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================================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                        
                            ----------------------
                                        
                                   FORM 10-K
                                        
(MARK ONE)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended   DECEMBER 31, 1998
                            -----------------

                                    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:  0-23562

                        MICROELECTRONIC PACKAGING, INC.
                                        
            (Exact name of Registrant as specified in its charter)

               California                             94-3142624
               ----------                             ----------
        (State of Incorporation)         (I.R.S. Employer Identification No.)

              9577 Chesapeake Drive, San Diego, California 92123
              --------------------------------------------------
         (Address of principal executive offices, including zip code)

      Registrant's telephone number, including area code:  (619) 292-7000
--------------------------------------------------------------------------------
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

     Title of each class         Name of each exchange on which registered
     -------------------         -----------------------------------------
           NONE                                    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 Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes  [X]   No [_]

     Indicate by a 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 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.  [_]

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 26, 1999 was approximately $3,691,000 (based upon
the closing price for shares of the Registrant's Common Stock as quoted by the
OTC Bulletin Board for the last trading date prior to that date). Shares of
Common Stock held by each officer, director and holder of 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.

     On March 26, 1999, 10,856,890 shares of the Registrant's Common Stock, no
par value, were outstanding.

                     DOCUMENTS INCORPORATED BY REFERENCE.

                                        
 PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE REGISTRANT'S
 ----------------------------------------------------------------------------
     ANNUAL MEETING TO BE FILED WITH THE SEC ON OR BEFORE APRIL 30, 1999,
     --------------------------------------------------------------------
          ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT 
          ----------------------------------------------------------
                                 ON FORM 10-K.
                                 -------------
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                                    PART I
                                    ------

ITEM 1.   BUSINESS

     The following Business section contains forward-looking statements which
involve substantial risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Annual Report on Form 10-K.

     Microelectronic Packaging, Inc. ("MPI") and its wholly-owned subsidiaries
(collectively, the "Company") provide electronic manufacturing services (EMS)
including  surface mount, chip-on-board and mixed assembly microelectronic
design, manufacturing, and testing capabilities.  To support the requirements of
electronic systems and integrated circuit manufacturers ("IC" or "semiconductor"
manufacturers) the Company offers both turnkey manufacturing and kitted
subassembly services featuring value added interconnect design and test
capabilities in addition to contract assembly.  MPI was incorporated in
California in 1984.  Headquartered in San Diego, California, with on-site
manufacturing facilities, the Company designs, develops, manufactures, markets
and sells to customers in the commercial, medical, military/aerospace,
wireless/telecommunications, automatic test equipment and other electronics-
related industries.

     MPI is a holding company with CTM Electronics, Inc. ("CTM") a California
corporation, the primary operating unit. The Company's other US subsidiary,
Microelectronic Packaging America ("MPA") is inactive. The Company's focus has
been to expand its surface mount and chip-on board contract assembly business in
San Diego. The Company has expanded its manufacturing capabilities and relocated
to a larger facility that resulted in a doubling of production space. A new
management team has been recruited and the Company has repositioned itself to
more effectively serve what it believes is the large and growing contract
assembly market to capitalize on the trends for electronic companies to
outsource manufacturing.

     The Company's Singapore subsidiaries are in various stages of liquidation
and are not consolidated in the Company's financial statements beginning in
1998. They are as follows: Microelectronic Packaging (S) Pte., Ltd. ("MPS"), MPC
(S) Pte., Ltd. ("MPC"), Furnace Technology ("FT"), MPM (S) Pte., Ltd. ("MPM")
and Microelectronic Packaging Asia Pte. Ltd. ("MP Asia"). MPS and MPM are
currently being managed by a receiver and are in receivership. MPC ceased
operations during 1997 and is in liquidation. FT is in liquidation. MP Asia was
formed in 1997, has had no operating activities, and is being liquidated. The
Company has not employed any persons in Singapore since July 1997.

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Future Operating Results -- Repayment of Debt
Obligations by MPM and MPS -- Adverse Impact of MPM and MPS Liquidations on 
MPI -- Certain Obligations of MPS High Leverage."

INDUSTRY OVERVIEW

     The Company believes that the electronic manufacturing services market is a
very large and growing market. General industry trends for companies of all
sizes are to outsource manufacturing and this, in the opinion of management, is
resulting in growth rates for contract assembly being significantly higher than
the growth rates for the electronic industries themselves. In recent years,
advances in interconnection technology has allowed semiconductor companies and
systems designers to increase the speed and complexity and reduce the size,
power and prices of their products. Until recently, interconnection technology
has not been considered a limiting factor in systems design and development.
However, emerging electronic products in all market segments including
wireless/telecommunication, medical, consumer, semiconductor related automatic
test equipment and
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military aerospace telecommunications equipment require designs that the Company
believes cannot always be done with conventional interconnection technology
offered by internal manufacturing operations or traditional through-hole/surface
mount contract assemblers.

     The increased reliance by IC and systems designers on interconnection
solutions has created a new challenge and opportunity for the electronic
packaging and interconnection industry to develop products that can effectively
respond to customers' new requirements.  Today's IC and system designers work
together with interconnection designers and manufacturers in the early stages of
product development.  These products must accommodate constant reductions in
size, increases in speed and complexity and the ability to handle the increased
heat generated by more powerful systems.

     Today's conventional electronic systems are comprised of printed circuit
boards ("PCBs") and single chip packages.  The size, weight and speed of the
electronic system is a function of the size, weight and performance of the fully
assembled PCB.  The PCB and the IC packages generally account for the majority
of the size, weight and the limitations on speed of the system.  Efforts to
develop smaller, lighter and faster electronic assemblies have recently focused
on improvements in IC packaging and interconnection technology.

     Manufacturers in the interconnection industry are evaluating technologies
to support market driven requirements for reduced size and increased
performance.  Improvements in semiconductor and electronic interconnection
technologies enable this continued reduction in size and cost with increasing
performance for electronic systems.

     The convergence of market forces that include a general trend to outsource
contract manufacturing at the same time that microelectronic technologies are
replacing traditional through-hole/surface mount assembly technologies has
created what the Company believes to be substantial business opportunities for
those companies positioned to take advantage of these market trends.

THE MPI SOLUTION

     The Company has expanded its focus in 1998 by offering products and
services in direct response to both what it believes is the growing trend to
outsource manufacturing and also the offering of design services that provide
added value in terms of addressing smaller size, higher performance, improved
thermal characteristics, plus lower materials and assembly costs. The Company
differentiates itself from much larger competitors by offering "mixed assembly"
services utilizing both surface mount and chip-on board electronic assembly.

     Chip-on-board (COB). The Company provides single or multi chip assembly
services that mount IC die directly to laminate or ceramic substrates with
passive components. The Company has historically derived the majority of its
revenue from these activities. These services are offered to both the
semiconductor integrated circuit suppliers (IC) and electronic systems
companies. The Company designs and manufactures these assemblies that replace
entire PCBs which are designed to reduce overall system size and increase
performance. The Company also designs and manufactures multi-chip-modules (MCM)
to interconnect multiple ICs, which the Company encloses in an advanced IC
package. The advanced IC package with the enclosed MCM is then mounted onto a
PCB. All of the Company's MCM products are designed to provide its customers
with increased speed and performance and decreased size and weight.

     Surface Mount Technology (SMT). The Company provides SMT assembly including
design for manufacturability that assists the Company's customers to better
utilize their internal resources.

     Ball Grid Array (BGA), Flip chip, Chip Scale Packaging (CSP).  The Company
has acquired a license from Motorola to supply BGA packages and is developing
capabilities for flip chip, CSP and other microelectronic packaging technologies
based upon market demand.

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TURNKEY CONTRACT MANUFACTURING AND DESIGN SERVICES

     The Company offers complete Turnkey design, assembly and test services as a
total solution for outsourced manufacturing. The Company believes these services
provide customers with a cost-effective alternative to existing product design
processes from internal operations or competitors of the company. To facilitate
awareness of the company's manufacturing services. QuickTurn Turnkey
manufacturing(TM) and QTM(TM) were established as unregistered trademarks.

CUSTOMERS, APPLICATIONS AND MARKETS

     The Company believes the serviceable markets for the Company's services are
extremely broad as the electronic content of nearly everything that is
manufactured increases. Highly visible markets include
wireless/telecommunications, medical, commercial/consumer, computer, automated
test equipment (ATE), military/aerospace, and instrumentation. In 1998 the
Company increased its investment in Sales and Marketing with the goal of
expanding its customer base and participating in markets not previously served
such as wireless, medical and automotive markets. The Company doubled the number
of customers in 1998 from 5 to 12 and is focused on reducing its dependence on
its largest customer, Schlumberger. There can be no assurance the Company will
be successful in reducing its dependence on Schlumberger. Sales to Schlumberger
accounted for 87%, 89% and 76% of the Company's net sales in 1998, 1997 and 1996
respectively. The majority of the Company's 1998 third and fourth quarter's
sales were repair of Schlumberger's products rather than the manufacture of new
products. This repair work continued into 1999. The Company furnishes chip-on-
board multi chip modules (MCM) to this customer for automated test equipment
usage. The Company's primary geographical market is North America for COB and
SMT products. In 1998 95% of the Company's sales were to customers in North
America. During 1998, 1997 and 1996 the Company had foreign net sales of $0,
$90,000 and $1,785,000, respectively. In 1998, the Company began supplying to
National Semiconductor in Singapore and Japan. Also in 1998, the Company
launched a sales effort in Europe.

     The Company currently sells its services through a combination of its own
direct sales for selected key accounts and use of independent sales
representatives located in 18 field sales offices in North America and Europe.
The Company can provide engineering, design and technical support to its sales
staff and potential customers.

LICENSE AND OTHER SIGNIFICANT AGREEMENTS

     The Company seeks to obtain licenses to technologies that complement and
expand the current technologies that the Company owns.  These agreements, along
with certain other significant agreements of the Company, are discussed below.

     Motorola. In July 1998, the Company signed an agreement with Motorola for
Ball Grid Array (BGA) and flip chip interconnect technologies. The company views
this as a significant technology license that has already been instrumental in
securing business from a new customer. The Company believes general industry
chip packaging trends show substantial growth for BGA and flip chip packaging
that replaces throughhole, PQFP and other forms of IC packaging.

     Schlumberger. In January 1998, the Company signed an agreement with
Schlumberger. Pursuant to the terms of the agreement, MPI supplies MCM products
to Schlumberger. The agreement includes warranty provisions, protection for raw
materials purchased by MPI against production demand forecasts supplied by
Schlumberger but subsequently changed, and pricing provisions. After March 31,
1998, there is no commitment from Schlumberger to purchase from the Company any
amount or a minimum amount of MCM products. The pricing provisions of the
agreement provide for periodic review of the selling prices of the Company's
products. Such reviews can be requested by either the Company or Schlumberger.
In 1998, the Company agreed to several pricing reviews and anticipates further
declines in unit selling prices of selected products provided by the Company to
Schlumberger. The agreement expires in October 2000. See "Liquidity and Capital
Resources Reliance on Schlumberger-Legal Proceedings."

     International Business Machines Corporation.  In August 1994, the Company
entered into a multilayer technology transfer and licensing agreement with IBM
(the "IBM Agreement") pursuant to which the Company was granted a license to
specific technology developed by IBM for the manufacture of 

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multilayer ceramic products. Under the terms of the IBM Agreement, the Company
and MPM acquired a nonexclusive, nontransferable right to use the licensed
technology to manufacture and sell certain specified products on a worldwide
basis. In exchange for the license, the Company paid an up-front non-refundable
royalty of $2,000,000, and was obligated to pay additional royalties based on
sales of products incorporating the licensed technology during the term of the
IBM Agreement, which was to remain in effect for a period of ten years from the
date of execution and thereafter from year to year unless terminated by either
party. Commencing in August 1996, the IBM Agreement was to be terminable by
either party without cause upon six months prior written notice.

     In March 1997, the Company ceased its multilayer ceramic operations prior
to the commencement of production and a Receiver appointed by the courts began
the liquidation of MPM's assets.  Changing market demand for multilayer ceramic
products and IBM's unwillingness to renegotiate the terms of the IBM Agreement
or to commit to purchasing multilayer ceramic products from the Company were the
principal reasons that the Company decided to liquidate MPM.  All of MPM's
Singapore employees have been terminated.  MPM has been in receivership since
March 1997, as defined under the laws of Singapore.  The receiver for MPM has
completed the liquidation of all of the MPM assets, and the proceeds therefrom
have been  used to retire a portion of MPM's debts.  During 1998, the High Court
of the Republic of Singapore ordered the Winding up of MPM Singapore Pte. Ltd.
("MPM"), a wholly owned subsidiary of the Company.  As a result of this
decision, MPM cannot continue as an operating business, and it cannot be allowed
to dispose of its assets or incur further liabilities.  In addition, the Company
does not have any control over the management of MPM.  This function is
undertaken by the Receiver and Manager appointed by DBS Bank.

     Asian Creditor Loan Agreements Guaranteed by MPI.  In connection with the
Company's subsidiaries in Singapore, which ceased operations in 1997, the
Company fully guaranteed the debt obligations listed below. During 1998, the
Company signed agreements with each of these creditors, which called for
settlement payments of approximately $9.3 million to satisfy all debt
obligations.

     Because the Company has not been able to obtain funding to satisfy the
settlement payment obligations, which are all due on May 1, 1999, the Company
renegotiated the terms and, has recently entered into non-binding letter
agreements with all eight creditors which call for the conversion of all debt
and accrued interest obligations into shares of the Company's Series A Preferred
Stock (See "Liquidity and Capital Resources" for general description of Series A
Preferred Stock), each share of which will be convertible into two shares of MPI
Common Stock. For the aggregate debt of $27,055,000, which is all the
Discontinued Operations debt, the Company has agreed to convert this debt into
shares of Series A Preferred Stock which is immediately convertible into shares
of MPI Common Stock.

     This debt conversion into equity is subject to the completion of definitive
agreements for all eight creditors and the approval of the debt conversion to
equity by a majority of the Company's shareholders.

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Future Operating
Results -- Future Capital Needs; Need for Additional Financing -- Repayment of
Debt Obligations by MPM and MPS -- Adverse Impact of MPM and MPS Liquidations on
MPI -- High Leverage -- Status as a Going Concern."

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     Transpac.  On March 27, 1996, the Company and MPM consummated a financing
with Transpac Capital Pte. Ltd. and other related investors (collectively,
"Transpac") pursuant to which the Company issued 842,013 shares of its Common
Stock to Transpac for the aggregate purchase price of $2,000,000 and MPM issued
a debenture (the "Debenture") to Transpac in the principal amount of $9.0
million.  The Debenture has a term of five years and bears interest at the rate
of 8.5% per annum and is guaranteed by MPI.  Accrued and unpaid interest is due
and payable in annual installments at the end of each year of the term of the
Debenture.  The principal outstanding under the Debenture will be due and
payable in full at the end of the five year term.  However, from and after April
23, 1997 and through the term of the Debenture, the Debenture will be
convertible at Transpac's option into shares of Common Stock of MPM or Common
Stock of MPI.  The Company has not made any payments under the Debenture.  In
February 1999, the Company and Transpac signed a non-binding letter agreement
which calls for the conversion of all the Company's obligations into shares of
Series A Preferred Stock.  See "Asian Creditor Loan Agreements Guaranteed by
MPI" in this section.

     STMicroelectronics, Inc. In 1995, MPS borrowed $4,000,000 from
STMicroelectronics ("ST") at an interest rate of 7.25% per annum. MPS did not
make any principal payments, and only made limited interest payments. The note
was fully guaranteed by MPI. In September 1998, the Company signed a
Restructuring, Settlement and Mutual Release Agreement which requires the
Company to pay $1,137,044 by May 1, 1999 as full satisfaction of all obligations
to STMicroelectronics. And, on April 14, 1999, ST signed a Letter of Intent with
a group of outside investors ("Investor") to assign its creditor position for
undisclosed consideration. This Letter of Intent is subject to the Company
obtaining approval of the debt conversion to equity by a majority of the
Company's shareholders. In anticipation that this assignment will be completed,
the Investor has signed a non-binding letter agreement which calls for the
conversion of all the Company's obligations to ST into shares of Series A
Preferred Stock. See "Asian Creditor Loan Agreements Guaranteed by MPI" in this
section.

     Texas Instruments ("TI").  In 1995, MPS borrowed $3,500,000 from TI at an
interest rate of 7.25% per annum.  The note is fully guaranteed by MPI.  The
Company entered into several amended loan agreements during 1997 and 1998;
however, the Company was unable to meet the terms of those agreements.  In
January 1999, the Company and TI signed a non-binding letter agreement which
calls for the conversion of all of the Company's obligations into shares of
Series A Preferred Stock.  See "Asian Creditor Loan Agreements Guaranteed by
MPI" in this section.

     Development Bank of Singapore ("DBS Bank").  In 1997 and prior, MPS, MPM
and MPC made various borrowings from DBS Bank under lines of credit, overdraft
facilities and accounts receivable financing.  Substantially all of the assets
of MPS and MPM have been liquidated by the Receivers and Managers, and the
proceeds from those liquidations were used to reduce the balances owed to DBS
Bank.  MPC has paid its loan to DBS Bank and is in voluntary liquidation.

     The remaining balances due to DBS Bank are in default, are payable upon
demand, and bear interest at the banks prime rate plus 5%.  All of these amounts
are guaranteed by MPI.  In February 1999, the Company and DBS Bank signed a non-
binding letter agreement which calls for conversion of all of the Company's
obligations into shares of Series A Preferred Stock.  See "Asian Creditor Loan
Agreements Guaranteed by MPI" in this section.

     Motorola, Inc. In 1995, MPS borrowed $2,000,000 from Citibank N.A. at an
interest rate of 7%. The loan was guaranteed by Motorola and was eventually paid
in full by Motorola. This obligation to Motorola is secured by all of the assets
of MPI, CTM and MPA not previously pledged to NSEB, as well as all capital stock
of MPS, CTM and MPA. In January 1999, the Company and Motorola signed a non-
binding letter agreement which calls for the conversion of all the Company's
obligations into shares of Series A Preferred Stock. See "Asian Creditor Loan
Agreements Guaranteed by MPI" in this section.

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     ORIX Leasing ("ORIX").  In 1996 and earlier, MPM, and to a lesser extent
MPS, borrowed approximately $2,600,000 under capital leases from ORIX.  Both MPM
and MPS stopped making lease payments, and ORIX foreclosed on the equipment and
sold it at an auction in 1997.  The balance remaining after the liquidation of
the leased assets is guaranteed by the Company.  In January 1999, the Company
and ORIX signed a non-binding letter agreement which calls for the conversion of
all the Company's obligations into shares of Series A Preferred Stock.  See
"Asian Creditor Loan Agreements Guaranteed by MPI" in this section.

     NS Electronics ("NSEB").  In 1995, MPI borrowed $1,500,000 from NSEB at an
interest rate of 14% per annum.  The Company has made no principal payments
since September 1996 and the loan is in default.  The NSEB note is secured by
all of MPI's domestic equipment and trade receivables that are not subject to
liens or other encumbrances existing prior to May 30, 1995.  In March 1997, the
Company entered into an Amended Loan and Security Agreement and a Second Secured
Promissory Note with NSEB pursuant to which NSEB agreed to waive any breach of
the covenants, terms and conditions of the original Loan and Security Agreement
and the original Secured Promissory Note (both dated May 30, 1995) and agreed to
a revised (and extended) payment schedule.  The interest rate on the outstanding
balance, however, was raised from 14% per annum to 18% per annum and MPI is
currently in default under the terms of the Second Secured Note.  In February
1999, the Company and NSEB signed a non-binding letter agreement which calls for
the conversion of all of the Company's agreed obligations into shares of Series
A Preferred Stock.  See "Asian Creditor Loan Agreements Guaranteed by MPI" in
this section.

     Samsung Corning Co., Ltd ("Samsung").  In 1996, MPS borrowed $1,000,000
from DBS Bank at the Singapore Interbank offer interest rate plus 1.5%,
repayable in twelve monthly installments beginning in November 1996.  The loan
had been fully guaranteed by Samsung, and co-guaranteed by MPI.  MPS made
payments under the note totaling approximately $417,000 during 1996 and 1997.
The remaining balance of approximately $583,000 plus interest, was paid to DBS
by Samsung Corning after DBS has called upon the guarantee of Samsung.  Samsung
has requested that MPI reimburse it for the amount paid under the guarantee.  In
March 1999, the Company and Samsung agreed to a non-binding settlement of all of
the Company's obligations into shares of Series A Preferred Stock.  See "Asian
Creditor Loan Agreements Guaranteed by MPI" in this section.

ENGINEERING AND PRODUCT DEVELOPMENT

     The Company provides design, assembly and test services and features 
engineering and product development as a differentiating service over its 
competitors. In 1998, the Company added the position of Vice President of 
Technology and increased its expenditures for engineering and product 
development. The Company works closely with its customers to develop expertise 
in new electronic assembly and packaging technologies based upon market demand. 
Primary focus in 1998 was on process engineering for chip-on-board and surface 
mount technologies including ball grid array and "flip chip" interconnect 
processes. In addition, the Company invested in flexible substrate and low 
temperature cofired ceramic substrate packaging technology, projected to be of 
increased demand in 1999 for commercial and wireless products. The Company also 
uses outside services for x-ray, surface analysis and ultrasonic imaging, as 
well as specialized design such as ASIC design, to supplement its internal 
capabilities. Engineering and product development expenditures were 
approximately $1,060,000, $760,000 and $666,000 in 1998, 1997 and 1996, 
respectively.

