in 1997, as compared to $675,000, or 8% of net revenues, in 1996.
This increase in dollar amount is attributable to increased  compensation  costs
resulting  from  additions  to  personnel,  together  with  increases  in  sales
commission  expense,  travel expenses,  recruitment and training expenses,  data
processing  expense and investor  relations  expenses.  Revenues  generated from
Chesapeake are not subject to sales commission expense.

         Interest  income was $41,000 for 1997,  as compared to $13,000 in 1996,
reflecting  higher  balances in the Company's  money market account during 1997.
The  Company  had  interest  expense  of  $8,000 in 1997 as  compared  to $3,000
interest  expense in 1996.  The interest  expense  incurred in 1997 results from
capital lease obligations utilized to finance new production equipment.

<PAGE>

         In 1997, the Company recorded an income tax expense of $55,000 to cover
potential  alternative  minimum tax  liabilities,  as compared to a deferred tax
benefit of $200,000  for 1996.  The 1996  deferred  tax  benefit  relates to the
operating  loss and credit  carryforwards  at December 28, 1996 that the Company
expects to realize in future periods.

Information and Data Processing Systems ("Year 2000")
-----------------------------------------------------

         The  Company  relies on an  internal  computer  network for much of its
day-to day operating and financial information. The software for this network is
a commercial  `off-the-shelf'  package  provided and  maintained  by a reputable
supplier.  As of the date of this  filing,  the  supplier  has  installed at the
Company  software  revisions  which have  eliminated any  anticipated  potential
problems with the year 2000.

         In addition,  the Company believes that its major customers,  suppliers
and financial institutions have, or are in process, of taking actions sufficient
to  protect  the  Company  from  adverse  effects  of the year 2000 in their own
internal systems. While the Company believes its efforts are adequate to address
its "year 2000" concerns, there can be no guarantee that "year 2000" issues will
not have a material effect on future Company operations.

Recent Accounting Pronouncements
--------------------------------

     In 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting  Comprehensive  Income". The Statement  established new rules for the
reporting and display of  comprehensive  income and its components in a full set
of general purpose financial statements.  This Statement is effective for fiscal
years  beginning  after  December 15, 1997.  Management  of the Company does not
believe this statement will have a material  impact on the financial  statements
of the Company.

     Also in 1997, the Financial Accounting Standards Board issued Statement No.
131.  "Disclosures  about  Segments of an Enterprise  and Related  Information",
which  supersedes  FASB Statement No. 14. The new rules will change the way that
public companies  report  information  about operating  segments in their annual
financial  statements.  This  Statement is effective for fiscal years  beginning
after  December  15,  1997.  Management  of the Company  does not  believe  this
statement  will  have a  material  impact  on the  financial  statements  of the
Company, as they operate exclusively in the hybrid microcircuit  industry as one
segment, as defined by the Statement.

Factors Affecting Future Results
--------------------------------

         There are a number of  factors  that  could  significantly  affect  the
future results of operations of the Company,  including, but not limited to, the
following.

<PAGE>

         Currently,  the Company is very  dependent on a single large  customer,
Chesapeake Sciences Corp.  Chesapeake,  which accounted for 53% of the Company's
1997 net revenues,  accounts for $4,614,000, or 60%, of the 1997 ending backlog.
The loss of business from  Chesapeake,  cancellation  of orders by Chesapeake or
major rescheduling of delivery dates to Chesapeake would have a material adverse
effect on the  Company's  business.  In 1996,  Chesapeake  accounted  for 62% of
revenues. The Company experienced a minor rescheduling of orders from Chesapeake
during the first  quarter of 1997,  which reduced  revenues and earnings  during
that period.  However,  this  rescheduling did not have a significant  impact on
annual operating results. Any future rescheduling of significant magnitude would
have a significant adverse effect on operating results.

           A disruption in Chesapeake's  operations,  or their loss of financial
stability, would have a major adverse impact on the Company's future operations.
Further,  the  products  for  Chesapeake  are  ultimately  utilized  in undersea
geophysical oil exploration. Consequently, any major changes, either positive or
negative,  in the nature of the world-wide oil market, or significant changes in
the demand for oil, could have a major impact on the Company's  future  business
with Chesapeake.

         During  1997,  the  Company  realized  36% of  its  net  revenues  from
government  or  military  funded  sources,  an  increase  from  24% in  1996.  A
significant portion of this business is dependent on the Company maintaining its
MIL-STD-1772 certification and qualification. While the Company fully expects to
maintain this certification and qualification (*), the loss of same would have a
material  adverse  impact  on the  Company's  ability  to  capture  this type of
business.  In  addition,  the  potential  for  additional  decreases  in defense
spending exists and could adversely affect future operations.

         The Company is currently  dependent on the custom  product market for a
substantial majority of its revenue.  Custom products accounted for 94% of total
revenues in both 1997 and 1996.  This market is generally more volatile than the
standard  product  market,  requiring  longer  product  lead  time  and  greater
investment  in product  design and  manufacturing  in  advance of  shipment  and
payment.  In addition,  the high  concentration  in the custom  market  requires
significant  investment in inventories,  which could be at financial risk in the
event of a major customer  cancellation.  Further,  the custom product market is
considerably  more  competitive  than  the  market  for the  Company's  standard
products. The Company must maintain a cost-effective  structure and operation to
remain  competitive in the custom product market.  Any failure of the Company to
remain  competitive in the custom  product market would have a material  adverse
effect on the Company's results of operations and financial condition.

         The  current  healthy  state  of the  economy  has  created  one of the
tightest labor markets in years. The Company's ability to meet increasing demand
and to develop new products that  contribute  to sales growth is dependent  upon
the  attraction and retention of qualified  employees,  for whom there is strong
demand.  Any failure of the Company to attract  and retain  qualified  personnel
could have a material adverse effect on the Company's  results of operations and
financial condition.

         The Company is dependent on certain key suppliers of raw materials. See
"Manufacturing"  in Part I, Item 1 hereof.  Any major  disruption  in production
capability  by these  suppliers  would have an adverse  impact on the  Company's
future operations.

<PAGE>

Liquidity and Capital Resources
-------------------------------

         During 1997, total assets increased by $2,856,000 and the net effect of
changes in current  assets and  current  liabilities  resulted  in a net working
capital increase of $1,444,000.

         The Company had  $1,190,000 in cash and cash  equivalents at January 3,
1998,  as compared to  $1,427,000  at the 1996 fiscal year end. This decrease is
the net result of the  expenditure  of $363,000 for the  purchase of  equipment,
partially offset by $23,000  generated from operating  activities,  and proceeds
from financing activities of $102,000.

         Accounts  receivable  increased  significantly  during  1997.  Accounts
receivable  were $2,514,000 at January 3, 1998, as compared to $1,126,000 at the
1996  fiscal  year end.  This large  increase is the result of the high level of
sales for the fourth quarter and  particularly  during  December.  At January 3,
1998,  accounts  in  excess  of 60 days  totaled  15% of total  receivables,  as
compared to 21% at December 28, 1996.  This was the result of a delayed  payment
from the Company's largest customer at year-end.
Such item has subsequently been collected.

