Exhibit 13

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

  1998 compared to 1997

     Results of  operations  reflect an increase in net sales of  $1,443,000  or
7.7% and a decrease in operating income (before the 1998 restructuring charge of
$510,000) of $1,175,000 or 58.9%.  Net income of $340,000  (after the effects of
the  restructuring  charge of $327,000 for 1998)  decreased  $1,063,000 or 75.8%
compared to net income of  $1,402,000  in 1997.  Diluted net income per share of
$.19 (after the effects of the restructuring  charge of $.18 per share for 1998)
decreased  $.60 per share or 76.0%  compared  to diluted net income per share of
$.79 in the prior year.  The  restructuring  charge  consisted of severance  and
early retirement benefits to fourteen employees.

     Net foreign sales  amounted to $5,114,000 or 25.4% of net sales, a decrease
of $617,000 or 10.8% compared to the prior year net foreign sales of $5,731,000.
Net domestic sales amounted to $14,988,000 or 74.6% of net sales, an increase of
$2,060,000  or  15.9%   compared  to  the  prior  year  net  domestic  sales  of
$12,928,000.  The overall  net sales  increase  was  partially  attributable  to
increased  shipments against a firm order backlog where customers' order release
dates coincided with the Company's  production and shipment  schedules,  process
improvement    initiatives,    customer   service   focus   and   reduction   of
total-cycle-time to market.

     Orders decreased $3,674,000 or 18.2% to $16,512,000 in 1998 and the backlog
of firm unfilled orders decreased  $3,590,000 or 36.8% to $6,168,000 at year-end
1998.  Softness in core business orders resulted from the deferment of purchases
by major satellite and defense customers due to delays in certain programs.  The
Company  believes  that many of the satellite  constellation  programs that have
been delayed may resume and translate into orders during 1999.  While this trend
in order delays is not expected to be long-term, an extended continuation in the
delay of or reduction in new orders for Company  products  could have a material
financial impact on future sales and earnings. Customer requests for design work
are on the increase and are currently under development  utilizing the Company's
proprietary Multi-Mix(TM) Microtechnology.  This technology provides greater per
unit  content  and enables the  Company's  entry into new markets for  increased
order opportunities.

     Cost of sales  increased  $1,600,000 or 16.1%.  The primary  reason for the
increase was the effect of the increase in sales.  Cost of sales as a percentage
of net  sales  increased  4.1% to 57.5%  for 1998.  These  increases  are due to
compensation   increases  for  the  hourly,  certain  salaried  engineering  and
supervisory  workforce effective in mid-1998,  an increase in levels of overtime
worked, additional manufacturing personnel hired for the Costa Rica facility and
additional manufacturing overhead expenses. Some of these costs were incurred in
order to further  efforts on  improving  delivery  performance  by reducing  the
number of late ship days in the backlog.

     Selling,  general  and  administrative  expenses  of  $6,681,000  increased
$520,000  or 8.5% and as a  percentage  of net  sales  increased  .2% to  33.2%.
Increases in selling  costs were  primarily  attributable  to  additional  sales
commissions  due to the  increase in sales  revenue.  The  opening,  support and
staffing of a European sales office added to higher  selling costs.  General and
administrative expenses partially increased due to compensation costs related to
the hiring of  additional  administrative  and  marketing  personnel  and higher
compensation  expenses  resulting  from the 1997  mid-year  merit  increases  to
certain  employees.  Further  increases in these expenses were related to market
development research and associated new product launch costs.

     Research and development expenses for new products,  primarily the recently
introduced Multi-Mix(TM) Microtechnology,  were $1,053,000 for 1998, an increase
of  $497,000  or 89.5%  compared to the prior  year.  Research  and  development
expenses  in prior  years  have been  reclassified  to  conform  to the  current
presentation.

                                      -1-
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

1997 Compared to 1996:

     Results of operations reflect increases in net sales of $4,506,000 or 31.8%
and operating  income  (before the 1996  restructuring  charge) of $1,202,000 or
151%.  Net income of  $1,402,000  compares to a net loss of  $297,000  after the
restructuring  charge  reported in 1996 and diluted net income of $.87 per share
compares to diluted net loss of $.19 per share in the prior year.

     Net foreign sales amounted to $5,731,000 or 30.7% of net sales, an increase
of $1,341,000 or 30.6% compared to prior year's net foreign sales of $4,390,000.
Net domestic sales amounted to $12,928,000 or 69.3% of net sales, an increase of
$3,165,000 or 32.4%  compared to prior year's net domestic  sales of $9,763,000.
The increases in net sales were  attributable  to increased  shipments of orders
from a higher order backlog, process improvement  initiatives,  customer service
focus and reduction of total-cycle-time to market.

     Orders increased $3,457,000 or 20.7% to $20,186,000 in 1997 and the backlog
of firm unfilled orders increased $1,527,000 or 18.6% to $9,758,000 at year-end.

     As a  result  of the  increases  in net  sales,  cost  of  sales  increased
$1,707,000 or 20.7%.  Cost of sales as a percentage of net sales  decreased 4.9%
to 53.3% for 1997.  The decrease in cost of sales as a  percentage  of net sales
when  compared  to the  prior  year is the  result  of  volume-related  improved
efficiencies in the  manufacturing  cycle, a higher  concentration of productive
labor utilized in completing  customer orders and a reduction of  non-productive
labor associated with training and instruction  programs  instituted  during the
prior year.

     Selling, general and administrative expenses increased $1,675,000 or 33.2%,
and as a percentage of net sales  increased  .4% to 36.0%.  Increases in selling
costs were related to higher sales  commissions due to increased sales revenues.
General  and  administrative  expenses  partially  increased  due to  additional
compensation  expenses  related  to  the  hiring  of  additional  administrative
personnel and higher  compensation  expenses resulting from last year's mid-year
merit increases to certain employees. Certain transitional costs associated with
further  restructuring and re-engineering  also increased  selling,  general and
administrative expenses.

     Research and development  expenses for new products were $556,000 for 1997,
an increase of $309,000 or 126% from prior year. The Company settled  litigation
relating  to a 1992  acquisition  claim and  obtained a  worldwide  release  for
current and any future  claims of any nature  arising  from the  utilization  of
acquired  technology.  The  cost  of the  settlement,  including  expenses,  was
$122,000 and was charged to operations this year.

Liquidity and Capital Resources

     The Company had liquid  resources  comprised  of cash and cash  equivalents
(including investments in available-for-sale  securities) totaling approximately
$1,800,000  compared to approximately  $2,400,000 in 1997. The Company's working
capital was approximately $7,400,000 and its current ratio was 3.5 at the end of
1998 compared to $8,700,000 and 4.7, respectively, in 1997.

     The Company's  operating  activities  generated cash flows of $2,241,000 in
1998  compared  to  $1,621,000  in 1997.  Primary  reasons  for the  increase in
operating cash flows in 1998 are a decrease in inventories of $1,407,000,  which
was  partially  offset by an increase in  accounts  receivable  of $664,000 as a
result of higher net sales. The Company made net investments in property,  plant
and  equipment of  $3,100,000  in 1998  compared to  $1,800,000  in 1997.  These
capital   expenditures   are  related  to  new  production  and  test  equipment
capabilities   in  connection   with  the   introduction  of  new  products  and
enhancements to existing products.

     The Company paid cash  dividends of $459,000 in 1997 at the quarterly  rate
of $.091  per  share  (previously  $.10 per  share,  adjusted  for the 10% stock
dividend).  The Board of  Directors  (the  "Board")  decided to  eliminate  cash
dividends on August 28, 1997. The Board approved the  declaration of a 10% stock
dividend to  stockholders  of record on May 15, 1998,  which was  distributed on
June 5, 1998 along with payments made for fractional shares.

