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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-QSB



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(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended April 3, 2004



OR



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------



For the transition period from
 to



Commission file number 0-11880



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HYTEK MICROSYSTEMS, INC.

(Exact name of small business issuer as specified in its charter)



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



400 Hot Springs
Road, Carson City, Nevada 89706

(Address of principal executive offices)



Issuers telephone number: (775) 883-0820



---



Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO ̈



As of May 14, 2004, the issuer had outstanding 3,256,008 shares of Common Stock, no par value.



Transitional Small Business Disclosure Format (Check
One):    YES ̈NO  x



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##### Table of Contents

Hytek Microsystems, Inc.

Quarterly Report on Form 10-QSB

For the Three Months Ended April 3, 2004



Index



|           |  |                                                                                                |  |     
|---------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|Item       |  |                                                                                                |  | Page
|           |  | PART I    FINANCIAL INFORMATION                                                                |  |     
|           |  |                                                                                               
|1.         |  | Financial Statements (Unaudited)                                                               |  |     
|           |  |                                                                                               
|           |  | Condensed Balance Sheets at April 3, 2004 and January 3, 2004                                  |  | 2   
|           |  |                                                                                               
|           |  | Condensed Statements of Operations for the three months ended April 3, 2004 and March 29, 2003 |  | 3   
|           |  |                                                                                               
|           |  | Condensed Statements of Cash Flows for the three months ended April 3, 2004 and March 29, 2003 |  | 4   
|           |  |                                                                                               
|           |  | Notes to Interim Condensed Financial Statements                                                |  | 5   
|           |  |                                                                                               
|2.         |  | Managements Discussion and Analysis or Plan of Operation                                      |  | 12  
|           |  |                                                                                               
|3.         |  | Controls and Procedures                                                                        |  | 23  
|           |  |                                                                                               
|           |  | PART II    OTHER INFORMATION                                                                   |  |     
|           |  |                                                                                               
|1.         |  | Legal Proceedings                                                                              |  | 23  
|           |  |                                                                                               
|2.         |  | Changes in Securities and Small Business Issuer Purchases of Equity Securities                 |  | 23  
|           |  |                                                                                               
|3.         |  | Defaults Upon Senior Securities                                                                |  | 23  
|           |  |                                                                                               
|4.         |  | Submission of Matters to a Vote of Security Holders                                            |  | 23  
|           |  |                                                                                               
|5.         |  | Other Information                                                                              |  | 23  
|           |  |                                                                                               
|6.         |  | Exhibits and Reports on Form 8-K                                                               |  | 24  
|           | 
|SIGNATURES |  | S-1                                                                                           
|           | 
|EXHIBITS   |  | X-1                                                                                           



Cautionary
Statement



This statement is for the purposes of the
Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. This document includes various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Sections 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events. Statements containing expressions, such as believes, anticipates, or expects,
used in our press releases and periodic reports on Forms 10-KSB and 10-QSB filed with the Commission, are intended to identify forward-looking statements. All forward-looking statements involve risks and uncertainties. Although we believe our
expectations are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurances that actual results will not materially differ from our expected results. We caution that these and
similar statements included in this report are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. Such factors include those discussed in our Annual Report on
Form 10-KSB for the year ended January 3, 2004 and in Part I, Item 2 of this Form 10-QSB. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date thereof. We undertake no obligation to
publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date thereof.



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##### Table of Contents

PART I    FINANCIAL INFORMATION



Item 1. Financial Statements.



Hytek Microsystems, Inc.



Condensed Balance Sheets



|                                                                                                                                              |  |               |            |   |                 |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | --------------- | - | ---------- | -
|                                                                                                                                              |  | April 3, 2004 |            |   | January 3, 2004 |  
|                                                                                                                                              |  | (Unaudited)   |            |   | (Note 1)        |  
|Assets:                                                                                                                                       |  |               |            |   |                 |   |            |  
|Current assets:                                                                                                                               |  |               |            |   |                 |   |            |  
|Cash and cash equivalents                                                                                                                     |  | $             | 641,889    |   |                 | $ | 682,009    |  
|Trade accounts receivable, net of allowance for doubtful accounts of $153,728 and $147,800 at April 3, 2004 and January 3, 2004,
respectively |  |               | 1,240,682  |   |                 |   | 1,204,565  |  
|Inventories                                                                                                                                   |  |               | 2,736,617  |   |                 |   | 2,657,112  |  
|Prepaid expenses                                                                                                                              |  |               | 72,791     |   |                 |   | 73,447     |  
|                                                                                                                                              |  |               |            |   |                 |   |            |  
|Total current assets                                                                                                                          |  |               | 4,691,979  |   |                 |   | 4,617,133  |  
|                                                                                                                                              |  |              
|Plant and equipment, at cost, less accumulated depreciation and amortization                                                                  |  |               | 842,233    |   |                 |   | 843,471    |  
|                                                                                                                                              |  |              
|Deposits                                                                                                                                      |  |               | 14,729     |   |                 |   | 22,459     |  
|                                                                                                                                              |  |               |            |   |                 |   |            |  
|Total assets                                                                                                                                  |  | $             | 5,548,941  |   |                 | $ | 5,483,063  |  
|                                                                                                                                              |  |               |            |   |                 |   |            |  
|Liabilities and shareholders equity:                                                                                                         |  |               |            |   |                 |   |            |  
|Current liabilities:                                                                                                                          |  |               |            |   |                 |   |            |  
|Note payable                                                                                                                                  |  | $             | 147,000    |   |                 | $ | 185,297    |  
|Accounts payable                                                                                                                              |  |               | 664,147    |   |                 |   | 381,017    |  
|Accrued employee compensation and benefits                                                                                                    |  |               | 288,259    |   |                 |   | 410,648    |  
|Accrued warranty, commissions and other                                                                                                       |  |               | 370,559    |   |                 |   | 455,379    |  
|Customer deposits                                                                                                                             |  |               | 687,747    |   |                 |   | 718,995    |  
|                                                                                                                                              |  |               |            |   |                 |   |            |  
|Total current liabilities                                                                                                                     |  |               | 2,157,712  |   |                 |   | 2,151,336  |  
|Commitments and contingencies                                                                                                                 |  |               |            |   |                 |   |            |  
|                                                                                                                                              |  |              
|Shareholders equity:                                                                                                                         |  |               |            |   |                 |   |            |  
|Common stock, no par value:Authorized shares  7,500,000Issued and outstanding shares  3,256,008 at April 3, 2004 and
January 3, 2004        |  |               | 5,390,959  |   |                 |   | 5,390,959  |  
|Accumulated deficit                                                                                                                           |  |               | (1,999,730 | ) |                 |   | (2,059,232 | )
|                                                                                                                                              |  |               |            |   |                 |   |            |  
|Total shareholders equity                                                                                                                    |  |               | 3,391,229  |   |                 |   | 3,331,727  |  
|                                                                                                                                              |  |               |            |   |                 |   |            |  
|Total liabilities and shareholders equity                                                                                                    |  | $             | 5,548,941  |   |                 | $ | 5,483,063  |  
|                                                                                                                                              |  |               |            |   |                 |   |            |  



See accompanying notes.