         Inventories  increased  significantly to $2,581,000 at January 3, 1998,
as  compared to  $1,269,000  at the 1996 fiscal  year-end.  The  increase is the
result of a significant  increase in the level of product  shipments planned for
December   1997   through  the  second   quarter  of  1998.   Raw  material  and
work-in-process increased by $982,000 and $515,000 respectively,  while finished
goods decreased by $185,000.

         Property,  plant  and  equipment,  net  of  accumulated   depreciation,
increased by $385,000  during 1997 as a result of  additions  to  machinery  and
equipment  during the year of  $520,000  offset by fiscal 1997  depreciation  of
$135,000.

         Accounts  payable  were  $1,308,000  at January 3, 1998 as  compared to
$268,000 at 1996 fiscal year end.  This  increase is  attributable  to increased
inventory  levels  combined with a slower vendor payment cycle during the fourth
quarter.

         Accrued employee  compensation and benefits  remained constant from the
prior fiscal year end. Although the number of employees increased  significantly
during  1997,  the timing of payroll  accruals at  year-end  resulted in a lower
year-end payroll accrual.  At January 3, 1998, $200,000 had been accrued for the
employee profit sharing plan as compared to $175,000 at December 28, 1996.

         Customer  prepayments  were $28,000 at January 3, 1998,  as compared to
$172,000 at December 28, 1996. This decrease is the result of product  shipments
during the year against the prepaid customer orders.

         Accrued  warranty,  commissions  and  other  accrued  liabilities  were
$207,000 at January 3, 1998, as compared to $169,000 at December 28, 1996.  This
increase  is  primarily   attributable  to  a  higher  level  of  accrued  sales
commissions at 1997 year-end.

<PAGE>

         In December 1997, the Company signed a Promissory  Note with SierraWest
Bank in the amount of $145,000 for the purpose of buying  additional  production
equipment.  This note bears an annual  interest  rate of 9.50% and has a term of
three years. This note is secured by the related equipment. The Company also has
capital lease  obligations  with  SierraWest Bank totaling  $206,000,  which are
secured by the related  equipment.  The current portion of this  indebtedness is
$127,000 at January 3, 1998. The remaining portion,  $224,000,  is classified as
long-term debt.

          The  Company  recognized  federal  income tax  expense  during 1997 of
$55,000, primarily to satisfy alternative minimum tax liability. The Company has
remaining net operating  loss  carryforwards  for Federal income tax purposes at
January 3, 1998 of approximately $2.5 million.  These  carryforwards will expire
between 2004 and 2008.

           At  January 3, 1998,  the  Company  had  long-term  debt of  $224,000
outstanding under its Promissory Note and capital lease obligations as described
above.  Further,  as of October 14, 1997, the Company renewed its line of credit
with SierraWest Bank. At that time, the line of credit was increased by $300,000
to a total of $400,000.  This line of credit is for a term of one year, expiring
in October 1998, and bears interest at the prime rate plus 1.50%.  At January 3,
1998,  the  Company  was in  compliance  with all of the  covenants  of the loan
agreement and no amounts were outstanding. This line of credit is collateralized
by  substantially  all of the Company's  assets.  Management  believes that cash
generated from operations  during 1998,  together with its line of credit,  will
provide  sufficient  cash to meet operating needs without  additional  financing
activity through 1998. * However,  should the Company need to pursue  additional
debt or  equity  financing  in the  future,  there  is no  certainty  that  such
financing  could be  obtained  or that the  terms on which it might be  obtained
would be favorable.

Future Outlook
--------------

         The Company's  backlog of unfilled  customer  orders at January 3, 1998
increased  by  approximately  18% from the prior  fiscal  year end.  Backlog  at
January 3, 1998 was  $7,676,000  as compared to $6,474,000 at December 28, 1996.
The  increase in backlog is the result of strong  customer  orders  during 1997,
which were in excess of $10 million.  Approximately $7.3 million of this backlog
is scheduled for shipment during 1998.  Chesapeake  Sciences accounts for 60% of
the  year-end  backlog.  Based  on  projections  from  Chesapeake,  the  Company
currently  anticipates a continuing level of shipments to Chesapeake  throughout
the ensuing year and that additional orders will be placed during 1998.*

         However,  because  customers  may place  orders for delivery at various
times throughout the year, and because of the possibility of customer changes in
delivery  schedules or cancellation of orders,  the Company's backlog or revenue
projections as of any particular date may not be a reliable  indicator of actual
future sales.

         The  investment  in  expanding  our sales force  during 1997 is already
paying dividends.  We are adding new customers and have experienced an increased
level of new inquiries and opportunities.

<PAGE>




ITEM 7.  FINANCIAL STATEMENTS
         --------------------

         The financial  statements of the Company  (including the notes thereto)
at January 3, 1998 and December  28, 1996 and for the years then ended,  and the
report  of  independent  auditors  thereon,  are  included  herein on pages F- 3
through F-19 of this Form 10-KSB.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
         ----------------------------------------------
         ON ACCOUNTING AND FINANCIAL DISCLOSURE.
         ---------------------------------------

         Not applicable.

                                 PART III
                                 --------

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS,  PROMOTERS AND CONTROL
         -----------------------------------------------------
         PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
         -----------------------------------------------------------

         Information regarding directors of the Company is to be set forth under
the heading  "Election of Directors - Nominees  for  Director" in the  Company's
Proxy Statement and is hereby incorporated herein by reference.

         Information  regarding the executive  officer of the Company who is not
also a director of the  Company is included in Part I of this Form 10-KSB  under
the heading  "Executive  Officers  of the  Company"  and is hereby  incorporated
herein by reference.

         Information  regarding  compliance with Section 16(a) of the Securities
Exchange Act of 1934 is to be set forth under the heading "Election of Directors
- Section 16(a)  Beneficial  Ownership  Reporting  Compliance"  in the Company's
Proxy Statement and is hereby incorporated herein by reference.


ITEM 10. EXECUTIVE COMPENSATION.
         -----------------------

         Information  regarding  the  Company's  remuneration  of its  executive
officers  and  directors  is to be set forth  under the  headings  "Election  of
Directors-Executive    Compensation",    "Election    of    Directors-Directors'
Compensation"  and  "Election  of  Directors--Directors'  Option  Plan"  in  the
Company's  Proxy  Statement,   which  information  is  incorporated   herein  by
reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
         ---------------------------------------------------------------

         Information  regarding  the security  ownership  of certain  beneficial
owners  and  management  is to be set  forth  under  the  heading  "Election  of
Directors  -  Security  Ownership"  in  the  Company's  Proxy  Statement,  which
information is incorporated herein by reference.