MANUFACTURING, SUPPLIERS AND TOTAL QUALITY PROGRAM

     The Company believes that its ability to manufacture its products in a
timely and cost effective manner at the highest quality level is essential in
order to  be competitive in its markets and achieve its growth objectives. The
Company's manufacturing facilities in San Diego, California include design and
prototype facilities and a production capability. The Company intends to support
high volume requirements for its MCM products partially through offshore
subcontract manufacturing and assembly agreements.

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     The Company believes that total quality management is a vital component of
customer satisfaction and internal productivity. The Company maintains a system
of quality control and documentation with respect to each of its manufacturing
processes.

     The Company maintains a supplier quality program that includes
qualification, performance measurement and corrective action requirements. The
Company chooses its suppliers based on quality, delivery, service and price.
Certain raw materials essential for the manufacture of the Company's products
are obtained from a sole supplier or a limited group of suppliers.  In
particular, MCMs that are provided to Schlumberger contain components which are
provided solely by Schlumberger to the Company on a consignment basis.  Under
the Company's current arrangement with Schlumberger, the Company would be unable
to supply Schlumberger with MCMs if Schlumberger were to cease supplying the
Company with such components. In such event, the Company's ability to continue
as a going concern would be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Future Operating Results and -- Sole or Limited Sources of Supply."

     The Company is subject to a variety of local, state, federal and foreign
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The Company believes that it is currently
in compliance in all material respects with such regulations and that it has
obtained all necessary environmental permits to conduct its business. To date,
compliance with such regulations has not had a material adverse effect on the
Company's capital expenditures or results of operations. The Company is
currently a party to certain ongoing environmental matters. See "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Future Operating Results and -- Environmental
Regulations."

BACKLOG

     In the first quarter of 1998, the Company experienced a "bubble" in demand
from its primary customer, Schlumberger, resulting in a backlog. As of December
31, 1997, the Company's backlog was $11.3 million. During 1998, there was a
substantial drop in demand for ATE equipment caused by a very weak semiconductor
market. As of December 31, 1998, the Company has a backlog of approximately $1.5
million. Because the Company generally ships products within 60 to 120 days of
receipt of the order, and because of possible changes in delivery schedules,
cancellations or rescheduling of orders and potential delays in product
shipments, the Company's backlog at any particular date is not representative of
actual sales for any succeeding period.

COMPETITION

     The top ten competitors in the electronic manufacturing services ("EMS")
market represented an aggregate annualized revenue of $17.5B in 1997 with
projected growth in 1998 to exceed 20% (sources: Manufacturing Market Insider
and Technology Forecasters, Inc., respectively). These global companies are
primarily focused on services the needs of the very large international
electronics companies that do not require chip-on-board thus MPI does not
believe these large companies are direct competition. The Company strives to
differentiate itself from other EMS competitors by focusing on flexibility and
customer service based upon concurrent engineering to provide design expertise
to meet physical size, thermal management, and solve performance issues that may
be beyond the internal capabilities of the customer resources.

     In 1998, MPI's primary customer (Schlumberger) developed second sources for
the products previously provided exclusively by MPI. As a result the Company
faces intense competition for the Schlumberger business from Natel Engineering
and VLSI Packaging. In response, the Company launched programs aimed at quality
improvement, manufacturing cycle time reduction, and cost reduction and believes
that it provides equal or superior services that should enable the Company
remain as a qualified supplier to this key customer.

     Since the Company believes there is such a large market (estimated to be as
large as $95B), there are a large number of companies that are potential
competitors of the Company. These include Flextronics, AVEX, Maxtek,

                                       8
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Aeroflex, HEI, SCI, and others. There are also "off shore" competitors such as
AMKOR in Korea and Tong Tshing in Taiwan. For any particular customer, small
local companies offer potential competition. Halcyon, a very small privately
held company, became a competitor as a second source in 1998. See "Management's
Discussion and Analysis -- Future Operating Results -- Highly Competitive
Industry; Significant Price Competition."

INTELLECTUAL PROPERTY RIGHTS

     The Company believes that the success of its business depends more on the
technical competence, creativity and marketing abilities of its employees,
rather than on patents, trademarks and other intellectual property rights.
Nevertheless, the Company has a policy of seeking patents as appropriate on
inventions resulting from its ongoing engineering and product development
activities.  In addition, the Company has acquired intellectual property rights
through business acquisitions and technology licenses.  The Company owns five
United States patents.  The Company has permitted two of these to lapse through
non-payment of renewal fees.  The other three expire beginning in February 2002
through July 2010.  In addition, the Company owns three foreign patents, which
expire beginning in May 1999 through March 2009, and eleven foreign patent
applications are currently pending.  The Company owns one registered United
States trademark. The Company continuously seeks to protect its intellectual 
property through proper documentation and protective marketing of designs and 
concepts.

     The Company views trademarks as an element of a marketing strategy to
increase awareness for the Company's services. The first marketing trademark
adopted is "QuickTurn Turnkey Manufacturing" and "QTM". These are being used as
unregistered trademarks at this time and therefore the Company does not have
certain presumptive legal rights granted by a federal trademark registration.
The Company will continue to seek opportunities to differentiate itself with the
use of trademarks.

     There can be no assurance that any of the Company's issued patents will
provide it with competitive advantages or will not be challenged by third
parties, or that the patents of others will not have an adverse effect on the
Company's ability to do business. Furthermore, there can be no assurance that
others will not independently develop similar products, duplicate the Company's
products or design around the patents issued to the Company. In addition, the
Company also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology or that the Company can meaningfully protect its trade secrets.

EMPLOYEES

     As of December 31, 1998, the Company had a total of 98 employees, including
71 engaged in manufacturing, 10 in engineering and product development, and 17
in sales, marketing and administration (including its executive officers).  All
of the Company's employees are located in the United States.  None of the
Company's employees are represented by a labor union, and the Company has not
experienced any work stoppages.  The Company considers its employee relations to
be good.

EXECUTIVE OFFICERS AND KEY EMPLOYEES

     The Company's executive officers and key employees, and their ages as of
March 23, 1999, are:

<TABLE>
<CAPTION>
Name                          Age   Position
----                          ---   --------                                                       
     <S>                       <C>  <C>
     Andrew K. Wrobel          47   Chairman of the Board, President and Chief Executive Officer
     Denis J. Trafecanty       56   Senior Vice President and Chief Financial Officer and Secretary
     Timothy R. Sullivan       42   Vice President and Controller
     Dudley E. Westlake        53   Vice President, Sales and Marketing
     Pete Hudson, Ph.D.        58   Vice President, Technology
     Craig Iwami               36   Director of Operations
</TABLE>

                                       9
<PAGE>
 
     Andrew K. Wrobel, age 47, has served as the Chairman, President and Chief
Executive Officer of the Company since January 1999.  Prior to that, Mr. Wrobel
was President, Chief Executive Officer and Director of the Company since October
1997.  From 1988 to 1997, Mr. Wrobel served as Chairman, President and Chief
Executive Officer of GIGATEK Memory Systems, Inc., a manufacturer of computer
disk drives.  Prior to 1988, Mr. Wrobel was Vice President of Technology for
Carlisle Memory Products Group and Vice President of Engineering for Data
Electronics, and held various management positions in Marketing and Engineering
at Texas Instruments and BASF.  Mr. Wrobel holds a Masters degree from the
Massachusetts Institute of Technology.

     Denis J. Trafecanty, age 56, joined the Company in August 1996 as its Vice
President and Chief Financial Officer and Secretary.  In March 1997, he was
promoted to Senior Vice President, Chief Financial Officer and Secretary.  Prior
to joining the Company, Mr. Trafecanty was the Vice President and Chief
Financial Officer for Tandon Magnetics/Tandon USA, a manufacturer and
distributor of personal computers and a distributor of computer hard disk
drives, from September 1995 to August 1996.  From December 1984 to August 1995,
he was Vice President and Chief Financial Officer for Tandon Corporation
(renamed TSL Holdings, Inc. in 1993), a manufacturer and distributor of personal
computers and peripheral equipment.  Mr. Trafecanty holds a B.A. degree in
Accounting from Loyola-Marymount University.

     Timothy R. Sullivan, age 42, has served as Vice President and Controller of
the Company since March 1997.  Prior to joining the Company and since 1995, Mr.
Sullivan was Chief Financial Officer of InteleTravel International, a wholesale
provider of consumer travel-related products.  From 1987 to 1995, Mr. Sullivan
was Chief Financial Officer of Uni-Vite, Inc., a distributor of consumer
products.  Mr. Sullivan holds a B.S. degree in business administration from
University of Southern California.

     Craig Iwami, age 36, joined the Company in May, 1998 as Manufacturing
Engineering Manager.  In September, 1998 he was promoted to Director of
Operations.  Prior to joining the Company, Mr. Iwami served as Department
Manager at the Microelectronics Circuits Division of Raytheon Defense Systems,
formerly known as Hughes Aircraft Company, from June, 1987 to May, 1998. Mr.
Iwami received B.S. degree in engineering at California State University Long
Beach.

     Pete H. Hudson, Ph.D., age 58, joined the Company in February, 1998 as Vice
President of Technology.  Prior to joining the Company, Dr. Hudson held various
management positions in Manufacturing, Engineering and Assembly at Hughes
Aircraft Corporation from June, 1984 to January, 1998. Dr. Hudson holds a Ph.D.
in Electrical Engineering from Stanford University, B.S. and M.S. degrees in
Electrical Engineering from University of Arizona.

     Dudley E. Westlake, age 53, joined the Company in April, 1998 as Vice
President of Sales and Marketing. Prior to joining the company, Mr. Westlake was
President and CEO of MSR Development Corporation since 1994.  He previously
served as Director of Marketing at Iomega Corporation from 1991 to 1994 and has
prior sales and marketing experience with Rockwell International Semiconductor
Division.  Mr. Westlake holds an MBA and a B.S. in Engineering from California
State Polytechnic University, Pomona, California.

ITEM 2. PROPERTIES

     The Company maintains its corporate headquarters in San Diego, California.
This leased facility totals approximately 25,000 square feet and is used for
corporate administration, design, engineering, manufacturing and sales
operations.  The lease on this facility expires in November 2002 and the Company

                                       10
<PAGE>
 
has an option to renew for  five years at the then fair market rent.  The
Company pays approximately $18,000 per month with respect to this facility.

ITEM 3. LEGAL PROCEEDINGS

     In May 1995, the United States Environmental Protection Agency ("EPA")
issued written notice to all known generators of hazardous waste shipped to a
Whittier, California treatment facility.  The EPA notice indicated that these
generators (including the Company) were potentially the responsible parties
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986
("CERCLA").  The notice requires all of the generators of this waste to take
immediate actions to contain and prevent any further release of hazardous
substances at the site. In response to the EPA notice, the Company and
approximately 100 of the other named generators provided the necessary funding
to effect the removal and destruction of the hazardous wastes stored at this
site.  At present, the Company believes its percentage of responsibility for
this site is less than one half of one percent; and that percentage is expected
to decrease substantially as additional generators are determined.  In addition,
the Company and such generators have provided certain funding to test the soil
and groundwater at this site, which testing is currently ongoing. Although the
cost incurred by the Company to date of removing and destroying the hazardous
waste stored at this facility was not significant, this effort does not address
the cleanup of potential soil and/or ground-water contamination present at this
site. There can be no assurance, therefore, that the costs and expenses
associated with this action will not increase in the future to a level that
would have a material adverse effect upon the Company's business, financial
condition, results of operations or cash flows.

     The Company also previously shipped small quantities of hazardous waste for
recycling to a San Diego hazardous waste treatment facility operated by a third
party operator ("Operator"). The owner of the facility and the State of
California have filed suits against the Operator and two of its officers and the
owner of the facility has obtained a mandatory injunction to compel the removal
of hazardous waste on site. If the Operator does not comply, it is possible that
the property owner or a government agency could also sue or bring enforcement
proceedings against approximately 100 hazardous waste generators, including the
Company, that shipped such wastes to the facility to pay for the removal and to
participate in site cleanup if any contamination is discovered. Based on its
limited investigation to date, the Company is unable to determine whether this
matter, if resolved adversely to the Company, would have a material adverse
effect on the Company's business, financial condition, results of operations or
cash flows.  However, the Company has received no further communication
regarding this site since 1994.

     The possibility exists that the Asian creditors (See "License and Other
Significant Agreements") may file or threaten lawsuits against MPI and its
subsidiaries for the respective various defaults and violations of certain
agreements including debt obligations entered into by MPI and its various
subsidiaries. If such creditors choose to enforce their claims and are
successful in doing so, the Company may be forced to seek protection under
Chapter 7 or 11 of Title 11 the United States Code.

     The Company's MPM and MPS subsidiaries are currently in receivership and
liquidation in Singapore.  The Company's MPC subsidiary is also currently in
liquidation in Singapore.

     Two of the Company's former directors, Lewis Solomon and Gary Stein
("Plaintiffs"), have filed a lawsuit on December 18, 1998 in the state of New
York against the Company and its major customer, Schlumberger. This filing was
made one day after Gary Stein resigned from the Company's Board of Directors.
Lewis Solomon previously resigned in August 1998 from the Company's Board of
Directors. In the complaint, Plaintiffs have charged that the Company failed to
pay them for alleged consulting services, expense reimbursements and other forms
of compensation aggregating $101,250. Further, Plaintiffs allege that they were
wrongfully terminated, thereby preventing them from exercising stock options,
and that the Company interfered with the Plaintiffs prospective economic
relationships and business advantages as

                                       11
<PAGE>
 
consultants and directors of public corporations. The total of other alleged
damages claimed by Plaintiffs are $5.5 million plus additional damages to be
determined at trial. The Company believes that the Plaintiffs' claims are
without merit and will vigorously oppose these allegations. In addition, the
Company has made substantial counterclaims against Plaintiffs for damages of
$829,020, attorneys fees and additional damages to be proven at trial. In the
counterclaim, the Company alleged that Mr. Solomon and Mr. Stein, as directors,
voted to approve an agreement between themselves and the Company which would
compensate them as consultants in addition to director fees that Mr. Solomon and
Mr. Stein were then being paid, which agreement was not approved by a majority
of disinterested directors in accordance with California Corporations Code
310(a). In addition, the counterclaim alleges Mr. Solomon and Mr. Stein voted
themselves various options in violation of the same Code, and that the agreement
was not signed by a Company officer with requisite authority to approve such an
agreement. And finally,the counterclaim alleges that in approving the agreement,
Mr. Solomon and Mr. Stein breached their fiduciary duties and they did not
provide any services of material benefit to the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
 
     None.

                                       12
<PAGE>
 
                                    PART II
                                    -------

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

     The Company's Common Stock was traded on the Nasdaq National Market under
the symbol MPIX from April 21, 1994 until March 12, 1997.  On March 13, 1997,
the Company was delisted from the Nasdaq National Market; subsequently, the
Company's Common Stock has been quoted on the OTC Bulletin Board.  The following
table sets forth the range of high and low per share bid information, as
reported on the Nasdaq National Market (through March 12, 1997) and the OTC
Bulletin Board (from March 12, 1997) for each quarter for the last two years
through December 31, 1998.  These over-the-counter quotations reflect inter-
dealer prices, without retail mark-up, mark-down, or commission and may
necessarily represent actual transactions.  On March 24, 1999, the average of
the highest and lowest trading price per share was $0.33.  On March 24, 1999,
the Company had 138 holders of record of its Common Stock and 10,856,890 shares
outstanding.

          QUARTER ENDED             HIGH       LOW
          -------------             ----       ---
          March 31, 1997           $1.250     $0.280
          June 30, 1997            $0.406     $0.156
          September 30, 1997       $0.500     $0.156
          December 31, 1997        $0.820     $0.360
          March 31, 1998           $0.730     $0.520
          June 30, 1998            $0.930     $0.370
          September 30, 1998       $0.480     $0.140
          December 31, 1998        $0.350     $0.110 
                             

     During the past year, the Company did not declare or pay any cash dividends
on its Common Stock. The Company currently plans to retain all of its earnings
to support the development and expansion of its business and has no present
intention of paying any dividends on the Common Stock in the foreseeable future.
The Company is prohibited by certain agreements from paying cash dividends.  MPS
is a party to a line of credit facility with DBS that requires MPS to obtain the
consent of DBS prior to declaring dividends, repaying creditors or transferring
funds to MPI.  In addition, an agreement relating to the guarantee by Motorola
of a bank loan to MPS grants Motorola the right to prohibit payment of dividends
on the stock of MPI, CTM and MPA.  The Transpac agreements also contain similar
restrictions.

     In connection with the Company's efforts to restructure its debt
obligations in 1998, warrants to purchase 500,000 shares of the Company's Common
Stock at an exercise price of $1.00 per share were issued to Transpac, and
warrants to purchase 200,000 shares of the Company's Common Stock at an exercise
price of $1.00 per share were issued to STMicroelectronics.  The Company relied
upon the exemption provided by Section 4(2) of the Securities Act for the
issuance of these warrants.

                                       13
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                FISCAL YEAR ENDED DECEMBER 31,
                                                   ---------------------------------------------------------
                                                    1998         1997          1996        1995       1994
                                                   -------     --------     ---------   --------     -------
                                                         (In thousands, except per share amounts)
<S>                                                <C>          <C>         <C>         <C>          <C> 
Consolidated Statements of Operations Data:                    
Net sales (4)....................................  $19,271     $ 28,522     $  19,044   $ 15,181     $10,445
Cost of goods sold...............................   14,714       23,352        15,774     11,980       9,512
                                                   -------     --------     ---------   --------     -------
Gross profit.....................................    4,557        5,170         3,270      3,201         933
Selling, general and administrative..............    2,915        4,204         4,353      4,524       3,042
Engineering and product development..............    1,060          760           666        565         406
                                                   -------     --------     ---------   --------     -------
Income (loss) from operations....................      582          206        (1,749)    (1,888)     (2,515)
Other income (expense):                                                                                
   Interest expense..............................      (18)         (37)         (787)       (69)        (90)
   Royalty revenue...............................                    --            --         --         153
   Other income..................................      179          120            10         66         235
                                                   -------     --------     ---------   --------     -------
Income (loss) from continuing operations                                                               
before income taxes..............................      743          289        (2,526)    (1,891)     (2,217)
Provision for income taxes                              18           --            --         --          --
Discontinued operations..........................    3,961      (11,785)      (39,316)       505        (722)
Net income (loss) (1)(3).........................  $ 4,686     $(11,496)    $ (41,842)  $ (1,386)     (2,939)
                                                   =======     ========     =========   ========     =======
Net income (loss) per common share:(2)                                                                 
   Historical....................................  $  0.07        $0.03     $   (0.46)  $  (0.41)         --
   Pro forma before change in accounting                                           --                    
   principle (unaudited).........................       --           --                       --       (0.53)
   Discontinued operations.......................     0.36        (1.14)        (7.22)      0.11       (0.17)
                                                   -------     --------     ---------   --------     -------
   Net profit (loss).............................  $  0.43     $  (1.11)    $   (7.68)  $  (0.30)    $ (0.70)
                                                   =======     ========     =========   ========     =======
Shares used in pro forma per share calculation...   10,818       10,361         5,445      4,660       4,174
                                                   =======     ========     =========   ========     =======

</TABLE> 

<TABLE>
<CAPTION>

                                                                   FISCAL YEAR ENDED DECEMBER 31,              
                                                   ------------------------------------------------------------
                                                     1998          1997         1996       1995         1994
                                                   ---------    ---------    ----------  ---------    ---------
                                                                          (In thousands)
<S>                                                <C>          <C>          <C>         <C>          <C> 
Consolidated Balance Sheet Data:
Working capital (deficiency).....................  $(27,120)    $ (41,657)   $ (30,015)  $ (4,883)    $    (368)
Total assets.....................................     6,885         9,911       24,894     42,427        27,635
Current liabilities..............................    32,028        50,074       50,726     25,438        16,603
Long-term debt, less current portion.............        49            69        4,782      9,573         2,230
Accumulated deficit                                 (65,335)      (80,248)     (68,752)   (26,910)      (25,524)
Total shareholders' equity (deficit).............   (25,192)      (40,232)     (30,614)     7,416         8,802

</TABLE>
_________
(1)  See discussion of effects of income taxes in Note 9 to Notes to
     Consolidated Financial Statements.

(2)  Historical net income (loss) per share has been omitted for 1994 since it
     is not considered meaningful due to the automatic conversion of all of the
     Company's outstanding shares of Preferred Stock into shares of Common Stock
     upon the closing of the Company's initial public offering in April 1994.
     The calculation of the number of shares used in computing pro forma net
     income per share in 1994 includes the effect of the conversion of all
     Series A and B Preferred Stock into 1,774,808 shares of Common Stock upon
     the closing of the Company's initial public offering as if such Preferred
     Stock had been converted into Common Stock on January 1, 1994.

(3)  See discussion of discontinued operations in Notes 14 and 15 to Notes to
     Consolidated Financial Statements.

(4)  1998 net sales were higher when compared to a pro forma net sales for 1997.
     See Note 5 of Notes to Consolidated Financial Statements for a proper
     comparison of net sales for the years 1995 through 1998.

                                       14
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS.

     Management's Discussion and Analysis of Financial Conditions and Results of
Operations contains forward-looking statements which involve substantial risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in this section and elsewhere in this Annual
Report on Form 10-K.