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Hytek Microsystems, Inc.



Condensed Statements of Operations



|                                                               |  |                    |           |   |                |   |           |  
|-------------------------------------------------------------- |  | ------------------ | --------- | - | -------------- | - | --------- | -
|                                                               |  | Three Months Ended |          
|                                                               |  | April 3, 2004      |           |   | March 29, 2003 |  
|                                                               |  | (Unaudited)        |          
|Net revenues                                                   |  | $                  | 2,466,124 |   |                | $ | 2,362,968 |  
|                                                               |  |                   
|Cost of revenues                                               |  |                    | 1,687,037 |   |                |   | 1,898,699 |  
|Engineering and development expenses                           |  |                    | 242,950   |   |                |   | 239,175   |  
|Selling, general and administrative expenses                   |  |                    | 474,827   |   |                |   | 388,027   |  
|                                                               |  |                    |           |   |                |   |           |  
|                                                               |  |                    | 2,404,814 |   |                |   | 2,525,901 |  
|                                                               |  |                    |           |   |                |   |           |  
|Operating income (loss)                                        |  |                    | 61,310    |   |                |   | (162,933  | )
|                                                               |  |                   
|Interest expense, net                                          |  |                    | (1,808    | ) |                |   | (3,732    | )
|                                                               |  |                    |           |   |                |   |           |  
|Net income (loss)                                              |  | $                  | 59,502    |   |                | $ | (166,665  | )
|                                                               |  |                    |           |   |                |   |           |  
|Basic net income (loss) per share                              |  | $                  | 0.02      |   |                | $ | (0.05     | )
|                                                               |  |                    |           |   |                |   |           |  
|Diluted net income (loss) per share                            |  | $                  | 0.02      |   |                | $ | (0.05     | )
|                                                               |  |                    |           |   |                |   |           |  
|Shares used in calculating basic net income (loss) per share   |  |                    | 3,256,008 |   |                |   | 3,256,008 |  
|                                                               |  |                    |           |   |                |   |           |  
|Shares used in calculating diluted net income (loss) per share |  |                    | 3,276,535 |   |                |   | 3,256,008 |  
|                                                               |  |                    |           |   |                |   |           |  



See accompanying notes.



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Hytek Microsystems, Inc.



Condensed Statements of Cash Flows



|                                                                                                   |  |                    |          |   |                |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | -------------- | - | -------- | -
|                                                                                                   |  | Three Months Ended |         
|                                                                                                   |  | April 3, 2004      |          |   | March 29, 2003 |  
|                                                                                                   |  | (Unaudited)        |         
|Operating activities:                                                                              |  |                    |          |   |                |   |          |  
|Net income (loss)                                                                                  |  | $                  | 59,502   |   |                | $ | (166,665 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                    |          |   |                |   |          |  
|Depreciation and amortization                                                                      |  |                    | 71,906   |   |                |   | 73,744   |  
|Gain on disposal of assets                                                                         |  |                    | 200      |   |                |   |         |  
|Changes in operating assets and liabilities:                                                       |  |                    |          |   |                |   |          |  
|Trade accounts receivable, net                                                                     |  |                    | (36,117  | ) |                |   | (195,988 | )
|Inventories                                                                                        |  |                    | (79,505  | ) |                |   | (101,167 | )
|Prepaid expenses                                                                                   |  |                    | 656      |   |                |   | 10,072   |  
|Deposits                                                                                           |  |                    |         |   |                |   | 1,150    |  
|Accounts payable                                                                                   |  |                    | 283,129  |   |                |   | 209,591  |  
|Accrued employee compensation and benefits                                                         |  |                    | (81,035  | ) |                |   | 82,946   |  
|Accrued warranty, commissions and other                                                            |  |                    | (126,173 | ) |                |   | 1,519    |  
|Customer deposits                                                                                  |  |                    | (31,248  | ) |                |   | (19,755  | )
|                                                                                                   |  |                    |          |   |                |   |          |  
|Net cash provided by (used in) operating activities                                                |  |                    | 61,315   |   |                |   | (104,553 | )
|                                                                                                   |  |                   
|Investing activities:                                                                              |  |                    |          |   |                |   |          |  
|Purchases of equipment                                                                             |  |                    | (63,138  | ) |                |   | (49,953  | )
|                                                                                                   |  |                    |          |   |                |   |          |  
|Net cash used in investing activities                                                              |  |                    | (63,138  | ) |                |   | (49,953  | )
|                                                                                                   |  |                   
|Financing activities:                                                                              |  |                    |          |   |                |   |          |  
|Principal payments on note payable                                                                 |  |                    | (38,297  | ) |                |   | (20,000  | )
|                                                                                                   |  |                    |          |   |                |   |          |  
|Net cash used in financing activities                                                              |  |                    | (38,297  | ) |                |   | (20,000  | )
|                                                                                                   |  |                    |          |   |                |   |          |  
|Net decrease in cash and cash equivalents                                                          |  |                    | (40,120  | ) |                |   | (174,506 | )
|Cash and cash equivalents at beginning of period                                                   |  |                    | 682,009  |   |                |   | 445,710  |  
|                                                                                                   |  |                    |          |   |                |   |          |  
|Cash and cash equivalents at end of period                                                         |  | $                  | 641,889  |   |                | $ | 271,204  |  
|                                                                                                   |  |                    |          |   |                |   |          |  



See accompanying notes.



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Hytek Microsystems, Inc.

Notes to Interim Condensed Financial Statements

April 3, 2004

(Unaudited)



1. Basis of Presentation



The accompanying unaudited condensed financial statements as of April 3, 2004 have been
prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited condensed financial statements include all
adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation. The operating results for the three-month period ended April 3, 2004 are not necessarily indicative of the results that may be expected for
the entire year ending January 1, 2005. We operate on a 52/53-week fiscal year, which approximates the calendar year. These condensed financial statements, notes and analyses should be read in conjunction with the financial statements for the fiscal
year ended January 3, 2004, and notes thereto, which are contained in our Annual Report on Form 10-KSB for such fiscal year.