                                      -2-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

     The Company has entered  into a $7,000,000  revolving  credit and term loan
agreement with Summit Bank, at one-half  percent below the bank's floating prime
rate. Up to $2,500,000 of borrowings may be used for capital  expenditures under
the term loan.  The full line was  available  at year-end  for future  borrowing
needs of the Company for working  capital and general  corporate  purposes.  The
Company  subsequently  borrowed $4,500,000 after year-end in connection with the
acquisition of Filtran Microcircuits Inc. on February 25, 1999.                 

     Management  believes that with the liquid  resources and the remaining line
of credit  available,  along  with cash  flows  expected  to be  generated  from
operations,   the  Company  will  have   sufficient   resources   for  currently
contemplated operations in 1999.

     The Company's  manufacturing  subsidiary in Costa Rica began  operations in
the second  half of 1996.  In January  1998,  the  subsidiary  moved to a larger
17,000 square-foot facility and during 1998 has obtained ISO 9002 certification.

     The  Company's  capital   expenditures  for  new  projects  and  production
equipment are anticipated to exceed its depreciation  and amortization  expenses
in 1999.  The  Company  has issued  purchase  order  commitments  to  processing
equipment  manufacturing vendors for approximately $300,000 of capital equipment
and building  improvements.  The Company anticipates that such equipment will be
purchased and become  operational  and building  improvements  will be completed
during 1999.

     The Company was  authorized  by the Board on November 1, 1996 to repurchase
up to 110,000 shares  (adjusted for the 10% stock dividend) of its common stock,
from  time  to  time,  depending  on  market  conditions,  and  has  repurchased
approximately  65,000 shares to date under such authorization.  There were 8,000
shares of common stock  repurchased  during  fiscal 1998 and there were no share
repurchases  during 1997.  In 1999,  the Company  repurchased  53,000  shares of
common stock at a cost of $329,000.

     Periodically,  the Company  explores the  possibility of acquiring  similar
manufacturers of electronic  devices or companies in related fields.  Management
believes that any such  acquisitions and business  operation  expansion could be
financed  through  its liquid  and  capital  resources  currently  available  as
previously  discussed and/or through additional  borrowing or issuance of equity
or debt securities.  The additional debt from any acquisitions,  if consummated,
would  increase  the  Company's  debt-to-equity  ratio  and such  debt or equity
securities  might,  at least in the near  term,  have a  dilutive  effect on net
income per share.  In February  1999, the Company  completed the  acquisition of
Filtran Microcircuits Inc. for approximately $4,700,000, see Note 15 of Notes to
Financial Statements.

Year 2000 Readiness Disclosure

     The Company  recognizes the need to assure that its operations  will not be
adversely impacted by Year 2000 software failures.  The impact on operations has
been  evaluated  and plans have been  formulated  to ensure  complete  Year 2000
compliance  before the end of 1999. The Company's  manufactured  products do not
contain  software  of any  kind  and  therefore  are not  subject  to Year  2000
problems. All of the Company's existing mission-critical  manufacturing software
and financial computer applications were made Year 2000 compliant as of December
31, 1998. Key suppliers have been contacted to obtain their Year 2000 compliance
status and the Company  anticipates  that these key suppliers  will be Year 2000
compliant  by December  31,  1999.  Software  revisions  have been  performed by
Company  employees  and  the  total  estimated  cost  for  achieving  Year  2000
compliance has not been, and is not anticipated to be, material to the Company's
financial position or results of operations.

     Information Technology Systems

     Without  remediation  certain of the Company's  internally  developed order
processing and manufacturing support applications would not have been capable of
processing  dates beyond  December 31, 1999 properly.  The Company has corrected
the  programs,  and all business  order  processing  and  manufacturing  support
operations  applications should properly process dates beyond December 31, 1999.
The Company does not have any third-party  software  applications  that are date
dependent.  The Company's desktop computers and internal local area network have
been  checked  for Year 2000  problems  and none have been found.  All  programs
purchased  from third  parties are believed to be Year 2000  compliant  based on
certification received from the vendors.

                                      -3-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

     Non-Information Technology Systems

     Internal systems used in the Company's manufacturing processes are not date
dependent.  Other support systems,  such as security and HVAC, have been checked
and will not be adversely affected by dates beyond December 31, 1999. All of the
Company's suppliers have been contacted concerning their Year 2000 readiness and
the  Company  will be  evaluating  their  responses  regarding  their  Year 2000
compliance.

     Costs to Company to Address Year 2000 Issues

     To date,  the Company has  expended  approximately  $60,000  (exclusive  of
internal  personnel  compensation  costs) to perform the program  remediation to
non-compliant  programs  and for  training and other  consulting  services.  The
Company  estimates  remaining  costs to project  completion to be  approximately
$50,000. No other information technology projects have been deferred as a result
of the Year 2000 project as it was scheduled as part of the Company's  strategic
business plan.
 
     Risks of the Company to Year 2000 Issues

     The Company believes that the risks of the Year 2000 problem are moderately
low  because its  products  are not date  dependent  and its  internal  software
applications  are Year 2000  compliant as of December 31, 1998. The Company will
be evaluating the Year 2000 readiness of its key suppliers  throughout  1999 and
will  find  alternate  sources  for  those  suppliers  that  are not  Year  2000
compliant.  The potential  impact and related costs resulting from the Company's
failure to find alternate  suppliers has not been determined.  In addition,  the
Company's  customers  are  evaluating  their  own Year 2000  readiness  and have
circulated  questionnaires  regarding the  Company's  level of  compliance.  The
Company  will  continue  to  update  its  customers  with  respect  to Year 2000
readiness and will monitor the progress of its customers to assess the attendant
risks of inadequate Year 2000 compliance.

     Contingency Plans

     Currently, the Company does not have a contingency plan, since its products
are not date dependent.  In addition, the Company's Year 2000 compliance program
is on schedule and near completion.
 
     Recent Accounting Pronouncements

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 130, Reporting  Comprehensive Income ("SFAS
130"),  and Statement of Financial  Accounting  Standards  No. 131,  Disclosures
about  Segments of an Enterprise  and Related  Information  ("SFAS 131"),  which
could  require  the  Company to make  additional  disclosures  in its  financial
statements no later than for the year ending  January 2, 1999.  SFAS 130 defines
comprehensive  income, which includes items in addition to those reported in the
statement  of  operations,  and requires  disclosures  about the  components  of
comprehensive  income.  SFAS 131  requires  disclosures  for each  segment  of a
business  and the  determination  of  segments  based  on a  company's  internal
management  structure.  The Company's management believes that the provisions of
SFAS 130 are not material to the disclosures made by the Company and a statement
of  comprehensive  income has not been  included in the  consolidated  financial
statements.  The Company's  management  believes that the provisions of SFAS 131
are  not  material  to the  disclosures  made  by  the  Company  and  additional
disclosures have not been made to the consolidated financial statements.