<PAGE>


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
         -----------------------------------------------

         Not applicable.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
         ---------------------------------

         (a)                Exhibits

                           The  exhibit  index at page X-1,  which  follows  the
         signature pages, is hereby  incorporated by reference into this Item 13
         (a).

         (b)      Reports on Form 8-K

                  There  were no Current  Reports  on Form 8-K filed  during the
                  fourth  quarter of the Company's  fiscal year ended January 3,
                  1998.
<PAGE>



                          HYTEK MICROSYSTEMS, INC.

     Index to Selected Quarterly Financial Data and Financial Statements



                                                                  Reference Page
                                                                  in Form 10-KSB
                                                                  --------------

Selected Quarterly Financial Data (unaudited)  .  .  .  .  .  . .  .  .  .   F-2

Balance Sheet, January 3, 1998
    and December 28, 1996   .  .  .  .  .  .  .  .  .  .  .  .  . .  .  .  . F-3

Statement of Income for the Years ended
     January 3, 1998 and December 28, 1996 .  .  .  .  .  .  . .  .  .   .   F-4

Statement of Shareholders' Equity (Deficit) for the
    Years ended January 3, 1998 and December 28, 1996  .    .  . .  .  .     F-5

Statement of Cash Flows for the Years Ended
    January 3, 1998 and December 28, 1996        .  .  .  .  .  .  .  .  .   F-6

Notes to Financial Statements   .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  F-7

Report of Independent Auditors   .  .  .  .  .  .  .  .  .  .  .  .  .  .   F-19

Consent of Independent Auditors   .  .  .  .  .  .  .  .  .  .  .  .  .  .  F-20






















                                    F-1
<PAGE>



                          HYTEK MICROSYSTEMS, INC.

              Selected Quarterly Financial Data (unaudited)

                  (In thousands, except per share data)
<TABLE>


                               ---------------------------------------------------------------------
                                                         Quarter Ended
                               ---------------------------------------------------------------------
                                          FISCAL  1997                     FISCAL  1996
                               -------------------------------   -----------------------------------
<S>                           <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>

                                Jan.3  Sept.27  Jun.28   Mar.29   Dec.28   Sept.28  Jun.29   Mar.30
                                -----  -------  ------   ------   ------   -------  ------   ------
Net revenues                  $ 3,205  $ 2,047  $ 2,181  $ 1,587  $ 1,881  $ 2,095  $ 2,628  $ 2,037

Gross profit                  $ 1,476  $   659  $   701  $   444  $   872  $   688  $   836  $   645

Net income                    $   950  $   281  $   335  $    95  $   686  $   368  $   518  $   354

Net income per share -
               basic          $  0.32  $  0.09  $  0.12  $  0.03  $  0.24  $  0.12  $  0.18  $  0.12

Net income per share -
               diluted        $  0.31  $  0.09  $  0.11  $  0.03  $  0.22  $  0.12  $  0.17  $  0.11

Market price range per share
               High           $  2.38  $  2.44  $  1.75  $  2.69  $  2.63  $  2.81  $  3.19  $  3.19
               Low            $  1.88  $  1.63  $  1.19  $  1.63  $  1.44  $  1.25  $  2.31  $  1.75


------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

      Since January 1992, the Company's Common Stock has been traded in the
 over-the-counter market but has not been quoted on the National Association of
Securities Dealers, Inc. Automated Quotation ("NASDAQ") System. Since March 26,
1992, Hytek's Common Stock has been quoted on the OTC Bulletin Board. The range
 of prices reported above indicates the high and low bid quotations as provided
  by the National Quotation Bureau, Inc. Such quotations reflect inter-dealer
prices, without retail markups, mark-downs or commissions and may not represent
                              actual transactions.


           As of March 16, 1998, there were approximately 208 holders
                    of record of the Company's Common Stock.

                      The Company has never paid any cash
dividends on its Commom Stock and has no intentions of paying cash dividends in
                            the foreseeable future.

              Per the terms of its loan agreement with SierraWest
    Bank, the Company is prohibited from paying cash dividends at this time.











                                      F-2
<PAGE>



<TABLE>

                            Hytek Microsystems, Inc.

                                  Balance Sheet

                      January 3, 1998 and December 28, 1996

<S>                                                                <C>              <C>
                                                                            1997          1996
                                                                            ----          ----
Assets
Current assets:
   Cash and cash equivalents                                       $   1,189,519    $   1,426,716
   Trade accounts receivable, net of allowance for doubtful
     accounts of $50,000 in 1997 and 1996                              2,513,668        1,125,817
   Inventories                                                         2,581,389        1,268,881
   Prepaid expenses and deposits                                          50,035           42,503
                                                                  --------------    --------------
Total current assets                                                   6,334,611        3,863,917

Deferred income taxes                                                    200,000          200,000

Plant and equipment, at cost, less accumulated depreciation
   and amortization                                                      755,845          370,362

                                                                  --------------    --------------
Total assets                                                       $   7,290,456       $4,434,279

Liabilities and shareholders' equity Current liabilities:
   Accounts payable                                                $   1,308,335       $  268,462
   Accrued employee compensation and benefits                            349,725          349,498
   Accrued warranty, commissions, and other                              206,569          169,376
   Customer deposits                                                      28,464          172,080
   Current portion of long-term debt                                      43,951                -
   Current obligations under capital leases                               82,752           33,990
                                                                  --------------    --------------
Total current liabilities                                              2,019,796          993,406

Long-term debt, less current portion                                     101,049                -
Long-term obligations under capital leases                               123,041           67,979

Commitments (Note 10)

Shareholders' equity:
   Common stock, no par value:
     Authorized shares - 7,500,000
     Issued and outstanding shares - 2,941,424 at
      January 3,1998 and 2,933,091 at December 28,1996                 4,974,676        4,962,677
   Retained earnings (accumulated deficit)                                71,894       (1,589,783)
                                                                  --------------    --------------

Total shareholders' equity                                          5,046,570           3,372,894

                                                                  --------------    --------------
Total liabilities and shareholders' equity                      $   7,290,456       $   4,434,279
                                                                  ==============    ==============
</TABLE>


See accompanying notes.












                                       F-3



<PAGE>
<TABLE>

                            Hytek Microsystems, Inc.

                               Statement of Income

                Years ended January 3, 1998 and December 28, 1996
<S>                                                   <C>           <C>


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

Net sales                                             $ 9,019,977    $8,640,890

Cost of sales                                           5,740,404     5,599,417
Engineering and development                               769,277       649,608
Selling, general and administrative expenses              825,972       675,305
                                                      ------------  ------------
                                                        7,335,653     6,924,330
                                                      ------------  ------------
Operating income                                        1,684,324     1,716,560

Interest income, net                                       32,353        10,085
                                                      ------------  ------------
Income before provision (benefit) for income taxes      1,716,677     1,726,645

Income tax provision (benefit)                             55,000      (200,000)
                                                      ------------  ------------

Net income                                           $  1,661,677    $1,926,645
                                                      ============  ============

Basic earnings per share                             $       0.56    $     0.66
                                                      ============  ============

Diluted earnings per share                           $       0.54    $     0.62
                                                      ============  ============

Shares used in calculating basic earnings per share      2,941,241    2,906,205
                                                      ============  ============

Shares used in calculating diluted earnings per share    3,086,743    3,086,825
                                                      ============  ============




</TABLE>



See accompanying notes.