The report of our independent auditors in the fiscal 2003 financial statements included an explanatory paragraph stating that there is substantial doubt with respect to
our ability to continue operating as a going concern.



The balance sheet at
January 3, 2004 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial
statements.



The unaudited condensed financial statements as of April 3, 2004
have been prepared in accordance with accounting principles generally accepted in the United States, which require the use of estimates and assumptions that affect the amounts reported in the condensed financial statements and accompanying notes.
Actual results could differ materially from those estimates.



Certain amounts
in the prior periods condensed financial statements have been reclassified to conform to the current periods presentation.



2. Summary of Significant Accounting Policies



Trade Accounts Receivable and Allowance for Doubtful Accounts



The Companys receivables are recorded when billed and represent claims against third parties that will be settled in cash. The carrying value of the Companys
receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value.



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The Company evaluates the collectibility of accounts receivable on a customer-by-customer basis. The Company records a
reserve for bad debts against amounts due to reduce the net recognized receivable to an amount the Company believes will be reasonably collected. The reserve is a discretionary amount determined from the analysis of the aging of the accounts
receivables, historical experience and knowledge of specific customers.



Legal Contingencies



The Company is currently involved in a
legal claim and proceeding that is a routine matter that is incidental to the Companys business. Periodically, the Company reviews the status of any significant litigation matter in which it is involved and assesses the potential financial
exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Significant judgment is required in both the determination of
probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes
available, the Company reassesses the potential liability related to pending claims and litigation and may revise the estimates. Such revisions in the estimates of the potential liabilities could have a material impact on the Companys
financial position, cash flows or results of operations.



Inventories



Inventories are stated at the lower of cost (determined using the
first-in, first-out method) or market. The Company plans production based on orders received and forecasted demand. The valuation of inventories at the lower of cost or market requires the use of estimates regarding the amounts of current
inventories that will be sold. These estimates are dependent on the Companys assessment of current and expected orders from its customers, including consideration that orders are subject to cancellation with limited advance notice prior to
shipment. Because the Companys markets are volatile, and are subject to technological risks and price changes as well as inventory reduction programs by the Companys customers, there is a risk that the Company will forecast incorrectly
and produce excess inventories of particular products.



As a result, actual
demand may differ from forecasts, and such a difference may have a material adverse effect on actual results of operations. Inventory reserves were calculated in accordance with the Companys policy, which is based on inventory levels in excess
of demand for each specific product.



Plant and Equipment



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



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Long-Lived Assets



The Company has adopted the provisions of the Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 requires impairment losses to be recognized for long-lived assets and identifiable intangibles, other than goodwill, used in operations when indicators of impairment are present and the estimated undiscounted
cash flows are not sufficient to recover the assets carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount.



Revenue Recognition



Sales are recorded by the Company upon delivery of the product and title transfer.



Stock-Based Compensation



The Company has adopted the disclosure provision for stock-based compensation of SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, which was released in December 2002 as an amendment of SFAS No. 123, but continues to account for such items using the intrinsic value method as outlined under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Under APB Opinion No. 25, if the exercise price of the Companys employee stock options equals or exceeds the fair market value of the
underlying stock on the date of grant, no compensation expense is recognized.



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



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For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting
period of the options. The following table illustrates the effect on net loss per share if the fair value-based method had been applied to all awards:



|                                                                                                                                |  |                    |         |   |                |   |          |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | -------------- | - | -------- | -
|                                                                                                                                |  | Three Months Ended |        
|                                                                                                                                |  | April 3, 2004      |         |   | March 29, 2003 |  
|Net income (loss) as reported                                                                                                   |  | $                  | 59,502  |   |                | $ | (166,665 | )
|Add: stock-based employee compensation expense included in reported net income (loss), net of related tax effects               |  |                    |        |   |                |   |         |  
|Deduct: stock-based employee compensation expense determined under the fair value method for awards, net of related tax
effects |  |                    | (24,714 | ) |                |   | (27,358  | )
|                                                                                                                                |  |                    |         |   |                |   |          |  
|Pro forma net income (loss)                                                                                                     |  | $                  | 34,788  |   |                | $ | (194,023 | )
|                                                                                                                                |  |                    |         |   |                |   |          |  
|Net income (loss) per share:                                                                                                    |  |                    |         |   |                |   |          |  
|Basic - as reported                                                                                                             |  | $                  | 0.02    |   |                | $ | (0.05    | )
|                                                                                                                                |  |                    |         |   |                |   |          |  
|Basic - pro forma                                                                                                               |  | $                  | 0.01    |   |                | $ | (0.06    | )
|                                                                                                                                |  |                    |         |   |                |   |          |  
|Diluted - as reported                                                                                                           |  | $                  | 0.02    |   |                | $ | (0.05    | )
|                                                                                                                                |  |                    |         |   |                |   |          |  
|Diluted - pro forma                                                                                                             |  | $                  | 0.01    |   |                | $ | (0.06    | )
|                                                                                                                                |  |                    |         |   |                |   |          |  



Effective March 12, 2004, the Board of
Directors amended the 2001 Stock Plan vesting provisions for 69,000 employee stock option grants from an annual vesting of the shares over four years to one-quarter of the shares vesting the first year following the vesting commencement date
followed by monthly vesting over the remaining three years. Prior exercise prices and the number of shares underlying the options remained unchanged. Compensation expense was measured based on the awards intrinsic value at the date of the
modification in excess of the awards original intrinsic value and amounted to approximately $16,000. The Company will recognize compensation expense over the new expected vesting period based on estimates of the numbers of options that employees
ultimately will retain that otherwise would have been forfeited, absent the modification.



On March 12, 2004, the Companys Board of Directors approved the grant of 133,000 options to certain officers and key employees of the Company, which were subject to shareholder approval. These options are
subject to a contingency and, therefore, a grant date has not occurred under APB Opinion No. 25. If the contingency is resolved, the Company may recognize compensation expense for these options to the extent that the fair market value on the
approval date exceeds the fair value market on the grant date.



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Product Warranty Costs



The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Companys warranty obligation is affected by product
failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Companys estimates, revisions to the estimated
warranty liability would be required.



