UNITED STATES
                       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 2, 1999, or

             [ ] TRANSITION REPORT UNDER SECTION 13 OR 5 (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 the  definitive  proxy or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

Revenues  of the Issuer for the most recent  fiscal  year ended  January 2, 1999
were: $12,533,000.

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
National  Association of Securities Dealers Automated  Quotation (NASDAQ) system
on  March  15,  1999)  was  approximately  $3,018,567.   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 15,  1999,  the issuer had  outstanding  3,064,758  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 14, 1999 (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.  Further, the Company uses
other technologies such as Low Temperature Co-fired Ceramic substrates (LTCC) to
produce hybrid circuits. In addition to custom hybrid microcircuits, the Company
also  manufactures  delay lines,  thermo-electric  cooler  controllers and laser
diode driver standard products.

     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.

     Net revenues in 1998  increased  39% from 1997 levels.  The Company had net
income of  $2,092,000  in 1998 as  compared to net income of  $1,662,000  during
1997. During 1998, the Company increased total assets by $985,000 and added $1.7
million to working capital. See "Management's Discussion and Analysis or Plan of
Operation" in Part II, Item 6 hereof.

     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 in  "Management's  Discussion  and Analysis or Plan of  Operation--Factors
Affecting  Future  Results"  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 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, satellite
systems,  industrial electronics and opto-electronic markets.  Approximately 96%
of the Company's  net revenues in 1998 were derived from  products  designed and
manufactured to meet a particular customer's specifications. The remaining 4% of
net  revenues  in 1998 were  derived  from  standard  products  designed  by the
Company's engineering staff.

     During 1998,  approximately 71% of the Company's revenues were derived from
commercial and industrial  private sector programs as compared to  approximately
64% in 1997.  Sales to the military,  aerospace and government  sector increased
slightly in absolute  dollars  during 1998 and  accounted  for 29% of 1998 total
revenues.
<PAGE>

     From 1987, when the Company was certified under MIL-Standard-1772,  through
1994, sales of military,  aerospace 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 1997 and 1998.  The Company  continues  to pursue  business in the
military  market and is  actively  seeking to expand its  customer  base in this
area.* Recent  dialog from both  Congress and the  Executive  Branch of the U.S.
Government  indicate the potential of increases in spending for national defense
that could foster additional  future growth in this market.* 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 this 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 is currently doing business with certain defense contractors who are
participating  in this area and 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,  such  as
automotive,  audio and video products and certain  communications  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.

     During 1998,  the Company has pursued  opportunities  in the medical device
and medical  instrumentation  markets and has  subsequently  received an initial
production  order for an  implantable  medical  device.  The Company  intends to
increase its efforts to further expand in this market.

     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 96% in 1998.

       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

<PAGE>

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.

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,  thin film  hybrid
circuits  and co-fired  ceramic  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,  the Company's primary  manufacturing
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.

     In past years, all of the microcircuits produced by Hytek were manufactured
using thick film  hybrid  circuit  packaging  techniques,  including  thick film
screen print, firing and laser trimming,  chip and wire assembly,  and automatic
testing.  During 1998,  the Company  began to produce a small number of circuits
utilizing Low Temperature  Co-fired Ceramic (LTCC)  substrates.  This technology

<PAGE>

increases the  uniformity of the substrate  layers,  yielding a higher number of
conductive  layers on a  substrate.  As a result,  LTCC  technology  can produce
higher  density,  more  complex  circuits  than  standard  thick-film  substrate
technology.  The Company will  continue to seek and 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 96% of the Company's sales in
1998.  These products serve a variety of  applications  in the oil  exploration,
military, satellite systems, industrial electronics and opto-electronic 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.

     Standard products  accounted for approximately 4% of the Company's sales in
1998. These products consist of delay lines,  thermo-electric cooler controllers
and laser diode driver  products  produced  for  applications  in the  military,
industrial electronic systems and communications 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 2, 1999, the
Company's  direct sales staff  consisted of five  employees  operating  from the
Company's principal office in Carson City. In addition, at such date the Company
had six 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.

     The Company  continues  to identify  certain  existing  and  potential  new
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 certified and qualified to
MIL-PRF-38534,  Class  H  (previously  Mil-Std-1772).  This  certification  is a
prerequisite  to participate in certain  military  contracts,  and is subject to
periodic audits by the U.S. government.  Loss of this certification would have a
material  adverse  impact on the  Company's  business  prospects  and  financial
condition.  Further,  the Company has  recently  been  audited to Class K (Space
Flight) level under MIL-PRF-38534,  and anticipates  certification to this level
in the near future.*

CUSTOMERS

     During 1998, the Company's five largest customers  accounted for 82% of the
Company's net revenues. In 1998, Chesapeake Sciences Corp. accounted for 64% of
the Company's net  revenues.  A large portion (53%) of the Company's  backlog of
orders for 1999 and beyond is attributable to Chesapeake  Sciences  Corporation,
which  recently  put all of its pending  orders on  "indefinite  hold".  This is
expected  to have a  material  adverse  effect  on the  Company's  revenues  and
operating results for 1999, as discussed further in "Management's Discussion and
Analysis-Factors Affecting Future Results" in Item 6 of Part II of this Form 
10KSB. Future delays 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.   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.
<PAGE>

     The  thick-film   hybrid   manufacturing   process,   which  accounted  for
approximately 98% of total production in 1998,  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.

     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 wire bonding process is very critical
to the overall  yield and  efficiency  of the  manufacturing  cycle.  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,  Hi-Rel
Products,  Inc.,  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

<PAGE>

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.

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 Company continued to
add to its engineering staff during 1998.

     During  1998  and  1997,   the  Company   spent   $945,000  and   $769,000,
respectively, on its total engineering efforts. Of these amounts,  approximately
$236,000  and  $115,000  were  spent on new  product  or  process  research  and
development  in 1998 and 1997,  respectively.  The amounts spent on research and
development were internally funded.

     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 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.  In 1998, Sales of Laser Diode Drivers,  while still minimal,
increased by more than 200% over 1997 sales.

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., 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-PRF-38534, 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.

     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  four  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  registered  trademarks or licenses
material to the conduct of its business.

EMPLOYEES

     As of January  2,  1999,  the  Company  employed  a total of 123  full-time
employees,  of whom 97 were in manufacturing,  5 were in marketing and sales, 17
were in engineering and development  and 4 were in  administration.  In February
1999, a total of 30 employees,  primarily in the  manufacturing  area, were laid
off as a cost reduction  measure.  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 1998, the Company  derived  approximately  29% 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.



<PAGE>

During  1998,  the  Company  experienced  no  such  termination  for  government
convenience.

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

     The Company currently leases a total of approximately 25,000 square feet of
manufacturing,  engineering and support  facilities in two adjacent buildings in
Carson City, Nevada. The main building,  consisting of 23,800 square feet, has a
lease term through June 2005,  with an option to extend for an  additional  five
years. The main facility is currently  operating at approximately  65% to 70% 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. *

     The second adjacent facility consists of approximately 1,200 square feet of
office  space  utilized  by the  Company's  Engineering  Department.  This lease
expires  March 31,  2000 and has no formal  option to extend.  This  property is
standard  commercial  office  space  and the  Company  does not  anticipate  any
difficulty in retaining this space after the formal initial lease expires.*


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  claimed sexual  harassment and
retaliatory  termination and sought  unspecified  monetary  relief.  The Company
denied  this  allegation  and filed a complete  response  to the charge with the
Equal Rights  Commission.  During 1998, upon advise of counsel,  and without any
admission of fault or guilt,  the Company elected to settle this claim without a
formal  hearing  before  the Equal  Rights  Commission.  As a  condition  of the
settlement,  the Company received a formal Release of Claims and Covenant Not To
Sue from the plaintiff. The total cost of this settlement, including legal fees,
was approximately $31,000.

