Total number of pages: 39
                                                                   With Exhibits
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

[X]      ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(D)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934 (FEE REQUIRED)

         For the fiscal year ended September 30, 1997 or

[ ]      TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

         For the transition period from _______________ to __________________

                         Commission file number 0-20506

                         BKC SEMICONDUCTORS INCORPORATED
             (Exact name of registrant as specified in its charter)


                    MASSACHUSETTS                        04-2883532
    (State or other jurisdiction of       (I.R.S. Employer Identification No.)
    incorporation or organization)

      6 LAKE STREET, LAWRENCE, MASSACHUSETTS               01841
      (Address of principal executive offices)           (Zip Code)

      Registrant's telephone number, including area code: (978) 681-0392

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

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

                           COMMON STOCK, NO PAR VALUE

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

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

The  aggregate   market  value  of  the   registrant's   Common  Stock  held  by
non-affiliates  of the  registrant,  based  upon the  closing  sale price of the
Common Stock on December 19, 1997,  was  approximately  $6,701,158 on the Nasdaq
SmallCap Market System. The number of shares held by non affiliates was 639,971.
Shares of Common  Stock held by each officer and director and by each person who
owns 5% or more 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.

The number of outstanding  shares of the  registrant's  Common Stock on December
19, 1997, was 1,276,411.



                                        1


<PAGE>



                                     PART I
                                     ------


ITEM 1.    BUSINESS
           --------
GENERAL
-------

               BKC   Semiconductors   Incorporated,    incorporated   in   1985,
manufactures a wide range of discrete semiconductor diodes for signal switching,
voltage conversion, rectification, and surge suppression in electronic circuits.
The Company's  manufacturing and executive offices are located at 6 Lake Street,
Lawrence,  Massachusetts 01841. The telephone number is (978) 681-0392,  and the
fax number is (978) 681- 9135.

PRODUCTS
--------

The Company's product line includes:

               SILICON SWITCHING  DIODES.  Silicon switching diodes are designed
for  relatively   low-power  (500  milliwatt  or  less)  applications.   In  end
applications,  they provide  voltage  rectification.  These diodes are generally
used for signal switching functions.

               RECTIFIERS.  High voltage diodes are often called  rectifiers and
are diodes designed for higher power (less than 10 watts) applications.

               ZENER  DIODES.  A zener diode is analogous to a valve which stops
flow in one  direction  but breaks down at a specific  pressure to allow flow in
the reverse  direction.  When reverse  voltage is applied to a zener  diode,  it
resists the flow of current  until its  breakdown  voltage is reached,  at which
point it allows current to flow at a particular  voltage level. Zener diodes are
used as voltage  regulators,  maintaining the voltage at the breakdown  voltage.
Zener diodes are used to maintain a particular voltage in an electronic unit.

               TRANSIENT   SUPPRESSORS.   Transient   suppressors   operate   as
higher-power zener diodes just as rectifiers operate as higher-power diodes.

               SCHOTTKY DIODES. Schottky diodes operate in much the same ways as
silicon and germanium  diodes,  but they are manufactured  with metal as well as
semiconducting materials. A Schottky diode provides a low voltage drop like that
of a germanium diode but also switches very rapidly.

               GERMANIUM  DIODES.  Germanium  diodes (which are less common than
silicon  diodes) have  advantages  in certain  applications.  A germanium  diode
functions  similarly to a silicon diode,  but it has a lower voltage drop across
it in operation.

MARKETS
-------

               Due to the broad applications of discrete  semiconductor devices,
any  industry  manufacturing  electronic  systems  is a  potential  user  of BKC
products.  The Company  generally  sells its products in two main  markets:  the
military/aerospace and the commercial/industrial markets.

                                       2

<PAGE>

               HIGH-RELIABILITY   MILITARY/AEROSPACE  PRODUCT  MARKET.  BKC  has
established itself as a high reliability  manufacturer of discrete semiconductor
devices  to  military  specifications.  Sales  of  products  built  to  military
specifications   are  made  primarily  in  the  U.S.  These  sales   represented
approximately  65% of total  revenues of the  Company in fiscal  year 1997.  The
Company  does  business  with  a  number  of  suppliers  of  conventional   high
reliability/military/space  products, including Motorola,  Honeywell,  Magnavox,
Rockwell, Texas Instruments, Boeing, Raytheon and Hughes.

               Despite anticipated  reductions in many areas of the US. military
budget,  BKC  believes  that the  demand  for its  products,  built to  military
specifications,  for use in satellite  communications,  civil aviation and space
applications will remain strong.  The Company believes that there is significant
market share growth opportunities considering the ever increasing supplier base.
This is coupled with BKC's broad line of product and  reputation  for  excellent
service and high quality.

               COMMERCIAL/INDUSTRIAL   PRODUCT  MARKET.  The  market  for  BKC's
commercial/ industrial products includes such applications as consumer products,
automotive    electronic    systems,     medical    applications,     computers,
telecommunications  and industrial  production.  Sales of  commercial/industrial
products  represented  approximately  35% of the Company's  sales in fiscal year
1997.

               The  commercial  market  is a very  price  competitive  arena for
discrete semiconductors with many high volume suppliers. As such, BKC's strategy
for this market  includes a combination of specialized  and sourced  products to
attack profitable niche opportunities.

CUSTOMERS
---------

               The Company's  business  strategy includes working closely with a
limited customer base to develop  partnership  programs and products designed to
meet customers' ongoing needs. The Company has franchise agreements with several
major  components  distributors,  including  Zeus/Arrow,  Hamilton/Hallmark  and
Future  Electronics.  The Company also has several major end users as customers,
including GM Delco, Hughes, Motorola, Lucent, Ericsson and Alcatel. Of these one
customer  represents  approximately 16.5% of the Company's sales. While the loss
of any one of these key  customers  would be  significant,  the  Company  is not
dependent on any one or two customers.

COMPETITION
-----------

               In  general,   the  discrete   semiconductor   industry  is  very
competitive  and  characterized  by continual  technological  change and product
obsolescence,  periodic  shortages of  materials,  variations  in  manufacturing
yields and efficiencies and significant foreign  competition.  The Company has a
number of major  competitors  in the discrete  semiconductor  components  in the
military/aerospace and the  commercial/industrial  market. Many of the Company's
current and prospective  competitors are larger, offer broader product lines and
have substantially greater technical, financial, marketing,  manufacturing,  and
other resources than the Company.

SALES AND DISTRIBUTION
----------------------

               The   Company's   products   are   sold  by   independent   sales
representatives  as  well  as the  premier  distributors,  such  as  Zeus/Arrow,
Hamilton/Hallmark, and Future Electronics.

                                       3

<PAGE>

               BKC's products are sold in North America,  the Far East,  Israel,
Canada,  Western  Europe and elsewhere.  The Company's  sales force covers North
America,  Europe  and  the Far  East,  working  with  its 31  independent  sales
representatives.   In  1997   approximately  35%  of  sales  were  made  through
distributors.

MANUFACTURING
-------------

               All  of  BKC's  manufacturing  operations  are  conducted  at its
facility in Lawrence,  Massachusetts.  BKC's manufacturing process comprises six
operations: wafer fabrication, assembly, testing, military processing, finishing
operations, and quality assurance.

               WAFER  FABRICATION  -- SILICON  PRODUCTS.  BKC purchases  silicon
wafers  with an  epitaxial  layer  already  applied.  Each  line of  diodes  and
rectifiers  as well as each zener of a  particular  voltage has its own specific
requirements as to silicon substrate and epitaxial  resistivities.  Each silicon
wafer is processed  through a multitude of steps,  producing a die lot. Once the
die lot is  completed,  samples are  evaluated  and tested in order to determine
yield  information  and establish a reliability  confidence  level. If a die lot
meets BKC standards, it is approved for assembly.

               WAFER  FABRICATION  --  GERMANIUM   DIODES.   BKC  purchases  raw
germanium material then recasts it into a workable mold. This mold is then drawn
into a germanium ingot using radio frequency  energy while doping the impurities
necessary  to produce  the  desired  resistivity.  Different  resistivities  are
required for each line of  specifications  being  targeted.  Once obtained,  the
ingot is sliced into wafers, which are processed through multiple steps in order
to  produce a die lot.  The die lot is then  tested and  approved  in the manner
described above.

               ASSEMBLY AND TESTING.  The Company  assembles  its products  into
hermetically sealed protective packages.  The Company uses an automated assembly
line which is intended to reduce  packaging time and improve  quality.  The test
area,  which is equipped to process  all BKC part  types,  tests the  electrical
characteristics of each part and sorts each part by electrical specification.

               MILITARY  PROCESSING.  Parts  designed  to  meet  military,  high
reliability   specifications   are  specially   processed  in  the   reliability
department.  This  processing  is  conducted  to  remove  infant-mortality  type
failures which cannot be detected by standard electrical testing and is designed
for customers needing products with above-average reliability.

               FINISHING.   Finishing   operations   include   electroplating  a
solderable  finish on the device leads,  marking the part with the specific part
number, polarity band and BKC logo, and packaging the parts for shipment.

               QUALITY ASSURANCE.  The function of BKC's Quality Assurance group
is to measure the quality level at which manufacturing is operating. The quality
level is monitored by using a  Statistical  Process  Control  system  located at
strategic points throughout the manufacturing  process,  commencing in the wafer
fabrication area and ending with a quality monitor just prior to shipping.

BACKLOG
-------

               The  backlog  of  unfilled  orders  totaled  $3,727,000,   as  of
September 30, 1997, as compared to approximately  $3,185,000 as of September 30,
1996. The increase in the backlog is due to increased orders of high reliability
product types. Orders counted in the backlog may be postponed or canceled by

                                       4

<PAGE>


the customer at any time subject to the terms of the purchase order.  Therefore,
the backlog level is not necessarily indicative of future operating results. The
Company  expects to fill all orders  (unless  canceled)  of its current  backlog
during the 1998 fiscal year.