Income Taxes



The Company had no income tax expense or benefit during the three months ended April 3,
2004, due to the Companys carryover amounts relating to prior net operating losses, and March 29, 2003, due to the Company recording a valuation allowance to offset the expected tax benefit due to its operating loss. The Company had net
operating loss and tax credit carryforwards for federal income tax purposes of $3,822,661 and $32,795, respectively. These net operating loss carryforwards will begin to expire in 2009. Future utilization of the Companys net operating loss and
other credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. Such an annual limitation could result in the expiration
of the net operating losses before utilization.



New Accounting
Pronouncements



In November 2002, the EITF reached a consensus on Issue
00-21, Multiple-Deliverable Revenue Arrangements (EITF 00-21). EITF 00-21 addresses how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The
consensus mandates how to identify whether goods or services or both that are to be delivered separately in a bundled sales arrangement should be accounted for separately because they are separate units of accounting. The guidance can
affect the timing of revenue recognition for such arrangements, even though it does not change rules governing the timing or pattern of revenue recognition of individual items accounted for separately. The final consensus will be applicable to
agreements entered into in fiscal years beginning after June 15, 2003, with early adoption permitted. Additionally, companies will be permitted to apply the consensus guidance to all existing arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, Accounting Changes. The adoption did not have a material impact on the Companys financial position, cash flows or results of operations.



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In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51 (FIN 46). In December 2003, FIN 46 was revised to clarify certain provisions and effective dates for application. FIN 46 addresses consolidation by business enterprises of variable interest entities
that have certain characteristics. Transferors to qualifying special-purpose entities and grandfathered qualifying special-purpose entities subject to the reporting requirements of SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, are excluded from the scope of FIN 46. FIN 46 is applicable no later than the end of the first interim or annual reporting period ending after March 15, 2004, unless the Company
has an interest in a special purpose entity, in which case the effective date for application is no later than the end of the first interim or annual reporting period ending after December 15, 2003. The Company currently has no contractual
relationship or other business relationship with a variable interest entity. However, if it were to enter into any such arrangement with a variable interest entity in the future, the financial position, cash flows or results of operations could be
adversely impacted.



3. Inventories



Inventories consist of the following:

|
|

|                |  |               |           |                 |   |          
|--------------- |  | ------------- | --------- | --------------- | - | ---------
|                |  | April 3, 2004 |           | January 3, 2004
|Raw materials   |  | $             | 1,839,481 |                 | $ | 1,833,038
|Work-in-process |  |               | 777,714   |                 |   | 698,654  
|Finished goods  |  |               | 119,422   |                 |   | 125,420  
|                |  |               |           |                 |   |          
|                |  | $             | 2,736,617 |                 | $ | 2,657,112
|                |  |               |           |                 |   |          



4. Net Income (Loss) per Share



A reconciliation of the shares used in the basic and diluted net income
(loss) per share calculations follows:



|                                            |  |                    |  |               
|------------------------------------------- |  | ------------------ |  | --------------
|                                            |  | Three Months Ended
|                                            |  | April 3, 2004      |  | March 29, 2003
|Basic weighted average shares outstanding   |  | 3,256,008          |  | 3,256,008     
|Effect of dilutive securities:              |  |                    |  |               
|Stock options                               |  | 20,527             |  |              
|                                            |  |                    |  |               
|Diluted weighted average shares outstanding |  | 3,276,535          |  | 3,256,008     
|                                            |  |                    |  |               



Net income (loss) per share of common
stock is computed in accordance with SFAS No. 128 Earnings Per Share. The calculation of basic and diluted net income (loss) per share is the same except for the dilutive effect of outstanding stock options (determined using the treasury
stock method). There is no effect of outstanding options on the diluted loss per share for the period ended March 29, 2003 because their effect would be anti-dilutive. Employee and director stock options to purchase approximately 180,500 and 303,000
shares of the Companys common stock for the three months ended April 3, 2004 and March 29, 2003, respectively, were not included in the computation of diluted loss per share because the effect would be anti-dilutive.



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5. Note Payable



At April 3, 2004, the Company was not in compliance with either the minimum tangible net worth or quick ratio covenant, which gave the bank the right to call the note
payable immediately. The bank has elected not to take any action as of that date. On May 14, 2004, the Company repaid in full the outstanding principal of $134,671 due under the note payable.



6. Product Warranties



The Company offers a standard 90-day warranty for all of its products and provides a basic limited warranty, including parts and labor. On
occasion, the warranty period may be greater than 90 days when deemed necessary by the Company. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs at the time
product revenues are recognized, approximately 2% to 4% of net revenues. Factors that affect the Companys warranty liability include the amount of revenues, historical and anticipated rates of warranty claims, and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.



Changes in the Companys product liability are as follows:



|                                              |  |                    |         |   |                |   |         |  
|--------------------------------------------- |  | ------------------ | ------- | - | -------------- | - | ------- | -
|                                              |  | Three Months Ended |        
|                                              |  | April 3, 2004      |         |   | March 29, 2003 |  
|Balance at beginning of period                |  | $                  | 75,000  |   |                | $ | 72,335  |  
|Warranties issued                             |  |                    | 73,856  |   |                |   | 70,889  |  
|Settlements made                              |  |                    | (26,881 | ) |                |   | (15,213 | )
|Changes in liabilities, including expirations |  |                    | (35,817 | ) |                |   | (54,801 | )
|                                              |  |                    |         |   |                |   |         |  
|Balance at end of period                      |  | $                  | 86,157  |   |                | $ | 73,209  |  
|                                              |  |                    |         |   |                |   |         |  



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Item 2. Managements Discussion and Analysis or Plan of Operation.



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



Overview



We manufacture high reliability micro-electronic circuits used in military applications, geophysical exploration, medical
instrumentation, satellite systems, industrial electronics, opto-electronics and other OEM applications. Although we have research and design capabilities, most of our products are build-to-print as specified by our customers. We also
have some standard product offerings, including thermo-electric cooler controllers (TECC), laser diode drivers (LDD), heaters and delay lines. For the first quarter of fiscal 2004, these standard products accounted for
approximately 8% of net revenues, up from approximately 7% during the first quarter of fiscal 2003.



As of April 3, 2004, we had 87 full and part-time employees. During the first quarter of fiscal 2004, our President and Chief Executive Officer, who was
previously consulting for us, joined us as a full-time employee. Additionally, we hired an experienced purchasing manager to further strengthen our infrastructure especially relating to our purchasing and inventory initiatives. During the second
quarter of fiscal 2004, we hired a regional sales manager to assist us in our sales and marketing efforts.