     At January 2, 1999, there were no other material legal proceedings pending.


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 2, 1999.



                        EXECUTIVE OFFICERS OF THE COMPANY

     Information  concerning  the executive  officers of the Company who are not
also directors of the Company is set forth below:

     Jon B. Presnell, age 48, was promoted to the position of Vice-President and
General Manager of Custom Products for the Company in October 1993. In May 1998,
Mr. Presnell's title was changed to Vice-President  and Chief Operating Officer.
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.

     Sally B. Chapman, age 43, re-joined the Company in May 1998, as Controller.
In July 1998,  Ms.  Chapman  was  promoted to the  position  of Chief  Financial
Officer and Corporate  Secretary.  Ms. Chapman has twenty years experience as an
accountant and chief financial officer in various  industries and was previously
employed as Accounting  Manager for Hytek from June 1995 to June 1996. From 1997
until  April  1998  Ms.  Chapman  was  Chief  Financial   Officer  for  a  paper
manufacturing and distribution  company.  From 1990 through 1994 Ms. Chapman was
Controller  for Sun Bird  Security  Systems,  a  security  systems  and  service
provider.


                                    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%.

     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 sales in 1998 were  $12,533,000,  a 39% increase from 1997 net revenues
of $9,020,000.  The increase in net sales is primarily attributable to increased
shipments to Chesapeake  Sciences Corp.  ("Chesapeake"),  the Company's  largest

<PAGE>

customer.  Shipments to Chesapeake increased approximately $3.2 million from the
prior year and represented 64% of the Company's net revenues in 1998 as compared
to 53% in 1997.  During 1998,  approximately 71% of the Company's net sales were
derived from sales of products for commercial  and industrial  uses (as compared
to 64% in 1997) and  approximately  29% were  derived  from sales for  military,
aerospace or government applications (as compared to 36% in 1997).

     Cost of sales was  $8,337,000,  or 67% of net revenues in 1998, as compared
to $5,740,000,  or 64% of net revenues in 1998. The increase in dollar amount is
the result of the higher  volume of products  shipped in 1998.  The  increase in
cost of sales as a  percentage  of net  revenues is  primarily  the result of an
increased  cost of direct labor over the prior year.  A "tight"  labor market in
the local area contributed to this cost increase.

     Engineering  and  development  expenses were $945,000 in 1998, or 8% of net
revenues,  as compared to $769,000, or 9% of net revenues, in 1997. The increase
in these expenses in 1998 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 $1,149,000,  or 9% of net
revenues, in 1998, as compared to $826,000, or 9% of net revenues, in 1997. This
increase  in dollar  amount is  attributable  to  increased  compensation  costs
resulting  from  additions  to personnel  and salary  increases,  together  with
increases in sales  commission  expense,  travel  expenses,  legal  expenses and
investor relations expenses.  Revenues generated from Chesapeake are not subject
to sales commission expense.

     Interest  income was  $92,000  for 1998,  as  compared  to $41,000 in 1997,
reflecting  higher balances in the Company's  interest  bearing  accounts during
1998. The Company had interest  expense of $35,000 in 1998 as compared to $8,000
interest expense in 1997. The interest expense incurred in 1998 and 1997 results
from loan and capital  lease  obligations  utilized  to finance  new  production
equipment.

     In 1998,  the Company  recorded an income tax provision of $66,000 to cover
alternative  minimum tax liabilities,  as compared to an income tax provision of
$55,000 for 1997.


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  that  were  represented  by the  supplier  to have
eliminated any anticipated potential problems with the Year 2000.

     Further, the Company has over 40 individual computer work-stations attached
to the network,  all of which have been individually tested and found to be Year
2000  compliant.  The Company has also  initiated a survey of its major material
suppliers  regarding  their state of  preparation  and action to avert Year 2000
problems.  As of the date of this filing,  approximately  61% of these suppliers
have responded to this survey and all respondents are  anticipating  timely Year
2000  compliance.  The  Company  anticipates  that its  supplier  survey will be
complete by June 30, 1999.

     The cost of the Company's  preparations  for Year 2000  computer  readiness
have  been  minimal  thus  far  and  as  of  this  filing  are  estimated  to be
approximately  $25,000.  All costs have been funded through operating cash flow.
Future costs are not expected to be material at this time.

     In addition,  the Company  believes that its major  customers and financial
institutions  have taken,  or are in process of taking  actions,  sufficient  to
protect the Company from adverse  effects of the Year 2000 in their own internal
systems.

      Management of the Company believes it has an effective program in place to
resolve  the Year 2000 issue in a timely  manner.  In the event that the Company
and its third  parties do not  complete  all  additional  Year 2000 efforts in a
timely manner,  or that its  remediation  efforts do not resolve the anticipated
problems,  disruptions  in the Company's  day-to-day  operations  may occur.  In
addition,  disruptions in the economy in general resulting from Year 2000 issues
could also  materially  adversely  affect the  Company.  The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.

     At the present time, the Company does not have a formal contingency plan in
the event it does not successfully complete all phases of its Year 2000 efforts.
The  Company  plans to  evaluate  the  status of its  progress  in June 1999 and
determine if such a plan is necessary.

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 has had any 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 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 has
had any 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>


      The  Company,  historically,  has been very  dependent  on a single  large
customer,  Chesapeake  Sciences  Corp.,  that accounted for 64% of the Company's
1998 net revenues. As recently announced,  and as a result of current low market
prices for crude oil combined with a market "glut" on the crude oil supply side,
Chesapeake  has  placed  their  current  orders  with  the  Company,  valued  at
approximately  $5 million,  on an indefinite  "hold status".  Although no orders
have been cancelled at this point,  it cannot be determined at this time when or
if  shipments  to  Chesapeake  will  resume.  The  Company  currently  does  not
anticipate  any further shipments to Chesapeake  for the remainder of 1999*. The
oil exploration market has a history of cyclical activity, and while the Company
believes that this market will eventually recover, there are no firm predictions
as to the timing of any recovery,  or any  guarantees  that such a recovery will
take place. This recent change will have a large negative impact on revenues and
operating  results for fiscal 1999.  The Company  currently  estimates that 1999
revenues will be in the $6 to $7 million range.*

     In addition to the negative impact of the current Chesapeake "hold status",
the Company has approximately  $1,400,000 in raw material,  work-in-process  and
finished  goods  inventory  for the  Chesapeake  program.  While the Company has
certain  rights to recover costs in the event of outright  termination  of these
orders, there is currently no assurance that all inventory costs can or would be
recovered. The potential for a write-down of inventory value exists in the event
of the future termination of these orders.

     Further, the Company anticipates that gross margins will be reduced in 1999
from  prior  year  levels as a result of  spreading  fixed  costs over a smaller
revenue base.

     The Company's  current 1999 revenue  estimate is based on a combination  of
firm backlog and a forecast of various  orders  anticipated to "book" during the
first half of the year.  In the event that  forecast  orders do not become  firm
business, or are "booked" later in the year than anticipated, the 1999 estimated
revenue range could be subject to further downward revision.

     During 1998, the Company  realized 29% of its net revenues from  government
or military/aerospace funded sources, a decrease from 36% in 1997. A significant
portion of this  business is dependent on the Company  maintaining  its MIL-PRF-
38534  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.  The Company has recently  undergone a  government  audit in regard to
this certification and does not anticipate any negative change in its status.*

     The positive side of the  military/aerospace  and government  market is the
current dialog and media reports of proposed increases in U. S. defense spending
for the future.  While such  increases  are only  proposed  at this time,  it is
encouraging for the future that both Congress and the Executive branch appear to
agree in this regard.