PATENTS AND PROPRIETARY RIGHTS
------------------------------

               The Company has a number of proprietary processes and techniques;
however,  the  Company  does not own any patents on any of its  technologies  or
processes nor are any pending.  The Company  attempts to restrict  access to its
proprietary  technologies and processes by requiring that its salaried employees
sign  non-disclosure  agreements as a condition of employment and by restricting
customer and visitor  access to proprietary  technology  and  information of the
Company.  There can be no assurance  that the Company will be  successful in its
efforts to protect its proprietary  technologies or processes.  In addition, the
laws of some  foreign  countries  in  which  the  Company  sells or may sell its
products do not protect the Company's proprietary rights in such products to the
same extent as do the laws of the U.S.

RESEARCH AND DEVELOPMENT
------------------------

               BKC believes  that its future is  significantly  dependent on its
ability to develop and  introduce  new products  for its  targeted  markets in a
timely manner.  Based upon information  furnished by the Sales organization,  as
well as demand from key customers,  R&D efforts will continue in areas that will
broaden  wafer fab  capability  and expand  package  types that the  Company can
utilize to service the market.

RAW MATERIALS
-------------

               The principal raw materials used by the Company include germanium
and silicon.  Each of these items is currently available from several sources at
the  quality  level and in the  quantities  that the  Company  requires.  Strong
industry demand has often extended the lead time for production of its products.
In  the  past,  extended  lead  times  for  raw  materials  have  tended  to  be
industry-wide,  affecting the Company's  competitors as well as the Company. The
Company also relies on third parties for the  manufacture of certain  assemblies
which are incorporated  into certain of the Company's  products,  such as wafers
for silicon  switching diodes,  zeners and rectifiers.  The loss of any critical
supply or  supplier  could  have a  material  effect on the  performance  of the
Company.

EMPLOYEES
---------

               As  of  September  30,  1997,   the  Company  had  135  full-time
employees,   117  of  whom  were  engaged  in   manufacturing   (including  test
development,  quality and materials functions),  and 2 in product development, 8
in sales, and 8 in finance and  administration.  The Company's employees are not
represented  by any collective  bargaining  agreements and the Company has never
experienced a work stoppage.

ENVIRONMENTAL MATTERS
---------------------

               The Company is a potentially responsible party in connection with
the contamination of soil and groundwater on the Company's leased  manufacturing
site in Lawrence.  The Company, as tenant, might be considered an "operator" and
therefore  strictly  liable for  cleanup  costs or liable  for  damages to

                                       5
<PAGE>

third parties,  unless it can establish certain  defenses.  The Company believes
that its use,  storage and disposal of material are carefully  controlled and do
not result and have not in the past resulted in a release  thereof.  New England
Environmental  Technologies  Corporation ("NEET") has conducted preliminary site
investigations   and  has  advised  the  Company  that,   although  one  of  the
contaminants  found is used in the  Company's  operations,  the Company is not a
likely  source  of the  contamination  and that the  contamination  most  likely
results from historical  improper  disposal of chlorinated  solvents on the site
and upgradient of the site predating the Company's occupancy of the property.

               If the Company  were  required to pay cleanup  costs,  applicable
hazardous waste laws allow the Company to seek  contribution  from other parties
who caused the  contamination  or are also  subject to strict  liability  (i.e.,
current and former owners and operators). The current owner and the prior lessee
have agreed to hold harmless the Company with respect to any contamination  that
may have occurred prior to October 16, 1985.

               Although the outcome of this matter and the cost,  if any, to the
Company cannot be reasonably estimated at this time, management does not believe
that the cost, if any, to the Company will have a material adverse effect on the
financial position of the Company.

               Federal, state and local regulations impose various environmental
controls on the  discharge  of chemicals  and gases used in BKC's  manufacturing
process.  The Company  believes that its operations are currently in substantial
compliance with all applicable environmental laws and regulations and that costs
of continuing  compliance will not, except as described  herein,  be material to
the Company's financial condition.

               The Company  believes that it has  insurance  coverage in amounts
and scope which are adequate  and  customary  for its  industry.  The  Company's
policies  contain  exclusionary  provisions  attempting  to limit the  insurer's
responsibility for damages, if any, arising from certain events, including those
arising from  pollution  or  contamination  of the  environment.  Whether  these
limitations would ultimately preclude recovery by the Company of damages arising
from these types of losses would likely be the subject of a dispute  between the
Company and its insurers at or after the time at which such liability arises.

ITEM 2.    PROPERTIES
           ----------

           The Company's executive offices and manufacturing  facilities are
located in  Lawrence,  Massachusetts,  and  consist of one  building  containing
approximately 160,000 gross square feet. The building is occupied by the Company
pursuant to a lease expiring in October, 2000.  Approximately 92,000 square feet
of the building are occupied by the Company,  53,000 square feet are  sub-leased
by the Company to third parties, 15,000 square feet are common area. The Company
believes its currently  leased  facilities  are adequate for all its  reasonably
foreseeable requirements.

ITEM 3.    LEGAL PROCEEDINGS
           -----------------
           None



                                        6


<PAGE>



ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
           -------------------------------------------------
            
           During the fourth  quarter of fiscal 1997, no matter was submitted to
a vote of the security holders through the solicitation of proxies or otherwise.


                                        7

<PAGE>



                                     PART II
                                     -------


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

           The Company's  Common Stock is traded on the Nasdaq  SmallCap  System
under the symbol BKCS.  Prior to February  25, 1997,  the Common Stock traded on
the  Nasdaq  National  Market  System.  The  following  table sets forth for the
periods  indicated  the  high  and low bid  quotations  of the  Common  Stock as
reported by Nasdaq. Such quotations reflect inter-dealer prices,  without retail
mark-up,  mark-down  or  commission  and may not  necessarily  represent  actual
transactions.


                                  1996                     1997
                                  ----                     ----
                             HIGH         LOW          HIGH         LOW
FISCAL QUARTER               BID          BID          BID          BID
--------------               ---          ---          ---          ---

First quarter               $3.75        $1.88        $3.75        $1.50

Second quarter               4.00         1.75         3.25         1.50

Third quarter                4.75         1.75         2.75         1.75

Fourth quarter               3.75         2.25         3.75         2.75


           On December  19,  1997,  the last  reported  bid price for the Common
Stock on the Nasdaq SmallCap system was $5.25, per share.

           As of  December  19,  1997,  the  Company  estimated  that  there are
approximately 700 record holders of the Company's Common Stock.

           The Company has not paid any cash dividends on its Common Stock since
inception,  and  it  does  not  anticipate  paying  any  cash  dividends  in the
foreseeable future.


                                       8


<PAGE>



ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share
          data)

 The following table summarizes certain financial data which
   are qualified by more detailed financial statements
   included herein.
<TABLE>
<CAPTION>

 STATEMENT OF CONSOLIDATED INCOME (LOSS) DATA:
------------------------------------------------------------------------------------------------------------------------------
                                                                          FISCAL YEARS ENDED SEPTEMBER 30,
                                                ------------------------------------------------------------------------------
                                                        1997           1996          1995           1994          1993
------------------------------------------------------------------------------------------------------------------------------

<S>                                                    <C>            <C>          <C>            <C>           <C>   
 Revenue                                               $11,089        $9,797       $11,277        $11,384       $9,775

 Gross profit                                            3,181         1,947         1,278          2,005        2,915

 Income (loss) from operations                             879            96        (1,530)          (533)         700

 Net income (loss)                                         378            34        (1,207)          (475)         353

 Net income (loss) per share                               .30           .03          (.97)          (.38)          .28

 Weighted average shares outstanding                     1,276         1,273         1,244          1,247        1,248




 CONSOLIDATED BALANCE SHEET DATA:
------------------------------------------------------------------------------------------------------------------------------

                                                                               AT SEPTEMBER 30,
                                                ------------------------------------------------------------------------------

                                                         1997           1996         1995           1994          1993
------------------------------------------------------------------------------------------------------------------------------

 Working capital                                        $2,482        $2,015        $1,744         $3,100       $3,232

 Total assets                                            6,904         6,429         7,824          8,351        7,761

 Short-term debt                                         2,067         1,805         2,967          2,144        1,556

 Long-term debt and non-current capital
   lease obligations                                       568           581           915          1,219          591

 Stockholders' equity                                    3,347         2,969         2,852          4,062        4,558


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



                                        9

<PAGE>




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

RESULTS OF OPERATION
--------------------

           1997 compared to 1996. Revenues for 1997 fiscal year were $11,089,064
versus  $9,796,858  for  fiscal  year 1996,  a 13%  increase.  Of fiscal  1997's
revenue,  96%,  compared to 88% for the prior  fiscal  year,  was from  products
manufactured by BKC, as opposed to products resold by the Company. This shift to
BKC-produced  product  follows the Company's  strategic  plan of focusing on our
internal  strengths of a high quality,  high  reliability  product  supplier for
demanding    applications    in    space/satellite,    telecommunications    and
industrial/medical markets.

           Net Income for fiscal  1997 was  $378,109  or $.30 per share,  versus
$34,156 or $.03 per share in fiscal 1996. This ten-fold increase was a result of
the increased  margins  gained in 1997 as BKC shifted the demand of its customer
base from the commercial  marketplace  to high  reliability  product  users.  In
addition the increased volumes of BKC-manufactured product (which generally have
higher margins than resold products) contributed to the increased profits.