RESULTS OF OPERATIONS

     The following table sets forth certain consolidated statements of
operations data of the Company expressed as a percentage of net sales for the
periods indicated:

                                                     YEAR ENDED DECEMBER 31,
                                                    1998      1997      1996
                                                   ------    ------    -------
Net sales........................................  100.0%    100.0%     100.0%
Cost of goods sold...............................   76.4      81.9       82.8
Gross profit.....................................   23.6      18.1       17.2
Selling, general and administrative..............   15.1      14.7       22.9
Engineering and product development..............    5.5       2.7        3.5
Income (loss) from operations....................    3.0       0.7       (9.2)
Other income (expense):                                               
  Interest expense...............................   (0.1)     (0.1)      (4.1)
  Other income...................................    0.9       0.4        0.0
Income (loss) from continuing operations.........    3.8       1.0      (13.3)
  Income (loss) from discontinued operations.....   20.5     (41.3)    (206.4)
Net income (loss)................................   24.3     (40.3)    (219.7)


YEARS ENDED 1998, 1997 AND 1996

     Net sales.  For the year ended December 31, 1998 ("1998"), net sales were
$19,271,000, representing a decrease of $9,251,000 or 32% from net sales of
$28,522,000 for the year ended December 31, 1997 ("1997").  Sales for 1997
increased by 50% from $19,044,000 for the year ended December 31, 1996 ("1996").
The Company's CTM subsidiary has purchased certain chips ("die") used in the
assembly of multichip modules sold to the Company's principal customer from that
same customer (see Note 5 of Notes to Consolidated Financial Statements).
Effective July 25, 1997, this customer notified the Company that it will no
longer sell die to the Company and instead is providing the die on consignment.
This change has resulted in a reduction in selling prices for products sold to
this customer.  After removing the effect of the change to consignment basis,
revenues on a comparative basis increased from $17,896,000 for 1997, an increase
of $1,375,000 or 7%.  This increase is the result of increased unit sales to the
Company's principal customer offset by decreased average selling price per unit.
The average unit selling price of sales to the Company's principal customer
decreased by 26% from 1997 to 1998 due to product mix changes and downward
competitive pressure on selling prices.

     The increase in net sales from 1996 to 1997 is primarily due to increased
unit sales to the Company's principal customer, partially offset by lower
average selling prices, a reduction of revenue of $2,100,000 from the closure of
the Company's former MPA subsidiary, as well as the reduction of $1,694,000 in
revenues derived under an equipment and technology transfer agreement.

                                       15
<PAGE>
 
     Net sales to the Company's principal customer comprised 87%, 89% and 76% of
net revenues for 1998, 1997 and 1996.

     Cost of goods sold.  For 1998, cost of goods sold were $14,714,000,
representing a decrease of $8,638,000 or 37% from cost of goods sold for 1997.
Cost of goods sold for 1997 increased by $7,578,000 or 48% over cost of goods
sold for 1996.  The decrease in cost of goods sold for 1998 over 1997 is the
result of a decrease in the average per unit cost of units sold to the Company's
principal customer.  The decrease in average per unit cost resulted from CTM's
principal customer deciding, effective July 25, 1997, to provide certain die on
consignment, rather than selling them to the Company (see Note 5 to the
Consolidated Financial Statements).  This change in the provision of die to the
Company has resulted in a decrease of approximately one half as compared to the
previous cost of such unit before the change to consignment.  If the cost of die
were to be excluded from cost of goods sold for 1997, then cost of goods sold
for 1998 on a comparative basis increased by $2,304,000 from $12,410,000 for
1997.  While costs to manufacture declined somewhat in 1998 due to lower
material costs and shorter process manufacturing times, selling prices to the
Company's principal customer were lowered more than this decline in costs.  This
lowering of average selling prices had the effect of therefore increasing the
cost of sales percentage to a percentage higher in 1998 than in 1997.  This
increase in percentage cost of goods sold was partially mitigated by increased
activities which utilize little direct material in the manufacture of the
particular product.

     The increase in cost of goods sold for 1997 as compared to 1996 is the
result of an increase of $10,136,000 for cost of multi-chip module products sold
at CTM, comprised primarily of increased unit sales to the Company's principal
customer.  This was offset by a reduction at MPA due to the sale and closure of
the MPA operation in September 1996.  Additionally, cost of goods sold for
"other sales" decreased by $1,480,000 from 1996 to 1997 due to the completion in
1997 of an equipment and technology transfer agreement.

     Gross profit.  Gross profit for 1998 was $4,557,000, a decrease of $613,000
or 12% from 1997.  Gross profit for 1997 increased by $1,900,000 or 58% over
gross profit of $3,270,000 in 1996.  Gross profit for 1998 represents 24% of net
sales, as compared to 18% for 1997 and 17% for 1996.  If the effect of the
change to customer-supplied material as described above in Net Sales had been
made effective as of the beginning of each year and the sales to, and attendant
cost of, the customer-supplied material was eliminated from the period, then
gross profit as a percentage of sales would have been 29% in 1997 and 30% in
1996.  Upon comparing 1997 gross profit as a percentage of sales without
customer-supplied material, to 1998 gross profit, the decrease is primarily the
result of lower average selling prices per unit of sales to the Company's
principal customer.  This was partially offset by decreases in costs of material
and shorter process manufacturing times.

     The increase in gross profit for 1997 as compared to 1996 is principally
the result of the increase in the Company's sales for that same period. The
increase in gross profit when expressed as a percentage of sales for 1997 as
compared to 1996 is primarily due to the efficiencies of higher sales volumes
and improved overhead absorption at CTM as well as differing product mix.

     Selling, General and Administrative.  Selling, general and administrative
expenses were $2,915,000 for 1998, a decrease of $1,289,000 or 31% as compared
to 1997.  Selling, general administrative expenses were $4,204,000 for 1997, a
decrease of $149,000 or 3% as compared to 1996.  The decreases in expenses for
both years are primarily the result of the Company's reduction of the additional
legal and consulting fees which had been incurred in connection with the
restructuring of the Company's U.S. operations and the winding up of its
Singapore operations.

     Engineering and Product Development.  Engineering and product development
expenses were $1,060,000 for 1998, an increase of $300,000 or 40% as compared to
1997.  Engineering and product 

                                       16
<PAGE>
 
development expenses were $760,000 in 1997, an increase of $94,000 or 14% as
compared to 1996. The increases for both years result primarily from the
increase in the engineering staff employed by the Company, which is part of the
Company's commitment to improvement in quality and processes in its
manufacturing facility.

     Interest expense.  Interest expense totaled $18,000 for 1998, a decrease of
$19,000 or 51% from 1997.  Interest expense was $37,000 for 1997, a decrease of
$750,000 or 95% from 1996.  Interest expense for 1997 and 1996 included interest
on the $2.8 million of convertible debentures issued by the Company in October
1996.  These debentures were converted into common shares of the Company by the
end of February 1997, thus no such interest was incurred in 1998 and only
incurred for two months of 1997.  Interest on customer loans that are related to
the discontinued operations in Singapore have been included in the Discontinued
Operations section of the Consolidated Statements of Operations.

     Other income. Other income was $179,000 for 1998, an increase of $59,000 or
49% from 1997. Other income was $120,000 in 1997, an increase of $110,000 or
111% as compared to 1996. Other income for 1998 and 1997 consists primarily of
the settlement of a note receivable which had been previously written-off.

     Effects of income taxes.  The Company believes that it has sufficient
losses to offset any taxable income that was generated during 1998.  However,
the Company's use of these losses may result in alternative minimum taxes for
Federal income tax purposes.  As a result, the Company has recorded a small
provision for income taxes for 1998.  During 1997, taxable income at the
Company's domestic and foreign operations was offset by the utilization of net
operating loss and other carryforwards.  During 1996, the Company's operations
generating operating losses for both financial reporting and income tax purposes
and no tax was due.

     The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code, and, as a result, the Company believes
that its ability to utilize its current net operating loss and credit
carryforwards in subsequent periods will be subject to annual limitations.

     Discontinued operations.  The net operating results of the activities of
MPM, MPS, MPC and Furnace Tech ("FT") for 1997 and 1996 have been included as
income or loss from discontinued operations on the Consolidated Statements of
Operations.  Amounts recorded as estimated losses on disposal of assets of the
discontinued operations reflect management's best estimates of the amounts
expected to be realized on the sale of the assets associated with these
discontinued operations and the expenses to be incurred through the disposal
date.  Such expenses include $3.5 million of interest expense relating to the
indebtedness of the discontinued operations through the expected completion of
the liquidation process for those debts guaranteed by MPI, which was anticipated
to be December 31, 1998.  Such interest expense was recorded as of June 30,
1997.  Since such indebtedness has not been repaid or restructured by the
beginning of the first quarter of 1999, the Company will again begin recording
interest expense on that outstanding indebtedness.  Interest of approximately
$563,000 would be accrued beginning in the first quarter of 1999 and would
continue until the indebtedness is repaid or restructured.

     Beginning in 1998, the Company has discontinued the consolidation of the
assets and liabilities of MPM, MPS, MPC and FT.  Those liabilities and accrued
interest guaranteed by MPI have continued to be included in the Consolidated
Balance Sheets of the Company.  The effect of the deconsolidation of these
entities was to reduce current liabilities and improve shareholders' deficit by
$10.2 million as of June 30, 1998.

     During 1998, the High Court of the Republic of Singapore ordered the
Winding up of MPM Singapore Pte. Ltd. ("MPM"), a wholly owned subsidiary of the
Company.  As a result of this decision, MPM cannot 

                                       17
<PAGE>
 
continue as an operating business, and it cannot be allowed to dispose of its
assets or incur further liabilities. In addition, the Company does not have any
control over the management of MPM. This function is undertaken by the Receiver
and Manager appointed by DBS Bank.

     In September 1997, the High Court of the Republic of Singapore ordered the
Winding Up of "Microelectronic Packaging (S) Pte. Ltd. ("MPS"), also a wholly
owned subsidiary of the Company.  As with MPM, MPS cannot continue as an
operating business, and the Company does not have any control over the
management of MPS.  This function is undertaken by the Receiver and Manager
appointed by DBS Bank.

     Due to the circumstances as described in the previous two paragraphs,
management, effective for 1998, will not consolidate MPS and MPM, into the
consolidated financial statements for MPI and subsidiaries. For MPM, the
decision was based upon the Singapore High Court's decision to Wind Up this
company. For MPS, the Singapore High Court had already ordered the Winding Up in
September 1997, however, due to the material amount of assets remaining to be
liquidated and also due to requests made by MPS' Receiver and Manager for the
Company to assist them in the realization and disposal of MPS' remaining assets,
Management elected to consolidate until there was a clearer determination of the
control of the subsidiary and realization of its assets. In November 1998,
Management was informed of the sale of the two buildings owned by MPS. In
addition, it became more evident during 1998 that any remaining realization of
accounts receivable on the books of MPS was highly questionable. Accordingly the
decision was made to not consolidate MPM and MPS.

LIQUIDITY AND CAPITAL RESOURCES

     During 1998 and 1997, the Company financed its operations from operating
cash flow. In 1996, the Company financed its operations through a combination of
bank and other borrowings, equipment lease financings and certain other debt and
equity financings. During 1998, operating activities of continuing operations
provided $304,000. Investing activities, consisting principally of sales of
assets of discontinued operations, provided $2,201,000, and financing activities
used $3,321,000 during 1998. At December 31, 1998, the Company had a working
capital deficiency of $27,120,000 and an accumulated deficit of $65,335,000. The
Company had outstanding at December 31, 1998 approximately $27,055,000 of debt
from its discontinued operations, which debt has been guaranteed by MPI, the
parent company, and this debt is in default and due on demand.

     During 1998, the Company had no significant additions of liquidity from
outside the Company.  During 1996, the Company completed two financings.  The
Company completed in March 1996 an equity financing of $2,000,000 with Transpac
and also issued to Transpac $9,000,000 of convertible debentures.  The Company
completed in October 1996 an additional $2,800,000 financing by issuing a series
of convertible debentures to various investors.  The Company's sole source of
liquidity at December 31, 1998 consisted of $469,000 of cash from operations.
The Company has no borrowing arrangements available to it.

     The Company is currently in default on substantially all of its debt
obligations which are classified as "discontinued operations" in the
Consolidated Balance Sheet.  It is currently attempting to convert these debt
obligations into the Company's equity.  There can be no assurance that the
Company will be successful in converting these debt obligations to equity or, if
converted, that the conversion will be on favorable terms and conditions.

     In connection with the Company's subsidiaries in Singapore, which ceased
operations in 1997, the Company fully guaranteed the debt obligations listed
below.  These obligations are classified as "Discontinued Operations" in the
accompanying financial statements for MPI and its consolidated subsidiaries.

                                       18
<PAGE>
 
     During 1998, the Company signed agreements with each of these creditors,
which called for settlement payments of approximately $9.3 million to satisfy
all debt obligations if the amount is paid by May 1, 1999. Because the Company
has not been able to obtain funding to satisfy the settlement payment
obligations which are all due on May 1, 1999, the Company renegotiated the terms
and has recently entered into non-binding letter agreements with all eight
creditors which call for the conversion of all debt and accrued interest
obligations into shares of the Company's Series A Preferred Stock, each share of
which is convertible into two shares of MPI Common Stock. For the aggregate debt
of $27,055,000, which is all the Discontinued Operations debt, the Company has
agreed to convert this debt into shares of Series A Preferred Stock which is
immediately convertible into shares of MPI Common Stock.

     This debt conversion into equity is subject to the completion of definitive
agreements for all eight creditors and the approval of the debt conversion to
equity by a majority of the Company's shareholders.

     The Series A Preferred Stock contemplated to be used by the Company in
connection with this debt-for-equity exchange will be convertible immediately
into MPI Common Stock.  Other proposed features will be a 3.5% per annum
cumulative dividend rate, senior privileges over Common Stock, liquidation
preferences, registration rights and protective provisions.

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations  Future Operating Results  Future Capital Needs; Need for
Additional Financing  Repayment of Debt Obligations by MPM and MPS  Adverse
Impact of MPM and MPS Liquidations on MPI  High Leverage  Status as a Going
Concern."

     At December 31, 1998, the Company's subsidiaries' MPM and MPS had
outstanding borrowings due to DBS totaling $1,364,000.  The amount outstanding
is the remaining balance of various borrowings made by MPM and MPS  under lines
of credit, overdraft facilities, and an accounts receivable financing line of
credit.  This balance remains after the liquidation of assets of MPM and MPS by
the receivers and the application to these debts of the resulting proceeds from
those assets of those entities.  All assets of MPM and substantially all assets
of MPS have been liquidated by the receivers of MPM and MPS. The receiver for
MPS is attempting to collect approximately $2,400,000 payable by a former
customer of MPS.  The amount has been unpaid since June 1997 and has been fully
reserved for by MPS.  If the receiver is successful in collecting all or a
portion of this receivable, the proceeds will be used to retire these
borrowings.  These amounts are currently in default, payable upon demand, and
bear interest at the bank's prime rate plus 5%, which is equal to the rate of
XXXX% as of December 31, 1998.  All of these amounts are secured by the
remaining assets of MPM and MPS and are guaranteed by MPI.

     At December 31, 1997, the Company's subsidiary MPM had borrowings of
$9,000,000 under the Transpac debentures (see Note 6 to Consolidated Financial
Statements).  The debentures bear interest at the rate of 8.5%.  As of December
31, 1998, approximately $2,165,000 of accrued interest was due and payable under
the Transpac debentures.  The debenture has been fully guaranteed by MPI.  The
debentures are currently in default and payable upon demand.

     At December 31, 1998, the Company had outstanding a term note due to NS
Electronics, a former customer of MPS, a discontinued Singapore operation.  The
note bears interest at 18% per annum.  The 

                                       19
<PAGE>
 
balance due under the note is $1,250,000 and approximately $399,000 of accrued
interest was also due and payable as of December 31, 1998. The note has been
fully guaranteed by MPI and is secured by certain assets of the Company. The
note is currently in default and payable upon demand.

     At December 31, 1998, the Company's subsidiary MPS had outstanding a term
note due to TI, a former customer of MPS.  The note bears interest at the rate
of 3.5% per annum.  The balance due under the note is $3,521,000 and
approximately $195,000 of accrued interest was due and payable as of December
31, 1998.  The note has been fully guaranteed by MPI.  The note is currently in
default and payable upon demand.

     At December 31, 1998, the Company's subsidiary MPS had outstanding a term
note due to STMicroelectronics (formerly SGS-Thomson Microelectronics), a former
customer of MPS.  The note bears interest at the rate of 7.25% per annum.  The
balance due under the note is $4,000,000 and approximately $703,000 of accrued
interest was due and payable as of December 31, 1998.  The note has been fully
guaranteed by MPI and is secured by certain assets of the Company.  The note is
currently in default and payable upon demand.

     At December 31, 1998, the Company's subsidiary MPS had outstanding a term
note due to Motorola, a former customer of MPS.  The note bears interest at
approximately 7% per annum.  The balance due under the note is $2,208,000 and
approximately $164,000 of accrued interest was due and payable as of December
31, 1998.  The note has been guaranteed by MPI and is secured by certain assets
of the Company as well as all shares of CTM and MPA.  The note is currently in
default and payable upon demand.

     At December 31, 1997, the Company's subsidiary MPS had outstanding an
amount due to Samsung Corning.  Samsung Corning had guaranteed a $1,000,000 loan
from DBS to MPS.  The remaining balance due to DBS under the loan, approximately
$583,000, was paid by Samsung Corning to DBS in December 1997.  The Company has
accordingly recorded the $583,000 as  a liability to Samsung Corning, as well as
$101,000 of accrued and unpaid interest as of December 31, 1998.

     At December 31, 1998, the Company had outstanding a deficiency balance from
capital leases due to ORIX Leasing totaling $1,610,000. The amount outstanding
is the remaining balance of various lease borrowings made by MPM and MPS.  This
balance remains after the liquidation of the leased assets of MPM by ORIX
Leasing and the application to these leases of the resulting proceeds from those
assets of those entities.  The remaining amount outstanding is represented by a
note issued by MPI at an interest rate of 7.25%.  The note is currently in
default and is payable upon demand.

     The Company also has various capitalized leases for equipment utilized in
the US operations, with a total balance of approximately $69,000 at December 31,
1998.  These lease obligations are being serviced currently by CTM.

     The Company's inventories declined by $1,157,000 or 27% at 1998 as compared
to 1997. This decline is due to the lower sales volume in 1998 as compared to 
1997, and the corresponding lower need to have inventory on hand to support 
sales volume. Accounts payable also declined, by $3,405,000 or 45% as compared 
to 1997, again due to lower sales volume.

     The Company previously purchased raw materials from its principal customer,
Schlumberger.  As of July 25, 1997, the material was supplied by the customer on
consignment.  As of December 31, 1998, the Company owes to that customer
approximately $2,900,000 from purchases previously made before the change to
consignment.  The Company is making periodic payments to Schlumberger under an
informal repayment plan.

FUTURE OPERATIONS

     Status as a Going Concern.  The Company's independent certified public
accountants have included an explanatory paragraph in their audit report with
respect to the Company's 1998, 1997, 1996 and 1995 consolidated financial
statements related to a substantial doubt with respect to the Company's ability
to continue as a going concern.   Absent outside debt or equity financing, and
excluding significant expenditures required for the Company's major projects and
assuming the Company is successful in restructuring its debt, 

                                       20
<PAGE>
 
the Company currently anticipates that cash on hand and anticipated cash flow
from operations may be adequate to fund its operations in the ordinary course
throughout 1999. Any significant increase in planned capital expenditures or
other costs or any decrease in or elimination of anticipated sources of revenue
or the inability of the Company to restructure its debt could cause the Company
to restrict its business and product development efforts. There can be no
assurance that the Company will be successful in restructuring its debt on
acceptable terms, or at all. If adequate revenues are not available, the Company
will be unable to execute its business development efforts and may be unable to
continue as a going concern. There can be no assurance that the Company's future
consolidated financial statements will not include another going concern
explanatory paragraph if the Company is unable to restructure its debt and
maintain profitability. The factors leading to and the existence of the
explanatory paragraph will have a material adverse effect on the Company's
ability to obtain additional financing. See "Future Capital Needs; Need for
Additional Financing -- Liquidity and Capital Resources -- Consolidated
Financial Statements."

     Risk of Bankruptcy.  If the Company is not able to restructure its debt to
the eight creditors referenced above, the Company will need to be reorganized
under Chapter 11 of Title 11 of the United States Code or liquidated under
Chapter 7 of Title 11 of the United States Code.  There can be no assurance that
if the Company decides to reorganize under the applicable laws of the United
States that such reorganizational efforts would be successful or that
shareholders would receive any distribution on account of their ownership of
shares of the Company's stock.  Similarly, there can be no assurances that if
the Company decides to liquidate under the applicable laws of the United States
that such liquidation would result in the shareholders receiving any
distribution on account of their ownership of shares of the Company's stock.  In
fact, if the Company were to be reorganized or liquidated under the applicable
laws of the United States, the bankruptcy laws would require (with limited
exceptions) that the creditors of the Company be paid before any distribution is
made to the shareholders.