     The  Company is  currently  dependent  on the custom  product  market for a
substantial majority of its revenue.  Custom products accounted for 96% of total
revenues in both 1998 and 1997.  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

<PAGE>

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  continuing  healthy state of the economy still supports a heavy demand
for skilled  employees.  The  Company's  ability to meet  varying  demand and to
develop new products that  contribute  to future 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.  At this  juncture the Company has not laid off any of its
technical  staff as these  employees  are  essential to our efforts to enter new
markets and capture new business.

     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.


LIQUIDITY AND CAPITAL RESOURCES

     During  1998,  total  assets  increased  by $985,000  and the net effect of
changes in current  assets and  current  liabilities  resulted  in a net working
capital increase of $1,749,000.

     The Company had $2,637,000 in cash and cash equivalents at January 2, 1999,
as compared to  $1,190,000 at the 1997 fiscal year end. This increase is the net
result of $2,089,000 generated by operating  activities  (primarily net income),
and  $32,000  proceeds  from the  issuance  of  common  stock to  employees  and
directors,  partially  offset  by  $517,000  used for the  purchase  of  capital
equipment and $157,000 used for principal  payments on capital lease obligations
and long-term debt. The Company  anticipates  reduced cash flow during 1999 as a
result of the Chesapeake "hold" situation.

     Accounts receivable decreased during 1998 to $1,918,000 at January 2, 1999,
as compared to  $2,514,000  at the 1997 fiscal year end. The primary  reason for
this  decrease was a  significantly  lower level of shipments  during the fourth
quarter  of  1998  as  compared  to  the  prior  year  fourth  quarter  due to a
rescheduling of shipments by Chesapeake  Sciences Corp.,  the Company's  largest
customer. At January 2, 1999, accounts in excess of 60 days totaled 25% of total
receivables,  as compared  to 15% at January 3, 1998.  A majority of this amount
relates to the Company's largest customer and was subsequently collected.

     Total inventories  remained  basically constant at $2,482,000 at January 2,
1999 as  compared  to  $2,581,000  at January  3,  1998.  See Note 2 of Notes to
Financial Statements for a comparison of inventory components. As noted above, a
significant  portion of the  inventory  relates to the  Chesapeake  program  and
carries the risk of potential future write-down.

<PAGE>

     Property,   plant  and  equipment,  net  of  accumulated  depreciation  and
amortization,  increased  by $243,000  during 1998 as a result of  additions  to
machinery and equipment during the year of $516,000,  partially offset by fiscal
1998 depreciation and amortization of $273,000.

     Accounts payable were $312,000 at January 2, 1999 as compared to $1,308,000
at 1997 fiscal year end. This  significant  decrease results from a reduction in
raw  material  purchases  during  the  fourth  quarter  of 1998 as a  result  of
Chesapeake  recheduling,  combined with a faster vendor payment cycle during the
year.

     Accrued employee compensation and benefits increased by $54,000 to $404,000
from the prior fiscal year end. This increase  results from  increased  year-end
employment levels and profit sharing accruals.  At January 2, 1999, $225,000 had
been  accrued for the  employee  profit  sharing plan as compared to $200,000 at
January 3, 1998.

     There were no  customer  prepayments  at January 2, 1999,  as  compared  to
$28,000 at January 3, 1998.  This  decrease  is the result of product  shipments
during the year against the prepaid customer orders.

     Accrued warranty,  commissions and other accrued  liabilities were $194,000
at January  2, 1999 as  compared  to  $207,000  at  January 3, 1998.  This small
reduction is primarily attributable to lower accrued sales commissions.

     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. The balance on this note at January 2, 1999 was $101,000. This note
is  secured  by the  related  equipment.  The  Company  also has  capital  lease
obligations  with  SierraWest  Bank totaling  $93,000,  which are secured by the
related  equipment.  The  current  portion  of these  long-term  obligations  is
$102,000 at January 2, 1999. The remaining  portion,  $91,000,  is classified as
long-term debt.

      The Company  recognized federal income tax expense during 1998 of $66,000,
primarily  to satisfy  alternative  minimum  tax  liabilities.  The  Company has
remaining  future tax credit  carryforwards  for Federal  income tax purposes at
January 2, 1999 of approximately $134,000. These carryforwards will not expire.

       At January 3, 1998, the Company had long-term debt of $91,000 outstanding
under its  Promissory  Note and capital lease  obligations  as described  above.
Further,  as of October 23,  1998,  the Company  renewed its line of credit with
SierraWest Bank. At that time, the line of credit was increased by $600,000 to a
total of $1,000,000. This line of credit is for a term of 18 months, expiring in
May 2000,  and bears interest at the prime rate. At January 2, 1999, 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 1999,  together with its line of credit,  will provide sufficient cash to
meet  operating  needs without  additional  financing  activity  through 1999. *
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.


<PAGE>

FUTURE OUTLOOK

     During 1998, the Company  achieved record levels of revenue and profits for
the current decade.  Unfortunately,  the outlook for the ensuing year or more is
not as bright.

      As previously  announced,  in February of this year,  Chesapeake  Sciences
Corp.  placed all current  orders on an indefinite  "hold status" as a result of
the depressed  situation in the world's oil market. Low oil prices combined with
a supply side glut have made further marine oil  exploration  unfeasible for the
present  time.  Primary  exploration  companies  are  docking  their  boats  and
curtailing  operations.  In addition,  new  exploration  vessels planned for the
future have been put on hold for indefinite periods or outright cancelled. While
the oil exploration market has a history of cycles, at the present time there is
no firm  expectation  as to when this  situation may reverse.  The net effect on
Hytek for the ensuing year is a significant  reduction in  anticipated  revenues
and  depressed  operating  results.  The Company is  currently  predicting  1999
revenues  to be in the range of $6 to $7 million and result in a  break-even  or
possible loss for the year.*

     While the Company has taken certain cost reduction  measures in response to
the  decline  in  the  oil  exploration   market,   we  have  retained  a  solid
technological  base  that  we  believe  provides  the key to  unlocking  further
opportunities  in other areas.  Subsequent  to  year-end,  Hytek has received an
order for an  implantable  medical  device and is  currently  in the  process of
qualifying circuits for another potential medical customer. We believe there may
be  significant  opportunities  for  future  growth in the  medical  device  and
instrumentation  market.*  With  health  care  an  ever-growing  portion  of the
domestic  economy,  the Company believes this is an area in which to concentrate
our efforts in an attempt to expand and broaden our customer base.

     The  military/aerospace  market  continues to be an  important  part of the
Company's  future.  While there was only minor  growth in this area during 1998,
the prospects for the future look  brighter.*  Current media reports  indicate a
favorable  attitude in Washington D. C. for  increased  defense  spending in the
future.  The Company will make every effort to be a participant in any resulting
growth opportunities.

     While the outlook for the next one or two years  currently  appears to be a
decline from previous levels,  we believe that through  concentrated  effort the
Company can broaden  its base and become less  reliant on one large  customer in
the future.*

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

     The financial  statements of the Company  (including  the notes thereto) at
January 2, 1999 and January 3, 1998 and for the years then ended, and the report
of independent  auditors thereon, are included herein on pages F- 3 through F-21
of this Form 10-KSB.

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

     Not applicable.

<PAGE>

                                    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  officers of the Company who are not
also a directors  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.

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 2, 1999.










<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 2, 1999
    and January 3, 1998  ................................................... F-3

Statement of Income for the Years ended
    January 2, 1999 and January 3, 1998 .....................................F-4

Statement of Shareholders' Equity for the
    Years ended January 2, 1999 and January 3, 1998 .........................F-5

Statement of Cash Flows for the Years Ended
    January 2, 1999 and January 3, 1998 .....................................F-6

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

Report of Independent Auditors ............................................ F-21

Consent of Independent Auditors ........................................... F-22





<PAGE>
<TABLE>
    

                                                                       HYTEK MICROSYSTEMS, INC.