           Gross profits for fiscal year 1997 were $3,180,847 or 29% of revenues
versus  $1,947,406 or 20% of revenues for fiscal 1996. This improvement in gross
profits  was  a  direct  result  of  product  mix  shift  to  BKC-produced  high
reliability products,  as well as benefit of increased  manufacturing volumes as
discussed above.

           Total operating  expenses for fiscal year 1997 were $2,301,377 or 21%
of  revenues  versus  $1,851,051  or 19% of revenues  for fiscal year 1996.  The
increase in expenses was due to costs related to product marketing, research and
development,  market  expansion,  as well as increased  administrative  costs to
support revenue growth.

           Research and  Development  expenses (R&D) were $97,051 in fiscal year
1997 versus  $211,825 in the prior year. The reduction in R&D expenses  reflects
the  cost  shift  into  manufacturing  as  previously   developed  products  are
introduced in the production area.

           The  major  risks the  Company  faces are its  ability  to  introduce
product  enhancements  and new  product  development  and to hire and retain key
personnel.

           1996 compared to 1995.  Revenues for 1996 fiscal year were $9,796,858
versus  $11,277,350  for fiscal year 1995. A major  element  attributing  to the
lower revenue for fiscal year 1996 was a decrease in the level of product resale
revenue which is derived from resale of components  manufactured for BKC from an
off-shore  vendor.  During  fiscal year 1996 the total  revenue from  components
resale was $1,115,000  versus  $2,166,000  during fiscal year 1995. This drop of
$1,051,000 in such revenue during fiscal year 1996 is related to the sensitivity
of the computer industry's inventory levels and model design changes. BKC's core
product line,  which is 100%  manufactured  at its Lawrence  site,  saw a slight
decline in fiscal year 1996 versus fiscal year 1995  resulting  from BKC actions
regarding increased pricing and product pruning.

           Net Income for the year was $34,156,  or $.03 per share, versus a net
loss of ($1,207,469), or ($.97) per share, for fiscal year 1995. Included in the
net income  figure for the year was a gain on disposal of property and equipment
of $208,815.  The additional improvement in net income versus the 


                                       10
<PAGE>


prior year was due to increased  pricing and  resultant  margins,  plus positive
results  from cost  reductions  and  reduced  spending  actions  throughout  the
Company.

           Gross Profits for fiscal year 1996 were $1,947,406,  or 20% of sales,
versus  $1,277,972,  or 11% of sales in fiscal year 1995. This improvement was a
result  of  management   instituted   initiatives  involving  increased  prices,
manufacturing cost reductions and decreasing the manufacturing spending levels.

           Operating  Expenses for the year were $1,851,051,  versus  $2,808,197
for fiscal year 1995,  which in fiscal year 1995 included a write down of assets
in the  amount  of  $574,873  due to the  Company's  decision  to exit the photo
detector  business.  Selling expenses for the current fiscal year were $898,714,
versus  $1,286,202 for fiscal year 1995. The improvement in selling expenses was
due to the  elimination  of  selling  expenses  related  to the  photo  detector
business  and  reduction in the general  expenses  and  spending  related to the
selling activity.

           General and Administrative Expenses were $740,512 for the fiscal year
compared  to $785,415  for fiscal year 1995.  The  reduction  in spending  was a
result  of the  company-wide  focus on cost  reduction  and  profit  improvement
objectives.

           Research and Development Expenses (R&D) were $211,825 versus $161,707
for the prior fiscal  year.  This  increase in spending was a planned  action to
invest in new product  development  such as the square  ended melf  product line
which had its  production  launch  during the first quarter of fiscal year 1997.
The  increased  spending  reflects   management's   commitment  to  new  product
development as the Company returns to profitability.

           The major risks the Company faces include the availability of silicon
wafers,  which is a total industry problem,  other raw materials,  and the speed
and effectiveness in accomplishing  performance  improvement initiatives planned
for fiscal year 1997.

           As discussed above,  fiscal year 1996, in total, had overall positive
net income.  The first  through  third  quarter of fiscal year 1996 had positive
performance, while quarter four had both a decrease in revenue compared to prior
quarters,  negative operating profits,  and negative net income. The issues with
the fourth  quarter  were a major  decrease  in resale  product  revenue,  and a
softening  in demand  from BKC's  distributors  and some key OEM  customers.  In
addition, during the fourth quarter of fiscal year 1996 certain adjustments were
made  to  recognize  the  return  of  products  by  some  BKC  distributors  and
product/customer  account  issues.  Looking  ahead,  there is continued  concern
regarding market demand as we enter the new year. Meeting business plan shipping
and  manufacturing  levels will be a critical  factor in reaching the  Company's
fiscal year 1997 goals.

           LIQUIDITY AND CAPITAL  RESOURCES.  The Company's  ability to meet its
short term commitments are reflected by its working capital ratios.

  WORKING CAPITAL:
  ----------------
  (Data in $000's except ratios)
                                               1995         1996          1997
                                               ----         ----          ----

  Beginning of Year                           $3,100       $1,744        $2,015

  End of Year                                  1,744        2,015         2,482

  Increase/(decrease) in Working Capital.     (1,356)         271           467

  Working Capital Ratio (Current Assets/
          Current Liabilities)                  1.4           1.7           1.8



                                       11
<PAGE>

           The Company  generated a $289,000  positive cash flow from operations
during fiscal 1997 versus a positive  cash flow of  $1,193,000  for fiscal 1996.
The  $904,000  change in cash flow  between the two years  primarily  reflects a
decrease  of  $453,000 in  Accounts  Payable  along with a $571,000  increase in
Accounts Receivable.

           During fiscal 1997, an additional  $127,000 of cash was provided from
financing  activities  through  additional  borrowings on the Company's existing
line of credit agreement with Eastern Bank.

           The combined benefit of cash generated from operations and additional
borrowings were used to purchase  $418,000 of plant and equipment in fiscal 1997
as compared to $145,000 in fiscal 1996.

           As of  September  30, 1997,  the Company had a revolving  credit line
with Eastern Bank for  $2,500,000,  collateralized  by accounts  receivable  and
inventories.  The balance  used on the line was  $1,683,272.  The line of credit
agreement contains certain restrictive  covenants which the Company has complied
with or the bank has waived. The Company believes that its current debt and cash
flow from operations will be adequate to fund all operations in fiscal 1998.

           The Company had long term debt,  including  the amount due within one
year of $952,000. The debt is secured by all the assets of the Company. Refer to
Notes 5 and 6 within the consolidated financial statements for details.

ITEM 7A    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
           MARKET RISK

           Not applicable.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

           Financial statements and schedules together with the auditors reports
thereon are referenced in Part IV and are attached hereto.

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

           None



                                       12


<PAGE>



                                    PART III
                                    --------

ITEM 10.      EXECUTIVE OFFICERS AND DIRECTORS OF REGISTRANT

           The executive officers and directors of the Company and their ages as
of September 30, 1997, are as follows:


             NAME                  AGE        POSITIONS HELD WITH COMPANY

    Albert A. Magdall               62        Chairman, Director
    James R. Shiring                56        President, CEO, Director
    John L. Campbell                63        Strategic Marketing and 
                                              Distribution, Clerk, Director
    William J. Kady                 57        Vice President of  Quality, 
                                              Director
    Gerald T. Billadeau             55        Director
    W. Randle Mitchell, Jr.         63        Director
    Thomas M. Cunneen               37        Vice President Marketing and Sales
    Bryan A. Schmidt                45        CFO, Treasurer

           Messrs. Billadeau, Kady and Campbell founded the Company in 1985. Mr.
Billadeau  served as the Company's  President and Chief  Executive  Officer from
1985 through July of 1995.

           Mr.  Magdall has been a Director  since November 1994. He was elected
Chairman  of the Board in May 1995.  From July 1995 to March 1996,  Mr.  Magdall
served as interim President and Chief Executive Officer.  On March 19, 1996, Mr.
Shiring became  President and Chief Executive  Officer,  and Mr. Magdall resumed
his role as Chairman and an independent  Director. In 1992 and 1993, he held the
position of Senior Vice  President of Genicom  Corporation  (Nasdaq),  a company
involved in the manufacture and sales of computer  printers.  The Company's four
European Sales and Service subsidiary  companies were under his direction.  From
1960 until 1987, Mr. Magdall was employed by IBM Corporation where he had a long
record of successful  management in product  development and  manufacturing.  In
1979 and 1980, Mr.  Magdall served as secretary to the IBM Corporate  Management
Committee  reporting  to the  Chairman of the Board.  From 1980 until 1987,  Mr.
Magdall served as a Vice President in several IBM business areas.

           Mr. Shiring joined BKC as its President and Chief  Executive  Officer
and a Director on March 19,  1996.  Mr.  Shiring had been  Managing  Director of
Clare  Europe,  a unit of CP  Clare,  a  worldwide  manufacturer  of  electronic
components,  and prior to that Chief Operating  Officer of the parent company of
CP Clare. Mr. Shiring's  professional  background covers 33 years of progressive
global  experience in the electronics  industry with the focus on  semiconductor
components.  His  prior  professional  experience  had been  with  Westinghouse,
Varian, Semicon,  Teledyne, and Theta-J Corporation,  the forerunner to CP Clare
Corporation.

           Prior to the founding of BKC, Mr.  Billadeau served as Vice President
and Controller of the ITT Semiconductors Division of ITT from 1980 to 1985. From
1973 to 1980, Mr. Billadeau served as Assistant Controller and Financial Manager
of a subsidiary of ITT. Mr.  Billadeau left BKC June 1995 pursue other interests
and is currently CFO at Riverside  Millwork  Company in Concord NH. He remains a
Director of the Company.

           Mr. Kady, Vice President of Quality and a Director, served in various
capacities in the ITT Semiconductors  Division of ITT, primarily in the areas of
engineering, quality and reliability, with the 

                                       13


<PAGE>


exception of the period from 1970 to 1979,  during which time Mr. Kady owned and
managed an automobile dealership.