During the first quarter of fiscal 2004, we had two customers, Chesapeake Sciences Corporation (Chesapeake) and Medtronic A/S
(Medtronic), that together accounted for 47% of our net revenues. At the end of the first quarter of fiscal 2004, we completed and shipped substantially all of the open orders in the backlog due to our largest customer, Chesapeake. We
believe there are sufficient orders in our backlog scheduled to ship this fiscal year, as well additional sales opportunities, to offset the level of revenues associated with Chesapeake. Additionally, we anticipate additional new orders from
Chesapeake during fiscal 2004. Also, in the first quarter of fiscal 2004, one of our two largest customers notified us one of their products that uses our component parts, was experiencing unacceptably high levels of failure. This customer
investigated and resolved the issue. The original problem causing the failures was isolated to another component used in their product and was not attributable to our component parts. Should either Chesapeake or Medtronic have a long-term slow down
in demand, become a credit risk or discontinue their relationship with us, it would have a material adverse effect on our financial position, cash flows and results of operations. Additionally, if the current orders in our backlog scheduled to be
shipped are changed as to timing or are cancelled, this could have a material adverse effect on our financial position, cash flows and results of operations.



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During the first quarter of fiscal 2004, the Defense Supply Center of Columbus (DSCC)
completed its audit of our MIL-PRF-38534 certification. This audit by the DSCC to continue with our Class H (military level) and Class K (space level) certification to MIL-PRF-38534, as well ISO-9001 certification, is required by the Federal
government and is conducted in the normal course of business with suppliers contracting to provide hybrid microelectronic products and services. At the completion of the audit, although some audit discrepancies were noted and we were issued DSCC
Action Requests (DARs), the DSCC audit team did recommend that we be re-certified to MIL-PRF-38534, Class H and Class K, as well as ISO-9001. We have responded to the DARs and upon satisfactory closure of the DARs, we
will be issued a certificate stating that we are compliant with the requirements of MIL-PRF-38534 and ISO-9001. Although the DARs are not yet closed, we do believe that we will be re-certified to MIL-PRF-38534, Class H and Class K, as well as
ISO-9001. However, any loss of our MIL-PRF-38534 or ISO certifications could have a material adverse effect on our financial position, cash flows and results of operations due to our inability to sell to customers that require such certifications
from their suppliers.



Our current fiscal 2004 internal revenue
forecast indicates a revenue level similar to 2003. This forecast is based on a combination of firm backlog and a forecast of orders anticipated to be placed during the balance of the second quarter of fiscal 2004. In the event that forecast orders
do not become actual sales, or are placed later in the fiscal year than anticipated, the fiscal 2004 revenue results could be lower than anticipated, which would have a material adverse effect on fiscal 2004 financial position, cash flows and
results of operations.



Our cash position remained stable
during the first quarter of fiscal 2004; however, it is forecasted to decrease during fiscal 2004 as we pay our accrued liabilities consisting primarily of payments on the note payable and accrued severance costs. We no longer have use, nor have we
had use, of our line of credit facility with Bank of the West since May 2003, when the bank converted our outstanding balance of $295,000 to a short-term note. As of April 3, 2004, we were not in compliance with either the minimum tangible net worth
or quick ratio covenants, which gave Bank of the West the right to call the note payable immediately. The bank elected not to take any action at that time as a result of the debt covenant violation, but reserves the right to do so if deemed
necessary. The bank agreed to continue the lending relationship; however, the bank reserves the right to call the loan at its discretion. The outstanding principal balance due on this note payable of $135,000 was paid in full on May 14,
2004 under the terms of the note agreement.



On May 10, 2004,
we entered into a non-binding term sheet to secure up to a $1,500,000 credit facility (proposed credit facility). This proposed credit facility would be based upon certain percentages of our trade accounts receivable and raw materials
inventory. The proposed credit facility would bear interest at prime plus 2% to 4% and be collateralized by substantially all of our assets. As this proposed credit facility has not been formalized, the final terms and conditions could differ
substantially from the non-binding term sheet.



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We have incurred covenant violations, have continued to experience operating losses and have had an
accumulated deficit since December 29, 2001. The report of independent auditors on our January 3, 2004 financial statements includes an explanatory paragraph indicating there is substantial doubt about our ability to continue as a going concern. We
have developed a plan to address these issues that allows us to continue as a going concern through at least the end of fiscal 2004. This plan includes sustaining revenues, increasing the gross margin percentage and reducing operating expenses as
necessary. Although we believe the plan will be successful, there is no assurance that these events will occur. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.



Critical Accounting Policies and Estimates



The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and use judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate estimates, including those related to bad debts, inventories, investments, financing operations, warranty obligations, contingencies and
litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.



We believe the following critical accounting policies and estimates affect the more significant judgments and estimates used
in the preparation of our financial statements.



Revenue Recognition and
Warranty Liability



We recognize revenue upon shipment
of product and transfer of title to the customer. We provide for the estimated cost of product warranty at the time revenue is recognized. Our warranty obligation is affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. Historically, our warranty results
have been consistent with our estimates.



Allowance for Doubtful Accounts



We estimate the possible losses resulting from
non-payment of outstanding accounts receivable on a customer-by-customer basis. We record a reserve for bad debts against amounts due to reduce the net recognized receivable to an amount we believe will be reasonably collected. The reserve is a
discretionary amount determined from the analysis of the aging of the accounts receivable, historical experience and knowledge of specific customers. If the estimates are not correct, we might have to write off accounts receivable in excess of the
bad debt reserve, which would be charged against earnings. Historically, our bad debt experience has been consistent with our estimates.



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Inventory Reserves



Our inventories are stated at the lower of cost (determined using the first-in, first-out method), or market. Our planned
production is based on orders received and, in some cases, forecasted demand. The valuation of inventories at the lower of cost or market requires the use of estimates regarding the amounts of current on-hand inventories that will be sold. These
estimates are dependent on our assessment of current and expected orders from customers, including consideration that orders are subject to cancellation with limited advance notice prior to shipment. In some cases, we are required to procure minimum
order quantities above planned or forecasted demand. As a result, actual material usage may differ from planned demand or forecasts, and such a difference may have a material adverse effect on actual results of operations due to required write-offs
of excess or obsolete inventory. In the past, we procured inventory on the basis of forecasted demand for our optical standard products that did not materialize, which resulted in the need to write off excess or obsolete inventory relating to such
products.