                                      F-4
<PAGE>
<TABLE>


                            Hytek Microsystems, Inc.

                   Statement of Shareholders' Equity (Deficit)

                Years ended January 3, 1998 and December 28, 1996

                                      Common Stock
                                 --------------------
                                                          Retained
                                                          Earnings
                                                        (Accumulated
                                  Shares      Amount       Deficit)        Total
                                 --------   ---------    -----------      ---------
<S>                              <C>        <C>          <C>              <C>

Balance at December 30, 1995     2,811,425  $ 4,913,806  $ (3,516,428)    $ 1,397,378

   Net income                            -            -     1,926,645       1,926,645

   Issuance of stock               121,666       48,871             -          48,871
                                 ---------  -----------  -------------    -----------

Balance at December 28, 1996     2,933,091    4,962,677    (1,589,783)      3,372,894

   Net income                            -            -     1,661,677       1,661,677

   Issuance of stock                 8,333       11,999             -          11,999
                                 ---------  -----------  -------------    -----------

Balance at January 3, 1998       2,941,424  $ 4,974,676  $     71,894     $ 5,046,570
                                 =========  ===========  =============    ===========



</TABLE>






See accompanying notes.
















                                      F-5


<PAGE>
<TABLE>


                            Hytek Microsystems, Inc.

                             Statement of Cash Flows

                Increase (Decrease) in Cash and Cash Equivalents

                Years ended January 3, 1998 and December 28, 1996


                                                          1997            1996
                                                        --------        --------
<S>                                                    <C>           <C>

Operating activities
Net income                                             $1,661,677    $1,926,645
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation                                          90,714        55,840
     Amortization                                          44,535         2,413
     Deferred income taxes                                      -      (200,000)
     Changes in operating assets and liabilities:
       Trade accounts receivable, net                  (1,387,851)       54,030
       Inventories                                     (1,312,508)      (29,096)
       Prepaid expenses and deposits                       (7,532)      (10,918)
       Accounts payable                                 1,039,873      (405,069)
       Accrued employee compensation and benefits             227       158,231
       Accrued warranty, commissions, and other            37,193       (35,371)
       Customer deposits                                 (143,616)       (6,584)
                                                   ---------------  ------------
Net cash provided by operating activities                  22,712     1,510,121

Investing activities
Purchases of equipment                                   (362,505)     (225,271)

Financing activities
Proceeds from borrowings on line of credit                      -        50,000
Principal payments on line of credit                            -       (50,000)
Proceeds from borrowings on long-term debt                145,000             -
Principal payments on capital lease obligations           (54,403)            -
Proceeds from issuance of common stock                     11,999        48,871
                                                   ---------------  ------------
Net cash provided by financing activities                 102,596        48,871
                                                   ---------------  ------------

Net increase (decrease) in cash and cash equivalents     (237,197)    1,333,721
Cash and cash equivalents at beginning of year          1,426,716        92,995
                                                   ---------------  ------------
Cash and cash equivalents at end of year              $ 1,189,519 $   1,426,716
                                                   ===============  ============

</TABLE>



See accompanying notes.










                                      F-6
<PAGE>

                            Hytek Microsystems, Inc.

                          Notes to Financial Statements

                Years ended January 3, 1998 and December 28, 1996


1.   Accounting Policies

Description of Business

The  principal  business of Hytek  Microsystems,  Inc.  (the  "Company")  is the
engineering,   manufacturing   and  sale  of  hybrid   microcircuits.   Products
manufactured   by  the  Company  are  sold   primarily  to  original   equipment
manufacturers  (OEMs)  serving  the  computer,   telecommunications,   military,
medical,  industrial electronic system and automatic test equipment markets. The
Company markets its products through its own sales staff and through independent
sales representatives.

Basis of Presentation

The  accompanying  financial  statements  have been prepared in conformity  with
generally accepted accounting principles, which require the Company's management
to make  estimates and  assumptions  that affect the amounts  reported  therein.
Actual   results  could  vary  from  such   estimates.   In  addition,   certain
reclassifications have been made to prior year's financial statements to conform
with the 1997 presentation. The Company operates under a 52/53 week fiscal year,
with year end being the Saturday  nearest  December 31st. The year ended January
3, 1998 was a 53-week  year,  whereas  the year ended  December  28,  1996 was a
52-week year.

Concentration of Credit Risk

The Company  performs  ongoing credit  evaluations  of its customers'  financial
condition,   and   generally   requires  no  collateral   from  its   customers.
Non-performance  by these  parties  would  result in  losses up to the  recorded
amount of the related  receivables.  Management does not anticipate  significant
non-performance,   and  believes  the  Company  has   adequately   provided  for
uncollectible receivables in the Company's allowance for doubtful accounts.

In 1997, the Company had sales to Chesapeake Sciences and TRW that accounted for
53% and 15%,  respectively,  of net sales.  In 1996,  the  Company  had sales to
Chesapeake Sciences and TRW that accounted for 62% and 12%, respectively, of net
sales.  The  products  sold to  Chesapeake  Sciences  are  used in the  eventual
production of off-shore geophysical oil exploration equipment. Any volatility in
the oil market could affect the operating results of the Company.










                                       F-7

<PAGE>

                            Hytek Microsystems, Inc.

                    Notes to Financial Statements (continued)


1.   Accounting Policies (continued)

Cash and Cash Equivalents

Cash and cash  equivalents  consist of cash and money market funds with original
maturities of less than ninety days.  The fair value of the Company's  financial
instruments  approximated  their  carrying value at January 3, 1998 and December
28, 1996. The Company maintains the majority of its cash and cash equivalents in
one financial institution.

During 1997 and 1996,  the Company  entered into non-cash  investing  activities
whereby  machinery and equipment  acquisitions  were  capitalized  under capital
leases in the amount of $158,226  and  $101,969,  respectively.  During 1997 and
1996, the Company paid income taxes of $55,000 and $0, respectively.

Inventories

Inventories  are  stated at the lower of cost  (determined  using the  first-in,
first-out  method),  or market.  Due to its  nature,  certain  of the  Company's
inventory at January 3, 1998 and  December 28, 1996 is subject to  technological
change and potential obsolescence.  Management does not anticipate these amounts
to be material,  and believes that they have adequately  provided for any losses
that may result.

Plant and Equipment

Plant  and  equipment  are  stated  at  cost.  Depreciation  is  provided  on  a
straight-line  basis over the  estimated  useful lives of the assets,  generally
three to five years.  Leasehold  improvements are amortized over the term of the
lease or their estimated useful lives, whichever is shorter.