           From 1963 to 1985, Mr. Campbell,  Director of Strategic Marketing and
Distributor Sales, as well as a Director of the Company,  held a number of sales
and marketing  positions in the ITT  Semiconductors  Division of ITT,  lastly as
Eastern Regional Sales Manager.

           Mr.  Mitchell  has been a member  of the  Board  since  1994,  and is
currently  Chairman of the Board of Learning  Services  Corporation (a privately
held company  specializing in post-acute acquired brain injury  rehabilitation).
He previously  served as President and Chief Executive Officer and a director of
Amoskeag Company (Nasdaq) from 1992 to 1994, and as its Chief Financial  Officer
from  1979 to 1991.  He also  served  as  Executive  Vice  President  and  Chief
Financial Officer of Amoskeag's 80% controlled  subsidiary,  Fieldcrest  Cannon,
Inc. (NYSE),  from 1985 to 1990. Mr. Mitchell has also served as Chairman of the
Board of the Bangor and Aroostook Railroad, a subsidiary of Amoskeag Company, as
a director and Chairman of the Audit  Committee of the  Keesville  National Bank
(New York), and as a director of Fanny Farmer Candy Shops,  Inc., Boston Bancorp
and the South Boston Savings Bank.

           Mr. Thomas M. Cunneen  joined BKC as its Vice  President of Sales and
Marketing in 1996.  Prior to joining BKC, Mr.  Cunneen had been Vice  President,
Field Operations of CP Clare, a worldwide manufacturer of electronic components.
Mr.  Cunneen's  professional  background  covers  fourteen  years of progressive
global  experience in the electronics  industry with the focus on  semiconductor
components.  His prior  professional  experience  has been with  Sprague,  Sigma
Instruments and Theta-J Corporation,  the forerunner to CP Clare Corporation for
the past ten years.

           Mr. Bryan A. Schmidt  joined BKC as its  Controller  in June 1996 and
was subsequently elected treasurer and CFO. Mr. Schmidt's  professional training
includes  degrees  of BS and MBA in Finance  from  Northeastern  University  and
progressive  financial management  experience within manufacturing  concerns for
the last twenty years.  Prior to joining BKC, Mr. Schmidt was Controller and CFO
for Gare, Inc., a manufacturer of products for the ceramics industry.

           All  directors   hold  office  until  the  next  annual   meeting  of
stockholders and until their  successors have been elected.  The officers of the
Company  are  elected  annually  and  serve at the  discretion  of the  Board of
Directors of the  Company.  There are no family  relationships  among any of the
directors and executive officers of the Company.

           The Company's outside directors,  Messrs.  Mitchell,  Billadeau,  and
Magdall serve on the Audit and Compensation Committees.

     SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
     -------------------------------------------------------

           Section  16(a) of the  Securities  Exchange Act of 1934  requires the
Company's  officers and  directors  and persons who own more than ten percent of
its common  stock to file reports with the  Securities  and Exchange  Commission
disclosing  their  ownership  of  stock  in the  Company  and  changes  in  such
ownership.  Copies of such  reports  are also  required to be  furnished  to the
Company.  Based solely on a review of the copies of such reports received by it,
the Company believes that during fiscal 1997, all such filing  requirements were
complied with.



                                       14


<PAGE>



ITEM 11.   EXECUTIVE COMPENSATION
           ----------------------

           The  following  table sets forth the  compensation  paid to the Chief
Executive Officer and the other most highly  compensated  executive officer (the
"Named  Executive  Officers") by the Company for services to the Company for the
fiscal years ended  September 30, 1997,  1996,  and 1995.  None of the Company's
other executive  officers had a total annual salary and bonus exceeding $100,000
during fiscal 1997.

<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

                                                                ANNUAL COMPENSATION

                                                FISCAL                                      ALL OTHER
     NAME                                       YEAR        SALARY($)        BONUS($)       COMP. $(1)
     ----                                       ----        ---------        --------       ----------



<S>                                            <C>           <C>            <C>               <C>   
   James R. Shiring (2)                        1997          $130,000       $10,000           $1,146
   President and CEO, Director                 1996            92,500             0              700
                                               1995               ---           ---              ---

   Thomas M. Cunneen (3)                       1997           100,000        12,000              286
   Vice President of Sales & Marketing         1996            59,615           ---              167
                                               1995               ---           ---              ---

   ------------------------------------------------
<FN>

   (1)   Premium cost of life insurance policy for Mr. Shiring and Mr. Cunneen.
   (2)   Mr. Shiring became President and Chief Executive Officer of the Company on March 19, 1996.
   (3)   Mr. Cunneen joined the Company as Vice President. of Sales and Marketing on May 14, 1996.
</FN>
</TABLE>

                          FISCAL YEAR END OPTION VALUES

           During Fiscal 1997,  none of the named executive  officers  exercised
options  that had been granted by the Company.  The  following  table sets forth
information  regarding  the  vested  and  unvested  number  of  shares  and  the
unrealized value (the difference  between the option price and the market value)
of the referenced  options issued by the Company and held by the Named Executive
Officers on October 1, 1997.
<TABLE>
<CAPTION>


                        NUMBER OF SHARES UNDERLYING         VALUE OF UNEXERCISED IN-THE-MONEY
                          UNEXERCISED OPTIONS (#)                     OPTIONS ($)

Name                  Vested            Unvested              Vested            Unvested
<S>                   <C>                <C>                 <C>                  <C>    
James R. Shiring      37,500             37,500              $51,375              $51,375
Thomas M. Cunneen     25,000             25,000                9,250                9,250
</TABLE>

           Mr.  Shiring and Mr.  Cunneen  have  employment  agreements  with the
Company  that  provide  for  the  payment   salary  and   benefits.   Agreements
automatically renew for successive one year periods, unless terminated per terms
of the agreements.
                                                                    

                         COMPENSATION COMMITTEE REPORT

           For fiscal 1997, the  Compensation  Committee  approved a formal cash
incentive  compensation  plan ("Plan") which  rewarded  several key employees if
certain  predetermined  earnings  targets  were  achieved  and certain  business
objectives  were met. The actual  results for fiscal 1997 were such that a total
of  $92,000  was  awarded  to  the  Plan   participants.   A  similar  incentive
compensation   plan  for  certain  key   employees  has  been  approved  by  the
Compensation Committee for fiscal 1997.


                                       15
<PAGE>

                             DIRECTORS' COMPENSATION

           The outside Directors'  compensation is as follows: (i) reimbursement
for expenses  related to attendance at each meeting.  (ii) payment of $1,000 for
each Board of Directors meeting attended, and $500.00 for each committee meeting
attended.  If a committee  meeting occurs the same day as a board meeting,  only
the Board  Meeting  fee will be paid.  (iii)  grant of stock  options  valued at
$7,500.00 each year pursuant to the Company's Non-Employee Director Stock Option
Plan by the stockholders of the Company.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT

           The  following  table  sets  forth  certain   information   regarding
beneficial  ownership of the Company's  Common Stock as of December 12, 1997, by
(i) each person who is known by the Company to own beneficially  more than 5% of
the outstanding shares of the Company's Common Stock; (ii) each of the Company's
directors who owns Common Stock; (iii) each of the named executive officers; and
(iv) all directors and executive  officers of the Company as a group.  Except as
otherwise  indicated,  each  person has sole  investment  and voting  power with
respect to the shares shown as being beneficially owned by such person, based on
information provided by such owners.

<TABLE>
<CAPTION>

                                                              COMMON STOCK             PERCENT OF SHARES
 NAME                                                       BENEFICIALLY OWNED           OUTSTANDING(5)
 ----                                                       ------------------           --------------

<S>                                                              <C>                       <C>  
 Gerald T. Billadeau (1) ...................................      196,680                   15.4%

 John L. Campbell (2) ......................................      165,660                   13.0%

 William J. Kady (3) .......................................      206,370                   16.2%

 Albert A. Magdall (4) .....................................       37,730                    3.0%

 W. Randle Mitchell, Jr. (5) ...............................        4,730                      *

 James R. Shiring (6).......................................       37,500                    2.9%

 Thomas M. Cunneen (7) .....................................       25,000                    1.9%

 All officers and directors as a group (8 persons) (8) .....      682,003(9)                53.4%
  

<FN>

*Less than 1%.
(1) Includes beneficial ownership of 180 shares of Common Stock held by spouse.
(2) Includes beneficial ownership of 160 shares of Common Stock held by spouse.
(3)  Includes  beneficial  ownership  of 6,100  shares of Common  Stock  held by
spouse.
(4) Includes  4,730  shares  which may be acquired by exercise of stock  options
within 60 days after Dec. 12, 1997.
(5) Includes  4,730  shares  which may be acquired by exercise of stock  options
within 60 days after Dec. 12, 1997.
(6) Consists of 37,500 shares which may be acquired by exercise of stock options
within 60 days after Dec. 12, 1997.
(7) Consists of 25,000 shares which may be acquired by exercise of stock options
within 60 days after Dec. 12, 1997.
(8) Based on 1,276,411 shares outstanding.
(9) Includes  80,293  shares which may be acquired by exercise of stock  options
within 60 days after Dec. 12, 1997.
</FN>
</TABLE>
           The Company  knows of no  arrangements,  including  any pledge by any
person of securities of the Company,  the operation of which may at a subsequent
date result in a change in control of the Company.  The Company also knows of no
agreements among its shareholders  which relate to voting or investment power of
its shares of Common Stock.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
           ----------------------------------------------
           None.