Legal Contingencies



We are currently involved in a legal claim and proceeding that is a routine
matter that is incidental to our business. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can
be estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether exposure can be reasonably estimated. Because of uncertainties related to these
matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such
revisions in the estimates of the potential liabilities could have a material impact on our financial position, cash flows and results of operations.



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##### Table of Contents

Results of Operations



The following table sets forth, for the periods indicated, certain statement of operations data for our company expressed as
a percentage of net revenues:



|                                             |  |                    |   |  |                |   
|-------------------------------------------- |  | ------------------ | - |  | -------------- | --
|                                             |  | Three Months Ended |  
|                                             |  | April 03, 2004     |   |  | March 29, 2003 |   
|Statements of Operations Data:               |  |                    |   |  |                |   
|                                             |  |                   
|Net revenues                                 |  | 100.0              | % |  | 100.0          | % 
|                                             |  |                   
|Cost of revenues                             |  | 68.4               |   |  | 80.4           |   
|Engineering and development expenses         |  | 9.9                |   |  | 10.1           |   
|Selling, general and administrative expenses |  | 19.2               |   |  | 16.4           |   
|                                             |  | 97.5               |   |  | 106.9          |   
|                                             |  |                   
|Operating income (loss)                      |  | 2.5                |   |  | (6.9           | ) 
|                                             |  |                   
|Interest expense, net                        |  | (0.1               | ) |  | (0.2           | ) 
|                                             |  |                   
|Net income (loss)                            |  | 2.4                | % |  | (7.1           | )%



Three Months Ended April 3, 2004
Compared with Three Months Ended March 29, 2003



Net
Revenues.Net revenues were $2,466,000 in the first quarter of fiscal 2004 compared to $2,363,000 in the first quarter of fiscal 2003. The increase of approximately $103,000, or 4%, was primarily the result of product mix and volume as no one
particular customer accounted for the increase. We experienced some increases in our medical and standard product sales, partially offset by a decrease in our geophysical product sales.



Cost of Revenues.Cost of revenues were $1,687,000, or 68% of net revenues, in the first quarter of fiscal 2004
compared to $1,899,000, or 80% of net revenues in the first quarter of fiscal 2003. The decrease of approximately $212,000, or 11%, is attributable to the recovery of scrap associated with precious metals that are reclaimed by an outside processor
and paid to us in the amount of approximately $119,000, or 5% of net revenues. The recovery of $119,000 is higher than customary, as it is attributable to approximately 14 months of scrap accumulation, along with higher rates paid on precious
metals. Additionally, factory labor costs, including fringe benefits, decreased approximately $100,000, or 4% of net revenues, and are attributable to reductions in force that occurred in December 2003. The remaining decrease is associated with
lower factory overhead expenses as we continue our cost containment initiatives.



Engineering and Development Expenses.Engineering and development expenses were $243,000, or 10% of net revenues, in the first quarter of fiscal 2004 compared to $239,000, or 10% of net revenues, in the first
quarter of fiscal 2003. The majority of our engineering and development expense is related to the introduction and start-up of new custom products and sustaining engineering efforts on current programs and products. During the first quarter of
fiscal 2004 and 2003, there was no material amount spent on research and development. The engineering resources available have been focused on program management, sustaining engineering and yield improvement.



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Selling, General and Administrative. Selling, general and administrative expenses were $475,000,
or 19% of net revenues, in the first quarter of fiscal 2004, as compared to $388,000, or 16% of net revenues, in the first quarter of fiscal 2003. The increase of $87,000, or 22%, is attributable to increased fees for professional services and
increased payroll due to management and finance personnel hired in late fiscal 2003. We experienced an increase in legal and accounting fees of approximately $24,000 in the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003
due primarily to increased services needed to respond to regulatory changes for publicly traded companies. Additionally, we incurred consulting fees of approximately $34,000, in the first quarter of 2004, as we retained an Information Technology
(IT) consultant to continue assisting in re-engineering our IT systems infrastructure. Finally, there was an increase of approximately $29,000 attributable to our hiring of a Corporate Controller, in late fiscal 2003, and an accounting
staff person, in early fiscal 2004, to assist in both general business operations and increased regulatory compliance for publicly traded companies.



Interest Expense, Net. Interest expense, net of interest income, decreased $2,000 in the first quarter of fiscal 2004 compared to the first quarter
of fiscal 2003. This decrease is attributable to the reduced principal amount of our note payable, offset partially by an increase in the interest rate incurred by us on the debt instruments outstanding in their respective periods.



Provision For (Benefit From) Income Taxes. During the first quarter of
fiscal 2004, we recognized no provision for income taxes because we had carryover amounts relating to prior operating losses. During the first quarter of fiscal 2003, we recognized no benefit from income taxes due to our recording of a valuation
allowance to offset the expected tax benefit due to our operating loss. At April 3, 2004, we had net operating loss carryforwards for federal income tax purposes of approximately $3,823,000. These loss carryforwards will begin to expire in 2009. We
also have future tax credit carry forwards for federal income tax purposes of approximately $33,000 at April 3, 2004. These tax credit carry forwards will not expire. Future utilization of our net operating loss and other credit carryforwards may be
subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses before
utilization.



Liquidity and Capital Resources



We derived net income of $60,000 during the first quarter of fiscal 2004 and
had an accumulated deficit of $2,000,000 at April 3, 2004. We had cash and cash equivalents of $642,000 at April 3, 2004, as compared to $682,000 at January 3, 2004. During the first quarter of fiscal 2004, we generated $61,000 from operating
activities primarily due to an increase in accounts payable, used $63,000 primarily for the purchase of capital equipment and made principal payments on our short-term note payable of $38,000. During the first quarter of fiscal 2003, we used
$105,000 in operating activities, used $50,000 for the purchase of capital equipment and made principal payments on our line of credit of $20,000. In addition, we had $147,000 and $185,000 in outstanding borrowings at April 3, 2004 and January 3,
2004, respectively, under our loan agreement. Subsequent to the end of the first quarter, the outstanding principal balance of $135,000 due on this note payable was paid in full.



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Accounts receivable increased $36,000, or 3%, and were $1,241,000 at April 3, 2004, as compared to
$1,205,000 at January 3, 2004. This overall increase is a result of the timing of our shipments, as well as our collection activity during the three months ending April 3, 2004. At April 3, 2004, accounts in excess of 60 days totaled 12% of total
receivables, as compared to 21% at January 3, 2004. During the course of the year, we have reviewed our exposure to losses resulting from bad debts and as a result have increased our reserve for bad debt losses by approximately $6,000.