     Future Capital Needs; Need for Additional Financing.  The Company's future
capital requirements will depend upon many factors, including the extent and
timing of acceptance of the Company's products in the market, requirements to
restructure and retire its substantial debt, requirements to construct,
transition and maintain existing or new manufacturing facilities, commitments to
third parties to develop, manufacture, license and sell products, the progress
of the Company's research and development efforts, the Company's operating
results and the status of competitive products. If the Company is successful in
restructuring its debt obligations, absent debt or equity financing and
excluding significant expenditures required for the Company's major projects,
the Company anticipates that cash on hand and anticipated cash flow from
operations may be adequate to fund its operations through 1999.  There can be no
assurance, however, that the Company will not require additional financing prior
to such date to fund its operations. In addition, the Company may require
substantial additional financing to fund its operations in the ordinary course,
particularly if the Company is unable to restructure its debt obligations.
Furthermore, the Company may require additional financing to fund the
acquisition of selected assets needed in its production facilities.  There can
be no assurance that the Company will be able to obtain such additional
financing on terms acceptable to the Company, or at all.

     The Company is in breach of substantially all of its debt obligations and
is in default under each of such agreements. If the Company cannot reach an
agreement with its creditors to repay its obligations, the Company will not be
able to continue as a going concern. The Company's high level of outstanding
indebtedness and the numerous restrictive covenants set forth in the agreements
covering this indebtedness and its default position prohibit the Company from
obtaining additional bank lines of credit and from raising funds through the
issuance of debt or other securities without the prior consent of DBS and
Transpac. The Company is currently in default on  its guarantee and loan
obligations to DBS as a result of the Company's liquidation of the assets of MPM
and MPS.  These liquidations have also resulted in the Company's default under a
number of other agreements, and certain creditors have informed the Company they
intend to accelerate outstanding payments due to them under various credit
agreements because of such defaults. There 

                                       21
<PAGE>
 
can be no assurance that other creditors of the Company will not also choose to
accelerate the Company's debt obligations and the Company will not able to repay
such accelerated obligations as they become due and immediately payable. If
either a sufficient number of creditors or any of the substantial creditors
choose to accelerate payments or to place MPI or one or more of its subsidiaries
under judicial reorganization, the Company may be forced to seek protection
under Chapter 11 of Title 11 of the United States Code. If the Company were to
seek additional financing, such additional financing may not be available to the
Company on acceptable terms, or at all. If additional funds are raised by
issuing equity or convertible securities, further dilution to the existing
shareholders will result. Since adequate funds are not currently available, the
Company has been required to delay, scale back or eliminate programs which could
continue to have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. In addition, the Company has been
forced to delay, downsize or eliminate other research and development,
manufacturing, construction or transitioning programs or alliances or obtain
funds through arrangements with third parties pursuant to which the Company has
been forced to relinquish rights to certain of its technologies or to other
assets that the Company would not otherwise relinquish. The delay, scaling back
or elimination of any such programs or the relinquishment of any such rights
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations. See "Status as a Going Concern",
"Future Capital Needs; Need for Additional Financing" and "Liquidity and Capital
Resources".

     Future Operating Results.  The Company's operating results have fluctuated
significantly in the past and will continue to fluctuate significantly in the
future depending upon a variety of factors, including corporate and debt
restructurings, creditor relationships, conversions of significant amounts of
debt into a significant amount of equity, downward pressure in gross margins,
losses due to low shipping volume, delayed market acceptance, if any, of new and
enhanced versions of the Company's products, delays, cancellations or
reschedulings of orders, delays in product development, defects in products,
integration of acquired businesses, political and economic instability, natural
disasters, outbreaks of hostilities, variations in manufacturing yields, changes
in manufacturing capacity and variations in the utilization of such capacity,
changes in the length of the design-to-production cycle, relationships with and
conditions of customers, subcontractors, and suppliers, receipt of raw
materials, including consigned materials, customer concentration, price
competition, cyclicality in the semiconductor industry and conditions in the
personal computer industries. In addition, operating results will fluctuate
significantly based upon several other factors, including the Company's ability
to retain present management and to attract new customers, changes in pricing by
the Company, its competitors, subcontractors, customers or suppliers, and
fluctuations in manufacturing yields.  The absence of significant backlog for an
extended period of time will also limit the Company's ability to plan production
and inventory levels, which could lead to substantial fluctuations in operating
results. Accordingly, the failure to receive anticipated orders or delays in
shipments due, for example, to unanticipated shipment reschedulings or defects
or to cancellations by customers, or to unexpected manufacturing problems may
cause net sales in a particular quarter to fall significantly below the
Company's expectations, which would materially adversely affect the Company's
operating results for such quarter. The impact of these and other factors on the
Company's net sales and operating results in any future period cannot be
forecasted with certainty. In addition, the significant fixed overhead costs at
the Company's facilities, the need for continued expenditures for research and
development, capital equipment and other commitments of the Company, among other
factors, will make it difficult for the Company to reduce its expenses in a
particular period if the Company's sales goals for such period are not met. A
large portion of the Company's operating expenses are fixed and are difficult to
reduce or modify should revenues not meet the Company's expectations, thus
magnifying the material adverse impact of any such revenue shortfall.
Accordingly, there can be no assurance that the Company will not incur losses in
the future or that such losses will not have a material adverse effect on the
Company's business, financial condition and results of operations.

     Repayment of Debt Obligations by MPM and MPS. As of December 31, 1998, MPM
and MPS had combined outstanding borrowings of approximately $27,000,000. Most
of the assets of MPM and MPS

                                       22
<PAGE>
 
have been liquidated by receivers appointed by DBS. The Company currently
anticipates that the remaining proceeds from the liquidation of assets will be
insufficient to fully repay its outstanding debt. Since the borrowings have been
guaranteed by MPI, the Company is currently attempting to negotiate a conversion
of the remaining indebtedness to MPI equity. The failure of the Company to
complete this conversion on favorable terms would materially adversely affect
the Company's financial condition and the ability of the Company to continue as
a going concern.

     Certain Secured Obligations of MPS. In connection with an MPS borrowing
from Citibank N.A., Motorola guaranteed (and subsequently satisfied MPS'
obligation) of $2.2 million in borrowings from Citibank N.A. Under the terms of
the agreement relating to Motorola's guarantee, MPI granted Motorola a security
interest in all of the issued and outstanding capital stock of MPS, CTM and MPA.
While in default, Motorola may have the right to vote and give consents with
respect to all of the issued and outstanding capital of MPS, CTM and MPA . As a
result, during the continuation of any such event of default, MPI may be unable
to control at the shareholder level the direction of the subsidiaries that
generate substantially all of the Company's revenues and hold substantially all
of the Company's assets. Any such loss of control would have a material adverse
effect on the Company's business, prospects, financial condition, results of
operations and status as an ongoing concern and could force the Company to seek
protection under Chapter 7 or Chapter 11 of Title 11 of the United States Code
or similar bankruptcy laws of Singapore. The other Asian debt agreements contain
numerous restrictions and events of default that have been triggered by the
aforementioned actions and would, if they became effective and operative,
materially adversely affect the Company's business, prospects, results of
operations, condition and status as an ongoing concern and could force the
Company to seek protection under Chapter 7 or Chapter 11 of Title 11 of the
United States Code or similar bankruptcy laws of Singapore.

     In January 1999, the Company and Motorola signed a non-binding letter
agreement which calls for the conversion of all the Company's obligations into
MPI's equity subject to certain conditions.  See "License and Other Significant
Agreements."  There can be no assurance that the Company will be successful in
its efforts to reduce this non-binding agreement reached with Motorola to a
binding written agreement.

     High Leverage.  The Company is highly leveraged and has substantial debt
service requirements. The Company has $32,077,000 in liabilities as of December
31, 1998. On December 31, 1998, the Company had a total shareholders' deficit of
approximately $25,192,000.  Based on current operations, the Company cannot
service the existing debt.  The Company's ability to meet its debt service
requirements will be dependent upon the Company's future performance, which will
be subject to financial, business and other factors affecting the operation of
the Company, many of which are beyond its control and on the willingness of the
Company's creditors to participate in restructuring the Company's debt to MPI
equity. There can be no assurance that the Company will be able to meet the
capital requirements described above or, if the Company is able to meet such
requirements, that the terms available will be favorable to the Company.  See
"Liquidity and Capital Resources".

     Highly Competitive Industry; Significant Price Competition.  The electronic
interconnection technology industry is intensely competitive. The Company
experiences intense competition worldwide from a number of manufacturers,
including Maxtek Components Corporation, Natel Engineering, VLSI Packaging,
Raytheon Electronic Systems, Hewlett-Packard Company, Advanced Packaging
Technology of America and MicroModule Systems, all of which have substantially
greater financial resources and production, marketing and other capabilities
than the Company with which to develop, manufacture, market and sell their
products.  The Company faces competition from certain of its customers that have
the internal capability to produce products competitive with the Company's
products and may face competition from new market entrants in the future. In
addition, corporations with which the Company has agreements are conducting
independent research and development efforts in areas which are or may be
competitive with the Company. The Company expects its competitors to continue to
improve the performance of their current products and to introduce new 

                                       23
<PAGE>
 
products or new technologies that provide improved performance characteristics.
New product introductions by the Company's competitors could cause a significant
decline in sales or loss of market acceptance of the Company's existing products
which could materially adversely affect the Company's business, financial
condition and results of operations. The Company is also experiencing
significant price competition, which may materially adversely affect the
Company's business, financial condition and results of operations. The Company
believes that to remain competitive in the future it will need to continue to
develop new products and to invest significant financial resources in new
product development. There can be no assurance that such new products will be
developed or that sales of such new products will be achieved. There can be no
assurance that the Company will be able to compete successfully in the future.

     Reliance on Schlumberger.  Sales to one customer, Schlumberger, accounted
for 87% of the Company's net sales in 1998 and is expected to continue to
account for a significant part of the Company's net sales.  Under the agreement
between Schlumberger and the Company entered into in January 1998, the Company
is obligated to provide Schlumberger with its requirements for MCM product.
Given the Company's anticipated continued reliance on its MCM business as a
percentage of overall net sales, the failure to meet Schlumberger's requirements
will materially adversely affect the Company's ability to continue as an ongoing
concern.  In addition, under the terms of the agreement, Schlumberger is
entitled to  request repricing of the Company's products.  Schlumberger has
requested repricing on several occasions in the past.  Such repricing in the
future may result in the Company being unable to produce the products made for
Schlumberger with an adequate operating profit, and the Company may be unable to
compete with the prices of other vendors who supply the same or similar products
to Schlumberger.  The failure to satisfy the terms of the agreement, or the
failure of the Company to achieve an operating profit under the contract, would
have a material adverse impact on the Company's business, financial condition,
and results of operation.

     Significant Customer Concentration.  Historically, the Company has sold its
products to a very limited number of customers.  Any reduction in orders by any
of these customers, including reductions due to market, economic or competitive
conditions in the semiconductor, personal computer or electronic industries or
in other industries that manufacture products utilizing semiconductors or MCMs,
could materially adversely affect the Company's business, financial condition
and results of operations.   The supply agreements with certain of the Company's
customers do not obligate them to purchase products from the Company. The
Company's ability to increase its sales in the future will also depend in part
upon its ability to obtain orders from new customers. There can be no assurance
that the Company's sales will increase in the future or that the Company will be
able to retain existing customers or to attract new ones.  Failure to develop
new customer relationships could materially adversely affect each such
subsidiary's results of operations and would materially adversely affect the
Company's business, financial condition and results of operations.

     Dependence on Semiconductor and Personal Computer Industries.  The
financial performance of the Company is dependent in large part upon the current
and anticipated market demand for semiconductors and products such as personal
computers that incorporate semiconductors. The semiconductor industry is highly
cyclical and historically has experienced recurring periods of oversupply  The
Company believes that the markets for new generations of semiconductors will
also be subject to similar fluctuations. The semiconductor industry is currently
experiencing rapid growth.  A reduced rate of growth in the demand for
semiconductor component parts due, for example, to competitive factors,
technological change or otherwise, may materially adversely affect the markets
for the Company's products. From time to time, the personal computer industry,
like the semiconductor industry, has experienced significant downturns, often in
connection with, or in anticipation of, declines in general economic conditions.
Accordingly, any factor adversely affecting the semiconductor or the personal
computer industry or particular segments within the semiconductor or personal
computer industry may materially adversely affect the Company's business,
financial condition and results of operations.  There can be no assurance that
the Company's net sales and results of operations will not be materially
adversely affected if downturns or slowdowns in the semiconductor, personal
computer industry or other industries utilizing the Company's products continue
or again occur in the future.

                                       24
<PAGE>
 
     Technological Change; Importance of Timely Product Introduction;
Uncertainty of Market Acceptance and Emerging Markets. The markets for the
Company's products are subject to technological change and new product
introductions and enhancements. Customers in the Company's markets require
products embodying increasingly advanced electronics interconnection technology.
Accordingly, the Company must anticipate changes in technology and define,
develop and manufacture or acquire new products that meet its customers' needs
on a timely basis. A general decline in the technology industry, which began in
1997, had a significant impact on the Company's sales in the third and fourth
quarter of 1998. The Company anticipates that technological changes could cause
the Company's net sales to decline in the future. There can be no assurance that
the Company will be able to identify, develop, manufacture, market, support or
acquire new products successfully, that any such new products will gain market
acceptance, or that the Company will be able to respond effectively to
technological changes. If the Company is unable for technological or other
reasons to develop products in a timely manner in response to changes in
technology, the Company's business, financial condition and results of
operations will be materially adversely affected. There can be no assurance that
the Company will not encounter technical or other difficulties that could in the
future delay the introduction of new products or product enhancements. In
addition, new product introductions by the Company's competitors could cause a
decline in sales or loss of market acceptance of the Company's products, which
could materially adversely affect the Company's business, financial condition
and results of operations. Even if the Company develops and introduces new
products, such products must gain market acceptance and significant sales in
order for the Company to achieve its growth objectives. Furthermore, it is
essential that the Company develop business relationships with and supply
products to customers whose end-user products achieve and sustain market
penetration. There can be no assurance that the Company's products will achieve
widespread market acceptance or that the Company will successfully develop such
customer relationships. Failure by the Company to develop products that gain
widespread market acceptance and significant sales or to develop relationships
with customers whose end-user products achieve and sustain market penetration
will materially adversely affect the Company's business, financial condition and
results of operations. The Company's financial performance will depend in
significant part on the continued development of new and emerging markets such
as the market for MCMs. The Company is unable to predict with any certainty any
growth rate and potential size of emerging markets. Accordingly, there can be no
assurance that emerging markets targeted by the Company, such as the market for
MCMs, will develop or that the Company's products will achieve market acceptance
in such markets. The failure of emerging markets targeted by the Company to
develop or the failure by the Company's products to achieve acceptance in such
markets could materially adversely affect the Company's business, financial
condition and results of operations.

     Sole or Limited Sources of Supply.  Certain raw materials essential for the
manufacture of the Company's products are obtained from a sole supplier or a
limited group of suppliers.  There are a limited number of qualified suppliers
of laminate substrates and  die which are of critical importance to the
production of the Company's MCM products. In the manufacturing process, the
Company also utilizes consigned materials supplied by certain of its customers.
The Company's reliance on sole or a limited group of suppliers and certain
customers for consigned materials involves several risks, including a potential
inability to obtain an adequate supply of required materials and reduced control
over the price, timely delivery, and quality of raw materials. There can be no
assurance that problems with respect to yield and quality of such materials and
timeliness of deliveries will not continue to occur. Disruption or termination
of these sources could delay shipments of the Company's products and could have
a material adverse effect on the Company's business, financial condition and
operating results. Such delays could also damage relationships with current and
prospective customers, including customers that supply consigned materials.

     Product Quality and Reliability; Need to Increase Production.  The
Company's customers establish demanding and time-consuming specifications for
quality and reliability that must be met by the Company's products. From initial
customer contact to actual qualification for production, which may take as long
as three years, the Company typically expends significant resources. Although
the Company has generally met its customers' quality and reliability product
specifications, the Company has in the past experienced and is currently
experiencing difficulties in meeting some of these standards. Although the
Company has addressed 

                                       25
<PAGE>
 
past concerns and has resolved a number of quality and reliability problems,
there can be no assurance that such problems will not continue or recur in the
future. If such problems did continue or recur, the Company could experience
delays in shipments, increased costs, delays in or cancellation of orders and
product returns, any of which would have a material adverse effect on the
Company's business, financial condition or results of operations. The
manufacture of the Company's products is complex and subject to a wide variety
of factors, including the level of contaminants in the manufacturing environment
and the materials used and the performance of personnel and equipment. The
Company has in the past experienced lower than anticipated production yields and
written off defective inventory as a result of such factors. The Company must
also successfully increase production to support anticipated sales volumes.
There can be no assurance that the Company will be able to do so or that it will
not experience problems in increasing production in the future. The Company's
failure to adequately increase production or to maintain high quality production
standards would have a material adverse effect on the Company's business,
financial condition and results of operations.

     Expansion of Operations.  In order to be competitive, the Company must
implement a variety of systems, procedures and controls.  The Company expects
its operating expenses to continue to increase. If orders received by the
Company do not result in sales or if the Company is unable to sustain net sales
at anticipated levels, the Company's operating results will be materially
adversely affected until operating expenses can be reduced. The Company's
expansion will also continue to cause a significant strain on the Company's
management, financial and other resources. If the Company is to grow, it must
expand its accounting and other internal management systems, and there can be no
assurance that the Company will be successful in effecting such expansion. Any
failure to expand these areas in an efficient manner at a pace consistent with
the Company's business could have a material adverse effect on the Company's
results of operations. Moreover, there can be no assurance that net sales will
increase or remain at or above recent levels or that the Company's systems,
procedures and controls will be adequate to support the Company's operations.
The Company's financial performance will depend in part on its ability to
continue to improve its systems, procedures and controls.

     Intellectual Property Matters.  Although the Company attempts to protect
its intellectual property rights through patents, trade secrets and other
measures, it believes that its financial performance will depend more upon the
innovation, technological expertise, manufacturing efficiency and marketing and
sales abilities of its employees. There can be no assurance that others will not
independently develop similar proprietary information and techniques or gain
access to the Company's intellectual property rights or disclose such technology
or that the Company can meaningfully protect its intellectual property rights.
There can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. Furthermore, there can be no assurance
that others will not develop similar products, duplicate the Company's products
or design around the patents owned by the Company, or that third parties will
not assert intellectual property infringement claims against the Company. In
addition there can be no assurance that foreign intellectual property laws will
protect the Company's intellectual property rights.

     Environmental Regulations.  The Company is subject to a variety of local,
state, federal and foreign governmental regulations relating to the storage,
discharge, handling, emission, generation, manufacture and disposal of toxic or
other hazardous substances used to manufacture the Company's products. The
Company believes that it is currently in compliance in all material respects
with such regulations and that it has obtained all necessary environmental
permits to conduct its business. Nevertheless, the failure to comply with
current or future regulations could result in the imposition of substantial
fines on the Company, suspension of production, alteration of its manufacturing
processes or cessation of operations. Compliance with such regulations could
require the Company to acquire expensive remediation equipment or to incur
substantial expenses. Any failure by the Company to control the use, disposal,
removal or storage of, or to adequately restrict the discharge of, or assist in
the cleanup of, hazardous or toxic substances, could subject to the Company to
significant liabilities, including joint and several liability under certain
statutes. The imposition 

                                       26
<PAGE>
 
of such liabilities could materially adversely affect the Company's business,
financial condition or results of operations. The Company has been notified by
the United States Environmental Protection Agency that it considers the Company
to be a potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986. See "Legal Proceedings."

     Growth Strategy Through Acquisitions.  As part of its growth strategy, the
Company has in the past sought and may in the future continue to seek to
increase sales and achieve growth through the acquisition of comparable or
complementary businesses or technologies. The implementation of this strategy
will depend on many factors, including the availability of acquisitions at
attractive prices and the ability of the Company to make acquisitions, the
integration of acquired businesses into existing operations, the expansion of
the Company's customer base and the availability of required capital.
Acquisitions by the Company may result in dilutive issuances of equity
securities, and in the incurrence of debt and the amortization of goodwill and
other intangible assets that could adversely affect the Company's profitability.
Any inability to control and manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will successfully expand
or that growth and expansion will result in profitability or that the Company's
growth plans through acquisitions will not be inhibited by the Company's current
lack of resources.

     Dependence on Key Personnel.  The Company's financial performance depends
in part upon its ability to attract and retain qualified management, technical,
and sales and support personnel for its operations. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting or retaining such personnel. The loss of any key
employee, the failure of any key employee to perform in his current position or
the Company's inability to attract and retain skilled employees, as needed,
could materially adversely affect the Company's business, financial condition
and results of operations.

     Nasdaq National Market  Listing Requirements.  The Company was delisted
from the Nasdaq National Market on March 13, 1997, at which date the Company's
Common Stock began trading on the OTC Electronic Bulletin Board.  The Company
may in the future be subject to continuing requirements to be listed on the OTC
Electronic Bulletin Board.  There can be no assurance that the Company could
continue to meet such requirements. The price and liquidity of the Common Stock
may be materially adversely affected if the Company is unable to meet such
requirements in the future.  There can be no assurance that the Company will be
able to requalify for listing on the Nasdaq National Market.

Disclosures Relating to Low Priced Stocks; Restrictions on Resale of Low Price
Stocks and on Broker-Deal Sale; Possible Adverse Effect of "Penny Stock" Rules
on Liquidity for the Company's Securities. Since the Company's securities were 
delisted from the NASDAQ SmallCap Market and the Company has net tangible assets
of less than $2,000,000, transactions in the Company's securities are subject to
Rule 15g-9 under the Exchange Act, which imposes additional sales practice 
requirements on broker-dealers who sell such securities to persons other than 
established customers and "accredited investors" (generally, individuals with a 
net worth in excess of $1,000,000 or annual incomes exceeding $200,000 or 
$300,000 together with their spouses). For transactions covered by this Rule, a 
broker-dealer must make a special suitability determination for the purchaser 
and have received the purchaser's written consent to the transaction prior to 
the sale. Consequently, this Rule may affect the ability of broker-dealers to 
sell the Company's securities, and may affect the ability of purchasers in this 
offering to sell any of the securities acquired hereby in the secondary market.