                                       16


<PAGE>



                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES

(a)  Documents filed as part of this report:

     (1) Financial Statements:                                      PAGE
  
         Index to Consolidated Financial Statements and              20
           Schedules
    
         Report of Independent Certified Public                      21
           Accountants
    
         Consolidated Balance Sheet, September 30, 1997              22
           and 1996
    
         Statement of Consolidated Income (Loss) for the             23
           years ended September 30, 1997, 1996 and 1995
    
         Statement of Consolidated Stockholders' Equity              24
           for the years ended September 30, 1997, 1996
           and 1995
    
         Statement of Consolidated Cash Flows for the                25
           years ended September 30, 1997, 1996 and 1995
    
         Notes to Consolidated Financial Statements,                 26
           September 30, 1997, 1996 and 1995
    
    (2)  Schedules for the years ended September 30, 1997, 
         1996 and 1995:
   
         II - Valuation and Qualifying Accounts                      38
  
    All other schedules called for under Regulation S-X are not submitted
      because they are not applicable or not required, or because the
      required information is included in the Consolidated Financial
      Statements and Notes thereto.


    (3) Exhibits:

   EXHIBIT
     NO.                           TITLE
     ---                           -----

     **3.2   -Restated Articles of Organization of the
              Registrant
     **3.4   -Amended and Restated By-Laws of the Registrant
      *4.3   -Specimen share certificate.
     *10.3   -Registrant's Savings Plan dated September 20,
              1991.
   **10.28   -Agreement dated March 25, 1992 between
              Registrant and Arthur W. Wood Company, Inc.


                                       17

<PAGE>





    EXHIBIT
      NO.                         TITLE
      ---                         -----

     10.39   -Financing with Eastern Bank, filed as an exhibit
             to the Company's Form 10-K for the year ended
             September 30, 1994 and incorporated herein by
             reference.
     10.40   -BKC/Eastern Bank/City of Lawrence - HUD Financing
             Agreement dated November 25, 1996, filed as an
             exhibit to the Company's Form 10-K for the year
             ended September 30, 1996 and incorporated herein
             by reference.
     27.1   -Financial data schedule
  ***99.1   -Registrant's 1994 Stock Option Plan
  ***99.2   -Registrant's 1994 Non-Employee Director Stock
             Option Plan


*      Incorporated by reference to the same exhibit number to the
       Registration Statement on Form S-18 filed with the Commission on June
       22, 1992.

**     Incorporated by reference to the same exhibit number of
       Amendment No. 1 to the Registration Statement on Form S-18
       filed with the Commission on August 4, 1992.

***    Incorporated by references to the same exhibit number of the
       Registration Statement on Form S-8 filed with the Commission on May 29,
       1995.

(b)    Reports on Form 8-K:

       The Company filed no Reports on Form 8-K with the Securities and
       Exchange Commissions during the quarter ended September 30, 1997.


                                       18

<PAGE>




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


           BKC Semiconductors Incorporated


Date:  December 23, 1997    /s/ James R. Shiring
                            -------------------------------------------------
                            By:  James R. Shiring, President and Chief Executive
                            Officer, Director, Principal Executive Officer

           Pursuant to the requirements of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.


Date:  December 23, 1997     /s/ James R. Shiring
                             ---------------------------------------------------
                             James R. Shiring, President and Chief Executive
                             Officer, Director, Principal Executive Officer



Date:  December 23, 1997     /s/ Bryan A. Schmidt
                             ---------------------------------------------------
                             Bryan A. Schmidt, CFO, Treasurer, Principal 
                             Financial and Accounting Officer



Date:  December 23, 1997      /s/ John L. Campbell
                              --------------------------------------------------
                              John L. Campbell, Strategic Marketing
                              and Distribution, Clerk, Director
                              


Date:  December 23, 1997      /s/ William J. Kady
                              --------------------------------------------------
                              William J. Kady, Vice President Quality, Director



                              --------------------------------------------------
Date:  December 23, 1997      Albert A. Magdall, Chairman, Director



                              --------------------------------------------------
Date:  December 23, 1997      W. Randle Mitchell, Jr., Director



                              --------------------------------------------------
Date:  December 23, 1997      Gerald T. Billadeau, Director



                                       19




                         BKC SEMICONDUCTORS INCORPORATED

            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

                                                                       PAGE
                                                                       ----

Financial Statements:

  Report of Independent Certified Public Accountants                    21

  Consolidated Balance Sheet, September 30, 1997 and 1996               22

  Statement of Consolidated Income (Loss) for the years                 23
    ended September 30, 1997, 1996 and 1995

  Statement of Consolidated Stockholders' Equity for the                24
    years ended September 30, 1997, 1996 and 1995

  Statement of Consolidated Cash Flows for the years                    25
    ended September 30, 1997, 1996 and 1995

  Notes to Consolidated Financial Statements, September                 26
    30, 1997, 1996 and 1995

Schedules for the years ended September 30, 1997, 1996 and 1995:

  II - Valuation and Qualifying Accounts                                38

All other schedules called for under Regulation S-X are not
   submitted because they are not applicable or not required, or
   because the required information is included in the
   Consolidated Financial Statements and Notes thereto.


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



                                       20

<PAGE>








               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
               --------------------------------------------------

To the Board of Directors and Stockholders of
  BKC Semiconductors Incorporated

            We have audited the accompanying consolidated balance sheet of BKC
Semiconductors Incorporated and subsidiaries as of September 30, 1997 and 1996,
and the consolidated statements of income (loss), stockholders' equity and cash
flows for the years ended September 30, 1997, 1996 and 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
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 our audits provide a
reasonable basis for our opinion.

            In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of BKC
Semiconductors Incorporated and subsidiaries as of September 30, 1997 and 1996,
and the results of their operations and their cash flows for the years ended
September 30, 1997, 1996 and 1995 in conformity with generally accepted
accounting principles.

            Our audits, referred to above, also include the financial schedules
listed in the Index at Item 14(a)(2). In our opinion, based on our audits, such
financial schedules present fairly the information required to be set forth
therein.


                                               SULLIVAN BILLE, P.C.



Boston, Massachusetts
October 31, 1997




                                       21

<PAGE>



<TABLE>
<CAPTION>

                         BKC SEMICONDUCTORS INCORPORATED
                         -------------------------------

             CONSOLIDATED BALANCE SHEET, SEPTEMBER 30, 1997 AND 1996
-----------------------------------------------------------------------------------------------------------------------------------

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

                                      A S S E T S
                                      ===========
CURRENT ASSETS:
<S>                                                     <C>            <C>        
  Cash                                                  $     3,593    $     5,921
  Accounts and notes receivable - trade (less
    allowance for doubtful accounts: 1997,
    $14,706; 1996, $11,694)                               1,811,349      1,274,927
  Inventories                                             3,249,197      3,119,741
  Prepaid expenses                                           78,098         33,577
  Deferred income taxes                                     274,900        460,000
                                                        -----------    -----------

        Total current assets                              5,417,137      4,894,166

PROPERTY AND EQUIPMENT - Net                              1,455,668      1,426,439

OTHER ASSETS                                                 31,410        107,908
                                                        -----------    -----------
                                    TOTAL               $ 6,904,215    $ 6,428,513
                                                        ===========    ===========

                          L I A B I L I T I E S   A N D
                      S T O C K H O L D E R S'    E Q U I T Y
                      =======================================
CURRENT LIABILITIES:
  Note payable - bank                                   $ 1,683,272    $ 1,430,839
  Accounts payable                                          566,061      1,019,836
  Accrued liabilities                                       301,626         54,481
  Current maturities of long-term debt                      383,986        374,070
                                                        -----------    -----------
         Total current liabilities                        2,934,945      2,879,226
                                                        -----------    -----------
LONG-TERM DEBT - Net of current maturities                  568,184        580,610
                                                        -----------    -----------
DEFERRED INCOME TAXES                                        54,300
                                                        -----------    -----------

STOCKHOLDERS' EQUITY:
  Convertible preferred stock, Series A - 6%,
    authorized, 5,000 shares of no par value;
    issued 2,940 shares                                     242,078        242,078
  Common stock - authorized, 2,000,000 shares
    of no par value; issued, 1,295,311 shares             3,916,721      3,916,721
  Deficit                                                  (456,394)      (834,503)
                                                        -----------    -----------
         Total                                            3,702,405      3,324,296
  Less cost of shares held in treasury:
    Convertible preferred stock, 2,940 shares               235,200        235,200
    Common stock, 18,900 shares                             120,419        120,419
                                                        -----------    -----------
                           Stockholders' equity - net     3,346,786      2,968,677
                                                        -----------    -----------
                                    TOTAL               $ 6,904,215    $ 6,428,513
                                                        ===========    ===========
</TABLE>

                 See notes to consolidated financial statements.
---------------------------------------------------------------------------


                                       22

<PAGE>

<TABLE>
<CAPTION>


                         BKC SEMICONDUCTORS INCORPORATED

                     STATEMENT OF CONSOLIDATED INCOME (LOSS)
              FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
--------------------------------------------------------------------------------
                                         1997            1996            1995
--------------------------------------------------------------------------------

<S>                                   <C>             <C>            <C>         
REVENUE                               $ 11,089,064    $ 9,796,858    $ 11,277,350

COST OF REVENUE                          7,908,217      7,849,452       9,999,378
                                      ------------    -----------    ------------
GROSS PROFIT                             3,180,847      1,947,406       1,277,972
                                      ------------    -----------    ------------

OPERATING EXPENSES:
  Selling                                1,191,734        898,714       1,286,202
  General and administrative             1,012,592        740,512         785,415
  Research and development                  97,051        211,825         161,707
  Write down of assets of Photo
    Detector division                                                     574,873
                                      ------------    -----------    ------------