Revenue Recognition

Sales are recorded by the Company upon shipment of the product, net of estimated
provisions for warranty and estimated returns.










                                       F-8

<PAGE>

                            Hytek Microsystems, Inc.

                    Notes to Financial Statements (continued)


1.   Accounting Policies (continued)

Stock-Based Compensation

In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has
elected to follow  Accounting  Principles Board Opinion No. 25,  "Accounting for
Stock Issued to Employees" ("APB 25") and related  interpretations in accounting
for its employee stock option plans.  Under APB 25, if the exercise price of the
Company's  employee  stock  options  equals  or  exceeds  the fair  value of the
underlying  stock on the date of grant as determined  by the Company's  Board of
Directors, no compensation expense is recognized (see Notes 6 and 7).

Income Taxes

Deferred tax assets and  liabilities  are  determined  based on the  differences
between  financial  reporting  and tax bases of assets and  liabilities  and are
measured  using the  enacted  tax rates and laws that will be in effect when the
temporary differences are expected to reverse. Additionally, deferred tax assets
and liabilities are separated into current and non-current  amounts based on the
classification  of the related assets and  liabilities  for financial  reporting
purposes.

Research and Development Costs

Research and  development  costs are charged to operations as incurred,  and are
included in engineering and development  expenses on the accompanying  statement
of income.  During the years ended  January 3, 1998 and December 28, 1996,  such
costs amounted to approximately $115,000 and $65,000, respectively.

Product Warranty Costs

The Company has provided a liability for estimated future product warranty costs
based upon historical experience and anticipated warranty costs.

Advertising Costs

The Company  expenses the costs of all  advertising  campaigns and promotions as
they are incurred. Total advertising expense for the years ended January 3, 1998
and  December  28,  1996   amounted  to   approximately   $27,000  and  $43,000,
respectively, and is included in selling, general and administrative expenses on
the accompanying statement of income.









                                       F-9

<PAGE>

                            Hytek Microsystems, Inc.

                    Notes to Financial Statements (continued)


1.   Accounting Policies (continued)

New Accounting Pronouncements

In 1997,  the Financial  Accounting  Standards  Board issued  Statement No. 128,
"Earnings per Share".  This  Statement  established  standards for computing and
presenting  earnings  per share (EPS) and applies to entities  that are publicly
held.  The  Statement  simplifies  the  standards  for  computing  EPS presently
contained in  Accounting  Principles  Board Opinion No. 15 "Earnings Per Share".
This Statement  replaces the presentation of primary and fully diluted EPS under
APB No. 15 with a presentation of basic and diluted EPS. The Company adopted the
provisions  of this  Statement  during  the year  ended  January  3,  1998,  and
retroactively applied its provisions to reported 1996 amounts.

In 1997,  the Financial  Accounting  Standards  Board issued  Statement No. 130,
"Reporting  Comprehensive  Income". The Statement  established new rules for the
reporting and display of  comprehensive  income and its components in a full set
of general purpose financial statements.  This Statement is effective for fiscal
years  beginning  after  December 15, 1997.  Management  of the Company does not
believe this statement will have a material  impact on the financial  statements
of the Company.

Also in 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures  about  Segments of an Enterprise and Related  Information",  which
supersedes  FASB Statement No. 14. The new rules will change the way that public
companies report  information about operating segments in their annual financial
statements.  This  Statement  is  effective  for fiscal  years  beginning  after
December 15,  1997.  Management  of the Company does not believe this  statement
will have a material impact on the financial  statements of the Company, as they
operate  exclusively  in the hybrid  microcircuit  industry as one  segment,  as
defined by the Statement.

2.   Inventories

Inventories consist of the following:

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

Finished goods                                   $      32,057       $   217,270
Work-in-process                                      1,287,720           772,462
Raw materials                                        1,261,612           279,149
                                                   -----------       -----------
                                                 $   2,581,389        $1,268,881
                                                   ===========       ===========










                                      F-10


<PAGE>


                            Hytek Microsystems, Inc.
                    Notes to Financial Statements (continued)

3.   Plant and Equipment

Plant and equipment consists of the following:

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

Leasehold improvements                          $     514,775       $   441,219
Machinery and equipment                             2,868,654         2,428,780
Furniture and fixtures                                 18,274            10,972
                                                --------------       -----------
                                                    3,401,703         2,880,971
Less accumulated depreciation and amortization     (2,645,858)       (2,510,609)
                                                --------------        ----------
                                                $     755,845       $   370,362
                                                ==============      ============

4.   Income Taxes

The significant components of the Company's deferred tax assets are as follows:

                                                            1997        1996
                                                      ------------  ------------
Deferred tax assets:
     Net operating loss carryforwards                   $  834,534    $1,432,610
     Credit carryforwards                                  264,786       210,572
     Other                                                 155,441       180,575
                                                      ------------  ------------
Total deferred tax assets                                1,254,761     1,823,757
Valuation allowance                                      1,054,761     1,623,757
                                                      ------------  ------------
Net deferred tax assets                                 $  200,000    $  200,000
                                                      ============  ============

The valuation  allowance as of December 28, 1996 was  approximately  $1,624,000,
resulting in a net decrease in the allowance of  approximately  $569,000 for the
year ended January 3, 1998.

The  provision  (benefit)  for income taxes  differs from the  provision  amount
computed by applying the  statutory  federal tax rate to income before taxes due
to the following:

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

Computed expected tax                                   $ 584,000     $ 587,000
Nondeductible expenses                                      6,000        10,000
Benefit of operating loss carryforward                   (590,000)     (597,000)
Other                                                      55,000             -
Valuation allowance adjustment                                  -      (200,000)
                                                      ------------  ------------
                                                      ============  ============
                                                        $  55,000     $(200,000)
                                                      ============  ============








                                      F-11


<PAGE>


                            Hytek Microsystems, Inc.

                    Notes to Financial Statements (continued)


4.   Income Taxes (continued)

The valuation allowance adjustment arose as a result of the Company's profitable
results of operations in 1997 and 1996.

As of January 3,  1998,  the  Company  had a net  operating  loss and tax credit
carryforwards for Federal income tax purposes of approximately  $2.5 million and
$265,000,  respectively.  These carryforwards will expire between 2004 and 2008.
Future  utilization  of the Company's net operating  losses may be subject to an
annual  limitation in amount if there is a greater than fifty percent  change in
ownership,  as defined in Section 382 of the Internal  Revenue Code of 1986,  as
amended.

5.    Earnings per Share

The following table sets forth the computation of basic and diluted earnings per
share:

                                                             1997        1996
                                                          ---------  -----------
Numerator:
   Net income                                           $ 1,661,677  $ 1,926,645

Denominator:
   Denominator for basic earnings per share -
     weighted average shares                              2,941,241    2,906,205
   Effect of dilutive securities:
     Employee stock options                                 145,502      180,620
                                                          ---------  -----------
   Denominator for diluted earnings per share - adjusted
     weighted average shares and assumed conversions
                                                          3,086,743    3,086,825
                                                          =========  ===========

Basic earnings per share                                $       .56  $       .66
                                                          =========  ===========

Diluted earnings per share                              $       .54  $       .62
                                                          =========  ===========

Options to purchase  125,000 shares of common stock at prices ranging from $2.13
to $3.07 per share were  outstanding  during 1997,  but were not included in the
computation of diluted  earnings per share because the options'  exercise prices
were greater than the average market price of the common shares and,  therefore,
the effect would be antidilutive.