     The Commission has adopted regulations which generally define a "penny 
stock" to be any non-NASDAQ equity security of a small company that has a market
price (as therein defined) less than $5.00 per share, or with an exercise price 
of less than $5.00 per share subject to certain exceptions, and which is not 
traded on any exchange or quoted on NASDAQ. For any transaction by 
broker-dealers involving a penny stock (unless exempt), the rules require 
delivery, prior to a transaction in a penny stock, of a risk disclosure document
relating to the penny stock market. Disclosure is also required to be made about
compensation payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are 
required to be sent disclosing recent price information for the penny stock held
in an account and information on the limited market in penny stocks.

     Volatility of Stock Price.  The Company believes that factors such as the
conversion of the Company's Asian debt to Series A Preferred Stock at a
significant dilution to current shareholders (See " Liquidity and Capital
Resources"), announcements of developments related to the Company's business,
fluctuations in the Company's financial results, general conditions or
developments in the semiconductor and personal computer industry and the general
economy, sales of the Company's Common Stock into the marketplace, the ability
of the Company to sell its stock on an exchange or over-the-counter, an outbreak
of hostilities, natural disasters, announcements of technological innovations or
new products or enhancements by the Company or its competitors, developments in
the Company's relationships with its customers and suppliers, or a shortfall or
changes in revenue, gross margins or earnings or other financial results which
are different from analysts' expectations could cause the price of the Company's
Common Stock to fluctuate, perhaps substantially. In recent years the stock
market in general, and the market for shares of small capitalization stocks in
particular, including the Company, have experienced extreme price fluctuations,
which have often been unrelated to the operating performance of affected
companies. There can be no assurance that the market price of the 

                                       27
<PAGE>
 
Company's Common Stock will not continue to experience significant fluctuations
in the future, including fluctuations that are unrelated to the Company's
performance.

     Recurring net operating losses.  The Company's decision to discontinue its
multilayer ceramic operations was the primary factor contributing to its 1996
net loss of $41,842,000.  The decision by the principal secured creditors of the
Company's pressed ceramic operations to liquidate that operation's assets was
the primary factor contributing to the 1997 net loss of $11,496,000, as well as
additional loss provisions made in 1997 relating to the discontinuance of the
multilayer ceramic operations.  At December 31, 1998, the Company had a working
capital deficiency of $27,120,000 and an accumulated deficit of $65,335,000.
The Company had outstanding at December 31, 1997 approximately $27,055,000 of
debt from its discontinued operations, which debt has been guaranteed by MPI,
the parent company, and most of which debt is in default and due on demand.

     Year 2000 Compliance.  Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field.  These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates.  As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.  Significant
uncertainty exists in the software industry and in other industries concerning
the potential effects associated with such compliance.  Although the Company
currently offers products that are designed to be Year 2000 compliant, there can
be no assurance that the Company's products and the software products used by
the Company contain all necessary date code changes. As of December 31, 1998,
the Company has partially completed an analysis of its readiness for compliance
with the Year 2000 change.  Its assessment of its manufacturing systems and
company products reveals that no known Year 2000 issues currently exist either
in the products, their raw materials, or their relationship as components to
larger systems produced by its customers; its financial systems software is
currently being upgraded to a newer replacement system which will be complete in
early 1999, and which system is Year 2000 compliant; documentation systems that
currently use fixed dating are Year 2000 compliant, while those that require
revision dating are currently under review; and approximately 50% of the
Company's computing hardware systems have been upgraded to be Year 2000
compliant.  The Company's costs to become Year 2000 compliant as of December 31,
1998 have been $235,000 for computer software and $48,000 for computer hardware.

     The Company has not yet completed its analysis of its readiness for
compliance with the Year 2000 change.  Based upon the partial analysis described
above, the Company believes its exposure to Year 2000 risks is limited because
the majority of the Company's recordkeeping systems are new and compliant and
have been installed within the last eighteen months.  The Company utilizes no
custom-programmed "legacy" software or hardware systems known to need Year 2000
upgrading or conversion.  The Company believes it should be fully compliant with
its Year 2000 issues by the end of the second quarter of 1999 when it believes
it will have completed due diligence of its internal systems and supplier
compliance requirements, as well as completed the remaining 50% of its computing
hardware upgrades needed.  However, there can be no assurance that conditions or
events may occur during the course of the completion of this analysis which will
have an adverse impact on the Company's readiness for compliance with the Year
2000 change.

     The Company believes that the purchasing patterns of customers and
potential customers and the performance of vendors may be affected by Year 2000
issues in a variety of ways.  Many companies are expending significant resources
to correct or patch their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase products
such as those offered by the Company or the inability to render services or
provide supplies to the Company.  Year 2000 issues may cause other companies to
accelerate purchases, thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for software products, and disruption of
supply patterns.  Additionally, Year 2000 issues could cause a significant
number of companies, including current Company customers and vendors, to spend
significant resources upgrading their internal systems, and as a result consider
switching to 

                                       28
<PAGE>
 
other systems or suppliers. Any of the foregoing could result in a material
adverse effect on the Company's business, operating results and financial
condition.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company has no derivative financial instruments.

     The Company has outstanding indebtedness at December 31, 1998 to DBS
denominated in Singapore dollars of approximately Singapore $737,000 (US
equivalent $445,000).  All of the Company's other indebtedness is denominated in
US dollars, and all other Singapore-based assets have been liquidated by the
receiver of MPM and MPS and used to retire outstanding indebtedness.
Accordingly, the Company believes its exposure to foreign currency rate
movements is extremely limited.

ITEM 8.   FINANCIAL STATEMENTS

     See Item 14(a) for an index to the financial statements and supplementary
financial information which are attached hereto.

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

     None.

                                       29
<PAGE>
 
                                   PART III
                                   --------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information required by this item relating to the Company's directors
and nominees and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders and is incorporated herein by reference.  The information required
by this item relating to the Company's executive officers and employees is
included under the caption "Executive Officers" in Part I of the Report on Form
10-K.

ITEM 11.  EXECUTIVE COMPENSATION.

     The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Registrant's Proxy
Statement for the 1999 Annual Meeting of Shareholders and is incorporated herein
by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required by this item is included under the caption "Stock
Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy
Statement for the 1999 Annual Meeting of Shareholders and is incorporated herein
by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by this item is included under the caption
"Certain Transactions" in the Registrant's Proxy Statement for the 1999 Annual
Meeting of Shareholders and is incorporated herein by reference.

                                       30
<PAGE>
 
                                    PART IV
                                    -------

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

     (a)  1. Index to Consolidated Financial Statements.
                                                                  FORM 10K
                                                                 Page Number
                                                                 -----------

Report of Independent Certified Public Accountants..........        F-1

Consolidated Balance Sheets as of
  December 31, 1998 and 1997................................        F-2

Consolidated Statements of Operations
  for the three-year period ended
  December 31, 1998.........................................        F-3

Consolidated Statements of Cash Flows for
  the three-year period ended
  December 31, 1998.........................................        F-4

Consolidated Statements of Shareholders'
  Equity (Deficit) for the three-year period
  ended December 31, 1998...................................        F-5

Notes to Consolidated Financial Statements..................        F-6

2.   Consolidated Financial Statement Schedules.

     The following financial statement schedules of Microelectronic Packaging,
Inc. and its subsidiaries are included in this annual report on Form 10-K.

                                                                  FORM 10K
                                                                 Page Number
                                                                 -----------


Report of Independent Certified Public Accountants on
  Financial Statement Schedules.............................       F-27

Schedule II -- Valuation and Qualifying Accounts and
               Reserves.....................................       F-28

Schedules other than those listed above have been omitted since they are either
not required, are not applicable, or the required information is shown in the
financial statements or related notes.

     (b)  Reports on Form 8-K

          No reports on Form 8-K were filed during the fourth quarter ended
          December 31, 1998.

     (c)  Exhibits

                                       31
<PAGE>
 
The following exhibits are referenced or included in this report.

Exhibit   Description
-------   -----------
3.1(13)    Amended and Restated Articles of Incorporation of the Company filed
           March 23, 1998.
3.2(1)     Amended and Restated Bylaws of the Company.
4.1(1)     Specimen Certificate of Common Stock.
4.2(1)     Form of Warrant to purchase 160,000 shares of Common Stock of the
           Company issued by the Company to Thomas James Associates, Inc.
           entered into upon the closing of the offering made pursuant to the
           Company's Registration Statement on Form S-1.
4.3(1)     Form of Warrant to Purchase Common Stock dated August 31, 1993 issued
           by the Company to certain investors.
4.4(13)    Warrants issued to The Seidler Companies dated November 3, 1997.
4.5(13)    Warrants issued to H.J. Meyers & Company, Inc. dated November 19, 
           1997.
10.1(1)    Second Amended and Restated Registration Rights Agreement, Waiver
           Agreement and Conversion Agreement entered into among the Company and
           certain investors named therein.
10.2(1)    Letter Agreement for General Banking Facilities dated October 9, 1993
           between Microelectronic Packaging (S) Pte. Ltd., a Singapore company
           ("MPS"), and Development Bank of Singapore, as revised by Letter
           Agreement dated November 19, 1993.
10.3(1)    Guaranty dated August 24, 1990 between the Company and Development
           Bank of Singapore, as confirmed by Letter of Confirmation dated April
           29, 1992.
10.4(1)    Term Loan between MPS and Development Bank of Singapore.
10.5(1)    Mortgages dated August 16, 1989 among MPS, DBS Finance Limited, a
           Singapore company, and Development Bank of Singapore.
10.6(1)    Escrow Agreement dated October 11, 1993 between the Company and
           Innoventure (S) Pte. Ltd., a Singapore company.
10.7(1)    Collaborative Manufacturing Agreement dated July 29, 1993 between the
           Company and Innoventure (S) Pte. Ltd., a Singapore company.
10.8(1)    Lease Agreement dated February 6, 1991 between Microelectronic
           Packaging (S) Pte. Ltd., a Singapore company, and Jurong Town
           Corporation for the industrial premises at 31 Tuas Avenue 8, Jurong
           Town, Singapore, as renewed by a Lease Renewal Letter dated August
           26, 1993.
10.9(1)    Lease Agreement dated February 11, 1993 between Microelectronic
           Packaging (S) Pte. Ltd., a Singapore company, and Jurong Town
           Corporation for a portion of the premises at 1003 Bukit Merah
           Central, Singapore.
10.10(1)   Lease Agreement dated November 21, 1984 between Microelectronic
           Packaging (S) Pte. Ltd., a Singapore company, and Jurong Town
           Corporation for the premises at 28 Tuss, Jurong Town, Singapore.
10.11(1)   Form of Indemnification Agreement between the Company and each of its
           officers and directors.
10.12(1)   Letter Agreement dated December 21, 1993, by and between the Company
           and Samsung.
10.13(1)   Letter Agreement, dated December 16, 1993, by and between the Company
           and Samsung.
10.14(1)   Consent to Certain Corporate Actions dated February 11, 1994 between
           the Company and Development Bank of Singapore.
10.15(1)   Consent to Certain Corporate Actions dated April 12, 1994 between the
           Company and Development Bank of Singapore.
10.16(3)   Letter Agreement, dated May 27, 1994, by and between the Company and
           Development Bank of Singapore.
10.17(3)+  Purchase Option Agreement dated August 4, 1994 by and between
           International Business Machines ("IBM") and the Company.

                                       32
<PAGE>
 
10.18(3)+  Multilayer Technology Transfer and Licensing Agreement, dated August
           4, 1994, by and between the Company and IBM.
10.19(3)   Tenancy Agreement relating to Private Lot A14698 at 9 Tuas Basin Link
           between Jurong Town Corporation and MPM Singapore Pte. Ltd. dated
           November 18, 1994.
10.20(3)   Offer of Tenancy for an Extended C8 Type Factory Building on Lot
           A14698(A) at 5 Tuas Basin Link, Jurong Industrial Estate, Singapore
           2263 from Jurong Town Corporation dated December 2, 1994.
10.21(3)   Offer of Tenancy for an Extended C8 Type Factory Building on Lot
           A14698(B) at 7 Tuas Basin Link, Jurong Industrial Estate, Singapore
           2263 from Jurong Town Corporation dated January 26, 1995.
10.22(3)   Offer Letter from DBS Bank of Term Loan/Short Term Advances
           Facilities dated December 15, 1994.
10.23(3)   Sale and Purchase Agreement for CERDIP Manufacturing Equipment and
           Alumina Powder Equipment between the Company and Samsung Corning
           Company, Ltd., dated December 19, 1994.
10.24(3)   Letter dated March 31, 1995 from Development Bank of Singapore.
10.25(4)   Loan and Security Agreement, dated May 16, 1995, between the Company,
           MPS and Texas Instruments.
10.26(4)   Loan and Security Agreement, dated May 30, 1995, between the Company,
           and NSEB.
10.27(4)   Supply Guarantee and Preferred Allocation Agreement dated August 17,
           1995 between Registrant, MPS and SGS-Thomson Microelectronics Pte.
           Ltd. (the "Supply Guarantee").
10.28(4)   Agreement Relating to Guarantee among Registrant, MPA, CTM, MPS and
           Motorola.
10.29(4)   Supplemental Agreement to the Supply Guarantee dated October 19,
           1995. 
10.30(4)   $1,000,000 Term Loan Financing between Citibank N.A. and MPS.
10.31(7)   Subscription Agreement by and among MPI, Transpac Capital Pte. Ltd.,
           Transpac Industrial Holdings Ltd., Regional Investment Company Ltd.
           and Natsteel Equity III Pte Ltd.
10.32(7)   Convertible Loan Agreement by and among MPI, MPM, Transpac Capital
           Pte Ltd., Transpac Industrial Holdings Ltd., Regional Investment
           Company Ltd. and Natsteel Equity III Pte Ltd.
10.33(7)   Guarantee issued by MPI.
10.34(5)   Form of Offshore Securities Subscription Agreement dated October 22,
           1996 by and among MPI, Purchaser and Loselle Greenawalt Kaplan Blair
           & Adler.
10.35(5)   Form of 8% Convertible Debenture issued to the Purchasers.
10.36(5)   Form of Common Stock Purchase Warrant dated October 22, 1995 issued
           by MPI to Dusseldorf Securities Limited.
10.37(6)   Form of Amendment to 8% Convertible Debenture.
10.38(8)   Amended Loan and Security Agreement dated January 2, 1997 by and
           between NS Electronics Bangkok (1993) Ltd. and Microelectronic
           Packaging, Inc.
10.39(8)   Second Secured Promissory Note dated January 2, 1997 by and between
           NS Electronics Bangkok (1993) Ltd. and Microelectronic Packaging,
           Inc.
10.40(8)   Amended Loan and Security Agreement dated February 16, 1997 by and
           between Texas Instruments Singapore (Pte) Limited and Microelectronic
           Packaging (S) Pte. Ltd.
10.41(8)   Consulting Agreement dated November 21, 1996, as amended, by and
           between the Company and The Watley Group, LLC.
10.42(8)   Consulting Agreement dated November 21, 1996, as amended, by and
           between the Company and G&L Investments.
10.43(10)  Loan and Security Agreement dated May 13, 1997, between the Company
           and Texas Instruments (Pte) Limited.
10.44(10)  Promissory Note dated May 13, 1997, between the Company and Citicorp
           USA, Inc.
10.45(10)  Amendment (to Promissory Note) dated July 11, 1997, between the
           Company and Citicorp USA, Inc.
10.46(11)  Building lease dated September 2, 1997.
10.47(11)  Employment agreement with Andrew K. Wrobel, dated October 6, 1997.
10.48(11)  Amendment dated September 9, 1997 to Promissory Note issued by
           Microelectronic Packaging, Inc. in favor of Citicorp USA.
         

                                       33
<PAGE>
 
10.49(11)  Agreement dated October 8, 1997 between ORIX Leasing and
           Microelectronic Packaging, Inc.
10.50(13)  Amendment dated December 8, 1997 to Promissory Note issued by
           Microelectronic Packaging, Inc. in favor of Citicorp USA.
10.51(13)  Amendment dated January 30, 1998 to Promissory Note issued by
           Microelectronic Packaging, Inc. in favor of Citicorp USA.
10.52(13)+ Agreement among Schlumberger Technologies, Inc. ATE Division and
           Microelectronic Packaging, Inc. and CTM Electronics, Inc. effective
           January 5, 1998.
10.53(14)  Restructuring, Settlement and Mutual Release Agreement between ORIX
           Leasing Singapore Limited and the Company dated April 14, 1998.
10.54(14)  Restructuring, Settlement and Mutual Release Agreement between Texas
           Instruments Singapore (Pte.) Ltd. and the Company dated April 24,
           1998.
10.55(14)  Restructuring, Settlement and Mutual Release Agreement between
           Samsung-Corning Co., Ltd. and the Company dated May 19, 1998.
10.56(14)  Restructuring, Settlement and Mutual Release Agreement between
           Transpac Capital Pte. Ltd., Transpac Industrial Holdings Ltd.,
           Regional Investment Company, Ltd. and Natsteel Equity III Pte. Ltd.,
           and the Company dated April 22, 1998.
10.57(14)  Forbearance, Restructure and Mutual Release Agreement between
           Motorola, Inc. and the Company dated July 1, 1998.
10.58(14)  Restructuring, Settlement and Mutual Release Agreement between NS
           Electronics Bangkok (1993) Ltd. and the Company dated May 29, 1998.
10.59(14)  Restructuring, Settlement and Mutual Release Agreement between the
           Development Bank of Singapore Limited and the Company dated July 10,
           1998.
10.60(14)  Form of Warrant to Purchase Common Stock dated April 24, 1998 issued
           to Transpac Capital Pte. Ltd., Transpac Industrial Holdings Ltd.,
           Regional Investment Company, Ltd. and Natsteel Equity III Pte. Ltd.
10.61(15)  Restructuring, Settlement and Mutual Release Agreement between
           STMicroelectronics, Inc. and the Company dated September 24, 1998.
10.62(15)  Amendment to Restructuring, Settlement and Mutual Release Agreement
           between Texas Instruments Singapore (Pte.) Ltd. and the Company dated
           August 11, 1998.
10.63(15)  Amendment to Restructuring, Settlement and Mutual Release Agreement
           between Transpac Capital Pte. Ltd., Transpac Industrial Holdings
           Ltd., Regional Investment Company, Ltd. and Natsteel Equity III Pte.
           Ltd., and the Company dated September 1, 1998.
10.64(15)  Amendment to Restructuring, Settlement and Mutual Release Agreement
           between ORIX Leasing Singapore Limited and the Company dated August
           11, 1998 .
10.65(15)  Amendment to Forbearance, Restructure and Mutual Release Agreement
           between Motorola, Inc. and the Company dated November 5, 1998.
10.66      Amendment to Restructuring, Settlement and Mutual Release Agreement
           between The Development Bank of Singapore Limited and the Company
           dated November 24, 1998.
10.67      Amendment to the Restructuring, Settlement and Mutual Release
           Agreement between Samsung Corning Co. Ltd. And the Company dated
           November 18, 1998.
10.68      Nonbinding Letter Agreement between The Development Bank of Singapore
           Limited and the Company dated January 19, 1999.
10.69      Nonbinding Letter Agreement between Motorola Inc. and the Company
           dated January 19, 1999.

                                       34
<PAGE>
 
10.70      Nonbinding Letter Agreement between NS Electronics Bangkok Ltd.and
           the Company dated January 20, 1999.
10.71      Nonbinding Letter Agreement between ORIX Leasing Singapore Ltd. and
           the Company dated January 19, 1999.
10.72      Nonbinding Letter Agreement between Texas Instruments Incorporated
           and the Company dated January 19, 1999.
10.73      Nonbinding Letter Agreement between Transpac Capital Pte. Ltd. and
           the Company dated January 25, 1999.
10.74      Immunity from Suit Agreement between Motorola, Inc. and the Company
           dated July 21, 1998.
21.1(3)    Subsidiaries of the Company.
24.1       Power of Attorney (see page 38).
27.1       Financial Data Schedule  1998
27.2       Financial Data Schedule  1997
27.3       Financial Data Schedule - 1996
99.1(12)   Amended 1993 Stock Option/Stock Issuance Plan dated April 10, 1997
           and filed in the state of California on March 23, 1998.
99.2(2)    Form of Notice of Grant of Stock Option and Stock Option Agreement.
99.3(2)    Addendum to Stock Option Agreement (Special Tax Elections).
99.4(2)    Addendum to Stock Option Agreement (Financial Assistance).
99.5(2)    Form of Notice of Grant of Stock Option with Stock Option Agreement
           (Non-Employee Director Automatic Grant).
99.6(2)    Form of Stock Issuance Agreement.
99.7(1)    Form of Director Automatic Option Grant Agreement.
---------------------
(1)  Incorporated by reference from an exhibit filed with the Company's
     Registration Statement on Form S-1 (File No. 33-72890) declared effective
     by the Securities and Exchange Commission on April 21, 1994.
(2)  Incorporated by reference from an exhibit filed with the Company's
     Registration Statement on Form S-8 (File No. 33-78452) filed with the
     Securities and Exchange Commission on April 29, 1994.
(3)  Incorporated by reference from an exhibit filed with the Company's Annual
     Report on Form 10-K filed with the Securities and Exchange Commission on
     April 17, 1995 as amended.
(4)  Incorporated by reference from an exhibit filed with the Company's Annual
     Report on Form 10-K for the 1995 fiscal year filed with the Securities and
     Exchange Commission.
(5)  Incorporated by reference from an exhibit filed with the Company's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     October 28, 1996.
(6)  Incorporated by reference from an exhibit filed with the Company's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     January 15, 1997.
(7)  Incorporated by reference from an exhibit filed with the Company's current
     report on Form 8-K dated March 27, 1996 and filed with the Securities and
     Exchange Commission on April 5, 1996.
(8)  Incorporated by reference from an exhibit filed with the Company's Annual
     Report on Form 10-K for the 1996 fiscal year filed with the Securities and
     Exchange Commission on April 15, 1997, as amended.
(9)  Not used.
(10) Incorporated by reference from an exhibit filed with the Company's
     Quarterly Report on Form 10-Q filed with the Securities and Exchange
     Commission on August 14, 1997.
(11) Incorporated by reference from an exhibit filed with the Company's
     Quarterly Report on Form 10-Q filed with the Securities and Exchange
     Commission on November 12, 1997.
(12) Incorporated by reference from an exhibit filed with the Company's
     Registration Statement on Form S-8 filed with the Securities and Exchange
     Commission on February 25, 1998.
(13) Incorporated by reference from an exhibit filed with the Company's Annual
     Report on Form 10-K for the 1997 fiscal year filed with the Securities and
     Exchange Commission.