                                      -4-
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

     Forward-Looking Statements

     This Annual Report  contains  statements  relating to future results of the
Company   (including   certain   projections  and  business   trends)  that  are
"forward-looking  statements"  as defined in the Private  Securities  Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of  certain  risks and  uncertainties.  These  risks and  uncertainties
include,  but are not limited to:  general  economic  and  industry  conditions;
slower than anticipated penetration into the satellite  communications,  defense
and wireless  markets;  the risk that the benefits expected from the acquisition
of Filtran Microcircuits Inc. are not realized; competitive products and pricing
pressures;  risks relating to governmental  regulatory actions in communications
and defense programs;  and inventory risks due to technological  innovation,  as
well as other  risks  and  uncertainties,  including  but not  limited  to those
detailed from time to time in the Company's  Securities and Exchange  Commission
filings.  These forward-looking  statements are made only as of the date hereof,
and the Company undertakes no obligation to update or revise the forward-looking
statements, whether as a result of new information, future events or otherwise.
                                      
                                      -5-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME


Years Ended January 2, 1999, January 3, 1998 and December 28, 1996 
<TABLE>
<CAPTION>

                                                           1998          1997           1996
                                                       ----------------------------------------
<S>                                                    <C>           <C>           <C>
Net sales ...........................................  $20,101,835   $18,659,106   $14,152,970   
                                                       ----------------------------------------
Costs and expenses:
   Cost of sales ....................................   11,547,529     9,947,774     8,240,639      
   Selling, general and administrative ..............    6,680,968     6,160,516     4,872,996      
   Research and development .........................    1,052,812       555,671       246,178
   Restructuring charge .............................      510,311                   1,381,709
                                                       ----------------------------------------
                                                        19,791,620    16,663,961    14,741,522     
                                                       ----------------------------------------
Operating income (loss) .............................      310,215     1,995,145      (588,552)     
Interest and other income, net ......................      110,085       162,264        97,300        
                                                       ----------------------------------------
Income (loss) before income taxes ...................      420,300     2,157,409      (491,252)     
Provision (benefit) for income taxes ................       80,000       755,000      (194,000)       
                                                       ----------------------------------------

Net income (loss) ...................................   $  340,300     1,402,409   $  (297,252)    
                                                       ========================================
Net income (loss) per common share-basic ............         $.19          $.83         $(.17)          
Net income (loss) per common share-diluted ..........         $.19          $.79         $(.17)          
                                                       ----------------------------------------
Weighted average number of shares outstanding-basic..    1,766,120     1,693,363     1,704,140     
Weighted average number of shares outstanding-diluted    1,805,212     1,780,173     1,733,067     
                                                       ----------------------------------------

The basic and diluted weighted average number of shares outstanding and net
income per share  information for all prior reporting periods have been restated
to reflect the effects of the 10% stock dividend which became  effective 
June 5, 1998.

</TABLE>
See accompanying notes.


                                       -6-
<PAGE>

CONSOLIDATED BALANCE SHEETS

January 2, 1999 and January 3, 1998
<TABLE>
<CAPTION>
                                                                                              1998            1997
                                                                                           ---------------------------
Assets

<S>                                                                                        <C>            <C>
Current assets:
   Cash and cash equivalents ..........................................................    $ 1,852,666     $ 2,414,725     
   Accounts receivable ................................................................      3,755,131       3,091,287       
   Inventories ........................................................................      3,101,256       4,508,569       
   Income tax refund receivable .......................................................        413,018            - 
   Other current assets ...............................................................        357,906         148,203         
   Deferred tax assets ................................................................        899,600         919,500         
                                                                                           ---------------------------
                  Total current assets ................................................     10,379,577      11,082,284       
                                                                                           ---------------------------
Property, plant and equipment, at cost ................................................     16,539,251      13,856,825      
   Less accumulated depreciation and amortization .....................................     10,322,958       9,663,081       
                                                                                           ---------------------------
Net property, plant and equipment .....................................................      6,216,293       4,193,744       
Deferred tax assets ...................................................................                         65,000          
Other assets ..........................................................................        319,512         113,776          
                                                                                           ---------------------------
                  Total Assets ........................................................    $16,915,382     $15,454,804     
                                                                                           ===========================
Liabilities and Shareholders' Equity

Current liabilities:
   Accounts payable ...................................................................     $1,479,284      $1,141,779     
   Accrued liabilities ................................................................      1,499,917       1,193,669         
   Income taxes payable ...............................................................           -             45,825
                                                                                           ---------------------------
                  Total current liabilities ...........................................      2,979,201       2,381,273       

Deferred compensation .................................................................        459,322         375,700         
Deferred tax liabilities ..............................................................         54,600            -
                                                                                           ---------------------------
                  Total liabilities ...................................................      3,493,123       2,756,973       
                                                                                           ---------------------------

Commitments and contingencies
Shareholders' equity:
   Common stock, par value $.50 per share;
      5,000,000 shares authorized; 2,690,405 and 2,651,131 shares issued ....... ......      1,345,203       1,325,566       
   Additional paid-in capital .........................................................     11,220,873       9,709,244       
   Retained earnings ..................................................................      8,950,055      10,995,086      
                                                                                           ---------------------------
                                                                                            21,516,131      22,029,896      

    Less treasury stock, at cost - 902,549 and 1,074,839 shares .......................     (7,733,872)     (9,227,065)
    Less loan to officer-shareholder ..................................................       (360,000)       (105,000)
                                                                                           ---------------------------
                  Total shareholders' equity ..........................................     13,422,259      12,697,831      
                                                                                           ---------------------------
                  Total Liabilities and Shareholders' Equity ..........................    $16,915,382     $15,454,804     
                                                                                           ===========================
</TABLE>

See accompanying notes.


                                       -7-
<PAGE>

<TABLE>
<CAPTION>


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Years Ended January 2, 1999, January 3, 1998 and  December 28, 1996
                                                                                    
                                                          Additional  Unrealized
                                       Common Stock          paid-in     holding   Retained      Treasury  Stock       Loan to 
                                   Shares        Amount      capital  gain (loss)  earnings     Shares     Amount      Shareholder
-----------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>          <C>         <C>           <C>      <C>          <C>        <C>         <C>
Balance, December 30, 1995         2,549,452   $1,274,726   $8,723,124    $1,900   $10,965,750    920,739  $7,596,617   $
-----------------------------------------------------------------------------------------------------------------------------------
Net (loss)                                                                            (297,252)                                     
Exercise of options                   36,297       18,149      268,206                                     
Tax benefit - stock options*                                    14,000
Effect of change in fair value of
  available-for-sale securities                                            4,262
Cash dividends                                                                        (616,778)   
Purchase of common stock                                                                          154,100   1,630,448
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 28, 1996         2,585,749    1,292,875    9,005,330     6,162    10,051,720  1,074,839   9,227,065
-----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                           1,402,409
Issuance of stock options                                       12,000
Exercise of options                   65,382       32,691      559,914
Tax benefit - stock options*                                   132,000
Effect of change in fair value of                                                                                                   
  available-for-sale securities                                           (6,162)  
Cash dividends                                                                        (459,043)  
Loan to shareholder                                                                                                       105,000  
-----------------------------------------------------------------------------------------------------------------------------------
Balance, January 3, 1998           2,651,131    1,325,566    9,709,244              10,995,086  1,074,839   9,227,065     105,000
-----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                             340,300
Issuance of stock options**                                     53,100
Exercise of options                   39,274       19,637      326,811
Tax benefit - stock options*                                    40,122
Cash dividends                                                                          (1,009)
Stock dividends                                              1,008,288              (2,384,322)  (160,290) (1,376,026)
Purchase of common stock                                                                            8,000      54,525
Sale of common stock                                            83,308                            (20,000)   (171,692)
Loan to shareholder                                                                                                       255,000  
-----------------------------------------------------------------------------------------------------------------------------------
Balance, January 2, 1999           2,690,405   $1,345,203  $11,220,873              $8,950,055    902,549  $7,733,872    $360,000
===================================================================================================================================
</TABLE>

*  Tax benefit resulting from exercise and disposition of stock options and 
   subsequent disposition of stock.

** Compensation expense, net of tax effects, from issuance of stock options at 
   a discount from fair market value.

See accompanying notes.