                                      F-12


<PAGE>


                            Hytek Microsystems, Inc.

                    Notes to Financial Statements (continued)


6.   Stock Option Plans

1991 and 1981 Stock Option Plans

In February 1997, the Board of Directors of the Company (the "Board"),  with the
consent of its  shareholders,  authorized  an  increase  to the number of shares
reserved  for  issuance  under the 1991 Stock  Option Plan (the "1991  Plan") to
376,175  shares of common  stock.  The 1991 Plan  expires in May 2001 and 92,842
shares were  available for future grant as of January 3, 1998. The Company had a
1981  Incentive  Stock Option Plan (the "1981 Plan") that expired in August 1991
and there were outstanding  options to purchase 95,000 shares under this Plan at
January 3, 1998.  Outstanding  stock options under the two plans are exercisable
cumulatively in annual  increments  that range between  one-third and one-fourth
each year  beginning  one year after the grant date.  Options  granted under the
1991 Plan and the 1981 Plan have terms of five years. However, in February 1995,
the  Board  extended  the term of  certain  options  under the 1981 Plan by five
years,  deferring  expiration  until 2000.  The exercise price of these extended
options was in excess of the fair market value of the Company's  common stock at
the date of extension.

A summary of the  Company's  1981 and 1991  Plans'  stock  option  activity  and
related  information  for the years ended  January 3, 1998  (fiscal  1997),  and
December 28, 1996 are as follows:

                                            1997                1996
                                ------------------------------------------------
                                      Weighted-Average          Weighted-Average
                             Options  Exercise Price    Options   Exercise Price
                                ------------------------------------------------
Outstanding-beginning of year  233,334   $      1.30     270,000          $  .53
Granted                         50,000          1.88      90,000            2.68
Exercised                       (8,333)         1.44    (106,666)            .43
Canceled                       (16,667)         1.44     (20,000)           1.91
                             ---------------------------------------------------

Outstanding-end of year        258,334   $      1.40     233,334          $ 1.30
                             ===================================================

Exercisable at end of year     148,334   $       .70     136,667          $  .45

Weighted-average fair value of
 options granted during the year         $      1.88                      $ 2.68












                                      F-13
<PAGE>

                            Hytek Microsystems, Inc.

                    Notes to Financial Statements (continued)


6.   Stock Option Plans (continued)

Exercise  prices for  options  outstanding  under the two Plans as of January 3,
1998 ranged from $.38 to $3.07. The weighted-average  remaining contractual life
of those  options is 3.8 years.  A summary of the  outstanding  and  exercisable
options at January 3, 1998, segregated by exercise price ranges, is as follows:

               Options Outstanding                           Exercisable Options
--------------------------------------------------------------------------------
                                             Weighted-Average          Weighted-
                              Weighted-         Remaining               Average
Exercise Price                 Average         Contractual              Exercise
    Range        Number     Exercise Price   Life (in years)   Number    Price
--------------------------------------------------------------------------------

$.38 - $.41     128,334         $.39              3.7         128,334       $.38
 $1.63   $2.13   50,000         1.88              4.5               -          -
 $2.38 - $3.07   80,000         2.72              3.5          20,000       2.72
                =======                                       =======
                258,334        $1.40              3.8         148,334       $.70
                =======                                       =======

1991 Directors' Stock Option Plan

Under the 1991 Directors'  Stock Option Plan (the  "Directors'  Plan"),  200,000
shares of the  Company's  common  stock had been  reserved  for  issuance  as of
January  3,  1998,  of which  options  to  purchase  80,000  shares at per share
exercise  prices  that range from  $0.1875  to $2.281 had been  granted  (60,000
shares had been  granted as of  December  28,  1996).  During  1997,  options to
purchase  15,000  shares  were  exercised  at an  exercise  price of  $.19.  The
Directors Plan provides for the automatic  grant of an option to purchase 15,000
shares upon first becoming an outside director (a "First Option").  In September
1997, the Directors' Plan was amended (subject to shareholder  approval) whereby
non-employee  directors  who serve on the Board of  Directors of the Company for
five years or more  receive an automatic  grant of 5,000  shares (a  "Subsequent
Option") on the last  business  day of each  fiscal  year at an exercise  prices
equaling the fair value of the Company's stock on such date. At January 3, 1998,
options  to  purchase  an  aggregate  of  20,000  shares  were  granted  to four
individuals  under this  amendment.  First Options  granted under the Directors'
Plan  become   exercisable   cumulatively   on  the  first,   second  and  third
anniversaries of the grant date.  Subsequent Options become fully exercisable on
the first  anniversary of the grant date. The Directors'  Plan expires  February
2001.











                                      F-14
<PAGE>


                            Hytek Microsystems, Inc.

                    Notes to Financial Statements (continued)


6.   Stock Option Plans (continued)

A summary of the  Company's  Directors'  Plan stock option  activity and related
information for the years ended January 3, 1998 (fiscal 1997),  and December 28,
1996 are as follows:

                                     1997                       1996
                             ---------------------------------------------------
                                      Weighted-Average          Weighted-Average
                             Options    Exercise Price Options    Exercise Price
                             ---------------------------------------------------
Outstanding-beginning of year  45,000   $     .19        60,000    $     .19
Granted                        20,000        2.28             -            -
Exercised                           -                   (15,000)         .19
                             ----------  ---------------------------  ----------

Outstanding-end of year        65,000   $     .83        45,000    $     .19
                             ==========  ===========================  ==========

Exercisable at end of year     45,000   $     .19        45,000    $     .19


Exercise  prices per share for options  outstanding as of January 3, 1998 ranged
from $ .19 to $2.28. The  weighted-average  remaining  contractual life of those
options is 4.5 years. A summary of the outstanding  and  exercisable  directors'
options at January 3, 1998, segregated by exercise price ranges, is as follows:

              Options Outstanding                       Exercisable Options
--------------------------------------------------------------------------------
                                          Weighted-Average
                            Weighted-        Remaining              Weighted-
Exercise Price              Average        Contractual             Average
    Range      Number   Exercise Price  Life (in years)   Number  Exercise Price
--------------------------------------------------------------------------------

   $.19          45,000        $.19           2.1         45,000       $.19
  $2.28          20,000        2.28          10.0              -          -
                =======                                  =======
                 65,000        $.83           4.5         45,000       $.19
                =======                                  =======

7.   Stock-Based Compensation

The Company has three  stock-based  compensation  plans:  The 1991 Stock  Option
Plan, The 1981 Incentive Stock Option Plan, and the 1991 Directors' Stock Option
Plan, all of which are described in Note 6 above.