                                       35
<PAGE>
 
(14) Incorporated by reference from an exhibit filed with the Company's
     Quarterly Report on Form 10-Q filed with the Securities and Exchange
     Commission on August 14, 1998.
(15) Incorporated by reference from an exhibit filed with the Company's
     Quarterly Report on Form 10-Q filed with the Securities and Exchange
     Commission on November 14, 1998.

+    Confidential Treatment has been granted for the deleted portions of this
     document.

                                       36
<PAGE>
 
                                  SIGNATURES

     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, on April 14, 1999.

                                  MICROELECTRONIC PACKAGING, INC.

Date:  April 14, 1999             By: /s/ Andrew K. Wrobel
                                     ----------------------
                                       Andrew K. Wrobel
                                       Chairman, President and Chief Executive
                                       Officer, Director

                               POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Andrew K. Wrobel and Denis J. Trafecanty, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

     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: April 14, 1999              By: /s/ ANDREW K. WROBEL 
                                     ---------------------
                                      Andrew K. Wrobel
                                      Chairman of the Board of Directors 
                                      of the Company
                                      President and Chief Executive Officer,
                                      Director

Date: April 14, 1999              By: /s/ DENIS J. TRAFECANTY
                                     ------------------------
                                      Denis J. Trafecanty
                                      Senior Vice President, Chief Financial
                                      Officer and Secretary

Date: April 14, 1999              By: /s/ ANTHONY J. A. BRYAN
                                     ------------------------
                                      Anthony J. A. Bryan
                                      Director of the Company

Date: April 14, 1999              By: /s/ FRANK L. HOWLAND
                                     ---------------------
                                      Frank L. Howland
                                      Director of the Company

Date: April 14, 1999              By: /s/ WALDEMAR HEEB
                                     ------------------
                                      Waldemar Heeb
                                      Director of the Company

                                       37
<PAGE>
 
Date: April 14, 1999              By: /s/ WONG LIN HONG
                                     ------------------
                                      Wong Lin Hong
                                      Director of the Company

                                       38
<PAGE>
 
              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
Microelectronic Packaging, Inc.
San Diego, California


We have audited the accompanying consolidated balance sheets of Microelectronic
Packaging, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1998.  These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Microelectronic
Packaging, Inc. at December 31, 1998 and 1997 and the results of its operations
and its cash flows for the years ended December 31, 1998, 1997 and 1996 in
conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has a working capital deficiency
of $27,120,000 and an accumulated deficiency of $65,335,000 as of December 31,
1998, is in default of most of it's loan agreements, is economically dependent
on a single customer, has three foreign subsidiaries in receivership and/or
liquidation under Singapore law, has various claims and lawsuits filed against
the Company and it's subsidiaries and may be forced to seek protection for the
Company and certain subsidiaries under United States bankruptcy law. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 2. Continuation of the Company is dependent on the Company's ability to
negotiate arrangements with its lenders, raise sufficient capital, achieve
sufficient cash flow to meet its debt obligations and profitability. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

                                    BDO SEIDMAN, LLP

Costa Mesa, California
March 11, 1999 except for
  Note 14, paragraph 14, which
  is as of April 14, 1999.


                                      F-1
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                          CONSOLIDATED BALANCE SHEETS


December 31,                                               1998          1997
-------------------------------------------------------------------------------
ASSETS                                            
CURRENT ASSETS                                    
  Cash                                              $    469,000   $  1,296,000
  Accounts receivable, net                             1,306,000      2,504,000
  Inventories                                          3,073,000      4,230,000
  Other current assets                                    60,000        387,000
-------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                   4,908,000      8,417,000
-------------------------------------------------------------------------------
Property, plant and equipment, net                     1,806,000      1,212,000
Other non-current assets                                 171,000        282,000
-------------------------------------------------------------------------------
                                                    $  6,885,000   $  9,911,000
===============================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT             
CURRENT LIABILITIES                               
  Current portion of long-term debt                 $     20,000   $     22,000
  Accounts payable                                     4,045,000      7,450,000
  Accrued liabilities                                    908,000      1,711,000
  Deferred revenue                                            --        265,000
  Debt and accrued interest of discontinued       
       operations, in default, due on demand          27,055,000     30,344,000
  Current liabilities of discontinued operations, 
       net                                                    --     10,282,000
TOTAL CURRENT LIABILITIES                             32,028,000     50,074,000
-------------------------------------------------------------------------------
Long-term debt, less current portion                      49,000         69,000
COMMITMENTS AND CONTINGENCIES 
SHAREHOLDERS' DEFICIT                             
Common stock, no par value:                       
  Authorized shares - 50,000,000                  
  Issued and outstanding  10,856,890 at 1998 and  
       10,793,279 at 1997                             40,143,000     40,016,000
Accumulated deficit                                  (65,335,000)   (80,248,000)
-------------------------------------------------------------------------------
                                                     (25,192,000)   (40,232,000)
                                                    $  6,885,000   $  9,911,000
===============================================================================

                 See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

Year ended December 31,                                        1998                    1997                1996
------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                     <C>                 <C>
Net Sales
  Product sales                                          $  19,271,000           $  28,432,000       $  17,259,000
  Other sales                                                       --                  90,000           1,785,000
------------------------------------------------------------------------------------------------------------------
                                                            19,271,000              28,522,000          19,044,000
------------------------------------------------------------------------------------------------------------------
Cost of goods sold
  Product sales                                             14,714,000              23,309,000          14,251,000
  Other sales                                                       --                  43,000           1,523,000
------------------------------------------------------------------------------------------------------------------
                                                            14,714,000              23,352,000          15,774,000
------------------------------------------------------------------------------------------------------------------
Gross profit                                                 4,557,000               5,170,000           3,270,000
Selling, general and administrative                          2,915,000               4,204,000           4,353,000
Engineering and product development                          1,060,000                 760,000             666,000
------------------------------------------------------------------------------------------------------------------
Income (loss) from operations                                  582,000                 206,000          (1,749,000)
Other income (expense):                                                                              
  Interest expense                                             (18,000)                (37,000)           (787,000)
  Other income, net                                            179,000                 120,000              10,000
------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations                       743,000                 289,000          (2,526,000)
Provision for income taxes                                      18,000                      --                  --
Net income (loss) from continuing operations before
   provision for income taxes                                  725,000                 289,000          (2,526,000) 
Discontinued operations:                                                                             
  Loss from operations, including a                                                         
   1996 provision of $6,163,000 for impairment of                                                     
   long-lived assets                                                --              (4,523,000)         (10,060,000)
  Estimated gain (loss) on disposal of discontinued                                                         
   operations, including provision of $3,500,000 in                                                  
   1997 and $1,580,000 in 1996 for operating losses                                                  
   through disposal date                                     3,961,000              (7,262,000)         (29,256,000)
-------------------------------------------------------------------------------------------------------------------
Net income (loss)                                        $   4,686,000           $ (11,496,000)      $  (41,842,000)
===================================================================================================================
Earnings per common share:                                                                           
  Income (loss) from continuing operations               $        0.07           $        0.03       $       (0.46)
  Discontinued operations                                         0.36                   (1.14)              (7.22)
------------------------------------------------------------------------------------------------------------------
 Net income (loss) per common share                      $        0.43           $       (1.11)      $       (7.68)
 Weighted average number of shares outstanding              10,818,000              10,361,000           5,445,000
==================================================================================================================
Earnings per common share  assuming dilution:                                                        
  Income (loss) from continuing operations               $        0.07           $        0.03       $       (0.46)
  Discontinued operations                                         0.36                   (1.09)              (7.22)
------------------------------------------------------------------------------------------------------------------
Net income (loss) per share                              $        0.43           $       (1.06)      $       (7.68)
Weighted average number of shares outstanding               10,968,000              10,886,000           5,445,000
==================================================================================================================
                                                          See accompanying notes to consolidated financial statements.
</TABLE> 
                                      F-3
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year ended December 31,                                            1998                  1997                1996
------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                  <C>                 <C>
Cash flows from operating activities:                                          
Net income (loss)                                            $  4,686,000         $ (11,496,000)      $ (41,842,000)
Adjustments to reconcile net income (loss) to                                  
net cash provided by (used in) operating activities:                           
  Depreciation and amortization                                   527,000               324,000           2,607,000
  Discontinued operations                                      (3,345,000)           11,874,000          39,405,000
  Provision for revaluation of long-lived assets                       --                    --           6,163,000
  Non-employee stock-based compensation                           114,000               177,000             332,000
  Discount on conversion of debentures                                 --                    --             700,000
  (Gain) Loss on sale of fixed assets                             (11,000)                8,000              12,000
  Realized benefit forward foreign currency contracts                  --                    --            (292,000)
Changes in assets and liabilities, net of effects of                           
 discontinuance in 1997 and 1996:                                              
  Accounts receivable                                            1,199,000           (1,066,000)            966,000
  Inventories                                                    1,157,000              375,000          (3,354,000)
  Other current assets                                             327,000             (242,000)          1,731,000
  Other non-current assets                                         111,000              108,000           1,303,000
  Accounts payable, accrued liabilities and deferred revenue    (4,472,000)           1,033,000           3,641,000
-------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities of:                           
 Continuing operations                                             293,000            1,095,000          11,372,000
 Discontinued operations                                                --            3,200,000         (15,529,000)
Net cash provided (used) by operating activities                   293,000            4,295,000          (4,157,000)
-------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:                                          
Acquisition of fixed assets                                                    
  Continuing operations                                         (1,102,000)            (973,000)         (1,284,000)
  Discontinued operations                                               --                   --          (8,852,000)
Proceeds from sale of fixed assets                                             
  Continuing operations                                             14,000               49,000             310,000
  Discontinued operations                                        3,289,000            2,805,000                  --
 Realized benefit from forward foreign currency contracts               --                   --             292,000
Net cash provided (used) by investing activities                 2,201,000            1,881,000          (9,534,000)
-------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:                                          
Increase (decrease) in short-term notes payable                                
  Continuing operations                                                 --                   --            (847,000)
  Discontinued operations                                               --           (6,500,000)            101,000
Borrowings under long-term debt and promissory notes                            
  Continuing operations                                                 --              109,000           5,128,000
  Discontinued operations                                               --                   --           9,000,000
Principal payments on long-term debt and promissory notes                     
  Continuing operations                                            (45,000)            (386,000)         (1,200,000)
  Discontinued operations                                       (3,289,000)          (1,057,000)           (340,000)
Issuance of common stock, net                                       13,000                   --           1,880,000
Net cash provided (used) by financing activities                (3,321,000)          (7,834,000)         13,722,000
-------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash                                   (827,000)          (1,658,000)             31,000
Cash at beginning of year                                        1,296,000            2,954,000           2,923,000
Cash at end of year                                          $     469,000        $   1,296,000       $   2,954,000
===================================================================================================================
                                                     See accompanying notes to consolidated financial statements.
</TABLE> 
                                      F-4
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                      CONSOLIDATED STATEMENTS OF CHANGES
                       IN SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                   Common Stock                      
                                       ------------------------------            Accumulated
                                           Shares            Amount                Deficit               Total
-----------------------------------------------------------------------------------------------------------------
<S>                                    <C>               <C>                   <C>                  <C>
BALANCE,
  January 1, 1996                        4,660,093         34,326,000            (26,910,000)           7,416,000
Common stock issued                      2,331,400          3,480,000                     --            3,480,000
Non-employee stock compensation                 --            332,000                     --              332,000
Net loss                                        --                 --            (41,842,000)         (41,842,000)
----------------------------------------------------------------------------------------------------------------- 
Balance,
December 31, 1996                        6,991,493         38,138,000            (68,752,000)         (30,614,000)
Common stock issued                      3,801,786          1,701,000                     --            1,701,000
Non-employee stock compensation                 --            177,000                     --              177,000
Net loss                                        --                 --            (11,496,000)         (11,496,000)
----------------------------------------------------------------------------------------------------------------- 
Balance,
December 31, 1997                       10,793,279         40,016,000            (80,248,000)         (40,232,000)
Common stock issued                         63,611             13,000                     --               13,000
Non-employee stock compensation                 --            114,000                     --              114,000
De-consolidation of Discontinued                --                 --             10,227,000           10,227,000
 subsidiaries
Net income                                      --                 --              4,686,000            4,686,000
Balance,
December 31, 1998                       10,856,890       $ 40,143,000          $ (65,335,000)       $ (25,192,000)
=================================================================================================================
                                                    See accompanying notes to consolidated financial statements.
</TABLE>
                                      F-5
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  -  DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES

Microelectronic Packaging, Inc. ("MPI" or the "Company") is an electronic
interconnect solutions company with design, manufacturing and sales services to
support the requirements of electronic systems companies.  The Company develops,
manufactures, markets and sells multichip modules ("MCMs") and, until July 1997
pressed ceramic packages, to customers in the integrated circuit,
telecommunications, automatic test equipment and other electronics related
industries.

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of MPI and its wholly-owned subsidiaries, CTM Electronics, Inc. ("CTM")
and Microelectronic Packaging America, Inc. ("MPA") which is dormant.  For years
prior to 1998, the consolidated financial statements also included
Microelectronic Packaging (S) Pte. Ltd. ("MPS"), which is in receivership
(including its wholly-owned subsidiary Furnace Technology (S) Pte. Ltd.) which
was dissolved in 1998, MPC (S) Pte. Ltd. ("MPC") which is in voluntary
liquidation and MPM (S) Pte. Ltd. ("MPM") which is in receivership. All
significant intercompany accounts, transactions and profits have been
eliminated.

CASH AND CASH EQUIVALENTS - For the purpose of the statement of cash flows, the
Company considers all highly liquid investments with original maturities of
three months or less to be cash and cash equivalents.

INVENTORIES - Inventories are stated at the lower of cost (determined using the
first-in, first-out method) or market. A substantial portion of the Company's 
December 31, 1998 inventory (approximately $2.3 million) was purchased for the 
Company's primary customer. See Note 4. Under terms of an agreement dated 
January 5, 1998 between the Company and the customer the Company has been and 
continues to be required to maintain certain inventory levels as defined by the 
agreement. The agreement stipulates that the cost of such inventory will be paid
to the Company should the customer terminate the business relationship. Terms of
the agreement have been used in determining the carrying value of the Company's 
December 31, 1998 inventory. The customer can terminate the agreement with 120 
days notice, the agreement is not enforceable should the Company file 
bankruptcy, and notice expires in October 2000.



PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost, less accumulated depreciation.  Depreciation is computed using the
straight-line method over estimated useful lives generally ranging from three to
five years.  Leasehold improvements and assets under capital leases are
amortized over the shorter of the estimated useful lives of the assets or the
life of the lease.

IMPAIRMENT OF LONG-LIVED ASSETS - As of January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 prescribes that an impairment loss is recognized in the event that
facts and circumstances indicate that the carrying amount of an asset may not be
recoverable, and an estimate of future undiscounted cash flows is less than the
carrying amount of the asset. Impairment is recorded based on an estimate of
future discounted cash flows.  Adoption of SFAS No. 121 did not have a material
impact on the Company's financial statements.

LONG-TERM PREPAID AND INTANGIBLE ASSETS - Long-term prepaid and intangible
assets are comprised of prepaid royalties, deferred facility start-up costs and
certain other intangible assets.  The amortization of such amounts is included
in the operating results of the period of expected benefit.  The Company
periodically assesses the recoverability of these assets and records an
impairment of such assets when the projected gross cash flows are no longer
estimated to be sufficient to recover such assets.

DEFERRED FACILITY START-UP COSTS - The Company has incurred costs associated
with establishing a production facility to manufacture product utilizing the
technology licensed from IBM (see Note 4). Such deferred facility start-up costs
primarily consisted of direct incremental employee and employee related costs
and pre-operating rent for new facilities which were included in other non-
current assets at December 31, 1995.  These costs, which totaled $8,921,000,
were expensed in 1996 as a result of the discontinuance of the multilayer
ceramics operations.

INTANGIBLE ASSETS - Intangible assets consist of an acquired customer base and
purchased technology licenses and are classified as other non-current assets.
Intangible assets are amortized using the straight-line method over 

                                      F-6
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

estimated useful lives of 7 years. In 1996, the Company determined that the
purchased technology is of no further benefit to the Company, and wrote-off the
remaining net book value in 1996.

REVENUE RECOGNITION - The Company recognizes revenue from product sales at the
time of shipment. Non-refundable license fees are recognized as revenue when the
Company has no material remaining performance obligations under the associated
license agreement.  Other sales in 1997 and 1996 include the revenue arising
from the resale of certain production equipment and related production supplies.
The equipment and supplies were purchased by the Company on behalf of, and sold
to, a third party pursuant to purchase orders.  Revenues from these transactions
were recognized at the time the Company had satisfied all of its significant
performance obligations.

INCOME TAXES - The domestic parent Company and its U.S. subsidiaries file
consolidated returns for U.S. federal income tax purposes.  For California
income tax purposes, the domestic parent company files on a unitary basis with
all subsidiaries.

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109. SFAS 109 requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the Company's financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based upon
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year(s) in which the
differences are expected to reverse.  This requires that the Company record a
deferred tax asset related to the future income tax benefits associated with tax
loss and credit carryforwards, and certain temporary differences for which tax
benefits have not previously been recognized.  Deferred tax assets are to be
reduced by a valuation allowance when it is more likely than not that a portion
or all of the deferred tax asset will not be realized.  In addition, under SFAS
109, the tax benefit associated with the utilization of operating loss
carryforwards is included in the regular provision for income taxes.

STOCK-BASED COMPENSATION - The Company applies APB Opinion 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock-based compensation plans.  Accordingly, no compensation cost is recognized
for its employee stock option plans, unless the exercise price of options
granted is less than fair market value on the date of grant.  The Company has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (see Note 12).

FOREIGN CURRENCY TRANSACTIONS - The accounts of the Company's formerly
consolidated Singapore subsidiaries were maintained in U.S. dollars and the U.S.
dollar is considered to be the functional currency of all consolidated
subsidiaries.  Transaction gains/(losses) resulting from transactions
denominated in foreign currencies (primarily related to certain raw material
purchases denominated in Japanese yen and other costs of production and
administration denominated in Singapore dollars) are included in the results of
operations for the period in which the exchange rates change.

FORWARD FOREIGN CURRENCY CONTRACTS - Subject to bank financing and consent, the
Company's formerly consolidated Singapore subsidiaries entered into forward
foreign currency contracts to minimize the short-term impacts of exchange rate
fluctuations related to certain raw material purchases denominated in Japanese
yen and other costs of production and administration denominated in Singapore
dollars.  The cost of the contracts and any resulting gains and losses on the
contracts are included in the results of operations in the period in which the
exchange rates change.

FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount of cash, accounts
receivable, accounts payable and accrued expenses are reasonable estimates of
their fair value because of the short maturity of these items.  The 

                                      F-7
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

carrying amounts of the Company's short-term credit facilities and mortgage
notes approximate fair value because the interest rates on these instruments are
subject to change with market interest rates. As the majority of the Company's
long-term obligations are classified as current liabilities (due on demand, due
to defaults under debt covenants), the Company believes that their carrying
amounts approximate their fair value.

ENGINEERING AND PRODUCT DEVELOPMENT COST - Engineering and product development
costs are expensed as incurred.

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

EARNINGS (LOSS) PER SHARE - Earnings (loss) per share is calculated pursuant to 
Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic
earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common shareholders by the weighted average number of
shares outstanding during the period. Diluted earnings (loss) per share reflects
the potential dilution of securities that could share in the earnings of the
Company.

RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform
to the current year presentation.