                                       -8-
<PAGE>



CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996
<TABLE>
<CAPTION>
                                                                     1998            1997            1996
Cash flows from operating activities:                            -------------------------------------------
<S>                                                               <C>            <C>            <C>
    Net income (loss) .......................................     $  340,300     $1,402,409      $ (297,252)     
    Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
        Depreciation and amortization .......................      1,103,142        953,705         890,859         
        Loss (gain) on sale of available-for-sale securities                        (65,006)         17,650
        Write-off of intangible assets ......................                                       244,500
        Deferred compensation ...............................        287,622        238,600         279,100
        Deferred income taxes ...............................         88,000         22,000        (473,000)       
        Stock-based compensation expense ....................         87,400         20,700
        Changes in operating assets and liabilities:
          Income tax refund receivable ......................       (413,018)
          Accounts receivable ...............................       (663,844)    (1,241,245)        523,139        
          Inventories .......................................      1,407,313       (342,751)       (245,808)       
          Other current assets ..............................       (209,703)        98,607        (145,595)         
          Deferred tax assets ...............................         25,313         (8,700)
          Other assets ......................................       (205,736)      (163,336)         (2,178)        
          Accounts payable ..................................        337,505        391,016         364,460          
          Accrued liabilities ...............................        154,748        158,789         (32,397)        
          Income taxes payable ..............................        (45,825)       186,325        (331,797)         
          Deferred compensation .............................        (52,500)       (30,000)
                                                                 -------------------------------------------
Net cash provided by operating activities ...................      2,240,717      1,621,113         791,681       
                                                                 -------------------------------------------
Cash flows from investing activities:
    Purchase of capital assets ..............................     (3,149,336)    (1,805,294)     (1,012,259)      
    Proceeds from sales of capital assets ...................         23,645          5,461           9,071           
    Proceeds from sales and maturities 
      of available-for-sale securities ......................                     1,340,454       2,272,070       
    Purchase of available-for-sale securities ...............                      (146,152)     (1,129,297)
                                                                 -------------------------------------------
Net cash provided by (used in) investing activities .........     (3,125,691)      (605,531)        139,585         
                                                                 -------------------------------------------
Cash flows from financing activities:
    Repurchase of common stock ..............................        (54,525)                    (1,630,448)     
    Proceeds from the issuance of common stock ..............        378,449        592,605         286,355         
    Payments of dividends ...................................         (1,009)      (459,043)       (616,778)       
                                                                 -------------------------------------------
Net cash provided by (used in) financing activities .........        322,915        133,562      (1,960,871)     
                                                                 -------------------------------------------
Net increase (decrease) in cash and cash equivalents ........       (562,059)     1,149,144      (1,029,605)      
Cash and cash equivalents at beginning of year ..............      2,414,725      1,265,581       2,295,186         
                                                                 -------------------------------------------
Cash and cash equivalents at end of year ....................     $1,852,666     $2,414,725      $1,265,581      
                                                                 ===========================================
Supplemental disclosures of cash flow information:
   Cash paid during the year for:
     Income taxes ...........................................     $  390,000     $  675,000      $  712,500      
                                                                 ===========================================

Supplemental disclosure of non-cash investing activity:
     Unrealized holding gain on available-for-sale
       securities, less deferred tax provision of $4,200 
       in 1996 ..............................................                                    $    4,262      
     Loan to officer-shareholder ............................     $  255,000     $  105,000         
                                                                 ===========================================
</TABLE>
See accompanying notes.



                                      -9-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996

1. Summary of significant accounting policies

     Principles of consolidation:  The financial statements include the accounts
of the Company, Industrias Merrimac Incorporada,  S.A. a wholly-owned subsidiary
located  in San Jose,  Costa  Rica,  and  Merrimac  International,  Inc.  FSC, a
wholly-owned  foreign sales  corporation.  All  intercompany  accounts have been
eliminated in consolidation.

     Cash  and  cash  equivalents:  The  Company  considers  all  highly  liquid
securities  with an  original  maturity  of less  than  three  months to be cash
equivalents. The Company maintains cash deposits with banks that at times exceed
applicable  insurance limits. The Company reduces its exposure to credit risk by
maintaining such deposits with high quality financial  institutions.  Because of
their liquidity and short-term maturities, the carrying value of these financial
instruments approximates their fair value.

     Use of estimates:  The  preparation  of financial  statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates and assumptions  that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.

     Contract  revenues:  Sales  and  related  cost of sales  under  fixed-price
contracts are recorded as deliveries are made. Prior to shipment,  manufacturing
costs  incurred on such  contracts  are  recorded as work in process  inventory.
Anticipated future losses on contracts are charged to income when identified.

     Investments:  The  Company  has  adopted the  provisions  of  Statement  of
Financial  Accounting  Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Available-for-sale securities are carried at quoted
market values.  Unrealized gains and losses are included as a separate component
of  shareholders'  equity.  Realized  gains  and  losses,  determined  using the
specific identification method, are included in income in the period incurred.

     Inventories: Inventories are valued at the lower of average cost or market.

     Other  Comprehensive  Income:  The Company has determined the components of
other  comprehensive  income impacting the Company  (unrealized  gains/losses on
available-for-sale  securities,  cumulative translation  adjustments and minimum
pension liability) are not significant.

     Reclassifications:  Certain  prior-year  amounts have been  reclassified to
conform with the 1998 presentations.

                                       -10-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996

     Depreciation:  Depreciation  is  computed  for  financial  purposes  on the
straight-line method, while accelerated methods are used, where applicable,  for
tax  purposes.  The  following  estimated  useful  lives are used for  financial
statement purposes:

Land improvements .....................................                 10 years
Building ..............................................                 25 years
Machinery and equipment ...............................             3 - 10 years
Office equipment, furniture and fixtures...............             5 - 10 years

     Assets under  construction are not depreciated  until the assets are placed
into service. Fully depreciated assets included in property, plant and equipment
at January 2, 1999 and January 3, 1998 amounted to $7,277,000 and  $6,818,000,
respectively.

     Long-lived  assets:  The Company applies Statement of Financial  Accounting
Standards No. 121,  "Accounting for the Impairment of Long-Lived  Assets and for
Long-Lived Assets to be Disposed of." Under Statement No. 121, impairment losses
on  long-lived  assets are  recognized  when events or changes in  circumstances
indicate  that the  undiscounted  cash flows  estimated  to be generated by such
assets are less than their carrying value.  Impairment  losses are then measured
by comparing the fair value of assets to their carrying amounts.

     During 1996, the Company determined that its intangible  assets,  comprised
primarily  of the excess of cost over the fair  value of net assets of  acquired
businesses,  had become  impaired and estimated that they would not generate any
significant cash flows in future periods. Accordingly, the carrying value of the
impaired  assets of $244,500 was written off in  conjunction  with certain other
restructuring charges (see Note 12). Prior to such determination, the intangible
assets  were  being  amortized  on a  straight-line  basis over a period of five
years.  

     Advertising: The Company expenses the cost of advertising and promotions as
incurred.  Advertising  costs  charged  to  operations  were  $213,000  in 1998,
$139,000 in 1997 and $150,000 in 1996.

     Income taxes:  The Company uses the asset and  liability  method to account
for income taxes.  Under this method,  deferred tax assets and  liabilities  are
determined based on temporary  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  differences  are  expected to reverse.
Valuation  allowances  are  established  when  necessary to reduce  deferred tax
assets to the amount expected to be realized.    