    Total operating expenses             2,301,377      1,851,051       2,808,197
                                      ------------    -----------    ------------
INCOME (LOSS) FROM OPERATIONS              879,470         96,355      (1,530,225)
                                      ------------    -----------    ------------

OTHER (INCOME) EXPENSE:
  Interest expense - net                   252,192        293,262         311,727
  Gain on disposal of property and
    equipment                                            (208,815)
                                      ------------    -----------    ------------

     Other expense - net                   252,192         84,447         311,727
                                      ------------    -----------    ------------

INCOME (LOSS) BEFORE PROVISION
  (CREDIT) FOR INCOME TAXES                627,278         11,908      (1,841,952)

PROVISION (CREDIT) FOR INCOME TAXES        249,169        (22,248)       (634,483)
                                      ------------    -----------    ------------

NET INCOME (LOSS)                     $    378,109    $    34,156    $ (1,207,469)
                                      ============    ===========    ============

NET INCOME (LOSS) PER SHARE           $        .30    $       .03    $       (.97)
                                      ============    ===========    ============
</TABLE>

                 See notes to consolidated financial statements.
---------------------------------------------------------------------------


                                       23

<PAGE>



<TABLE>
<CAPTION>

                         BKC SEMICONDUCTORS INCORPORATED
                         ===============================
                 STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
--------------------------------------------------------------------------------------------------------------------------------

                                                                            CONVERTIBLE
                                CONVERTIBLE                   RETAINED      PREFERRED       COMMON
                                 PREFERRED        COMMON      EARNINGS      STOCK HELD     STOCK HELD    STOCKHOLDERS'
                                   STOCK          STOCK       (DEFICIT)     IN TREASURY   IN TREASURY     EQUITY - NET
--------------------------------------------------------------------------------------------------------------------------------

<S>                             <C>            <C>            <C>          <C>            <C>              <C>       
BALANCE AT SEPTEMBER 30, 1994   $   242,078    $ 3,834,221    $ 338,810    $(235,200)     $(118,115)       $4,061,794
                                                                                                         
PURCHASE OF 1,000 SHARES OF                                                                              
  COMMON STOCK FOR THE                                                                                   
  TREASURY                                                                                   (2,304)          (2,304) 
                                                                                                         
NET LOSS FOR THE YEAR                                        (1,207,469)                                  (1,207,469) 
                                -----------    -----------    ---------    ---------      ---------        ----------
BALANCE AT SEPTEMBER 30, 1995       242,078      3,834,221     (868,659)    (235,200)      (120,419)        2,852,021
                                                                                                         
ISSUANCE OF 33,000 SHARES OF                                                                             
  COMMON STOCK                       82,500         82,500                                               
                                                                                                         
NET INCOME FOR THE YEAR              34,156                      34,156                                               
                                -----------    -----------    ---------    ---------      ---------        ----------
BALANCE AT SEPTEMBER 30, 1996       242,078      3,916,721     (834,503)    (235,200)      (120,419)        2,968,677
                                                                                                         
NET INCOME FOR THE YEAR             378,109                     378,109                                               
                                -----------    -----------    ---------    ---------      ---------        ----------
BALANCE AT SEPTEMBER 30, 1997   $   242,078    $ 3,916,721    $(456,394)   $(235,200)     $(120,419)       $3,346,786
                                ===========    ===========    =========    =========      =========        ==========
</TABLE>
                                                                      
                 See notes to consolidated financial statements.
---------------------------------------------------------------------------


                                       24

<PAGE>



<TABLE>
<CAPTION>

                         BKC SEMICONDUCTORS INCORPORATED

                      STATEMENT OF CONSOLIDATED CASH FLOWS
              FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
-------------------------------------------------------------------------------------------------

                                                     1997              1996            1995
-------------------------------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                              <C>              <C>            <C>
  Cash received from customers and
    tenants                                        $ 10,517,642    $ 10,413,935    $ 10,990,248
  Cash paid to suppliers and employees               (9,964,575)     (9,123,310)    (11,047,999)
  Interest received                                       2,959
  Interest paid                                        (255,151)       (293,262)       (311,727)
  Income taxes paid                                     (11,469)         (8,030)        (32,800)
  Income tax refunds received                           204,003         436,627
                                                   ------------    ------------    ------------
                  Net cash provided by operating
                    activities                          289,406       1,193,336          34,349
                                                   ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Additions to property and equipment                  (418,917)       (145,049)       (268,196)
  Proceeds from disposal of property and
    equipment                                                           426,344
                                                   ------------    ------------    ------------
                  Net cash provided by (used in)
                    investing activities               (418,917)        281,295        (268,196)
                                                   ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings (payments) under line-
    of-credit agreements                                252,433        (848,808)        647,596
  Proceeds from issuance of long-term
    debt                                                244,912          55,819          26,864
  Principal payments on long-term debt                 (370,162)       (704,061)       (462,065)
  Purchase of stock for the treasury                     (2,304)
                                                   ------------    ------------    ------------
                  Net cash provided by (used in)
                    financing activities                127,183      (1,497,050)        210,091
                                                   ------------    ------------    ------------
NET DECREASE IN CASH                                     (2,328)        (22,419)        (23,756)

CASH AT BEGINNING OF YEAR                                 5,921          28,340          52,096
                                                   ------------    ------------    ------------
CASH AT END OF YEAR                                $      3,593    $      5,921    $     28,340
                                                   ============    ============    ============
</TABLE>

                 See notes to consolidated financial statements.
-----------------------------------------------------------------------------


                                       25

<PAGE>




                         BKC SEMICONDUCTORS INCORPORATED
                         ===============================
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995
                        ---------------------------------


1.  OPERATIONS

          BKC Semiconductors Incorporated (the Company), and its subsidiaries,
            Souza Semiconductors, Inc. (Souza), BKC Photo Detector Division,
            Inc. (Photo Detector) and Clearwater Enterprises of Massachusetts,
            Inc. (Clearwater), design, manufacture and market discrete and photo
            detector semi-conductor devices in the United States and
            internationally. The Company grants credit to its customers in the
            industrial, automotive, telecommunications, military and aerospace
            industries. Approximately 7.5%, 8% and 19% of revenues during the
            years ended September 30, 1997, 1996 and 1995, respectively, were
            from international sales.

          There was one customer which accounted for 16.5% and 10% of revenue
            for the years ended September 30, 1997 and 1996, respectively. There
            were no customers accounting for more than 10% of revenue during the
            year ended September 30, 1995.

2.  SIGNIFICANT ACCOUNTING POLICIES

          PRINCIPLES OF CONSOLIDATION
          ---------------------------

          The consolidated financial statements include the accounts of the
            Company and its subsidiaries Souza, Clearwater and Photo Detector.
            All material intercompany transactions have been eliminated.

          Effective September 30, 1996, Clearwater was liquidated. Effective
            June 30, 1995, Souza was merged into the Company and Photo Detector
            was liquidated. In connection with Photo Detector's liquidation, the
            Company recorded a loss of $574,873 in the accompanying statement of
            consolidated income (loss) from the write down of inventory and
            property and equipment to its net realizable value.

          MANAGEMENT ESTIMATES
          --------------------

          The preparation of consolidated financial statements in conformity
            with generally accepted accounting principles requires management to
            make estimates and assumptions that affect the reported amounts of
            assets and liabilities and disclosure of contingent assets and
            liabilities at the date of the consolidated financial statements and
            the reported amounts of revenues and expenses during the reporting
            period. Actual results could differ from those estimates.

                                       26

<PAGE>



2.  SIGNIFICANT ACCOUNTING POLICIES (Continued)

          REVENUE RECOGNITION
          -------------------

          Revenue from product sales is recorded upon shipment to the customer.

          INVENTORIES
          -----------

          Inventories are valued at the lower of cost (first-in-first-out
            method) or market.

          PROPERTY AND EQUIPMENT
          ----------------------

          Property and equipment are recorded at cost. Depreciation and
            amortization are computed principally on the straight-line method
            for financial accounting purposes, and accelerated methods for tax
            purposes, over the estimated useful lives of the assets.

          Leasehold improvements are amortized on the straight-line method over
            their respective lives or the lease terms, whichever is shorter.

          Costs of maintenance and repairs are charged to expense while costs of
            significant renewals and betterments are capitalized.

          INCOME TAXES
          ------------

          Amounts in the consolidated financial statements related to income
            taxes are calculated using the principles of Financial Accounting
            Standards Board Statement No. 109, "Accounting for Income Taxes"
            (SFAS 109). Under SFAS 109, prepaid and deferred taxes reflect the
            impact of temporary differences between the amounts of assets and
            liabilities recognized for financial reporting purposes and the
            amounts recognized for tax purposes as well as tax credit
            carryforwards and loss carryforwards. These deferred taxes are
            measured by applying currently enacted tax rates. A valuation
            allowance is used to reduce deferred tax assets when it is "more
            likely than not" that some portion or all of the deferred tax assets
            will not be realized.