Inventories increased $80,000, or 3%, and were $2,737,000 at April 3, 2004
as compared to $2,657,000 at January 3, 2004. The overall increase is a result of inventory scheduling and receipts of orders to meet our production demands during the second quarter of fiscal 2004.



Note payable decreased $38,000, or 21%, and was $147,000 at April 3, 2004, as
compared to $185,000 at January 3, 2004. The overall decrease is a result of principal payments on the note payable. On May 14, 2004, we paid in full the remaining principal of $135,000 due under the note payable.



Accounts payable increased $283,000, or 74%, to $664,000 at April 3, 2004 as
compared to $381,000 at January 3, 2004. This increase is attributable to the timing of our inventory scheduling and receipts of orders, as well as our utilization of cash resources to pay accrued expenses, primarily amounts relating to payroll,
severance and professional services.



Accrued employee
compensation and benefits decreased $123,000, or 30%, to $288,000 at April 3, 2004 compared to $411,000 at January 3, 2004. The decrease is attributable to payments for payroll and severance previously accrued. The amount of accrued and unpaid
severance, both compensation and benefits, to our former Chief Executive Officer and Chief Financial Officer was $78,000 at April 3, 2004.



Accrued warranty, commissions and other accrued liabilities decreased $84,000, or 18%, to $371,000 at April 3, 2004 as compared to $455,000 at January 3,
2004. A majority of this decrease is attributable to payments for consulting, legal, accounting and tax professional services previously accrued.



Customer deposits decreased $31,000, or 4%, to $688,000 at April 3, 2004 as compared to $719,000 at January 3, 2004. This decrease is attributable to
shipments of finished products to customers who had prepaid for materials to commence production of their products.



We had no long-term debt as of April 3, 2004 and January 3, 2004.



During the first quarter of fiscal 2004, we extended our non-cancelable operating lease for our primary facility from June 30, 2005, the original
expiration date, to June 30, 2015. The total aggregate contractual obligation under this extended lease is $2,110,000 for the period of July 1, 2005 to June 30, 2015. In addition, we have future cash payments due under severance agreements with our
former Chief Executive Officer and Chief Financial Officer in the amounts of $11,000 and $67,000, respectively, as of April 3, 2004. The former Chief Executive Officers severance will be fully paid in the second quarter of fiscal 2004. The
former Chief Financial Officers severance will be fully paid in the fourth quarter of 2004.



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We have no off-balance sheet financing arrangements as of April 3, 2004.



We have no material commitments for capital expenditures as of April 3, 2004.



Our fundamental accounting policies are formulated to achieve
compliance with Generally Accepted Accounting Principles (GAAP), Securities and Exchange Commission rules and other applicable federal regulations. The emphasis of our financial management oversight function includes sustaining revenues, increasing
the gross margin percentage and reducing operating expenses as necessary.



Our management team believes that our backlog and projected new business in the ensuing year, together with cost reduction measures already initiated, can provide sufficient cash to meet normal operating needs without
additional financing activity through 2004. We are pursuing additional debt and equity financing opportunities as we feel it would strengthen our position to assist us in our long-term growth initiatives; however, there is no certainty that such
financing can be obtained or that the terms on which it can be obtained would be favorable.



Factors Affecting Future Results



There are a number of factors that could significantly affect our future financial position, cash flows and results of operations, including, but not limited to, the following:



Customer Concentration



During the first quarter of fiscal 2004, we had two customers that together
accounted for 47% of our net revenues. Should either customer have a slow-down in demand or discontinue its relationship with us, there would be a material adverse effect to the extent we could not rapidly replace this lost business.



During the first quarter of fiscal 2004, one of our two largest customers
informed us one of their products that use our parts was experiencing unacceptably high levels of failure when operated by end-users. This customer has since determined that the cause of the failure is completely unrelated to the component parts
provided by us. Further, our customer has isolated the problem and has developed what they believe to be the appropriate solution. We are currently producing component parts based upon our customers forecast.



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Dependence on Key Suppliers



We are heavily dependent on key suppliers for critical components as specified by us or by our customers. To the extent we
can not obtain components in a timely manner, at quoted prices, we may not be able to satisfy the needs of our customers or will satisfy them at a cost detrimental to us. The results could include order cancellation, penalties and higher costs,
which could have a material adverse effect on our financial position, cash flows and results of operations.



Economic Factors



We are experiencing selected price increases for components and manufacturing materials we buy containing precious metals. To the extent we cannot capture
these costs through increased prices to our customers, we could experience a decrease in our margins, which could have an adverse effect on our results of operations. Additionally, as economic conditions improve, we are starting to experience an
allocation of key components by our suppliers to all of their customers. Therefore, the key components that we are attempting to procure may be available in limited quantities. This could cause manufacturing delays and could have a material adverse
effect on our financial position, cash flows and results of operations.



New Programs



Many of our current
programs are legacy products and, over time, run the risk of obsolescence and re-design. To the extent our customers redesign their products eliminating thick film and hybrid technologies, we run the risk of a reduction in revenue. To
the extent we can not capture newly designed products utilizing our standard technologies, we also run the risk of reduced net revenues.



Manufacturing



Historically, manufacturing yield has been a major cost element of our financial performance. From time to time, we have experienced significant yield
problems, which have reduced our net revenues and increased our cost of revenues. Although we have seen some improvement in manufacturing yields during the past year, there can be no assurances that this improvement can be maintained, which could
have an adverse effect on our financial position, cash flows and results of operations. In addition, much of our manufacturing equipment, although currently in good working order, is nearing the end of its useful life. We currently do not have the
financial resources to heavily invest in new equipment and, as a result, run the risk of manufacturing delays and associated costs should a key piece of equipment become irreparable.



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Dependence on Key Personnel



We are heavily dependent on key personnel in engineering, manufacturing, sales and accounting. The ability to recruit and
retain qualified personnel is dependent on our ability to pay competitive salaries and to offer a safe and stable work environment. In addition, our location in Carson City, Nevada makes it difficult to attract employees who wish to live in or near
a major metropolitan area. To the extent we can not retain the key personnel currently employed or any failure by us to attract and retain qualified personnel in the future could have a material adverse effect on our financial position, cash flows
and results of operations.