                                                           Selected Quarterly Financial Data (unaudited)

                                                               (In thousands, except per share data)

                              ------------------------------------------------------------------------------------------------------
                                                                           Quarter Ended
                              ------------------------------------------------------------------------------------------------------
                                             FISCAL          1998                                 FISCAL        1997
                              ------------------------------------------------        ----------------------------------------------

                                Jan. 2      Oct. 3      Jul. 4      Apr. 4          Jan. 3      Sept. 27    Jun. 28     Mar. 29
                              ----------  ----------  ----------  ----------      ----------  ----------  ----------  ----------
<S>                           <C>         <C>         <C>         <C>             <C>         <C>          <C>         <C>

Net revenues                  $  2,230    $   3,026   $   3,690   $   3,587       $  3,205    $  2,047     $  2,181    $  1,587

Gross profit                  $    370    $   1,094   $   1,325   $   1,407       $  1,476    $    659     $    701    $    443

Net income (loss)             $   (169)   $     516   $     827   $     918       $    950    $    281     $    335    $     95

Net income (loss) 
     per share - basic        $  (0.06)   $    0.17   $    0.28   $    0.31       $   0.32    $   0.09     $   0.12    $   0.03

Net income (loss) 
     per share - diluted      $  (0.05)   $    0.16   $    0.26   $    0.29       $   0.31    $   0.09     $   0.11    $   0.03

Market price range per share
    High                      $   4.25    $    4.75   $    5.06   $    3.75       $   2.38    $   2.44     $   1.75    $   2.69

    Low                       $   2.38    $    3.38   $    3.75   $    1.94       $   1.88    $   1.63     $   1.19    $   1.63

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

                                                                               
From March 26, 1992 through July 24, 1998, the Company's Common Stock was traded
on the OTC Bulletin  Board.  Since July 27, 1998  Hytek's  Common Stock has been
quoted and traded on the NASDAQ Small Cap Market.  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  mark-ups,  mark-downs  or  commissions  and  may  not  represent  actual
transactions.

As of March 1,  1999,  there  were  approximately  201  holders of record of the
Company's Common Stock.

The Company  has never paid any cash  dividends  on its Common  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.





<PAGE>

<TABLE>

                            HYTEK MICROSYSTEMS, INC.
                                  Balance Sheet

                       January 2, 1999 and January 3, 1998

                                                                           1998               1997
                                                                   ----------------------------------------
<S>                                                                   <C>                 <C>   
ASSETS
Current assets:
   Cash and cash equivalents                                          $   2,637,182       $   1,189,519
   Trade accounts receivable, net of allowance for doubtful
     accounts of $50,000 in 1998 and 1997                                 1,918,265           2,513,668
   Inventories                                                            2,481,707           2,581,389
   Prepaid expenses and deposits                                             38,932              50,035
                                                                   ----------------------------------------
Total current assets                                                      7,076,086           6,334,611

Deferred income taxes                                                       200,000             200,000

Plant and equipment, at cost, less accumulated depreciation and
   amortization                                                             999,027             755,845

                                                                   ----------------------------------------
Total assets                                                          $   8,275,113       $   7,290,456
                                                                   ========================================
                                                                   
LIABILITIES AND SHAREHOLDERS' EQUITY 
Current liabilities:
   Accounts payable                                                   $     312,430       $   1,308,335
   Accrued employee compensation and benefits                               404,284             349,725
   Accrued warranty, commissions and other                                  193,509             206,569
   Customer deposits                                                              -              28,464
   Current portion of long-term debt                                         48,313              43,951
   Current obligations under capital leases                                  53,850              82,752
                                                                   ----------------------------------------
Total current liabilities                                                 1,012,386           2,019,796

Long-term debt, less current portion                                         52,736             101,049
Long-term obligations under capital leases                                   38,709             123,041

Commitments and contingencies

Shareholders' equity:
   Common stock, no par value:
     Authorized shares - 7,500,000
     Issued and outstanding shares - 3,039,758 at January 2, 1999
       and 2,941,424 at January 3, 1998                                   5,007,093           4,974,676
   Retained earnings                                                      2,164,189              71,894
                                                                   ----------------------------------------

Total shareholders' equity                                                7,171,282           5,046,570

                                                                   ----------------------------------------
Total liabilities and shareholders' equity                            $   8,275,113       $   7,290,456
                                                                   ========================================

</TABLE>

See accompanying notes.

<PAGE>

<TABLE>
                                                
                            HYTEK MICROSYSTEMS, INC.

                               Statement of Income

                 Years ended January 2, 1999 and January 3, 1998


                                           1998                1997
                                    ----------------------------------------

<S>                                   <C>                  <C>           
Net sales                             $12,533,045          $    9,019,977

Cost of sales                               8,336,635           5,740,404
Engineering and development                   945,312             769,277
Selling, general and
    administrative expenses                 1,149,194             825,972
                                    ----------------------------------------
                                           10,431,141           7,335,653
                                    ----------------------------------------
                                    
Operating income                            2,101,904           1,684,324

Interest income, net                           56,826              32,353
                                    ----------------------------------------
Income before provision
    for income taxes                        2,158,730           1,716,677

Income tax provision                           66,435              55,000
                                    ----------------------------------------

Net income                             $    2,092,295      $    1,661,677
                                    ========================================

Basic earnings per share               $        0.70       $        0.56
                                    ========================================

Diluted earnings per share             $        0.66       $        0.54
                                    ========================================

Shares used in calculating 
    basic earnings per share               3,004,721           2,941,241
                                    ========================================

Shares used in calculating 
    diluted earnings per share             3,159,724           3,086,743
                                    ========================================


</TABLE>

See accompanying notes.                    

<PAGE>

<TABLE>

                            HYTEK MICROSYSTEMS, INC.

                        Statement of Shareholders' Equity

                 Years ended January 2, 1999 and January 3, 1998

                                               Common Stock
                                      -------------------------------
                                                                          Retained
                                                                          Earnings
                                                                        (Accumulated
                                          Shares          Amount          Deficit)            Total
                                      --------------- --------------- ------------------ -----------------

<S>                                       <C>         <C>               <C>                <C>         
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

   Net income                                     -                -          2,092,295       2,092,295

   Issuance of stock                         98,334           32,417                  -          32,417
                                      --------------- --------------- ------------------ -----------------

Balance at January 2, 1999                3,039,758   $    5,007,093    $     2,164,189  $    7,171,282
                                      =============== =============== ================== =================

</TABLE>



See accompanying notes.                     


<PAGE>
<TABLE>


                            HYTEK MICROSYSTEMS, INC.

                             Statement of Cash Flows

                Increase (Decrease) in Cash and Cash Equivalents

                 Years ended January 2, 1999 and January 3, 1998


                                                                             1998             1997
                                                                       ------------------------------------

<S>                                                                       <C>              <C>    
OPERATING ACTIVITIES
Net income                                                                $   2,092,295    $   1,661,677
Adjustments to reconcile net income to net cash provided
   by operating activities:
     Depreciation                                                               207,747           90,714
     Amortization                                                                65,660           44,535
     Gain on disposal of equipment                                                 (200)               -
     Changes in operating assets and liabilities:
       Trade accounts receivable, net                                           595,403       (1,387,851)
       Inventories                                                               99,682       (1,312,508)
       Prepaid expenses and deposits                                             11,103           (7,532)
       Accounts payable                                                        (995,905)       1,039,873
       Accrued employee compensation and benefits                                54,559              227
       Accrued warranty, commissions and other                                  (13,060)          37,193
       Customer deposits                                                        (28,464)        (143,616)
                                                                       ------------------------------------
Net cash provided by operating activities                                     2,088,820           22,712

INVESTING ACTIVITIES
Purchases of equipment                                                         (516,589)        (362,505)
Proceeds from sale of equipment                                                     200                -
                                                                       ------------------------------------
Net cash used in investing activities                                          (516,389)        (362,505)

FINANCING ACTIVITIES
Proceeds from borrowings on long-term debt                                            -          145,000
Principal payments on long-term debt                                            (43,951)               -
Principal payments on capital lease obligations                                (113,234)         (54,403)
Proceeds from issuance of common stock                                           32,417           11,999
                                                                       ------------------------------------
Net cash provided by (used in) financing activities                            (124,768)         102,596
                                                                       ------------------------------------

Net increase (decrease) in cash and cash equivalents                          1,447,663         (237,197)
Cash and cash equivalents at beginning of year                                1,189,519        1,426,716
                                                                       ------------------------------------
Cash and cash equivalents at end of year                                  $   2,637,182    $   1,189,519
                                                                       ====================================

</TABLE>

See accompanying notes.   