                                      -11-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996

     Savings and Investment Plan: The Company's Savings and Investment Plan is a
401(k) plan (the "Plan") that  provides  eligible  employees  with the option to
defer and  invest up to 16% of their  compensation,  with 50% of the first 6% of
such savings  matched by the Company.  The Company's  contributions  to the Plan
were  $167,000  in 1998,  $147,000 in 1997 and  $142,000  in 1996.  The Board of
Directors may also  authorize a  discretionary  amount to be  contributed to the
Plan and allocated to eligible employees  annually.  Amounts  contributed to the
Plan were $200,000 in 1997 and $145,000 in 1996. No contribution amount was 
authorized for 1998.

     Stock-based  compensation:  Effective  December  31,  1995,  the  Financial
Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation,"  which  permitted the Company to elect to account for stock-based
compensation  arising  under its stock  option and stock  subscription  plans by
using a fair value based method or  continuing to measure  compensation  expense
using the  intrinsic  value method  prescribed by  Accounting  Principles  Board
Opinion No. 25,  "Accounting  for Stock  Issued to  Employees."  The Company has
elected to  continue  using the  intrinsic  value  method and make the pro forma
disclosures required by Statement No. 123 of net income and net income per share
as if the fair value based method of  accounting  had been applied (see Note 6).
Since the Company  generally  grants options and rights to subscribe to purchase
shares at or near the market price of the underlying share on the date of grant,
it will not be required to  recognize  compensation  expense as a result of such
grants.

     Research  and  development:   Research  and  development   expenditures  of
$1,053,000  in 1998,  $556,000  in 1997 and  $246,000  in 1996 were  expensed as
incurred.     
     
     Net income (loss) per share: Effective January 3, 1998, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 128, "Earnings
per Share," which  establishes the new standard for computation and presentation
of net income (loss) per common share. Under the new requirements both basic and
diluted net income (loss) per common share are  presented.  All prior period net
income (loss) per common share information have been restated.

     Basic net income  (loss) per common  share is  calculated  by dividing  net
income  (loss),  less  dividends  on  preferred  stock,  if any, by the weighted
average common shares outstanding during the period.

     The calculation of diluted net income (loss) per common share is similar to
that of basic net income (loss) per common share, except that the denominator is
increased to include the number of additional common shares that would have been
outstanding  if  all  potentially  dilutive  common  shares,  principally  those
issuable under stock options,  were issued during the reporting period 
(see Note 6).

     Accounting  period:  The  Company's  fiscal  year is the 52-53 week  period
ending on the Saturday  closest to December 31. The Company has quarterly  dates
that  correspond  with the  Saturday  closest  to the last day of each  calender
quarter and each  quarter  consists of 13 weeks in a 52-week  year.  Every fifth
year,  the  additional  week to make a 53-week  year  (fiscal  year 1997 was the
latest  and fiscal  year 2002 will be the next) is added to the fourth  quarter,
making such quarter consist of 14 weeks.
     

                                      -12-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996

2. Inventories 

Inventories consist of the following:

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

Finished goods .......................           $  607,738           $  778,675
Work in process ......................            1,597,215            2,571,426
Raw materials and
  purchased parts ....................              896,303            1,158,468
                                                 -------------------------------
                                                 $3,101,256           $4,508,569
                                                 ===============================

     Total  inventories  are net of valuation  allowances  for  obsolescence  of
$1,501,000 in 1998 and $1,533,000 in 1997.
                                     
3. Property, plant and equipment

Property, plant and equipment consists of the following:

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

Land and land improvements ...............      $   547,446          $   547,446
Building .................................        2,606,225            2,375,680
Machinery and equipment ..................        8,103,055            6,169,081
Office equipment,                            
   furniture and fixtures ................        5,282,525            4,764,618
                                                  ------------------------------
                                                $16,539,251          $13,856,825
                                                ================================
4. Accrued liabilities

Accrued liabilities consist of the following:
                                                     1998                1997
                                                --------------------------------
Commissions ..........................          $   320,064          $   152,871
Vacation .............................               78,138               82,969
Savings Plan contribution ............                 -                 162,204
Employee compensation ................              176,384              278,382
Warranty reserve .....................              150,000              150,000
Deferred compensation ................              263,500              112,000
Other  ...............................              511,831              255,243
                                                --------------------------------
                                                $ 1,499,917          $ 1,193,669
                                                ================================
5. Line of credit

     The Company has a $7,000,000  unsecured bank line of credit  agreement with
interest  payable at one-half percent below the lending bank's prime rate. There
were no  borrowings  outstanding  under  this  line of credit  agreement  or any
previous line of credit agreements as of the end or during any of the last three
fiscal  years.  (See  Note  15.  Subsequent  events  -  Acquisition  of  Filtran
Microcircuits Inc.)

6. Stock option and stock purchase plans

     Under the Company's 1993 Stock Option Plan,  324,360 shares of common stock
were initially reserved for issuance. The 1993 Option Plan provides for issuance
of qualified and non-qualified  options. The qualified options may not be issued
at less than 100% of the fair  market  value of the  shares on the date of grant
and they may be exercised at any time between one and ten years from the date of
grant.  The  non-qualified  options may be granted to  employees  at an exercise
price  determined by the Stock Option  Committee of the Board of Directors which
may not be less than par value. Such options may become exercisable  immediately
after the grant and/or at any time before the tenth anniversary of the grant.

                                      -13-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996

     The  non-qualified  options may also be granted to non-employee  directors,
provided the option price is at least equal to the closing price on the date the
option is granted.  Such options are exercisable  after the grant or at any time
before the fifth anniversary of the grant.
     
     In 1997,  the Company's  Shareholders  approved a long-term  incentive plan
("LTIP")  pursuant to which 275,000  shares of the  Company's  common stock were
initially  reserved  for grant to  eligible  employees.  The LTIP  provides  for
issuance of Incentive Stock Options,  Non-qualified  Stock Options,  Bonus Stock
and  Discounted  Stock  Options.  Under  this  plan,  the  Company  may grant to
employees  who  hold  positions  no  more  senior  than  mid-level   management,
discounted  stock  options for up to 110,000  shares of common  stock,  with the
option price per share of common  stock to be at least  greater than or equal to
50% of the fair market value of the common  stock on the date of grant.  In 1997
discounted  stock  options  for the  purchase of 6,900  shares  were  granted at
$14.00,  a discount of $3.00  below the fair market  value at the date of grant.
During 1998 discounted options were granted for the purchase of 10,425 shares at
$9.75,  a discount of $1.50 below the fair market value at the date of grant and
7,200 shares at $11.75,  a discount of $2.88 below fair market value at the date
of grant.  As of January 2, 1999  options  for the  purchase  of 100,390  remain
outstanding of which 11,000 are exercisable.

     As of January  2,  1999,  options  for the  purchase  of a total of 254,045
shares  remained  outstanding  and  exercisable  under the 1993 Option Plan, and
options for 12,415  shares were  available for future  grant.  In addition,  (i)
qualified  options  for  the  purchase  of a  total  of  5,458  shares  remained
outstanding and  exercisable  under the Company's 1983 Key Employee Stock Option
Plan  (however,  options  can no longer be granted  under this  plan);  and (ii)
non-qualified  options  for the  purchase of a total of 33,000  shares  remained
outstanding  and  exercisable as a result of grants by the Board of Directors in
1996 to non-employee directors at fair market value on the date of grant.