                                      F-15
<PAGE>

                            Hytek Microsystems, Inc.

                    Notes to Financial Statements (continued)


7.   Stock-Based Compensation (continued)

Pro forma information regarding net income and earnings per share is required by
SFAS 123,  which also  requires  that the  information  be  determined as if the
Company has  accounted  for its employee  stock  options  granted  subsequent to
December 31, 1994 under the fair value method of that Statement.  The fair value
for these  options  was  estimated  at the date of grant  using a  Black-Scholes
option pricing model with the following  weighted-average  assumptions  for 1997
and 1996,  respectively:  risk-free  interest  rates of 5.6% and 6.2%,  dividend
yields of 0% and 0%;  volatility  factors of the  expected  market  price of the
Company's common stock of .889 and .952, and a weighted-average expected life of
the options of 4.6 and 4.5 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options,  which have no vesting  restrictions and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective assumptions,  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense  over the vesting  period of the options.  The effect of
applying  SFAS 123's  fair  value  method to the  Company's  stock-based  awards
results in pro forma information as follows:

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

Net income as reported                 $    1,661,677       $     1,926,645
                                     ==================   ======================

Pro forma net income                   $    1,640,060       $     1,916,331
                                     ==================   ======================

Earnings per share as reported:
     Basic                             $          .56       $           .66
                                     ==================   ======================
     Diluted                           $          .54       $           .62
                                     ==================   ======================

   Pro forma earnings per share:
     Basic                             $          .56       $           .66
                                     ==================   ======================
     Diluted                           $          .53       $           .62
                                     ==================   ======================









                                      F-16

<PAGE>

                            Hytek Microsystems, Inc.

                    Notes to Financial Statements (continued)


7.   Stock-Based Compensation (continued)

Because SFAS 123 is applicable  only to options  granted  subsequent to December
15, 1994, its pro forma effect will not be fully reflected until fiscal 2000.

8.   Profit Sharing Plan

In February 1995, the Company's  Board adopted the 1995 Profit Sharing Plan (the
"Profit Sharing Plan"),  which is available to all eligible full-time  employees
of the Company,  except executive officers of the Company, as defined. Under the
Profit  Sharing Plan, the Company will  distribute to employees  between 10% and
15% of the Company's pre-tax income, as defined. The distribution  percentage is
at the discretion of the Company's  Board. The Plan, which terminates by its own
terms in December  2005,  may be terminated or amended at any time by the Board.
During  the  years  ended  January  3, 1998 and  December  28,  1996,  the Board
authorized $200,000 and $175,000,  respectively, in profit sharing distributions
to  employees,  which amount is included in accrued  employee  compensation  and
benefits in the accompanying balance sheet.

9.   Long-Term Debt

In October  1997,  the  Company  renewed an  existing  revolving  business  loan
agreement  (the "Loan  Agreement")  with a bank under  which it may borrow up to
$400,000  at the  bank's  prime  rate plus 1.5%  (aggregating  10% at January 3,
1998). Interest is payable monthly up to the maturity date, October 14, 1998, at
which time all unpaid  principal and interest  become due. The Loan Agreement is
collateralized by substantially all of the Company's assets.  The Loan Agreement
imposes  certain  limitations  on the payment of  dividends  and  incurrence  of
additional  indebtedness.  At January 3, 1998,  the Company  had no  outstanding
borrowings under this Loan Agreement.

In December  1997,  the Company  entered  into a $145,000  promissory  note (the
"Note") with the same bank for the purpose of acquiring  equipment.  Interest on
the Note  accrues  at a rate of 9.5%.  Interest  and  principal  are  payable in
monthly  installments of $4,654,  with a final payment due in December 2000. The
Note is collateralized  by substantially  all of the Company's assets.  The Note
imposes  certain  limitations  on the payment of  dividends  and  incurrence  of
additional  indebtedness.  At January 3, 1998,  the Company  had an  outstanding
balance of $145,000 under this Note.











                                      F-17



<PAGE>


                            Hytek Microsystems, Inc.

                    Notes to Financial Statements (continued)


9.   Long-Term Debt (continued)

Following are the scheduled  principal  reductions of the Note by fiscal year of
the Company:

         1998                              $     43,951
         1999                                    48,314
         2000                                    52,735
                                     ===================
                                           $    145,000
                                     ===================

10.  Commitments

The Company leases its  administrative  and production  facility and also leases
certain operating  equipment under  noncancelable  operating lease  arrangements
with terms in excess of one year.  The  Company  also leases  certain  equipment
under noncancelable lease arrangements that are accounted for as capital leases.
Plant and equipment  includes assets under capital leases  amounting to $220,958
(net of  accumulated  amortization  of $39,237) and $101,969 (net of accumulated
amortization  of $0) at January 3, 1998 and  December  28,  1996,  respectively.
These capital leases are secured by the related equipment.

The aggregate  future  minimum lease payments  under  noncancelable  capital and
operating leases are as follows at January 3, 1998:

                                                      Capital        Operating
                                                      Leases           Leases
                                         ---------------------------------------
         1998                                   $   100,119        $    172,000
         1999                                        93,207             173,000
         2000                                        40,601              89,000
                                         ---------------------------------------
         Total minimum payments                     233,927        $    434,000
                                                                  ==============
         Less amount representing interest          (28,134)
                                               -------------
         Present value of minimum lease payments    205,793
         Less current obligations                   (82,752)
                                               =============
         Long-term obligations                  $   123,041
                                               =============

The Company's net rental expense charged to operations amounted to approximately
$281,000 and $252,000 in 1997 and 1996, respectively.










                                      F-18

<PAGE>




                         Report of Independent Auditors

The Board of Directors and Shareholders
Hytek Microsystems, Inc.

We have audited the accompanying balance sheet of Hytek Microsystems, Inc. as of
January 3, 1998 and  December 28, 1996,  and the related  statements  of income,
shareholder  equity  (deficit),  and cash flows for the years then ended.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Hytek  Microsystems,  Inc. at
January 3, 1998 and December 28, 1996, and the results of its operations and its
cash  flows for the years  then  ended in  conformity  with  generally  accepted
accounting principles.


Reno, Nevada                                      /s/ Ernst & Young LLP
January 30, 1998














                                      F-19

<PAGE>


                                                                    Exhibit 23.1



                         CONSENT OF INDEPENDENT AUDITORS


We consent to the incorporation by reference in the Prospectuses  constituting a
part of the  Registration  Statements on Form S-8 (File Nos.  2-90789,  33-7452,
33-28848,  33-61717,  33-42836 and 333-27899)  pertaining to the Incentive Stock
Option Plan,  the Key Employee  Stock  Purchase Plan, the 1991 Stock Option Plan
and the 1991 Directors'  Stock Option Plan, of our report dated January 30, 1998
with respect to the financial statements of Hytek Microsystems, Inc.