<PAGE>
                
                            HYTEK MICROSYSTEMS, INC.

                          Notes to Financial Statements

                 Years ended January 2, 1999 and January 3, 1998


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 oil exploration,  military,  satellite systems,
industrial  electronic  system,  opto-electronics  and automatic  test equipment
markets.  The  Company  markets  its  products  through  its own sales staff and
through independent sales representatives.

BASIS OF PRESENTATION

The Company operates under a 52/53 week fiscal year, with the year end being the
Saturday  nearest  December 31st. The year ended January 2, 1999 ("fiscal 1998")
was a 52-week year, whereas the year ended January 3, 1998 ("fiscal 1997") was a
53-week year.

CONCENTRATION OF CREDIT RISK  (Note 11)

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 fiscal 1998,  the Company had sales to Chesapeake  Sciences  Corporation  and
TRW, Inc. that accounted for 64% and 6%,  respectively,  of net sales. In fiscal
1997, sales to these two companies accounted for 53% and 15%,  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.

<PAGE>







                                            
                            
CASH AND CASH EQUIVALENTS

Cash and cash  equivalents  consist of cash and money market funds with original
maturities  of less  than 90 days.  The fair  value of the  Company's  financial
instruments  approximated their carrying value at January 2, 1999 and January 3,
1998. The Company maintains the majority of its cash and cash equivalents in one
financial institution.

During  fiscal 1997,  the Company  entered into  non-cash  investing  activities
whereby  machinery and equipment  acquisitions  were  capitalized  under capital
leases in the amount of $158,226.  During fiscal 1998 and 1997, the Company paid
income taxes of $45,000 and $55,000,  respectively,  and interest of $35,000 and
$8,000, respectively.

INVENTORIES (Note 11)

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 2, 1999 and  January 3, 1998 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.


<PAGE>






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).

EARNINGS PER SHARE

The Company has adopted Financial  Accounting Standards Board Statement No. 128,
"Earnings per Share".  This  Statement  establishes  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 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.

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 2, 1999 and  January 3, 1998,  such
costs amounted to approximately $236,000 and $115,000, respectively.

<PAGE>


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 2, 1999
and January 3, 1998 amounted to approximately $26,000 and $27,000, respectively,
and  is  included  in  selling,  general  and  administrative  expenses  on  the
accompanying statement of income.

NEW ACCOUNTING PRONOUNCEMENTS

The Company has adopted  Statement of Financial  Accounting  Standards  No. 130,
"Reporting  Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all items
required  to  be  recognized  under   accounting   standards  as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.  The Company's  comprehensive
net income was the same as its net income for fiscal years 1998 and 1997.

Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information" ("SFAS 131"). SFAS 131 superseded Statement of Financial Accounting
Standards No. 14, "Financial  Reporting for Segments of a Business  Enterprise".
SFAS 131  establishes  standards  for the way that public  business  enterprises
report information about operating  segments in annual financial  statements and
requires that those  enterprises  report  selected  information  about operating
segments in interim financial reports.  SFAS 131 also establishes  standards for
related  disclosures  about products and services,  geographic  areas, and major
customers.  The  adoption  of SFAS 131 did not affect the  Company's  results of
operations or financial  position,  and did not affect the disclosure of segment
information.

USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ materially from those estimates.
<PAGE>
                             


2.   INVENTORIES (Note 11)
     ---------------------

Inventories consist of the following:
<TABLE>

                                         1998               1997
                                 ----------------------------------------

     <S>                             <C>                 <C>          
      Finished goods                 $     164,268       $      32,057
      Work-in-process                    1,031,896           1,287,720
      Raw materials                      1,285,543           1,261,612
                                 ----------------------------------------
                                     $   2,481,707       $   2,581,389
                                 ========================================
</TABLE>

3.   PLANT AND EQUIPMENT
     -------------------

Plant and equipment consists of the following:
<TABLE>

                                         1998               1997
                                 ----------------------------------------

<S>                                  <C>                 <C>          
Leasehold improvements               $     519,957       $     514,775
Machinery and equipment                  3,370,279           2,868,654
Furniture and fixtures                      25,888              18,274
                                 ----------------------------------------
                                         3,916,124           3,401,703
Less accumulated depreciation
     and amortization                   (2,917,097)         (2,645,858)
                                 ----------------------------------------
                                     $     999,027       $     755,845
                                 ========================================
</TABLE>

4.   INCOME TAXES
     ------------

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

                                             1998                1997
                                      ----------------------------------------
<S>                                      <C>                 <C>   
Deferred tax assets:
     Net operating loss carryforwards    $           -       $     834,534
     Credit carryforwards                      134,100             264,786
     Other                                     215,748             155,441
                                      ----------------------------------------
Total deferred tax assets                      349,848           1,254,761
Valuation allowance                           (149,848)         (1,054,761)
                                      ----------------------------------------
Net deferred tax assets                  $     200,000       $     200,000
                                      ========================================
</TABLE>

The  valuation  allowance  as of January 3, 1998 was  approximately  $1,055,000,
resulting in a net decrease in the allowance of  approximately  $905,000 for the
year ended January 2, 1999.


<PAGE>
                                      

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:
<TABLE>

                                               1998               1997
                                       ----------------------------------------

<S>                                        <C>                 <C>         
Computed expected tax                      $    744,491        $    584,000
Nondeductible expenses                            2,152               6,000
Benefit of operating loss carryforward         (656,230)           (590,000)
Benefit of AMT tax credit                       (47,675)                  -
State taxes, net                                 23,697                   -
Other                                                 -              55,000
                                       ----------------------------------------
                                           $     66,435        $     55,000
                                       ========================================
</TABLE>

As of January 2, 1999,  the  Company  had tax credit  carryforwards  for Federal
income tax purposes of  approximately  $134,000.  These  carryforwards  will not
expire.

5.    EARNINGS PER SHARE
      ------------------

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

                                                  1998                1997
                                         ---------------------------------------
<S>                                        <C>                   <C>    
Numerator:
   Net income                              $    2,092,295        $    1,661,677

Denominator:
   Denominator for basic earnings per 
     share--weighted average shares             3,004,721             2,941,241
   Effect of dilutive securities:
     Employee stock options                       155,003               145,502
                                         ---------------------------------------
   Denominator for diluted earnings 
     per share--adjusted weighted average
     shares and assumed conversions             3,159,724             3,086,743
                                         =======================================

Basic earnings per share                   $         0.70        $         0.56
                                         =======================================

Diluted earnings per share                 $         0.66        $         0.54
                                         ----------------      ----------------
</TABLE>


<PAGE>

Options to purchase  45,000 shares of common stock at prices  ranging from $4.88
to $5.00 per share were  outstanding  during fiscal 1998, but these options were
not  included in the  computation  of diluted  earnings  per share  because such
options'  exercise  prices were  greater  than the average  market  price of the
common shares and, therefore, the effect would be antidilutive.