3.  INVENTORIES

          Inventories consisted of the following:

                                                       September 30,
                                       -----------------------------------------
                                               1997                     1996
                                               ----                     ----

              Raw Material                 $  681,157               $  558,008
              Work in Process               1,756,847                1,519,481
              Finished Goods                  811,193                1,042,252
                                           ----------               ----------
                     Total                 $3,249,197               $3,119,741
                                           ==========               ==========



                                       27

<PAGE>



4.  PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following:
<TABLE>
<CAPTION>

                                                             September 30,
                                                -----------------------------------

                                                   1997                     1996
                                                   ----                     ----

<S>                                              <C>                     <C>       
         Machinery and equipment                 $5,673,562              $5,268,890
         Leasehold improvements                     247,889                 233,444
         Equipment under capital lease              132,000                 132,000
         Furniture and office equipment             153,583                  31,043
                                                 ----------              ----------

              Total                               6,207,034               5,665,377
         Less accumulated depreciation and
           amortization                           4,751,366               4,238,938
                                                 ----------              ----------

         Property and equipment - net            $1,455,668              $1,426,439
                                                 ==========              ==========

</TABLE>

          The useful lives employed for computing depreciation and amortization
            on principal classes of property and equipment are as follows:

                    CLASS DESCRIPTION                           YEARS
                    -----------------                           -----

          Machinery and equipment                              5 - 10
          Leasehold improvements                                 10
          Equipment under capital lease                           5
          Furniture and office equipment                       5 - 10


5.  NOTE PAYABLE - BANK

          Note payable - bank of $1,683,272 and $1,430,839 at September 30, 1997
            and 1996, respectively, represents borrowings on the Company's
            $2,500,000 line of credit. Interest is payable monthly at prime plus
            1% (1997, 9-1/2%; 1996, 9-1/4%). The line is collateralized by a
            security interest in substantially all assets of the Company. The
            loan documents contain certain restrictive covenants which the
            Company has complied with or the bank has waived. The revolving
            line-of-credit agreement has a renewal date of January 31, 1998.



                                       28

<PAGE>



6.  LONG-TERM DEBT
<TABLE>
<CAPTION>

  Long-term debt consisted of the following:
                                                                         September 30,
                                                                   ------------------------------

                                                                      1997          1996
                                                                      ----          ----

<S>                                                                 <C>         <C>
Note payable - bank, prime plus 1% (1997, 9-1/2%; 1996, 9-1/4%),
  payable in monthly instalments of $27,500, plus interest, balance
  due March 2000, collateralized by a security interest in
  substantially all assets of the Company and a $450,000 guarantee
  by the City of Lawrence, Massachusetts, the guarantee is reduced
  by $25,000 per month and expires May 1998
                                                                      $852,500   $908,839

Notes payable - other, 8-1/2%, payable in monthly instalments
  aggregating $2,920 ($2,778 in 1996), including interest, through
  September 1998, collateralized by
  security interests in certain equipment                               30,731     11,108

Capital lease obligations, 10.7% to 14.2%, payable in monthly
  instalments aggregating $3,726 ($2,825 in 1996), including
  interest, through December 2000, collateralized by security
  interests in certain equipment                                        68,939     34,733
                                                                      --------   --------

          Total                                                        952,170    954,680

Less current maturities                                                383,986    374,070
                                                                      --------   --------

Long-term debt - net                                                  $568,184   $580,610
                                                                      ========   ========

</TABLE>

 The above note payable - bank contains the same restrictive covenants
   as the Company's line of credit (Note 5) which the Company has
   complied with or the bank has waived.

 Principal payments of long-term debt as of September 30, 1997 are due
   as follows:

      YEAR ENDED
     SEPTEMBER 30,                              AMOUNT
     -------------                              ------

         1998                                 $383,986
         1999                                  347,651
         2000                                  212,294
         2001                                    8,239
                                              --------

                             Total            $952,170
                                              ========



                                       29

<PAGE>



7.  LEASE AGREEMENTS

          The Company leases its manufacturing and office facility in Lawrence,
            Massachusetts under an eight-year operating lease which expires in
            October 2000, at an annual rental of $144,000 through October 1997
            and $168,000 thereafter. The lease provides for an option to
            purchase the facility at a base price of $960,000 adjusted by
            increases in the Consumer Price Index (not to exceed 5% per year).
            The option expires in October 1999. The future minimum lease
            payments, under the lease, are as follows:

             YEAR ENDED
            SEPTEMBER 30,                      AMOUNT
            -------------                      ------

                1998                          $166,000
                1999                           168,000
                2000                           168,000
                2001                            14,000
                                              --------

                                Total         $516,000
                                              ========


          The above future minimum lease payments have not been reduced by the
            total sublease rentals to be received of approximately $619,000
            under non-cancelable subleases.

          The amount charged to rent expense was approximately $144,000, for
            each of the years ended September 30, 1997, 1996 and 1995. The
            Company received approximately $210,500, $228,400 and $219,000 in
            sublease rental income for the years ended September 30, 1997, 1996
            and 1995, respectively.

          The Company leases certain equipment under operating lease agreements
            which expire at various dates through December 1999. The future
            minimum lease payments are as follows:

            YEAR ENDED
           SEPTEMBER 30,                      AMOUNT
           -------------                      ------

               1998                          $ 54,045
               1999                             9,096
               2000                             7,180
               2001                             2,127
                                              -------

                                   Total      $72,448
                                              =======


8.  INCOME TAXES

          Provision (credit) for income taxes consisted of the following:
<TABLE>
<CAPTION>

                                                             September 30,
                                  ----------------------------------------------------

                                     1997                 1996                 1995
                                     ----                 ----                 ----

  Current:
<S>                                <C>                 <C>                <C>       
    Federal                                             $ 11,252           $(215,988)
    State                           $  9,769               9,000              30,205
  Deferred:
    Federal                          213,500             (42,352)           (355,805)
    State                             25,900                (148)            (92,895)
                                    --------            --------           ---------
       Provision (credit) for
             income taxes - net     $249,169            $(22,248)          $(634,483)
                                    ========            ========           =========
</TABLE>



                                       30

<PAGE>



8. INCOME TAXES (Continued)

          The differences between the provision (credit) for income taxes
            and income taxes using the U.S. Federal Income Tax Rate of 34%
            is as follows:
<TABLE>
<CAPTION>

                                                            September 30,
                                       -------------------------------------------------------------

                                            1997                 1996                1995
                                            ----                 ----                ----
<S>                                        <C>                <C>                 <C>       

    Amount computed using the
      above rate                           $213,300           $ 4,000             $(626,300)
    State income tax - net of
      federal tax benefit                    23,600            10,200              (107,375)
    Reduction of deferred tax
      asset due to uncertainty of
      state loss carryforward, net
      of federal tax benefit                                                         66,000
    Other                                    12,269           (36,448)               33,192
                                           --------          --------             ---------

        Provision (credit) for
              income taxes - net           $249,169          $(22,248)            $(634,483)
                                           ========          ========             =========
</TABLE>


          The Company has available federal net operating loss carryforwards of
            approximately $397,700 expiring through September 2011 and state net
            operating loss carryforwards of approximately $1,732,200 expiring
            through September 2001. A deferred tax asset valuation allowance of
            $66,700 and $100,000 at September 30, 1997 and 1996, respectively,
            has been recognized to offset the related deferred tax asset due to
            the uncertainty of realizing a portion of the benefit of the state
            loss carryforward.

          Significant components of the Company's deferred tax assets and
            liabilities are as follows:

                                                           September 30,
                                                   -----------------------------

                                                      1997              1996
                                                      ----              ----

    Deferred income tax assets:
      Federal and state net operating loss
        carryforwards                                 $299,900         $616,900
      Inventory reserve                                 61,100           51,700
      Other non-deductible accruals                      8,700            6,900
                                                      --------         --------

              Total deferred income tax
                assets                                 369,700          675,500

    Deferred income tax liabilities - tax
      over book depreciation                          (82,400)         (115,500)
    Valuation allowance for deferred tax
      assets                                          (66,700)         (100,000)
                                                     --------          --------

                   Net deferred income tax
                     asset                            $220,600         $460,000
                                                      ========         ========



                                       31

<PAGE>



8.  INCOME TAXES (Continued)

          The above deferred income tax assets and liabilities are shown in the
            accompanying consolidated balance sheet under the following
            captions:

                                                                September 30,
                                                           ---------------------

                                                            1997          1996
                                                            ----          ----

              Current asset                               $274,900      $460,000
              Long-term liability                          (54,300)
                                                          --------

                        Net deferred income tax asset     $220,600      $460,000
                                                          ========      ========


9.  EMPLOYEE BENEFIT PLAN

          The Company has a deferred compensation plan (the Plan) under Section
            401(k) of the Internal Revenue Code for the benefit of all employees
            who meet certain requirements. Each participant in the plan may
            elect to defer or contribute up to 20% of his/her annual
            compensation on a pre-tax basis to a maximum of $9,500 per year.

          The Company is not required to make any contributions under the Plan
            and did not make a contribution to the Plan during the years ended
            September 30, 1997, 1996 and 1995.

10. NET INCOME (LOSS) PER SHARE

          Net income (loss) per share is based on the weighted average number of
            shares of common stock and common stock equivalents outstanding
            during the respective period. Shares reserved for outstanding
            warrants have been excluded from the net income per share
            calculation because their effect is antidilutive. The weighted
            average number of shares outstanding is as follows:


                    YEAR ENDED                           NUMBER
                   SEPTEMBER 30,                         OF SHARES
                   -------------                         ---------
                 
                       1997                              1,276,411
                       1996                              1,272,895
                       1995                              1,243,978
            

11. STOCK PURCHASE WARRANTS

          Inconnection with the Company's public offering in August 1992, the
            Company sold to the underwriter warrants to purchase up to 50,000
            shares of common stock at a price per share equal to 140% of the
            initial per share public offering price of the common stock of $7.
            The underwriter warrants were exercisable for a period of four years
            commencing August 21, 1993. The warrants expired in August 1997
            without being exercised.


                                       32

<PAGE>



12. STOCK OPTION PLANS

          During the year ended September 30, 1995, the Company's Board of
            Directors and Stockholders approved the 1994 Stock Option Plan (the
            Plan) covering its officers and employees. The total number of
            shares of common stock, no par value, for which options may be
            granted under the Plan, as amended, cannot exceed 235,000 shares.