NOTE 2  -  OPERATING RESULTS, CAPITAL RESOURCES AND GOING CONCERN

The Company's decision to discontinue its remaining operations in Singapore,
which produced pressed ceramic packages and aluminum nitride components, was the
primary cause of the 1997 net loss of $11.5 million.  The discontinuation of
these operations resulted in a reduction in the carrying amount of inventories
by $2.3 million, production consumables by $0.8 million and property, plant and
equipment by $0.8 million and the accrual of interest expense through the
anticipated completion of the liquidation process of $3.5 million.  Other
factors contributing to the Company's 1997 loss was the operating loss of $4.1
million generated by the Company's Singapore operations (primarily the MPS
pressed ceramics operations) from the beginning of 1997 up until the time they
were discontinued in July 1997, and the Company incurring significant overhead
expenses in the US in connection with the restructuring of the Company's
operations.

The Company's decision to discontinue its multilayer ceramics operations was the
leading cause of the 1996 net loss of $41.8 million.  The discontinuation of
this operation resulted in the write-off of $8.9 million of pre-production
costs, $2.0 million of prepaid royalties, a reduction in the carrying amount of
property, plant and equipment by $14.9 million, the accrual of certain
miscellaneous costs of $1.9 million, and the accrual of estimated losses to be
incurred through the disposal date totaling $1.6 million.  Other factors
contributing to the Company's 1996 loss were: (1) a $6.2 million reduction in
the carrying amount of pressed ceramic equipment at the MPS facility in
Singapore and in Indonesia, and a $1.6 million allowance against MPS's
receivable for inventory advanced to the Company's joint venture partner in
Indonesia and (2) a significant decline in sales of pressed ceramic products by
MPS, due to an industry-wide over-supply of pressed ceramic products.

A receiver was appointed to handle the liquidation of the pressed ceramics
operations on July 10, 1997, and on March 18, 1997, a receiver was appointed to
handle the liquidation of the multilayer ceramics operations.  Certain other
factors, including, but not limited to, the majority of the Company's debt which
is currently in default, cross default provisions specified in most of the
Company's borrowing arrangements, various claims and lawsuits filed against the
Company and its subsidiaries, dependence on primarily one customer who is also
the Company's major vendor, the high debt service costs of the Company, and the
Company's scarcity of working 

                                      F-8
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

capital have the potential to have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.

The accompanying financial statements have been prepared assuming the Company
(MPI along with its only operating subsidiary - CTM) will continue as a going
concern.  A number of factors, including the Company's history of significant
losses, the debt service costs associated with the Company's high level of
existing indebtedness, the Company's reliance on one customer, the need to
restructure debt which is currently in default, various claims and lawsuits, and
the Company's Singapore operations in receivership and liquidation raise
substantial doubts about the Company's ability to continue as a going concern.
As of December 31, 1998, the Company has an accumulated deficiency of $65.3
million and a working capital deficiency of $27.1 million, which includes $27.1
million of debt of discontinued operations, due on demand.  The Company does not
possess sufficient cash resources to repay these obligations, and the Company
would be unable to repay these loans in the event that such demand was made by
the Company's creditors (see Note 15).

Because the Company has not been able to obtain funding to satisfy the
settlement payment obligations, the Company renegotiated the terms and, has
recently entered into non-binding letter agreements with all eight creditors
which call for the conversion of all debt and accrued interest obligations into
the Company's equity. For the aggregate debt of $27,055,000, which is all the
Discontinued Operations debt, the Company has agreed to convert this debt into
equity (see Note 14).

The conversion to equity is subject to the agreement of STMicroelectronics to 
sign a document similar to the other signed non-binding letter agreements, 
completion of definitive agreements for all eight creditors, and approval of 
such conversion by a majority of the Company's shareholders.

The Company does not have the financial resources to meet its obligations or
guarantees for all of its debt obligations, and thus is in default on all of
these obligations.  (See Note 7.)  The Company is currently negotiating with
these lenders about a possible restructuring of these debt obligations.  If the
Company is unsuccessful in its negotiations, the Company would not be able to
repay the amounts outstanding under these obligations.  This failure would
materially adversely affect the Company's financial condition and ability to
continue as a going concern, and could, as is the case with other debt defaults
and failure to repay, require that the Company seek bankruptcy protection under
Chapter 11 or Chapter 7 of Title 11 of the United States Code for MPI and its
U.S. subsidiaries.

NOTE 3  -  COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

December 31,                                           1998           1997
----------------------------------------------------------------------------
Accounts receivable consist of:                                   
 Trade receivables..............................  $ 1,541,000     $ 2,739,000
 Allowance for doubtful accounts................     (235,000)       (235,000)
                                                  -----------     -----------
                                                  $ 1,306,000     $ 2,504,000
                                                  ===========     ===========
Inventories consist of:                                          
 Raw materials..................................  $ 2,203,000     $ 2,689,000
 Work-in-progress...............................    1,531,000       1,654,000
 Finished goods.................................       38,000         131,000
 Obsolescence reserve...........................     (699,000)       (244,000)
                                                  -----------     -----------
                                                  $ 3,073,000     $ 4,230,000
                                                  ===========     ===========
Property, plant and equipment consist of:                        
 Machinery and equipment........................  $ 2,564,000     $ 1,757,000
 Leasehold improvements.........................      568,000         263,000
 Furniture and fixtures.........................       47,000          41,000
                                                  -----------     -----------
                                                    3,179,000       2,061,000
Accumulated depreciation........................   (1,373,000)       (849,000)
                                                  -----------     -----------
                                                  $ 1,806,000     $ 1,212,000
                                                  ===========     ===========
Accrued liabilities consist of:                                  
 Accrued employee compensation..................  $   443,000     $   406,000
 Other..........................................      465,000       1,305,000
                                                  -----------     -----------
                                                  $   908,000     $ 1,711,000
                                                  ===========     ===========

                                      F-9
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 4  -  Significant Agreements

SCHLUMBERGER TECHNOLOGIES, INC. ATE DIVISION - In January 1998, the Company
signed an agreement with Schlumberger Technologies, Inc.  The agreement
delineated the terms pursuant to which MPI supplies products to Schlumberger.
The agreement includes warranty provisions, protection for raw materials
purchased by MPI against production demand forecasts supplied by Schlumberger
but subsequently changed, and pricing provisions.  The agreement expires in
October 2000.

Effective July 26, 1997, Schlumberger informed the Company that it would no
longer sell die to the Company, but instead would provide the die on
consignment.  The die supplied by Schlumberger is used in the assembly of MCMs
sold to Schlumberger.  This change to providing die on consignment has had the
effect of reducing sales revenue and corresponding cost of sales to Schlumberger
by approximately 60%, although the change has no impact on the units sold by the
Company to Schlumberger.

INTERNATIONAL BUSINESS MACHINES CORPORATION - In August 1994, the Company
entered into a technology transfer and licensing agreement (the "IBM Agreement")
with International Business Machines Corporation ("IBM") pursuant to which the
Company was granted a license to specific technology developed by IBM for the
manufacture of multilayer ceramic products.  Under the terms of the IBM
Agreement, the Company and its wholly-owned subsidiary, MPM, acquired a
nonexclusive, nontransferable right to use the licensed technology to
manufacture and sell certain specified products on a worldwide basis.  In
exchange for the license, the Company paid an up-front non-refundable royalty of
$2,000,000, and is obligated to pay additional royalties based on sales of
products incorporating the licensed technology during the term of the IBM
Agreement, which shall remain in effect for a period of ten years from the date
of execution and thereafter from year to year unless terminated by either party.
The technology agreement also requires the Company to reach certain specified
production levels at specified dates. In the event the Company fails to achieve
these specified milestones, IBM has the right to terminate the technology
agreement.  Commencing in August 1996, the IBM Agreement was terminable by
either party without cause upon six months prior written notice. In March 1997,
the Board of Directors of the Company decided to discontinue the multilayer
ceramics operations.  Changing market demand for multilayer ceramic products and
IBM's unwillingness to renegotiate the terms of the IBM Agreement or to commit
to purchasing multilayer ceramic products from the Company were the main reasons
that the Board decided to discontinue the multilayer ceramics operations.  All
Singapore employees working on the multilayer ceramics operations have since
been terminated. MPM is currently being managed by a Receiver and is in
liquidation, as defined under the laws of Singapore.  The Company has assisted
the Receiver and Manager for MPM in selling off all of the remaining tangible
assets of MPM.  The proceeds from the sale of MPM's assets have been used to
retire a portion of MPM's debts (the proceeds are not sufficient to retire all
outstanding MPM debt). The Company anticipates that the liquidation of MPM will
be completed by the end of 1999.

NOTE 5  -  CONCENTRATIONS OF CREDIT RISK AND SALES TO MAJOR CUSTOMERS

The Company operates in one reportable business segment with three product lines
within that segment, and primarily sells to a limited number of semiconductor
manufacturers and related suppliers which results in concentrated credit risk
with respect to the Company's accounts receivable. The Company performs ongoing

                                     F-10
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

credit evaluations of its customers but does not require collateral for credit
purchases. The Company maintains allowances for potential credit losses, and
such losses have been within management's expectations.

During 1998, 1997 and 1996, the Company had only one major customer (customers
accounting for 10% or more of total sales), which accounted for 87%, 89% and
76%, respectively, of the Company's total sales.  Amounts due from this customer
comprised 90% and 81% of accounts receivable at December 31, 1998 and 1997,
respectively.

The Company's CTM Electronics, Inc. subsidiary has purchased certain chips
("die") used in the assembly of multichip modules ("MCM's") sold to the
Company's significant customer from that same customer.  Effective July 25,
1997, this customer notified the Company that it will no longer sell die to the
Company and instead is providing the die on consignment. The unaudited pro forma
presentation below gives effect to this change in operations on selected line
items from the Company's Consolidated Statements of Operations for each of the
two years in the period ended December 31, 1997, as if this change had been put
into effect on January 1, 1996.

<TABLE>
<CAPTION>
=================================================================================================
                               Historical                                          Pro Forma     
                               Year Ended               Pro Forma                  Year Ended    
                            December 31, 1997          Adjustments              December 31, 1997
-------------------------------------------------------------------------------------------------
                                                       (unaudited)                 (unaudited)          
<S>                          <C>                      <C>                       <C>
Net sales                    $  28,522,000            $ (10,626,000) (1)            $  17,896,000
Cost of goods sold              23,352,000              (10,942,000) (2)               12,410,000
Gross profit                     5,170,000                  316,000                     5,486,000
Net income (loss)            $ (11,496,000)                 316,000                 $ (11,180,000)
=================================================================================================
Net income (loss) per                                                         
common share                 $       (1.06)           $          --                 $       (1.06)
=================================================================================================
</TABLE>                                                                      
<TABLE>                                                                       
<CAPTION>                                                                     
=================================================================================================
                                Historical                                         Pro Forma     
                                Year Ended              Pro Forma                  Year Ended    
                             December 31, 1996         Adjustments              December 31, 1996
-------------------------------------------------------------------------------------------------
                                                       (unaudited)                  (unaudited)          
<S>                          <C>                      <C>                       <C>
Net sales                    $ 19,044,000             $ (8,266,000) (1)             $  10,778,000
Cost of goods sold             15,774,000               (8,304,000) (2)                 7,470,000
Gross profit                    3,270,000                   38,000                      3,308,000
Net income (loss)            $(41,842,000)                  38,000                  $ (41,804,000)
=================================================================================================
Net income (loss) per                                                         
common share                 $      (7.68)            $         --                  $      (7.68)
=================================================================================================
</TABLE>

  (1) The cost of the die to be provided on consignment will be removed from the
      selling price of the MCMs.  The amount of the 2% prompt payment discount
      offered to the customer, which is included in revenues, will be reduced by
      the lower selling prices for these MCMs.

  (2) The cost of the die to be provided on consignment will be removed from the
      cost of goods sold, corresponding to the reduction in selling prices of
      the MCM's.

Until July 1997, the Company had a foreign exchange line of credit with the
Development Bank of Singapore ("DBS") under which it could enter into forward
currency contracts of up to S$30,000,000  for contracts with a maturity of up to
twelve months.  Advances under the line of credit are guaranteed by MPI and
secured by all the 

                                     F-11
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

assets of MPS, including a second mortgage on MPS's leasehold land and facility.
Subject to bank financing and consent, the Company had entered into forward
foreign currency contracts to economically hedge foreign currency transactions
on a continuing basis for periods consistent with the underlying exposures,
generally ranging from one-to-nine months in duration. The Company does not
engage in foreign currency speculation; however, the Company's previous use of
forward foreign currency contracts does not qualify for hedge accounting
treatment in accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation." The Company's objective in entering into forward
contracts was to minimize on a continuing basis the impact of foreign exchange
rate movements on the Company's operating results. This line of credit was
terminated on July 9, 1997 when DBS appointed a Receiver and Manager for MPS.

NOTE 6  - DEBT AND ACCRUED INTEREST OF DISCONTINUED OPERATIONS, IN DEFAULT, DUE
          ON DEMAND

<TABLE>
<CAPTION>
December 31,                                                                      1998              1997
----------------------------------------------------------------------------------------------------------
Debt of discontinued operations, in default, due on demand 
consists of:
<S>                                                                            <C>               <C>
Line of credit facilities and short-term borrowings of discontinued 
operations, which are currently in default and included in "Debt of 
discontinued operations, in default, due on demand," bear interest 
at the bank's prime rate plus 5% (total 13.75% at December 31, 1998) 
while in default, secured by substantially all of the assets of MPS,
and is guaranteed by MPI. Net of assets held as collateral of $138,000 
for 1998 and $1,868,000 for 1997.                                              $  109,000       $   770,000
 
Line of credit facilities and short-term borrowings of discontinued
operations, which are currently in default and accordingly included 
in "Debt of discontinued operations, in default, due on demand," 
secured by  substantially all of the assets of MPM, guaranteed by MPI.  
Net of assets  held as collateral of $236,000 for 1998 and $71,000 for 1997.      881,000         1,246,000
 
8.5% debentures, related to discontinued operations, which are currently
in default and thus, due on demand and accordingly included in the
caption "Debt of discontinued operations, in default, due on demand",
interest is due annually, principal due in March 2001, guaranteed by MPI        9,000,000         9,000,000
 
Term notes to, or guaranteed by, certain customers of discontinued
operations, which are currently in default and included in "Debt of
discontinued operations, in default, due on demand," bearing interest at
rates ranging from 3.5% to 18.0%, payable in quarterly installments
commencing in March 1997, principal due in quarterly installments over a
four-year term commencing in March 1998, secured by various assets
including certain MPS production equipment, guaranteed by MPI                   4,771,000         4,771,000
 
Term notes to, or guaranteed by, certain customers of discontinued
operations, which are currently in default and accordingly included in
"Debt of discontinued operations, in default, due on demand," originally
payable in various quarterly installments commencing in the second
quarter of 1996, plus interest at rates ranging from 6.7% to 8.75%,
secured by various assets including certain MPS production equipment, all
of the domestic assets of MPI, MPA and CTM and all of the outstanding
common stock of MPA, MPS and CTM                                                6,792,000         6,583,000
</TABLE> 
                                     F-12
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
December 31,                                                                      1998              1997
-----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>               <C> 
Mortgage notes of discontinued operations  due January 2000 and January
2005, which are currently in default and accordingly included in "Debt of
discontinued operations, in default, due on demand" for 1997, payable in
monthly installments of S$22,000 (U.S. $14,000) plus interest, with
interest at variable rates (13.75% at December 31, 1997), secured by MPS
buildings and improvements, guaranteed by MPI                                         --          1,081,000
 
Note payable resulting from the deficiency balance of capital leases of
discontinued operations, which are currently in default and accordingly
included in "Debt of discontinued operations, in default, due on demand,"
bears interest at 7.25% and is guaranteed by MPI                                1,610,000         1,601,000
 
Capital lease obligations of discontinued operations, which are currently
in default and accordingly included in "Debt of discontinued operations,
in default, due on demand" consisting of various machinery and equipment 
financing agreements, payable in monthly installments of $10,000, including 
interest at rates ranging from 4% to 6%                                               --           160,000
 
Equipment leases  1998 balance matures in January 2000 and July 2002,
payable in monthly installments of $4,000, including interest at rates
ranging from 21.6% to 25.9%, secured by various CTM production equipment
and guaranteed by MPI                                                              69,000            91,000
                                                                               ----------       -----------
                                                                               23,232,000        25,303,000
Current portion of long-term debt                                                 (20,000)          (22,000)
Accrued interest                                                                3,892,000         5,132,000
Long-term debt, less current portion                                              (49,000)          (69,000)
                                                                              -----------       -----------
Debt of discontinued operations, in default, due on demand                    $27,055,000       $30,344,000
                                                                              ===========       ===========              
</TABLE>

Certain of the above obligations are payable in Singapore dollars and the
balances have been translated at an exchange rate of U.S.$1.00 = S$1.66 at
December 31, 1998 and U.S. $1.00 = S$1.6825 at December 31, 1997.  Accordingly,
actual settlement amounts of such obligations are subject to variances caused by
changes in foreign exchange rates.

The Company does not have the financial resources to meet its obligations or
guarantees for most all of the above obligations, and thus is in default on all
of these obligations (except for the equipment leases).  As a result, these
obligations are due on demand and have been classified as current liabilities
within the caption "Debt of discontinued operations, due on demand."  The
Company is currently negotiating with these lenders to discuss a possible
restructuring of these debt obligations.  If the Company is unsuccessful in its
negotiations, the Company would not be able to repay the amounts outstanding
under these obligations.  This failure would materially adversely affect the
Company's financial condition and ability to continue as a going concern, and
could, as is the case with other debt defaults and failure to repay, require
that the Company seek bankruptcy protection under Chapter 11 or Chapter 7 of
Title 11 of the United States Code for MPI and its U.S. subsidiaries.

Scheduled maturities of principal balances are $20,000, $16,000, $20,000,
$13,000 and $0 in 1999 through 2003, respectively. However, the company is
currently in default under almost all of its debt agreements and accordingly,
$27,055,000 is currently due on demand.

MPI is directly liable, or is contingently liable based on guarantees of
repayment provided, for effectively all of the above obligations.

                                     F-13
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

In October 1996, the Company issued $2.8 million in 8% convertible debentures to
a group of offshore investors (collectively "Purchasers"). As of February 20,
1997, holders of the remaining $1.9 million of debentures had elected to
convert, resulting in the issuance of an additional 3,801,787 shares (see Note
10).

NOTE 7  -  COMMITMENTS AND CONTINGENCIES

Following is a schedule by year of estimated future minimum lease payments under
capital and operating lease agreements.

<TABLE>
<CAPTION>
YEAR ENDED                                            CAPITAL   OPERATING
DECEMBER 31,                                          LEASES      LEASES
--------------------------------------------------------------------------
<S>                                                   <C>       <C>
     1999                                             $33,000   $  611,000
     2000                                              25,000      601,000
     2001                                              25,000      607,000
     2002                                              14,000      575,000
     2003                                                  --      360,000
     Thereafter                                            --    1,600,000
--------------------------------------------------------------------------
     Total minimum lease payments                      97,000   $4,354,000
                                                                ==========
     Amount representing interest                      28,000
--------------------------------------------------------------------------
     Present value of net minimum lease payments       69,000
     Current portion                                   20,000
--------------------------------------------------------------------------
     Long-term portion                                $49,000
==========================================================================
</TABLE>

The Company entered into an agreement in 1998 whereby the Company obtained the 
use of a piece of test equipment and technical support for such equipment from 
the supplier. The agreement provides for minimum annual payments of $360,000 
through 2007, plus the possible acceleration of payments if the Company obtains
new customers with projects that require the use of the equipment and technical
support of the equipment supplier. The Company has included its commitment under
the agreement in the previous table as an operating lease.

Certain machinery and equipment are subject to leases which are classified as
capital leases for financial reporting purposes.  At December 31, 1998 and 1997
$155,000 ($97,000 net) and $155,000 ($128,000 net), respectively, of such leased
equipment are included in property, plant and equipment.  Amortization expense
related to assets under capital leases, for continuing operations was $31,000,
$83,000 and $58,000 in 1998, 1997 and 1996, respectively.

The Company is also committed under noncancelable operating agreements for the
lease of buildings, machinery and equipment.  Rent expense for continuing
operations in 1998, 1997 and 1996 was approximately $261,000, $336,000 and
$364,000  respectively.

Certain of the Company's shareholders have been granted certain registration
rights; the costs of any such offering, exclusive of any underwriting discount,
would be borne by the Company.

In May 1995, the United States Environmental Protection Agency ("EPA") issued
written notice  to all known generators of hazardous waste shipped to a
Whittier, California treatment facility that it considers these generators
(including the Company) to be a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA").
The notice requires all of the generators of this waste to take immediate
actions to contain and prevent any further release of hazardous substances at
the site.  In response to the EPA notice, the Company and approximately 100 of
the other named generators provided the necessary funding to effect the removal
and destruction of the hazardous wastes stored at this site.  At present, the
Company's percentage of responsibility for this site is less than one half of
one percent; and that percentage is expected to decrease substantially as
additional generators are determined.  In addition, the Company and such
generators have provided the necessary funding to test the soil and ground water
at this site, which testing is currently ongoing.  Although the cost incurred by
the Company to date of removing and destroying the hazardous 

                                     F-14
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

waste stored at this facility was not significant, this effort does not address
the cleanup of potential soil and/or ground-water contamination present at this
site. There can be no assurance, therefore, that the costs and expenses
associated with this action will not increase in the future to a level that
would have material adverse effect upon the Company's operations. Based upon the
Company's investigation to date, the Company is not able to determine whether
this matter, if resolved adversely to the Company, would have a material adverse
effect upon the Company's financial position, results of operations or cash
flows.