     A summary  of all stock  option  activity  and  information  related to all
options outstanding follows:
<TABLE>
<CAPTION>

                                          1998                         1997                        1996
------------------------------------------------------------------------------------------------------------------
                                 Weighted                    Weighted                    Weighted
                                  average      Shares         average      Shares         average     Shares
                                 exercise      or price      exercise      or price      exercise     or price
                                    price      per share        price      per share        price     per share
------------------------------------------------------------------------------------------------------------------
<S>                                 <C>      <C>            <C>        <C>               <C>       <C>
Outstanding, 
beginning of year ...............   $11.24        289,212    $ 9.76         181,612      $8.90          140,684       
Stock dividend adjustment .......                  36,558     
Granted   .......................    12.71         96,625     12.32         156,400      10.97           64,500        
Exercised .......................     9.83        (23,800)     9.17         (47,400)      7.82          (20,572)       
Cancelled .......................    10.46         (5,702)     8.67          (1,400)      9.10           (3,000)       
------------------------------------------------------------------------------------------------------------------
Outstanding at end of year.......    10.66        392,893     11.24         289,212       9.76          181,612         
---------------------------------------------------------------------------------------------------------------
Exercisable at end of year.......   $10.40        303,503    $11.24         282,312      $9.76          181,612       
------------------------------------------------------------------------------------------------------------------
Option price range at end of year            $5.00-$13.64              $5.50-$15.00                $5.50-$11.00                 
------------------------------------------------------------------------------------------------------------------
Weighted average estimated fair  
 value of options granted during                                 
 the year........................                   $4.62                     $4.71                       $1.98                     
------------------------------------------------------------------------------------------------------------------

     The approximate  weighted average of the remaining  contractual life of the
outstanding options at January 2, 1999 was 8.7 years.
</TABLE>
                                      -14-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996

6. Stock option and stock purchase plans (continued)

     In 1995, the Company's Shareholders approved a stock purchase plan pursuant
to which 218,320 shares of the Company's  common stock were  initially  reserved
for sale to eligible employees. Under this plan, the Company may grant employees
the right to  subscribe  to purchase  shares of common stock from the Company at
85% of the  market  value on  specified  dates  and pay for the  shares  through
payroll deductions over a period of up to 27 months.
   
A summary of stock purchase plan subscription activity is as follows:
<TABLE>
<CAPTION>

                                       1998                         1997                         1996
----------------------------------------------------------------------------------------------------------------
                            Weighted                      Weighted                    Weighted
                             average          Shares       average          Shares     average            Shares
                            exercise        or price      exercise        or price    exercise          or price
                               price       per share         price      per shares       price         per share
----------------------------------------------------------------------------------------------------------------
<S>                           <C>    <C>                  <C>          <C>             <C>          <C>
Subscribed, 
 beginning of year ........   $9.93        16,056         $8.66          18,274        $7.30             16,932       
Subscribed ................   11.03        16,308         10.09          17,923         9.46             18,649                     
Stock dividend adjustment .                 2,626 
Purchased .................    7.61       (15,474)         8.82         (17,982)        7.98            (15,725)       
Cancelled .................    9.84        (7,710)         9.70          (2,159)        8.70             (1,582)       
----------------------------------------------------------------------------------------------------------------
Subscribed at end of year..  $11.38        11,806         $9.93          16,056        $8.66             18,274       
----------------------------------------------------------------------------------------------------------------
Subscription price 
 range, end of year                  $9.18-$11.03                  $9.46-$10.09                     $6.69-$9.46                  
----------------------------------------------------------------------------------------------------------------
Weighted average estimated  
 fair value of rights granted
 during the year ........                   $4.29                         $3.75                           $3.10
----------------------------------------------------------------------------------------------------------------


                                      -15-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996

6. Stock option and stock purchase plans (continued)

</TABLE>

     The weighted average  remaining  contractual  life of an outstanding  stock
subscription at January 2, 1999 was approximately one year.

     As  explained  in Note 1,  the  Company  has  adopted  the  disclosure-only
provisions of Statement No. 123. Accordingly, no earned or unearned compensation
cost was recognized in the accompanying  consolidated  financial  statements for
stock options and stock  purchase plan  subscription  rights granted in 1997 and
1996, except for the discounted stock options granted in 1998 and 1997.

     The table  below  sets  forth the pro forma net  income  (loss) and the pro
forma  diluted  net  income  (loss)  per  share  information  as  calculated  in
accordance with Statement No. 123.

<TABLE> 
                                                      1998          1997            1996
-------------------------------------------------------------------------------------------
<S>                                               <C>            <C>             <C>
Net income (loss) - as reported  ...............  $340,300       $1,402,409     $(297,252)        
Net income (loss) - pro forma  .................    63,400        1,212,409      (495,252)       
-------------------------------------------------------------------------------------------
Net income (loss) per share - as reported ......      $.19             $.79         $(.17)           
Net income (loss) per share - pro forma ........      $.04             $.68         $(.29)          
-------------------------------------------------------------------------------------------

     The  Statement  No. 123 method of  accounting  has been  applied to options
granted  in  periods  after  December  31,  1994  and the  resulting  pro  forma
compensation expense may not be indicative of pro forma expense in future years.


</TABLE>

     The fair value of each of the options and purchase plan subscription rights
granted  in 1998,  1997 and 1996 was  estimated  on the date of grant  using the
Black-Scholes  option valuation model. For 1998, the following  weighted average
assumptions were utilized: no dividend yield; expected volatility of 35%; a risk
free  interest rate of 5.5%;  and expected  lives of five years.  For 1997,  the
following  weighted  average  assumptions  were  utilized:  no  dividend  yield;
expected  volatility of 30%; a risk free interest rate of 6%; and expected lives
of five years.  For 1996 and 1995, the following  weighted  average  assumptions
were utilized:  dividend yield of 3.4%;  expected volatility of 25%; a risk free
interest rate of 6%; and expected lives of two years. However, 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  and   subscription   rights   have   characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and  subscription
rights.


                                      -16-

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996

7. Income taxes

     The  provision  (benefit)  for  income  taxes  consists  of  the  following
components:

                                            1998           1997          1996
Current tax provision (benefit):         ---------------------------------------
   Federal .........................      $ 1,000       $ 569,000     $ 214,000 
   State ...........................       (9,000)        164,000        65,000 
                                         ---------------------------------------
                                           (8,000)        733,000       279,000 
                                         ---------------------------------------
Deferred tax provision (benefit):

   Federal .........................       63,000          17,000      (369,000)
   State ...........................       25,000           5,000      (104,000)
                                         ---------------------------------------
                                           88,000          22,000      (473,000)
                                         ---------------------------------------
Provision (benefit) for income taxes.     $80,000       $ 755,000     $(194,000)
                                         =======================================

     Temporary  differences which gave rise to a significant portion of deferred
tax  assets  and  liabilities  at  January  2, 1999 and  January  3, 1998 are as
follows:

                                                            1998         1997
                                                         -----------------------
Current deferred tax assets:
  Inventory valuation allowance ...................      $600,500      $685,000 
  Capitalized inventory costs .....................        45,200        87,100 
  Warranty cost ...................................        64,500        64,500 
  Deferred compensation ...........................       113,300        12,900 
  Other* ..........................................        76,100        70,000 
                                                         -----------------------
                                                          899,600       919,500
                                                         -----------------------

Non-current deferred tax assets:
  Deferred compensation ...........................       197,500       196,800
Non-current deferred tax liabilities:
  Depreciation and amortization ...................      (177,600)      (45,000)
  State income taxes ..............................       (74,500)      (86,800)
                                                         -----------------------
                                                          (54,600)       65,000 
                                                         -----------------------
       Net deferred tax assets ....................      $845,000      $984,500 
                                                         =======================

* Other includes $72,300 for restructuring charges in
 1998

                                          -17-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996

7. Income taxes (continued)

     The  statutory  federal  income tax rate is reconciled to the effective tax
rate  computed by dividing the  provision  (benefit)  for income taxes by income
(loss) before income taxes as follows:
<TABLE>
<CAPTION>
                                                         1998        1997        1996
                                                        ---------------------------------
<S>                                                      <C>         <C>         <C>
Statutory rate .......................................   34.0%       34.0%       (34.0)%     

Effect of:
   State income tax, net of federal income tax effects    2.5         5.2         (5.2)       
   Tax exempt dividends and interest .................                (.5)        (6.2)      
   Foreign sales corporation income ..................  (12.9)       (2.7)        (3.3)      
   Foreign subsidiary (income) loss  .................   (2.3)                     7.6
   Research and development credits ..................   (4.9)        (.8)
   Other .............................................    2.6         (.2)         1.5         
                                                        ---------------------------------
Effective tax rate ...................................   19.0%       35.0%       (39.6%) 
                                                        =================================    
</TABLE>

8. Cash dividends

     During the first  three  quarters of fiscal  1997,  and in each of the four
quarters of fiscal 1996 the Company paid a $.091 per share dividend  (previously
$.10 per share,  adjusted for the 10% stock dividend in May 1998).  The dividend
was eliminated by a decision of the Board of Directors on August 28, 1997.