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 57,842
shares were  available for future grant as of January 2, 1999. The Company had a
1981  Incentive  Stock Option Plan (the "1981 Plan") that expired in August 1991
and there were outstanding  options to purchase 60,000 shares under this Plan at
January 2, 1999.  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.














<PAGE>


A summary of the  Company's  1981 and 1991  Plans'  stock  option  activity  and
related information for fiscal 1998 and 1997 are as follows:

<TABLE>
                                                                                    
                                                      1998                                 1997
                                      ------------------------------------------------------------------------
                                                       Weighted-Average                    Weighted-Average
                                           Options      Exercise Price         Options      Exercise Price
                                      ------------------------------------------------------------------------
<S>                                        <C>             <C>                 <C>              <C>    
Outstanding-beginning of year              258,334         $   1.40            233,334          $  1.30
Granted                                     55,000             4.49             50,000             1.88
Exercised                                  (68,334)             .39             (8,333)            1.44
Canceled                                   (20,000)            2.38            (16,667)            1.44
                                      ------------------------------------------------------------------------

Outstanding-end of year                    225,000         $   2.37            258,334          $  1.40
                                      ========================================================================

Exercisable at end of year                 102,500         $   1.28            148,334          $   .70

Weighted-average fair value of
   options granted during the year                         $   3.03                             $  1.31
</TABLE>

Exercise  prices for  options  outstanding  under the two Plans as of January 2,
1999 ranged from $.38 to $5.00. The weighted-average  remaining contractual life
of those  options is 3.0 years.  A summary of the  outstanding  and  exercisable
options at January 2, 1999, segregated by exercise price ranges, is as follows:
<TABLE>

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

<S>                       <C>                <C>                <C>              <C>                <C>  
 $ .38                    60,000             $ .38              1.8              60,000             $ .38
 $1.63 - $2.13            50,000              1.88              3.5              12,500              1.88
 $2.30 - $3.07            70,000              2.76              2.0              30,000              2.84
 $4.88 - $5.00            45,000              4.97              4.4                   -                 -
                   ---------------                                        ---------------
                         225,000             $2.37              3.0             102,500             $1.28
                   ===============                                        ===============

</TABLE>


<PAGE>
                                              

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  2,  1999,  of which  options to  purchase  100,000  shares at per share
exercise  prices that range from $.19 to $2.69 had been granted  (80,000  shares
had been  granted as January 3, 1998).  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  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
price equaling the fair value of the Company's stock on such date. At January 2,
1999 and  January 3, 1998,  options to purchase an  aggregate  of 20,000  shares
(40,000  shares  total) were  granted to the four outside  directors  under this
amendment.  First Options  granted under the  Directors'  Plan vest on the first
anniversary of the grant date and become exercisable  cumulatively on the first,
second and third  anniversaries of the grant date.  Subsequent  Options vest and
become  fully  exercisable  on the  first  anniversary  of the grant  date.  The
Directors' Plan expires February 2001.

A summary of the  Company's  Directors'  Plan stock option  activity and related
information for fiscal 1998 and 1997 are as follows:
<TABLE>

                                                     1998                                1997
                                      ------------------------------------------------------------------------
                                                       Weighted-Average                    Weighted-Average
                                         Options        Exercise Price       Options        Exercise Price
                                      ------------------------------------------------------------------------
<S>                                         <C>         <C>                     <C>         <C>      
Outstanding-beginning of year               65,000      $    0.83               45,000      $    0.19
Granted                                     20,000           2.69               20,000           2.28
Exercised                                  (30,000)          0.19                    -              -
                                      ------------------------------------------------------------------------

Outstanding-end of year                     55,000      $    1.86               65,000      $    0.83
                                      ========================================================================

Exercisable at end of year                  35,000      $    1.38               45,000      $    0.19



Weighted-average fair value of
  options granted during the year                       $    1.96                           $    1.70
</TABLE>

                                     
<PAGE>



Exercise  prices per share for options  outstanding as of January 2, 1999 ranged
from $.19 to $2.69.  The  weighted-average  remaining  contractual life of those
options is 7.5 years. A summary of the outstanding  and  exercisable  directors'
options at January 2, 1999, segregated by exercise price ranges, is as follows:
<TABLE>

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

     <S>            <C>                      <C>              <C>         <C>                       <C>           
     $0.19                15,000             $0.19              2.1              15,000             $0.19
     $2.28                20,000              2.28              9.0              20,000              2.28
     $2.69                20,000              2.69             10.0                   -                 -
                   ---------------                                        ---------------
                          55,000             $1.86              7.5              35,000             $1.38
                   ===============                                        ===============
</TABLE>

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.

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 1998
and 1997,  respectively:  risk-free  interest  rates of 4.8% and 5.6%,  dividend
yields of 0% and 0%;  volatility  factors of the  expected  market  price of the
Company's common stock of .863 and .889, and a weighted-average expected life of
the options of 4.7 and 4.6 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
  
<PAGE>



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:
<TABLE>

                                              1998               1997
                                      ----------------------------------------

<S>                                     <C>                 <C>           
Net income as reported                  $    2,092,295      $    1,661,677
                                      ========================================

Pro forma net income                    $    2,039,444      $    1,640,060
                                      ========================================

Earnings per share as reported:
     Basic                              $        0.70       $        0.56
                                      ========================================
     Diluted                            $        0.66       $        0.54
                                      ========================================

   Pro forma earnings per share:
     Basic                              $        0.68       $        0.56
                                      ========================================
     Diluted                            $        0.65       $        0.53
                                      ========================================
</TABLE>

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 2, 1999 and January 3, 1998, the Board authorized
$225,000  and  $200,000,   respectively,  in  profit  sharing  distributions  to
employees,  which  amount is  included  in  accrued  employee  compensation  and
benefits in the accompanying balance sheet.



<PAGE>

9.   LONG-TERM DEBT
     --------------

In October  1998,  the  Company  renewed an  existing  revolving  business  loan
agreement  (the "Loan  Agreement")  with a bank under  which it may borrow up to
$1,000,000  at the bank's  prime rate  (aggregating  7.75% at January 2,  1999).
Interest is payable monthly up to the maturity date, May 15, 2000, at which time
all  unpaid   principal  and  interest   become  due.  The  Loan   Agreement  is
collateralized  by the  Company's  inventory and accounts  receivable.  The Loan
Agreement imposes certain limitations on the payment of dividends and incurrence
of additional  indebtedness.  At January 2, 1999, 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 a piece  of  equipment  with a net  book  value  of
approximately  $106,000.  The Note imposes certain limitations on the incurrence
of additional  indebtedness.  At January 2, 1999, the Company had an outstanding
balance of $101,049 under this Note.

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


         1999                       $     48,313
         2000                             52,736
                                  -------------------
                                    $    101,049
                                  ===================

10.  COMMITMENTS AND CONTINGENCIES
     -----------------------------

LEASES

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 $121,307
(net of  accumulated  amortization  of $36,919) and $220,958 (net of accumulated
amortization  of $39,237) at January 2, 1999 and January 3, 1998,  respectively.
These capital leases are secured by the related equipment.

<PAGE>



The aggregate  future minimum lease payments  under  non-cancelable  capital and
operating leases are as follows at January 2, 1999:
<TABLE>

                                              Capital        Operating Leases
                                              Leases
                                        ---------------------------------------
<S>                                        <C>                <C>          
1999                                       $    59,823        $     180,000
2000                                            39,992              174,000
2001                                                 -              175,000
2002                                                 -              180,000
2003                                                 -              186,000
Thereafter                                           -              288,000
                                        ---------------------------------------
Total minimum payments                         $99,815        $   1,183,000
                                                            ===================
Less amount representing interest               (7,256)
                                        --------------------
Present value of minimum lease payments         92,559
Less current obligations                       (53,850)
                                        ====================
Long-term obligations                      $    38,709
                                        ====================
</TABLE>

The  Company's   total  rental  expense   charged  to  operations   amounted  to
approximately $287,000 and $281,000 in fiscal 1998 and 1997, respectively.