                                                         /s/Ernst & Young LLP


Reno, Nevada
March 23, 1998



















                                      F-20

<PAGE>


                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                         HYTEK MICROSYSTEMS, INC.


                                         By:  /s/ Charles S. Byrne
                                                Charles S. Byrne
                                                President and Chief
                                                Executive Officer

                                         Date:   March 20, 1998


                                POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature
appears below  constitutes  and appoints  Charles S. Byrne and Shou-Chen Yih, or
either of them, his attorney-in-fact,  each with the power of substitution,  for
him in any and all  capacities,  to sign any amendments to this Annual Report on
Form 10-KSB,  and to file the same, with exhibits thereto and other documents in
connection  therewith,  with the  Securities  and  Exchange  Commission,  hereby
ratifying  and  confirming  all  that  each  of said  attorneys-in-fact,  or his
substitute or substitutes, may do or cause to be done by virtue hereof.

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.

SIGNATURE                          TITLE                               DATE
---------                      -------------------              ----------------


/s/ Charles S. Byrne           President and Chief                March 20, 1998
--------------------           Executive Officer
Charles S. Byrne               (Principal Executive
                               Officer), Chief Financial
                               Officer (Principal Financial
                               and Accounting Officer)
                               and Director
















                                       S-1

<PAGE>



SIGNATURE                          TITLE                              DATE
---------                         ---------                       --------------



/s/ Robert Boschert               Director                        March 16, 1998
-------------------
Robert Boschert


/s/ Edward W. Moose               Director                        March 16, 1998
-------------------
Edward W. Moose


/s/ Edward Y. Tang                Director                        March 16, 1998
------------------
Edward Y. Tang


/s/ Shou-Chen Yih                 Director                        March 16, 1998
-----------------
Shou-Chen Yih



























                                       S-2

<PAGE>



                            HYTEK MICROSYSTEMS, INC.

                          Annual Report on Form 10-KSB
                    for the fiscal year ended January 3, 1998

                                  EXHIBIT INDEX

(The  Registrant  will furnish to any shareholder who so requests a copy of this
Annual  Report on Form  10-KSB,  including a copy of any Exhibit  listed  below,
provided  that the  Registrant  may require  payment of a reasonable  fee not to
exceed its expense in furnishing any such Exhibit.)

Exhibit
Number                                  Exhibit Description
-------           --------------------------------------------------------------


3.1 (1)           Amended and Restated Articles of Incorporation
                   filed on February 10, 1983.

3.2 (2)           Certificate of Amendment of Articles of Incorp-
                   oration filed June 28, 1988.

3.3 (10)          Amended and Restated Bylaws, as amended through July 27,
                   1992.

4.1               Reference Exhibits 3.1, 3.2 and 3.3.

9.1 (4)           Shareholders' Agreement dated as of April 9, 1990.

10.1a (9) (*)     Incentive  Stock  Option  Plan,  as amended July 27,
                   1992.

10.1b (5) (*)     Forms of Incentive Stock Option Agreement and
                   Non-statutory Stock Option Agreement used under
                    Incentive Stock Option Plan.

10.2 (11) (*)     Form of Amendment to Option Agreements of
                   Charles S. Byrne, Jay L. Kimball and Jonathan B.
                       Presnell.

10.3a (13) (*)    1991 Stock Option Plan, as amended  February 7, 1997
                   (subject to shareholder approval).

10.3b (9) (*)     Form of  Agreement  used  under the 1991  Stock
                   Option Plan.










                         X-1 (Footnotes at end of index)
<PAGE>


Exhibit
Number                                  Exhibit Description
-------           --------------------------------------------------------------

10.4a (7) (*)     1991 Directors' Stock Option Plan and form of
                    Agreement thereunder.

10.4b (14) (*)    1991  Directors'  Stock  Option  Plan as amended
                    September 11,1997 (subject to shareholder approval).

10.5a (3)  (*)    Key Employee Stock Purchase Plan.

10.5b (5) (*)     Form of Stock  Purchase  Agreement used under the Key
                   Employee Stock Purchase Plan.

10.6  (7)  (*)    Form of Indemnification Agreement entered into
                   by the Registrant with each of its directors and
                   executive officers.

10.7  (6)         Proprietary Information Agreement dated
                   as of March 25, 1992, between James M. Phalan
                   and the Registrant.

10.8 (14)         Line of Credit Agreement dated October 14,
                   1997 between HytekMicrosystems, Inc. and
                   SierraWest Bank.

13.1              President's Letter to Shareholders dated
                   April 6, 1998, which together with
                   this Form 10-KSB comprises the Registrant's
                   1997 Annual Report to Shareholders.

21.1              The Registrant has no subsidiaries.

23.1              Consent of Independent Auditors
                   (see page F- 20).

24.1              Power of Attorney (see page S-1).

27.1              Financial Data Schedule.

Footnotes:
----------

(1)               Incorporated by reference to Exhibit filed with the
                  Registration Statement on Form S-1 (File No. 2-82140).

(2)               Incorporated by reference to Exhibit filed with the
                  Quarterly Report on Form 10-Q for the quarter ended July 2,
                  1988.

(3)               Incorporated  by  reference  to Exhibit  filed with the Annual
                  Report on Form 10-K for the year ended December 29, 1990.


                                       X-2

<PAGE>

(4)               Incorporated  by  reference  to Exhibit  filed with the Annual
                  Report on Form 10-K for the year ended December 30, 1989.

(5)               Incorporated  by  reference  to Exhibit  filed with the Annual
                  Report on Form 10-K for the year ended December 31, 1986.

(6)               Incorporated  by  reference  to Exhibit  filed with the Annual
                  Report on Form 10-K for the year ended December 28, 1991.

(7)               Incorporated  by  reference  to Exhibit  filed with the Annual
                  Report on Form 10-K for the year ended December 31, 1988.

(9)               Incorporated by reference to Exhibit filed with the Quarterly
                  Report on Form 10-Q for the quarter ended September 26,
                  1992.

(10)              Incorporated by reference to the Exhibit filed with the
                  Quarterly Report on Form 10-Q for the quarter ended June 27,
                  1992.

(11)              Incorporated  by  reference  to Exhibit  filed with the Annual
                  Report on Form 10-KSB for the year ended December 31, 1994.

(12)              Incorporated  by  reference  to Exhibit  filed with the Annual
                  Report on Form 10-KSB for the year ended December 30, 1995.

(13)              Incorporated  by  reference  to Exhibit  filed with the Annual
                  Report on Form 10-KSB for the year ended December 28, 1996.

(14)              Incorporated  by reference to Exhibit filed with the Quarterly
                  Report On Form  10-QSB for the  quarter  ended  September  27,
                  1997.

(*)               Management contract or compensatory plan or arrangement in
                  which  any  director or executive officer named in the
                  Registrant's  Annual  Report  on Form  10-KSB  or Proxy
                  Statement has participated or participates.



















                                       X-3

<PAGE>