9. Stock dividend
     
     The Board announced on May 5, 1998, the declaration of a 10% stock dividend
payable  on June 5, 1998 to  shareholders  of record on May 15 1998.  Fractional
shares  were  cashed-out  and  payments  were  made to  shareholders  in lieu of
fractional  shares on June 5, 1998. The basic diluted weighted average number of
shares  of  outstanding  and net  income  per  share  information  for all prior
reporting  periods  have been  restated  to  reflect  the  effects  of the stock
dividend.

10. Nature of business

     Management considers the Company to be in one business segment: the design,
manufacture and sale of electronic  devices  offering  extremely broad frequency
coverage and high performance  characteristics.  The Company  primarily sells to
customers in the communications, defense and aerospace industries.

     Foreign sales amounted to approximately  $5,114,000 in 1998,  $5,731,000 in
1997 and $4,390,000 in 1996. Sales to any one foreign country did not exceed 10%
of net sales for 1998, 1997 or 1996. Sales to Hughes Aircraft in 1998 were 10.9%
of net sales and sales to  Lockheed  Martin in 1998,  1997 and 1996  amounted to
10.0%, 13.4% and 10.8% of net sales, respectively.

                                      -18-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996

     Accounts receivable are financial  instruments that expose the Company to a
concentration  of credit risk. A substantial  portion of the Company's  accounts
receivable  are  from  customers  in the  defense  industry,  and  51.6%  of its
receivables at January 2, 1999 were from five customers. Exposure to credit risk
is limited by the large  number of  customers  comprising  the  remainder of the
Company's customer base, their  geographical  dispersion and by ongoing customer
credit evaluations performed by the Company.

<TABLE>
11. Net income (loss) per common share

     The following  table  summarizes  the  calculation of basic and diluted net
income (loss) per common share for 1998, 1997 and 1996:
<S>
                                                                                   1998            1997          1996
                                                                                ----------------------------------------
Numerator:                                                                      <C>             <C>          <C>
Net income (loss) available to common shareholders .........................       340,300      $1,402,409    $(297,252)    
------------------------------------------------------------------------------------------------------------------------
Denominator:
Weighted average shares outstanding for basic net income (loss) per share ..     1,766,120       1,693,363    1,704,140      
Effect of dilutive securities - stock options                                       39,092          86,810       28,927        
------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding for diluted net income (loss) per share.     1,805,212       1,780,173    1,733,067        
------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share - basic ........................................          $.19            $.83        $(.17)         
Net income (loss) per share - diluted ......................................          $.19            $.79        $(.17)         
------------------------------------------------------------------------------------------------------------------------
     
     At January 2, 1999, there were 111,415 stock options outstanding  excluded
from the calculation of dilutive  securities  because the exercise prices of the
options were greater than the average market value of the common shares.

</TABLE>

12. Commitments and contingencies

Lease commitments:

     The  Company  leases  real  estate and  equipment  under  operating  leases
expiring at various dates through  December 2002. The leases include  provisions
for rent escalation, renewals and purchase options, and the Company is generally
responsible  for taxes,  insurance,  maintenance and repairs.  Aggregate  rental
expense charged to operations  amounted to $120,000 in 1998 and $54,000 in 1997.
Rental  expense in 1996 was not material.  Future  minimum lease  payments under
noncancellable  operating  leases with an initial term exceeding one year are as
follows:
        
         1999                 122,000
         2000                 100,000
         2001                 106,000
         2002                 113,000

Purchase obligations:

     The Company has issued purchase order  commitments to processing  equipment
manufacturing  vendors  for  approximately  $300,000  of capital  equipment  and
building  improvements.  The Company anticipates the equipment will be purchased
and become operational during 1999.                                    

Employment, retirement and consulting agreements; deferred compensation:

     The  Company  is  party  to an  employment  agreement  with  its  Chairman,
President and Chief Executive  Officer that provides him a minimum annual salary
of  $240,000.  The initial term of the  agreement  ends on December 31, 2002 and
automatically  renews for  successive  twelve-month  periods  thereafter  unless
terminated pursuant to the terms of the agreement.

                                      -19-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996:

     The  Company  is party to a  retirement  agreement  with  its  former  Vice
Chairman and Chief  Technology  Officer  which became  effective on December 31,
1998. Pursuant to the retirement agreement, such former officer, who received an
initial  payment of $151,700 in 1998 and a payment of $185,500 in January  1999,
will  receive a final  payment of $185,500 in January  2000.  In  addition,  the
agreement  provides for the continuation of certain ongoing benefits,  including
health benefits until December 2009.

     The  Company  is  party  to a  retirement  agreement  with  a  former  Vice
President,  which initial term ends February 2001 and  automatically  renews for
successive  twelve-month periods thereafter unless otherwise terminated pursuant
to the terms of the agreement.  The agreement  provides for minimum  payments of
$24,000 per year and includes health and other certain benefits.

     The Company  entered into a consulting  agreement on January 1, 1998 with a
director of the Company who is also the beneficial owner of more than 10% of the
Company's  Common Stock. The term of the consulting  agreement,  which initially
ended on January  1, 1999,  automatically  renews  for  successive  twelve-month
periods until terminated pursuant to the terms of the agreement.  The consulting
agreement provides this director with an annual fee of $36,000 for his services.

     The Company is party to a  shareholder's  agreement dated as of October 30,
1998 with a former director and Chairman of the Company who is also a beneficial
owner  of  more  than  5%  of  the  Company's  Common  Stock.  Pursuant  to  the
shareholder's  agreement,   this  former  director  provides  the  Company  with
consulting  services for a fee of $5,000 per month.  The term of the  consulting
agreement expires October 2001, unless earlier terminated in accordance with the
terms of the shareholder's agreement.

     The Company is party to a retirement agreement effective January 1997, with
its former Vice  President,  Secretary  and  Controller,  that provides him with
annual payments of $30,000 for ten years.

     In connection  with certain  retirement  agreements  described  above,  the
Company recognized deferred  compensation  expense of approximately  $288,000 in
1998,  $239,000 in 1997 and  $279,000 in 1996.  The Company  accrues the present
value of the estimated future payments over the periods of the projected term of
each of the  respective  agreements.  The minimum  benefits  payable in 1999 are
estimated  to be  $264,000  and  the  present  value  of  the  estimated  future
consulting and retirement benefits payable beyond 1999 and accrued as of January
2, 1999 is approximately $459,000.