LEGAL PROCEEDINGS

     In the course of  business,  the Company  occasionally  receives  inquiries
relating to various legal matters.  In the opinion of  management, any liability
resulting  from such  inquiries  will not have a material  adverse effect on the
Company's financial position or results of operations.

11.    SUBSEQUENT EVENT
       ----------------

On  February  25,  1999,  the Company  was  notified  by its  largest  customer,
Chesapeake  Sciences  Corp.,  to place all open orders on an  indefinite  "hold"
status,  citing  continuing  depressed crude oil prices and an over-abundance of
the world oil supply.  Although no orders have been cancelled at this point,  it
cannot be  determined  when  or if shipments  to  Chesapeake  will  resume.  The
Company  currently does not  anticipate any further  shipments to Chesapeake for
the  remainder of 1999.  At January 2, 1999,  approximately  $1.4 million of the
Company's total inventory balance related to the Chesapeake  program.  While the
Company may have certain rights to recover costs in the event of an

<PAGE>



outright  termination of these orders,  there is currently no assurance that all
inventory  costs can or will be  recovered.  The  potential  for a write-down of
inventory  exists  in the  event of the  future  termination  of  these  orders.
Management  of the Company  believes  that a recovery of the world oil market is
likely, that orders with Chesapeake will resume, and that no reserve against the
related inventory is appropriate as of January 2, 1999.



<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 2, 1999 and  January  3, 1998,  and the  related  statements  of income,
shareholders'  equity,  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 2, 1999 and January 3, 1998,  and the results of its  operations and its
cash  flows for the years  then  ended in  conformity  with  generally  accepted
accounting principles.

                                                           /s/ Ernst & Young LLP
Reno, Nevada
January 28, 1999,  except for Note 11,
as to which the date is February 25, 1999








<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 28, 1999,
except for Note 11 as to which the date is February 25, 1999 with respect to the
financial statements of Hytek Microsystems, Inc.

                                                            /s/Ernst & Young LLP


Reno, Nevada
March 30, 1999

























                                                                     

<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 19, 1999


                                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  or  her   attorney-in-fact,   each  with  the  power  of
substitution,  for him or her 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 or her 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 19, 1999
      --------------------                                                      
     Charles S. Byrne               Executive Officer,
                                    Director



     /s/ Sally B. Chapman           Chief Financial Officer       March 19, 1999
     --------------------                                          
     Sally B. Chapman               (Principal financial and
                                    accounting officer)











<PAGE>
                                    





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



     /s/ Robert Boschert                   Director               March 23, 1999
     -------------------                                                        
     Robert Boschert


     /s/ Edward W. Moose                   Director               March 23, 1999
     -------------------
     Edward W. Moose


     /s/ Edward Y. Tang                    Director               March 23, 1999
     ------------------                                                        
     Edward Y. Tang


     /s/ Shou-Chen Yih                     Director               March 23, 1999
     -----------------                    
     Shou-Chen Yih







<PAGE>
                            HYTEK MICROSYSTEMS, INC.

                          Annual Report on Form 10-KSB
                    for the fiscal year ended January 2, 1999

                                  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               Composite Article of Incorporation, as amended
                    through June 28, 1998.

3.4 (9)           Amended and Restated Bylaws, as amended
                    through July 27, 1992.

4.1               Reference Exhibits 3.1, 3.2, 3.3 and 3.4.

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

10.1a (8) (*)     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 (10) (*)     Form of Amendment to Option Agreements of
                    Charles S. Byrne, Jay L. Kimball and Jonathan B.
                    Presnell.
 
10.3a (11) (*)    1991 Stock Option Plan, as amended
                    February 7, 1997.
 
10.3b (8)  (*)    Form of Agreement used under the 1991
                    Stock Option Plan.


 

                           (Footnotes at end of index)

<PAGE>



10.4  (12) (*)    1991 Directors' Stock Option Plan as amended
                    September 11, 1997, and form of Agreement thereunder.

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  (13)        Line of Credit Agreement dated October 23,
                    1998 between Hytek Microsystems, Inc. and
                    SierraWest Bank.

10.9              Lease dated March 12, 1990 for the facility at
                    400 Hot Springs Road, Carson City, Nevada.

10.10             Fiscal 1998 Incentive Compensation Agreement
                    with Charles S. Byrne.

10.11             Fiscal 1998 Incentive Compensation Agreement
                    with Jonathan B. Presnell.

10.12 (12)        Promissory Note and line of credit agreement 
                    dated October 14, 1997 between Hytek Microsystems,
                    Inc. and SierraWest Bank.
 
13.1              President's Letter to Shareholders dated
                    April 2, 1999, which together with
                    this Form 10-KSB comprises the Registrant's
                    1998 Annual Report to Shareholders.
 
21.1                The Registrant has no subsidiaries.

23.1              Consent of Independent Auditors
                    (see page F- 22).

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

27.1              Financial Data Schedule.
                                                              
<PAGE>



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.
                                                     
(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.

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

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

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

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

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

(13)              Incorporated by reference to the Exhibit filed with the 
                  Quarterly Report on Form 10-QSB for the quarter ended 
                  October 3, 1998.

(*)               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.


<PAGE>

                                                                     Exhibit 3.3


                      COMPOSITE ARTICLES OF INCORPORATION
                                       OF
                            HYTEK MICROSYSTEMS, INC.
                            A California Corporation
                       (As amended through June 28, 1988)

     ONE:     This corporation elects to be governed by all of the provisions 
of the General  Corporation Law effective January 1, 1977, not otherwise 
applicable to it under Chapter 23 thereof.

     TWO:     The name of this corporation is HYTEK MICROSYSTEMS, INC.

     THREE:     The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General  Corporation
Law of California other than the banking  business,  the trust company business,
or the practice of a profession  permitted to be  incorporated by the California
Corporations Code.

     FOUR:     (a)  This corporation is authorized to issue two classes of 
shares to be designated respectively "Preferred Stock" and "Common Stock". The 
number of shares of Preferred Stock authorized is 250,000.  The number of shares
of Common Stock authorized is 7,500,000.

               (b)  The Preferred Stock may be issued from time to time in one 
or more series. The Board of Directors is authorized to fix the number of shares
of any series of Preferred  Stock and to determine the designation of any such 
series.  The Board  of Directors is also authorized to determine or alter the  
rights, preferences, privileges, and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and, within the limits and 
restrictions stated in any resolution or resolutions of the Board of Directors  
originally fixing the number of shares constituting any series, to increase or 
decrease (but not below the number of shares of such series then  outstanding) 
the number of shares of any such series subsequent to the issue of shares of 
that series.

     FIVE:     (a)  Limitation  of Directors'  Liability.  The  liability of the
directors of this corporation for monetary damages shall be eliminated to the 
fullest extent permissible under California law.

               (b)  Indemnification of Corporate  Agents.  This  corporation  is
authorized to provide indemnification of agents of the corporation (as defined 
in Section 317 of the California General Corporation Law), through bylaw 
provisions, through agreements  with its  agents,  by vote  of its  shareholders
or disinterested directors or otherwise, in excess of the indemnification  
otherwise permitted by said Section 317 for said agents to the fullest extent 
permissible under California law, subject only to the applicable limitations set
forth in Section 204 of the California General Corporation Law with respect to 
actions for breach of duty to this corporation and its shareholders.  

            (c) Repeal or Modification.  Any repeal or modification of this 
Article FIVE or any provision hereof shall not adversely affect any right of  
indemnification or limitation of liability of an agent of this corporation  
relating to acts or omissions occurring prior to such repeal or modification.