Availability of Financial
Resources



We have limited financial resources
currently available to invest in new initiatives, additional key personnel, new equipment and operating capital. Although we are seeking additional sources of capital, there are no assurances we will be successful. As cash is a limited resource, any
long-term manufacturing disruption, unforeseen expenses or other cash utilization activities not in the ordinary course of business could have a material adverse effect on us. Our cash position remained stable during the first quarter of fiscal
2004; however, we have forecasted a decrease during fiscal 2004 as we pay out accrued liabilities consisting primarily of payments on the note payable and accrued severance costs. We no longer have use, nor have we had use, of our line of credit
facility with Bank of the West since May 2003, when the bank converted our outstanding balance of $295,000 to a short-term note. The outstanding principal balance due on this note payable of $135,000 was paid in full on May 14, 2004 under the terms
of the note agreement.



The report of independent auditors on
our January 3, 2004 financial statements includes an explanatory paragraph indicating there is substantial doubt about our ability to continue as a going concern. We have developed a plan to address these issues and allow us to continue as a going
concern through at least the end of fiscal 2004. This plan includes sustaining revenues, increasing the gross margin percentage and reducing operating expenses as necessary. Although we believe the plan will be realized, there is no assurance that
these events will occur. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.



Military
Certification



A significant portion of our business
is military and is dependent on maintaining our MIL-PRF 38534 certification and qualification. While we fully expect to maintain this certification and qualification, the loss of it would have a material adverse impact on our ability to capture this
type of business and could significantly reduce our revenues.



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Inventory Excess and Obsolescence



Because our markets are volatile, and are subject to technological risks and
price changes as well as inventory reduction programs by our customers, there is a risk that we will forecast incorrectly and procure excess inventories of particular products. In some cases, we are required to procure minimum order quantities above
planned or forecasted demand. As a result, actual material usage may differ from planned demand or forecasts, and such a difference may have a material adverse effect on actual results of operations due to required write-offs of excess or obsolete
inventory.



Competition



The primary factors of competition in the markets served by us are product
reliability, timely delivery, price, performance and stability of the manufacturer. We believe that we generally compete favorably with respect to all of these factors; however, our stability (our losses in the past three fiscal years, as well as
our accumulated deficit through the end of the first quarter of 2004) may be a concern to certain of our customers. If our instability causes a competitive disadvantage, this will have a material adverse effect on our financial position, cash flows
and results of operations.



Legal Proceeding



We are currently involved in a legal claim and
proceeding that is a routine matter that is incidental to our business. On September 19, 2002, a charge of discrimination was filed against us by a former employee with the Nevada Equal Rights Commission, alleging harassment and sexual
discrimination. Under applicable Federal law, the claimant cannot bring suit against us until an administrative process has been exhausted. At some point in the future, the Nevada Equal Rights Commission will issue a determination that the charge
either is or is not meritorious. While we conducted an investigation and determined that the claims were non-meritorious, it is possible that the claim could involve potential damages, which could have a material impact on our financial position,
cash flows and results of operations.



Intellectual
Property Inquiry



We received an inquiry in February
2004 from the Business Software Alliance (BSA) regarding the potential unlicensed use of certain office and computer-aided design (CAD) software by us. During the first quarter of fiscal 2004, we conducted an audit of our
software and on March 31, 2004, we sent a formal response that, as of that date, we were in full compliance with the licensing requirements of the software utilized by us. As of the date of this filing, we have received no response from BSA
concerning this matter. If BSA pursues litigation regarding the alleged past unlicensed use of software, the costs of such litigation could have a material adverse effect on our financial position, cash flows and results of operations.



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Item 3. Controls and Procedures.



Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of April 3, 2004. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have
each concluded that our disclosure controls and procedures are effective to ensure that we record, process, summarize and report information required to be disclosed by us in our quarterly reports filed under the Securities Exchange Act within the
time periods specified by the Securities and Exchange Commissions rules and forms.



During the quarterly period covered by this report, there have not been any changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.



We are aware that
any system of controls, however well designed and operated, can only provide reasonable, and not absolute, assurance that the objectives of this system are met, and that maintenance of disclosure controls and procedures is an ongoing process that
may change over time.



PART II    OTHER INFORMATION



Item 1. Legal Proceedings.



We are involved in a legal claim and proceeding that is a routine matter that is incidental to our business. We do not believe that this proceeding will have a material adverse effect on our financial position, cash flows or results of
operations.



Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities.



Not Applicable.



Item 3. Defaults Upon Senior Securities.



The information contained in Note 5 of Notes to Interim Condensed Financial Statements in Part I, Item 1 hereof is hereby incorporated by reference into this Part II, Item 3.



Item 4. Submission of Matters to a Vote of Security Holders.



Not Applicable.



Item 5. Other Information.



On
April 5, 2004, our Board of Directors appointed Payne W. Bair, Corporate Controller, to fulfill the role of Principal Accounting Officer, which had previously been filled by Philip S. Bushnell, Chief Financial Officer (Principal Financial Officer).



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Item 6. Exhibits and Reports on Form 8-K.



| | (a) | Exhibits
| | --- | --------



| | 3.1 | Amended and Restated Bylaws, as amended through October 30, 2003.
| | --- | -----------------------------------------------------------------



| | 10.6 | Lease Agreement Extension dated March 10, 2004 for the facility at 400 Hot Springs Road, Carson City, Nevada.
| | ---- | -------------------------------------------------------------------------------------------------------------



| | 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------



| | 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------



| | 32.1 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
| | ---- | ------------------------------------------------------------------------------------------------------------------------



| | (b) | Reports on Form 8-K
| | --- | -------------------



We filed a Current Report on Form 8-K on March 18, 2004 under Items 7 and 12 for the purpose of furnishing our financial results for the fourth quarter of
fiscal 2003.



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##### Table of Contents

SIGNATURES



In accordance with the
requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



HYTEK MICROSYSTEMS, INC.By:

/s/ Philip S. BushnellPhilip S. BushnellChief Financial Officer and Secretary(Principal Financial Officer)Date: May 14, 2004




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##### Table of Contents

Hytek Microsystems, Inc.

Quarterly Report on Form 10-QSB

For the Three Months ended April 3, 2004



EXHIBIT INDEX



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



|              |  |                                                                                                                         
|------------- |  | ------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                     
|              | 
|3.1           |  | Amended and Restated Bylaws, as amended through October 30, 2003.                                                       
|              | 
|10.6          |  | Lease Agreement Extension dated March 10, 2004 for the facility at 400 Hot Springs Road, Carson City, Nevada.           
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                     
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                     
|              | 
|32.2          |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.



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