Litigation:

     The Company is a party to  lawsuits,  both as a plaintiff  and a defendant,
arising  from the normal  course of business.  It is the opinion of  management,
that the disposition of these various  lawsuits will not have a material adverse
effect to the  consolidated  financial  position or results of operations of the
Company.

13. Restructuring and related charges

     Because of the  current  weakness in orders for its  products,  the Company
announced a reduction of its workforce and offered early retirement  packages to
certain  employees during the fourth quarter of 1998. The  restructuring  charge
for 1998 was  $510,000,  and charges net of tax benefits of $327,000 or $.18 per
share,   as  a  result  of  the  reduction  in  workforce  and  voluntary  early
retirements affecting fourteen persons.

     The restructuring of engineering responsibilities and its attendant refocus
of  product  lines  during  1996  impacted  the  valuation  of  inventories.  An
additional review by management of inventories, certain intangibles arising from
acquired product designs, a non-compete  agreement and deferred compensation for
a retiring  senior  officer  resulted in aggregate  charges of  $1,382,000,  and
charges net of tax  benefits of $829,000 or $ .52 per share,  to  operations  in
1996.

                                      -20-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 2, 1999, January 3, 1998 and December 28, 1996:

     The  Company  initially  recognized  aggregate   restructuring  charges  of
$1,822,000  in the third quarter of 1996 and charges,  net of tax  benefits,  of
$1,093,000.  The Company  reduced its estimate of the total  charges by $145,000
and reclassified  charges of $295,000 to cost of sales and selling,  general and
administrative expenses in the fourth quarter of 1996.
                                         
14. Transactions with management and loan to shareholder

     On May 4, 1998,  the Company sold 20,000 (22,000 after giving effect to the
Company's 10% stock dividend)  shares of Common Stock from its treasury to Mason
N. Carter, Chairman,  President and Chief Executive Officer of the Company, at a
price  of  $12.75  per  share  (the  approximate  average  closing  price of the
Company's  Common Stock during the first quarter of 1998).  The Company extended
Mr.  Carter a loan of $255,000 in  connection  with the purchase of these shares
and amended a prior loan to Mr. Carter of $105,000.  A new promissory note for a
total of $360,000,  due May 4, 2003,  was executed by Mr. Carter in favor of the
Company.  Payment of the loan is  secured  by a pledge of the  33,000  shares of
Common Stock purchased by Mr. Carter with the proceeds of the loans. The Company
has  recorded  compensation  expense  of  $52,000  which  is  being  charged  to
operations over the one-year period  commencing on the date of the  transaction,
as Mr. Carter is expected to perform services  throughout this time period.  The
sale of these  shares of Common  Stock was exempt  from  registration  under the
Securities  Act of 1933,  as amended,  as a  transaction  not involving a public
offering under Section 4(2) of Act.

15. Subsequent events

Acquisition of Filtran Microcircuits Inc.

     On  February  25,  1999 the  Company  completed  the  previously  announced
acquisition  of  all  of  the  outstanding  stock  of   privately-held   Filtran
Microcircuits  Inc.  ("FMI") of  Ottawa,  Ontario,  Canada,  a  manufacturer  of
microwave  micro  circuitry.  FMI,  which had 1998 sales of  approximately  $3.2
million,  is a leading  manufacturer of microwave micro circuitry.  The purchase
price was approximately $4.7 million,  including the assumption of approximately
$500,000 existing indebtedness, and was financed by utilizing an existing unused
credit  facility.  The  acquisition  will be  accounted  for as a purchase  and,
accordingly,  the purchase price will be allocated to the underlying  assets and
liabilities based on their estimated fair values at the date of the acquisition,
with the excess, which approximates $3.0 million, recorded as goodwill.

Shareholder Rights Plan

     On March 5,  1999,  the  Board  of  Directors  of the  Company  approved  a
shareholder  rights plan and  declared a dividend of one common  share  purchase
right (a "Right") for each outstanding share of Common Stock of the Company. The
dividend is payable on March 19, 1999 (the "Record Date") to the shareholders of
record as of the close of  business  on that date.  Each Right will  entitle the
holder to purchase from the Company,  upon the occurrence of certain events, one
share of Common Stock for $25.00.

     Generally,  if any person or group acquires beneficial  ownership of 10% or
more of the Company's  outstanding  Common Stock,  each Right (other than Rights
held by such  acquiring  person or group)  will be  exercisable,  at the  $25.00
purchase price,  for a number of shares of Common Stock having a market value of
$50.00.  Upon an acquisition of the Company,  each Right (other than Rights held
by the acquiror) will generally be  exercisable,  at the $25.00  purchase price,
for a number of shares of common stock of the acquiror  having a market value of
$50.00. In certain circumstances, each Right may be exchanged by the Company for
one share of Common  Stock.  The Rights  will expire on March 19,  2009,  unless
earlier exchanged or redeemed at $0.01 per Right.

END OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      -21-
<PAGE>                           

     Summarized  quarterly  unaudited  financial data reported for 1998 and 1997
follows:
<TABLE>
<CAPTION>
1998                                        April 4         July 4         October 3        January 2
                                          -------------------------------------------------------------
<S>                                       <C>             <C>             <C>              <C>
Net sales .............................   $5,792,607      $5,573,659      $5,120,946       $3,614,623
Gross profit ..........................    2,574,755       2,541,932       2,268,970        1,168,649 
Net income (loss) .....................      427,546         408,842         247,803         (743,891)    
-------------------------------------------------------------------------------------------------------
Net income per (loss) share - basic ...         $.25            $.23            $.14            $(.42)(A)
Net income per (loss) share - diluted .         $.24            $.22            $.14            $(.42)(A)
-------------------------------------------------------------------------------------------------------
1997                                        March 29         June 28    September 27        January 3
-------------------------------------------------------------------------------------------------------
Net sales .............................   $4,275,155      $4,986,288      $4,983,793       $4,413,870 
Gross profit ..........................    1,900,048       2,385,205       2,249,174        2,176,905 
Net income ............................      277,746         378,100         350,015          396,548
-------------------------------------------------------------------------------------------------------
Net income per share - basic...........         $.17            $.23            $.21             $.23
Net income per share - diluted.........         $.16            $.22            $.19             $.22
-------------------------------------------------------------------------------------------------------

(A) Reflects the effects of a  restructuring  charge of $510,000  (see Note 12)
which  reduced  net  income  by  $327,000  or $.18 per share for the  fourth
quarter and fiscal 1998.  

The basic and diluted weighted average number of shares  outstanding and
net income per share information for all prior reporting periods  have been  
restated to reflect  the effects of the 10% stock  dividend which became 
effective June 5, 1998.

</TABLE>
QUARTERLY COMMON STOCK DATA
<TABLE>
<CAPTION>
                                        1998                                1997
                          ----------------------------------------------------------------------

Quarter                    1st      2nd     3rd       4th      1st      2nd      3rd     4th
Market price per share:   ----------------------------------------------------------------------
<S>                        <C>     <C>      <C>       <C>      <C>      <C>      <C>     <C>
         High .......      9 3/4   15 7/8   13 15/16  9 7/8    $10 7/8  11 7/8    18     18 1/16   
 
         Low ........      9 3/16  13        7 7/8    6 3/8      9 3/4   9 3/16   11     10       
                          ----------------------------------------------------------------------
</TABLE>
     The common  stock of the Company is listed on the American  Stock  Exchange
and trades under the symbol MRM.

     The market price per share  information is provided with regard to the high
and low bid  prices  of the  common  stock of the  Company  during  the  periods
indicated. 

     The basic and diluted weighted average number of shares outstanding and net
income per share  information for all prior reporting periods have been restated
to reflect the effects of the 10% stock dividend which became  effective June 5,
1998.

                                      -22-