 

<PAGE>
                                                                   EXHIBIT 10.10

              Incentive Compensation Agreement for Charles S. Byrne

                   for the Fiscal Year Ending January 2, 1999


Upon completion of the audit for the fiscal year 1998 and  certification  of the
Company's  financial  statements  for the  year,  Hytek  will pay the  following
incentive to Charles S. Byrne based upon achievement of the following criteria:
<TABLE>

Criteria                                                       Maximum Incentive
--------                                                       -----------------
<S>                                                                    <C>   

1.  Achieve 1998  original forecast pre-tax profit
      of $2,542,000:  $10,000

    Achieve additional $458,000 pre-tax profit for
      1998 (total $3,000,000): additional $5,000                       $15,000

2.  Achieve additional  revenue over the 1998 forecast 
      ($12,035K) of $3,000,000 payable in increments:
         Additional $1,500,000 = $3,000
         Additional $3,000,000 = $6,000                                 $6,000

3.  Thorough additional efforts in working with the
      financial community, achieve a year-end stock
      price of $7.00 per share or greater.                              $6,000
                                                                       -------

                  Total Potential Incentive                            $27,000
</TABLE>

Each  criteria  above is a  separate  item and will be  awarded  if such item is
achieved.  This incentive program is authorized by the Compensation Committee of
the Board of Directors as of May 15, 1998,  and is duly  recorded in the minutes
of such meeting.



/s/ Charles S. Byrne
--------------------
Secretary



<PAGE>
                                                                   EXHIBIT 10.11



              Incentive Compensation Agreement for Jon B. Presnell

                   for the Fiscal Year Ending January 2, 1999


Upon completion of the audit for the fiscal year 1998 and  certification  of the
Company's  financial  statements  for the  year,  Hytek  will pay the  following
incentive to Jon B. Presnell based upon achievement of the following criteria:
<TABLE>

Criteria                                                      Maximum Incentive
--------                                                      -----------------
<S>                                                                   <C>   
1.  Achieve 1998 forecast confident bookings
      of $9,300,000.                                                   $2,500

2.  Book an additional $5,000,000 in business over 
      the forecast confident bookings. 
      Payable in increments:
         Additional $1,500,000 = $2,500
         Additional $3,000,000 = $5,000
         Additional $5,000,000 = $10,000                              $10,000


3.  Achieve 1998 forecast sales of $12,035,000.                        $5,000

4.  Achieve 1998 forecast gross margin of
      $4,597,000.                                                      $2,500

5.  Achieve additional 1998 sales of $3,000,000.
         Additional $1,500,000 = $2,000
         Additional $3,000,000 = $4,000                                $4,000
                                                                       ------

                  Total Potential Incentive                           $24,000
</TABLE>

Each  criteria  above is a  separate  item and will be  awarded  if such item is
achieved.  This incentive program is authorized by the Compensation Committee of
the Board of Directors as of May 15, 1998, an is duly recorded in the minutes of
such meeting.


By:  /s/ Charles S. Byrne
     --------------------
     Charles S. Byrne, C.E.O.

<PAGE>
                                                                    EXHIBIT 13.1

                             Message To Shareholders

Dear Fellow Shareholders:                                          April 2, 1999

1998 was another year of growth in earnings  and revenues for our Company.  This
growth was fueled by increasing  customer demand during the year. To accommodate
this growth,  the Company  expanded its  employee  base and acquired  additional
production equipment.

Unfortunately,  and as previously  announced,  this trend will not be continuing
during 1999. In February 1999,  Chesapeake Sciences Corp., the Company's largest
customer, placed all current orders on an "indefinite hold" status. As a result,
the Company expects a severe decline in revenues for 1999 and  anticipates  that
operating  results  will  be  essentially  break-even.  In  addition,  as a cost
reduction measure,  the Company laid off 30 employees in February 1999, reducing
the work-force to 90 employees.

FINANCIAL PERFORMANCE

For the fourth quarter of 1998,  Hytek reported a net loss of $169,000, or $0.06
per share, on lower than originally  anticipated revenues of $2.2 million.  This
compares  with net income of $950,000,  or $0.31 per share,  on revenues of $3.2
million for the same period last year.

For the year,  net income was $2.1 million,  or $0.66 per share,  on revenues of
$12.5 million, as compared to net income of $1.7 million, or $0.54 per share, on
revenues  of $9.0  million  for the prior  year ended  January 3, 1998.  The 39%
increase in revenue over the prior year is primarily  the result of an increased
level of shipments of geophysical  exploration  circuits to Chesapeake  Sciences
Corp.  that  accounted  for 64% of total  revenues in 1998 as compared to 53% of
1997 revenues.

MARKETS AND CUSTOMERS

As noted above, the geophysical  exploration market (Chesapeake  Sciences Corp.)
represented the largest percentage of the Company's revenues during 1998, as has
been the case for the past several years.  While there was significant growth in
this market  during 1998,  the current low price of crude oil combined  with the
current  "glut" in  world-wide  crude oil  supplies has  effectively  halted new
exploration  efforts,  resulting in  Chesapeake's  recent  action.  While we are
unable to predict or forecast a reversal of the  current  slump in this  market,
there is historically  little doubt that this situation will ultimately reverse.
When that occurs,  we believe that Hytek will be well  positioned to participate
in the geophysical exploration market again.

During  1998,  revenues  related to  military,  aerospace  or  government-funded
programs  accounted  for  approximately  29% of  revenues  as compared to 36% of
revenues  during 1997.  While lower as a percentage  of total  revenues in 1998,
this market sector had a small increase in absolute  dollar revenue for the year
and resulted in several new  customers,  which bodes well for  potential  future
growth.  We will continue to maintain an active and aggressive  presence in this
market,  particularly  in light of the current  potential  for increases in U.S.
Government defense spending.

Further,  during 1998,  the Company began  discussions,  and provided  prototype
circuits, to a manufacturer of implantable medical devices. We have subsequently

<PAGE>

received an initial  production  release for this device.  In  addition,  we are
currently in the qualification process with a second medical market manufacturer
and anticipate production orders from this potential customer during the ensuing
year.  The Company  intends to  concentrate a  significant  portion of its sales
efforts  toward further  penetration  of the medical device and  instrumentation
market.

TECHNOLOGY

Traditionally,  the  Company's  business  has  been  based on a  single,  proven
technology:  thick-film substrate technology. During 1998, applications from new
military/aerospace  customers  brought  a new  technology  into  the  fold:  Low
Temperature   Co-fired  Ceramic  substrates  (LTCC).  LTCC  technology  provides
advantages  over  thick-film  technology in  applications  where higher  circuit
density  and  complexity  are  critical to  performance  or required by customer
design  criteria.  This  additional  technology will allow the Company to pursue
opportunities   that  were  previously   beyond  the  reach  of  our  thick-film
capabilities.   The  Company  will   continue  to  evaluate  new  and  different
technologies in an effort to expand our ability to satisfy diversified  customer
requirements.

FOCUS ON EXPANDING CUSTOMER AND PRODUCT BASE

As we pass from a year of growth to a year of decline in our largest market,  we
must focus our energy and efforts on reducing our  dependency  on a single large
customer or market.  Our sales staff will be  concentrating  on  developing  new
customers  and any  available  resources  will be allocated  to this effort.  In
addition, we will continue to explore other vehicles that could broaden our base
and  enhance  our  position  in the  market,  such  as  strategic  alliances  or
acquisition opportunities.


We sincerely  appreciate the support of our  shareholders  and our customers and
thank our employees for their continued hard work, loyalty and commitment to the
Company.  We will keep you advised of new developments and our progress over the
ensuing year.


                                           Sincerely yours,


                                           Charles S. (Chuck)  Byrne
                                           President and Chief Executive Officer