          Following the statutory requirements of the Internal Revenue Code, the
            Plan provides that the Board of Directors may establish the purchase
            price of the stock at the time the option is granted. However, the
            purchase price may not be less than 100 percent of the fair market
            value of the Company's common stock. The aggregate fair market value
            of the stock for which any employee may be granted options in any
            calendar year shall not exceed $100,000 plus any unused limit
            carried over (as defined in the Plan) to such year from any prior
            calendar year. The Plan terminates in 2004, ten years from its
            effective date. Options granted vest over a period of two to three
            years and expire ten years from the date of grant. The Plan provides
            that any outstanding options will become immediately exercisable
            upon merger or acquisition transaction in which the Company does not
            survive as a separate entity.

          Also during the year ended September 30, 1995, the Company's Board of
            Directors and Stockholders approved the 1994 Non- Employee Director
            Stock Option Plan (the NED Plan). The total number of shares of
            common stock, no par value, for which options may be granted under
            the NED Plan cannot exceed 60,000 shares.

          The NED Plan provides that the Board of Directors may select
            non-employee directors of the Company to whom the options will be
            granted. Options may be granted on April 1 of each year for each
            non-employee director for a number of shares of common stock not to
            exceed $7,500 in market value at the date of grant. The purchase
            price may not be less than 100 percent of the fair market value of
            the Company's common stock at the time the option is granted. The
            NED Plan terminates in 2004, ten years from its effective date.
            Options granted vest over a two year period and expire ten years
            from the date of grant or 180 days after a director ceases to be a
            director.


                                       33

<PAGE>



12. STOCK OPTION PLANS (Continued)

      The following table summarizes stock option activity:

                                                      STOCK            PRICE
                                                      OPTION         PER SHARE
                                                      ------         ---------

          Outstanding at September 30, 1994             -0-             -0-
          Granted                                      7,060           $2.13
                                                     -------       -------------
                                                                 
          Outstanding at September 30, 1995            7,060          $2.13
          Granted                                    216,500       $2.00 - $3.75
                                                     -------       -------------
                                                                 
          Outstanding at September 30, 1996          223,560       $2.00 - $3.75
          Granted                                     31,250       $1.88 - $2.00
          Cancelled                                  (5,000)            ($3)
                                                    --------       -------------
                                                                 
          Outstanding at September 30, 1997          249,810       $1.88 - $3.75
                                                     =======       =============
                                                                 
          Exercisable at:                                        
            September 30, 1996                           -0-         -0-
            September 30, 1997                        97,635       $2 - $3.75
                                                                 
          Available for Grant at:                                
            September 30, 1996                        71,440     
            September 30, 1997                        45,190     
                                                             

      The Company has adopted the disclosure-only provisions of Statement of
        Financial Accounting Standards No. 123, "Accounting for Stock-Based
        Compensation." Accordingly, no compensation cost has been recognized
        for the stock option plans. Had compensation cost for the Company's
        two stock option plans been determined based on the fair value at
        the grant date for awards consistent with the provisions of SFAS No.
        123, the Company's net income and earnings per share would have been
        reduced to the pro forma amounts indicated below:

                                                              1997
                                                              ----

          Net income - as reported                          $378,109
          Net income - pro forma                             370,388
          Earnings per share - as reported                      0.30
          Earnings per share - pro forma                        0.29


      The fair value of each option grant is estimated on the date of grant
        using the Black-Scholes option-pricing model.


                                       34

<PAGE>



13. CASH FLOW INFORMATION

          The following is a reconciliation of net income (loss) to net cash
            provided by operating activities for the years ended September 30,
            1997, 1996 and 1995:
<TABLE>
<CAPTION>

                                                1997             1996          1995
                                                ----             ----          ----

<S>                                             <C>          <C>            <C>         
Net income (loss)                               $ 378,109    $    34,156    $(1,207,469)
Adjustments to reconcile net
  income (loss) to net cash
  provided by operating
  activities:
  Non-cash charges (credits) to
    net income (loss):
    Depreciation and amortization                 538,003        528,061        562,688
    Gain on disposal of property
      and equipment                                             (208,815)
    Write down of assets of Photo
      Detector division                                                         574,873
    Provision for doubtful
      accounts                                     35,000          7,244         11,410
    Reserve for inventory
      obsolescence                                203,000                       551,908
    Deferred income taxes                         239,400        (42,500)      (448,700)
  Decrease (increase) in other
    assets                                         50,923        (24,058)       (24,135)
  Decrease (increase) in current
    assets:
    Accounts receivable                          (571,422)       617,577       (287,102)
    Refundable income taxes                       215,255        218,044
    Inventories                                  (332,456)       (81,659)      (105,639)
    Prepaid expenses                              (44,521)         9,755         15,857
  Increase (decrease) in current liabilities:
    Accounts payable                             (453,775)       122,337        179,397
    Accrued liabilities                           247,145         15,983         (6,783)
                                                ---------    -----------    -----------

        Net cash provided by
          operating activities                  $ 289,406    $ 1,193,336    $    34,349
                                                =========    ===========    ===========

</TABLE>

          The Company incurred the following non-cash investing and financing
            activities:

            During the years ended September 30, 1997 and 1995, $122,740 and
               $307,375, respectively, of property additions were financed.

            During the year ended September 30, 1997, the Company refinanced
               $855,088 of long-term debt with the same bank.

            TheCompany issued 33,000 shares of common stock for $82,500 in lieu
               of compensation during the year ended September 30, 1996.


                                       35

<PAGE>



14. FAIR VALUE OF FINANCIAL INSTRUMENTS

          The following methods and assumptions were used by the Company in
            determining its fair value disclosures for financial instruments:

            CASH
            ----

            Thecarrying amount reported in the consolidated balance sheet
               approximates fair value.

            SHORT AND LONG-TERM DEBT

            Thecarrying amount of the Company's short-term bank borrowings and
               floating-rate long-term debt approximates its fair value. The
               fair value of the Company's fixed rate long-term debt is
               estimated using discounted cash flow analysis.

          The carrying amounts and fair values of the Company's financial
            instruments are as follows:
<TABLE>
<CAPTION>

                                                                September 30,
                                 ------------------------------------------------------------------------------

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

                                    CARRYING               FAIR              CARRYING               FAIR
                                     AMOUNT               VALUE               AMOUNT                VALUE
                                     ------               -----               ------                -----

<S>                                <C>                  <C>                 <C>                  <C>      
           Cash                    $   3,593            $   3,593           $   5,921            $   5,921
           Line-of-credit          1,683,272            1,683,272           1,430,839            1,430,839
           Long-term debt
             (including current
             maturities)             952,170              952,170             954,680              954,680

</TABLE>

15. CONTINGENCIES

          The Company is a potentially responsible party in connection with the
            contamination of soil and groundwater on the Company's leased
            manufacturing site in Lawrence. The Company, as tenant, might be
            considered an "operator" and therefore strictly liable for cleanup
            costs or liable for damages to third parties, unless it can
            establish certain defenses. The Company believes that its use,
            storage and disposal of materials are carefully controlled and do
            not result and have not in the past resulted in a release thereof.
            New England Environmental Technologies Corporation ("NEET") has
            conducted preliminary site investigations and has advised the
            Company that, although one of the contaminants found is used in the
            Company's operations, the Company is not a likely source of the
            contamination and that the contamination most likely results from
            historical improper disposal of chlorinated solvents on the site and
            upgradient of the site predating the Company's occupancy of the
            property.


                                       36

<PAGE>



15. CONTINGENCIES (Continued)

          Ifthe Company were required to pay cleanup costs, applicable
            hazardous waste laws allow the Company to seek contribution from
            other parties who caused the contamination or are also subject to
            strict liability (i.e., current and former owners and operators).
            The current owner and the prior lessee have agreed to hold harmless
            the Company with respect to any contamination that may have occurred
            prior to October 16, 1985.

          Although the outcome of this matter and the cost, if any, to the
            Company cannot be reasonably estimated at this time, management does
            not believe that the cost, if any, to the Company will have a
            material adverse effect on the financial position of the Company.




                                       37

<PAGE>




                                                                     SCHEDULE II


<TABLE>
<CAPTION>



                         BKC SEMICONDUCTORS INCORPORATED

                        VALUATION AND QUALIFYING ACCOUNTS
--------------------------------------------------------------------------------------------------------------------------------
     COLUMN A                    COLUMN B                 COLUMN C                      COLUMN D                COLUMN E
--------------------------------------------------------------------------------------------------------------------------------

                                                          ADDITIONS
                                 BALANCE                 ----------      
                                    AT           CHARGED TO      CHARGED TO                                      BALANCE
                                 BEGINNING       COSTS AND          OTHER                                         AT END
      DESCRIPTION                OF YEAR         EXPENSES         ACCOUNTS              DEDUCTIONS               OF YEAR
--------------------------------------------------------------------------------------------------------------------------------

YEAR ENDED SEPTEMBER
  30, 1995:

<S>                                <C>               <C>                                <C>                   <C>    
  Allowance for
    doubtful accounts              $10,092           $11,410                            $1,502 (1)               $20,000

  Reserve for
   inventory
   obsolescence                      $ -0-          $551,908                                                    $551,908

YEAR ENDED SEPTEMBER
  30, 1996:

  Allowance for
    doubtful accounts              $20,000            $7,244                            $15,550 (1)              $11,694

  Reserve for
   inventory
   obsolescence                   $551,908                                             $423,405 (2)             $128,503

YEAR ENDED SEPTEMBER
  30, 1997:

  Allowance for
    doubtful accounts              $11,694           $35,000                            $31,988 (1)              $14,706

  Reserve for
   inventory
   obsolescence                   $128,503          $203,000                           $179,619 (2)             $151,884

<FN>

(1) Represents accounts written off during the respective period.

(2) Represents inventory written off during the respective period.

</FN>

</TABLE>

                                       38