The Company has also previously shipped small quantities of hazardous waste for
recycling to a San Diego hazardous waste treatment facility operated by a third
party operator ("Operator").  The owner of the property and the State of
California have filed suits against the Operator and two of its officers and the
owner of the property has obtained a mandatory injunction to compel the removal
of hazardous waste on site.  If the Operator does not comply, it is possible
that the property owner or a government agency could also sue or bring
enforcement proceedings against approximately 100 hazardous waste generators,
including the Company, that shipped such wastes to the facility to pay for the
removal and to participate in site cleanup if any contamination is discovered.
Based upon the Company's investigation to date, the Company is not able to
determine whether this matter, if resolved adversely to the Company, would have
a material adverse effect upon the Company's financial position, results of
operations or cash flows.  However, the Company has received no further
communication regarding this site since 1994.

Numerous creditors have filed or threatened lawsuits against MPI and its
subsidiaries for various defaults and violations of certain agreements entered
into by MPI and its various subsidiaries.  As a result of DBS Bank's decision to
enforce its claims, MPM and MPS are in liquidation and receivership,
respectively in Singapore.  Should MPI be unable to restructure its debt
obligations incurred through guarantees of MPM's and MPS's debts, MPI may be
forced to seek protection under Chapter 7 or 11 of Title 11 the United States
Code.

On April 10, 1997, DBS sent to MPS a written demand for payment of the
outstanding debt owed to DBS by MPM.  In addition to demanding payment, DBS
imposed the default interest rate (an additional 3% interest rate) on the
outstanding debt, which has been accrued through the expected completion of the
liquidation process.

Two of the Company's former directors, Lewis Solomon and Gary Stein
("Plaintiffs"), have filed a lawsuit on December 18, 1998 in the state of New
York against the Company and its major customer, Schlumberger. This filing was
made one day after Gary Stein resigned from the Company's Board of Directors.
Lewis Solomon previously resigned in August 1998 from the Company's Board of
Directors. In the complaint, Plaintiffs have charged that the Company failed to
pay them for alleged consulting services, expense reimbursements and other forms
of compensation aggregating $101,250. Further, Plaintiffs allege that they were
wrongfully terminated, thereby preventing them from exercising stock options,
and that the Company interfered with the Plaintiffs prospective economic
relationships and business advantages as consultants and directors of public
corporations. The total of other alleged damages claimed by Plaintiffs are $5.5
million plus additional damages to be determined at trial. The Company believes
that the Plaintiffs' claims are without merit and will vigorously oppose these
allegations. In addition, the Company has made substantial counter claims
against Plaintiffs for damages of $829,020, attorneys fees and additional
damages to be proven at trial. In the counterclaim, the Company alleged that Mr.
Solomon and Mr. Stein, as directors, voted to approve an agreement between
themselves and the Company which would compensate them as consultants in
addition to director fees that Mr. Solomon and Mr. Stein were then being paid,
which agreement was not approved by a majority of disinterested directors in
accordance with California Corporations Code 310(a). In addition, the
counterclaim alleges Mr. Solomon and Mr. Stein voted themselves various options
in violation of the same Code, and that the agreement was not signed by a
Company officer with requisite authority to approve such an agreement. And
finally, the counterclaim alleges that in approving the agreement, Mr. Solomon
and Mr. Stein breached their fiduciary duties and they did not provide any
services of material benefit to the Company.

Because the lawsuit is at such an early stage, it is impossible to estimate the
damages, if any, the Company may be required to pay the Plaintiffs.

The Company is involved in various other claims arising in the ordinary course
of business; none of these other claims, in the opinion of management, is
expected to have a material adverse impact on the financial position, cash flows
or overall trends in the results of operations of the Company.

                                     F-15
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8  -  INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns.  Under the
SFAS 109 asset and liability method, deferred tax assets and liabilities are
determined based upon the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the
year(s) in which the differences are expected to reverse.

Net income (loss) is comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31,         1998          1997            1996
----------------------------------------------------------------------
<S>                          <C>          <C>             <C>
Domestic operations          $  725,000   $    289,000    $ (2,526,000)
Singapore operations          3,961,000    (11,785,000)    (39,316,000)
----------------------------------------------------------------------
  Total                      $4,686,000   $(11,496,000)   $(41,842,000)
======================================================================
</TABLE>

A reconciliation of the provision for income taxes to the amount computed by
applying the statutory Federal income tax rate to income before income taxes
follows:

Year ended December 31,                       1998          1997       1996
-------------------------------------------------------------------------------
Amounts computed at Federal statutory 
rate                                     $ 1,593,000 $ (3,909,000) $(14,295,000)
Foreign losses with no benefit                          3,121,000    10,910,000
Taxes below the Federal rate
  on undistributed foreign earnings                       831,000     2,829,000
Alternative minimum taxes due                 12,000
Realization of previously deferred tax 
  benefits                                (1,369,000)
Amortization of non-deductible intangible
  assets                                      37,000       37,000        38,000
Non-deductible expenses                        7,000        6,000       247,000
Losses for which no current benefits are 
  available                                       --           --       271,000
Utilization of NOL carryforward             (262,000)     (86,000)           --
-------------------------------------------------------------------------------
Provision for income taxes               $    18,000  $        --  $         --
=============================================================================== 
 
                                     F-16
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
The components of deferred income taxes:
Year ended December 31,                          1998             1997
Deferred tax assets:
 Net operating loss carryforwards            $ 3,724,000     $  3,951,000
 Accrued liabilities and reserves                652,000        2,804,000
 Tax credit carryforwards                        635,000          499,000
 Deferred income                                      --          106,000
 Book and tax depreciation differences            95,000           92,000
--------------------------------------------------------------------------------
                                               5,106,000        7,452,000
Valuation allowance                           (5,106,000)      (7,452,000)
--------------------------------------------------------------------------------
Deferred taxes                               $        --     $         --
================================================================================

At December 31, 1998 and 1997, a 100% valuation allowance has been provided on
the total deferred income tax assets as they are not more likely than not to be
realized.

The Company has not recorded provisions for any United States income taxes in
1997 and 1996. At December 31, 1998, the Company had Federal net operating loss
carryforwards of approximately $10,531,000 for Federal tax reporting purposes
and approximately $2,450,000 for California tax purposes.  The net operating
loss carryforwards for tax purposes expire between 2000 and 2011.

As of December 31, 1998, the Company also has approximately $500,000 and
$135,000 in Federal and state research and development credit carryforwards,
respectively.  These credits expire between 2000 to 2012.  Additionally, the
Company has approximately $31,000 of investment tax credits which expire in
2001.  The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company believes
that its ability to utilize its current net operating loss and credit
carryforwards in subsequent periods will be subject to annual limitations.

During 1997 and 1996, the Company's Singapore operations generated operating
losses for both financial reporting and income tax purposes.

NOTE 9  -  SHAREHOLDERS' EQUITY

In October 1996, the Company issued $2.8 million in 8% convertible debentures.
As of December 31, 1996, holders of $900,000 of these debentures had elected to
convert, under the terms of the debentures, into 1,306,996 shares of common
stock.  As of February 20, 1997, holders of the remaining $1.9 million of
debentures had elected to convert, resulting in the issuance of an additional
3,801,786 shares.

During 1998, employees exercised options to purchase 63,611 shares of the
Company's common stock.

In order to permit the Company to issue additional options to employees, the
Shareholders approved an amendment to the Company's 1993 Stock Option/Stock
Issuance Plan, which reserved an additional 4 million shares for the plan (see
Note 12) on August 21, 1997.

As of March 10, 1998, shareholders approved an amendment to the Company's
Amended and Restated Articles of Incorporation to increase the authorized shares
of Common Stock from 15 million shares to 50 million shares and to add 10
million shares of undesignated preferred stock, pursuant to a written consent
solicitation.

The Company is prohibited by certain agreements from paying cash dividends. MPS 
is a party to a line of credit facility with a bank that requires MPS to obtain 
the consent of DBS prior to declaring dividends, repaying creditors or 
transferring funds to MPI. In addition, an agreement relating to the guarantee 
of Motorola of a bank loan to MPS grants Motorola the right to prohibit payment 
of dividends on the stock of MPI, CTM and MPA. The Transpac agreements also 
contain similar restrictions.

                                     F-17
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10  -  EMPLOYEE BENEFIT PLAN

The Company maintains a defined contribution retirement savings plan which is
intended to qualify under section 401(k) of the Internal Revenue Code.  The Plan
covers substantially all full-time U.S. employees.  Participants may contribute
a percentage of their salaries subject to statutory annual limitations.  The
Company matches a percentage of the employee contributions as specified in the
plan agreement.  Contributions by the Company totaled $70,000, $48,000 and
$65,000 in 1998, 1997 and 1996, respectively.

NOTE 11  -  STOCK OPTION/STOCK ISSUANCE PLAN AND STOCK PURCHASE WARRANTS

STOCK OPTION/STOCK ISSUANCE PLAN - The Company maintains a stock option/stock
issuance plan under which incentive stock options may be granted to employees of
the Company and nonqualified stock options may be granted to consultants and
non-employee directors of the Company.  Under the terms of the plan,
nontransferable options may be granted for terms of up to 10 years and are
generally exercisable at the rate of 33% per year, although vesting terms are
determined at the discretion of the Board of Directors.  Options are generally
granted with an exercise price not less than the fair market value of the common
stock shares at the date of grant.  A total of 4,690,632 shares of common stock
have been reserved for issuance under the plan.  The plan expires in December
2000.

On August 21, 1997, the Company cancelled and regranted substantially all
existing options (other than options granted pursuant to the Automatic Option
Grant Program).  Based in part upon the delisting of the Company's Common Stock
from the Nasdaq National Market, the financial condition of the Company, the
stock price and the necessity of retaining its employees, the Company believes
that this program would be in the best interests of the shareholders.  As such,
the Board of Directors and the Stock Option Plan Administration Committee
cancelled and regranted substantially all options outstanding under the
Discretionary Option Grant Program of the Plan (and granted additional options
to persons who have received options under the Automatic Option Grant Program)
with an exercise price in excess of the fair market value of the Common Stock of
the Company as traded on the OTC Bulletin Board on the Grant Date.  Pursuant to
such program, each such outstanding option was cancelled and a new replacement
option granted for the same number of shares, with an exercise price of $0.19875
(the fair market value of the Common Stock on the new grant date).

The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for this plan.  Under APB Opinion 25,
when the exercise price of options granted under the Company's plan is equal to
the market price of the underlying stock on the date of grant, no compensation
cost is recognized.

Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," requires the Company to provide pro forma
information regarding net income and earnings per share as if such compensation
cost for the Company's stock option and issuance plans had been determined in
accordance with the fair value based method prescribed in SFAS 123.  The Company
estimates the fair value of each stock option at the grant date by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: 0% dividend
yield; expected volatility of 75%, 19 - 23% and 16%, risk free interest rates of
5.39 - 5.75%, 5.25% - 6.22% and 6.10%; and expected lives of 3 to 6 years
(determined on an option-by-option basis).

Under the accounting provisions of SFAS 123, the Company's net income (loss) per
share would have been increased to the pro forma amounts indicated below:

                                     F-18
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                       1998               1997                 1996
Net loss:                                                                           
<S>                                                <C>               <C>                  <C>
  As reported...................................   $4,686,000        $(11,496,000)        $(41,842,000)
  Proforma......................................    4,650,000         (11,583,000)         (41,858,000)
Earnings per common share:                                                          
  As reported...................................         0.43               (1.11)               (7.68)
  Proforma......................................         0.43               (1.12)               (7.69)
Earnings per common share  assuming dilution:                                       
  As reported...................................         0.43               (1.06)               (7.68)
  Proforma......................................         0.42               (1.07)               (7.69)
</TABLE>
A summary of the status of the Company's stock option plan as of December 31,
1998, 1997 and 1996, and changes during the years ending on those dates is
presented below:

<TABLE>
<CAPTION>
                                               1998                             1997                             1996
                                 -----------------------------------------------------------------------------------------------
                                                 WEIGHTED-                        Weighted-                       Weighted-
                                    SHARES        AVERAGE             Shares        Average            Shares       Average 
                                     (000)     EXERCISE PRICE          (000)     Exercise Price         (000)    Exercise Price 
                                 -----------------------------------------------------------------------------------------------
<S>                                 <C>        <C>                   <C>         <C>                   <C>       <C> 
Outstanding at beginning of year      3,870             $0.36          1,547              $2.22           550             $2.62
Granted                                 578              0.54          4,264               0.32         1,117              2.03
Exercised                               (64)             0.20             --                 --           (61)             1.35
Forfeited                            (1,960)             0.28         (1,941)              1.75           (59)             3.28
Outstanding at end of year            2,425              0.48          3,870               0.36         1,547              2.22
Options exercisable at year-end       1,066              0.41          1,202               0.37           867              2.14
Weighted-average fair value of                                     
 options granted during the year    $  0.27                          $  0.10                           $ 0.53
 
</TABLE>

The following table summarizes information about fixed stock options outstanding
at December 31, 1998.

<TABLE>
<CAPTION>
                                           Options Outstanding                             Options Exercisable
                    ---------------------------------------------------------------     ----------------------------
                           Number         Weighted-Average     Weighted-Average         Number          Weighted-
 Range of Exercise     Outstanding at         Remaining         Exercise Price      Exercisable at       Average 
     Prices               12/31/98        Contractual Life                             12/31/98       Exercise Price 
--------------------------------------------------------------------------------------------------------------------
<S>                    <C>                <C>                  <C>                  <C>                <C>
$  0.20  to  $  0.26          504,720          8.6 years            $0.20                258,587           $0.20
$  0.42  to  $  0.51        1,605,333          8.9                  $0.47                775,001           $0.49
$  0.58  to  $  0.63          259,000          9.2                  $0.61                    -0-           $  --
$  1.75  to  $  1.91           45,900          7.9                  $1.90                 23,175           $1.90
$  4.19  to  $  5.13            9,900          5.6                  $5.04                  9,450           $5.08
                       ==============                                               =============
$  0.20  to  $  5.13        2,424,853                                                  1,066,213
                       ==============                                               =============

</TABLE>

STOCK PURCHASE WARRANTS - On November 19, 1997, the Company entered into an
Investment Banking Agreement for a term of two years.  Pursuant to the
Investment Banking Agreement, the Company is to receive business development
services including the review of the Company's managerial and financial
requirements, review of the Company's budgets and business plans, analysis of
alternative methods by which the Company can raise capital and certain other
related services in exchange for the issuance of 1,000,000 common stock purchase
warrants.  This warrant has a term of five years, an exercise price of $1.00 per
share, and has certain registration rights.  The fair market value of the
Company's Common Stock on the grant date was $0.625.  The exercise of the
warrant was contingent on shareholder approval of an increase in the number of
authorized shares necessary to provide a sufficient number of shares underlying
the warrant.  Shareholders subsequently granted such 

                                     F-19
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

approval effective March 10, 1998. The Company issued 50,000 common stock
purchase warrants at an exercise price of $1.00 per share in November 1997,
pursuant to an agreement whereby the Company will receive investment consulting
services for a period of two years. The warrants become exercisable over the
first two years of the agreement and expire in November 2002. Both agreements
were cancelled for nonperformance during 1998 and the warrants lapsed without
exercise.

In connection with the issuance of $2.8 million of convertible debentures on
October 23, 1996 (see Note 7) the Company issued 75,421 common stock purchase
warrants to the lead investor at an exercise price of $0.55 (the average
conversion price of the debentures).  These warrants, which were exercisable 45
days after issuance, expired on October 23, 1997.  In connection with its IPO
(see Note 10), the Company issued 160,000 common stock purchase warrants to its
underwriter at an exercise price of $6.50.  These warrants, which were
exercisable upon issuance, expire in April 1999.  The Company issued 17,693
common stock purchase warrants at an exercise price of $5.63 per share in August
1993.  These warrants expired in August 1998.

No stock purchase warrants have been exercised during the three years ended
December 31, 1998.

NOTE 12  -  SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS

Cash paid for interest during 1998, 1997 and 1996 totaled $18,000, $688,000 and
$1,731,000  respectively.  In 1996, the Company entered into capital lease
obligations to acquire property, plant and equipment totaling $1,784,000.  As
discussed in Notes 7 and 10, holders of $1,900,000 of convertible debentures had
elected to convert their debentures into 3,801,856 shares of common stock, as of
December 31, 1997.

NOTE 13  -  RELATED PARTY TRANSACTIONS

In exchange for management, marketing, advisory, strategic planning and
technical services, the Company paid $249,000 and $626,000 in 1998 and 1997 to
the Company's present or former Board Members or entities which are affiliated
with three of the Company's Board members. The Company has $67,000 accrued and
unpaid to Board Members at December 31, 1998.

NOTE 14  -  DISCONTINUED OPERATIONS

On July 10, 1997, The Development Bank of Singapore Limited, one of the
Company's and its subsidiaries largest creditors ("DBS"), appointed a Receiver
and Manager to liquidate the assets of Microelectronic Packaging (S) Pte. Ltd.
("MPS"), which is a wholly owned subsidiary of the Company which manufactured
primarily pressed ceramics products.  DBS exercised its option to appoint a
Receiver and Manger under the terms of a Deed of Debenture dated November 27,
1984 (as amended) between DBS and MPS.  The Company anticipates that the
Receiver and Manager will complete the liquidation of MPS in 1999.  The Company
has guaranteed all of MPS's obligations to DBS  These loans are included in the
caption "Debt and accrued interest of discontinued operations, due on demand" in
the Consolidated Balance Sheet.  The Company has guaranteed the repayment of
such shortfall. The Company recorded the effect of the receivership as of June
30, 1997, and the results of operations of MPS have been classified as "Loss
from discontinued operations" on the Consolidated Statement of Operations.  As a
result of the appointment of a Receiver and Manager, MPS is no longer able to
manufacture its pressed ceramic products and has ceased generating revenue since
July 10, 1997.

During 1998, the Company (as guarantor) reached written agreements with all six
of MPS' secured creditors.  For five of those creditors (see separate discussion
regarding the settlement of the DBS Bank loans below), the Company agreed to
make payments aggregating $3,565,062 as full satisfaction of the total of all
obligations to these creditors.  The payments to these creditors are due on 
May 1, 1999. In addition, for one of these creditors, the Company issued
immediately exercisable warrants for the purchase of 200,000 shares of the
Company's common stock at an exercise price of $1.00 per share in full
satisfaction of the debt. The Company has reached further agreements with five
of the six MPS creditors. The Company has signed letter agreements which call
for the conversion of all amounts due to these five creditors into shares of
Series A Preferred Stock. These conversion agreements are

                                     F-20
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

subject to agreement of the final creditor to conversion, reduction of the
letter agreement into definitive agreements, as well as approval by a majority
of the Company's shareholders.

The Company has also evaluated the net realizable value of the assets of its MPS
subsidiary.  The effect of this is to reduce the carrying value of certain
assets by $6.4 million in 1997 and $6.2 million in 1996.  These charges are
included on the Consolidated Statement of Operations in the caption "Estimated
gain (loss) on disposal of discontinued operations."

In 1998, the Company revised its estimate of the amount it will ultimately owe 
under debt obligations originating in Singapore. In November 1998, Management 
was informed of the sale of the two buildings owned by MPS, and such buildings 
were sold in excess of their book value. The net proceeds from these sales were 
utilized to retire a portion of Singapore debt obligations. The revised estimate
of the amount ultimately owed under these debt obligations resulted in recording
a gain on the estimated disposal of discontinued operations of $3,512,000 for
the year ended December 31, 1998. This gain is included on the Consolidated
Statement of Operations in the caption "Estimated gain (loss) on disposal of
discontinued operations."

On March 18, 1997, a Receiver was appointed to handle the liquidation of the
multilayer ceramics operations of MPM (S) Pte. Ltd.  As of December 31, 1998,
essentially all of the assets of MPM had been sold.  Final resolution of the
remaining liabilities will come only after the liquidation of MPS, since MPS has
guaranteed the DBS bank loan and the equipment leases entered into by MPM.  The
portion of these liabilities remaining after any reduction available from the
sale of MPS and MPM assets will then be transferred to MPI, as MPI also
guaranteed these loans and leases.

As of April 14, 1998, the Company (as guarantor) reached an agreement with MPM's
lessor for the, payment of $483,056 as full satisfaction of the balance
remaining after the sale of the leased equipment; this payment is due May 1,
1999.  The Company has reached further agreement with the lessor wherein the
lessor would convert the amount due to it into shares of Series A Preferred
Stock.  This conversion agreement is subject to agreement of the final MPS
creditor to conversion, reduction of the letter agreement into definitive
agreements, as well as approval of a majority of the Company's shareholders.

The holders of the debentures issued to Transpac and related parties still
retain $9.0 million of debt securities issued by MPM which are guaranteed by the
Company.  The Company and MPM are in default thereunder.  On April 22, 1998, the
Company (as guarantor) reached an agreement with Transpac for the payment of
$3,112,463 as full satisfaction of the total of all obligations to Transpac;
this payment is due on May 1, 1999. In addition, immediately exercisable
warrants for the purchase of 500,000 shares of the Company's common stock at an
exercise price of $1.00 per share were issued to Transpac, and the Company
agreed to a payment of 30% of any monetary proceeds from the settlement of a
specific claim, and the Company guaranteed a minimum proceeds of $1,000,000 on
or prior to December 31, 1999. The Company has reached further agreement with
Transpac wherein Transpac would convert the amount due to it into shares of
Series A Preferred Stock. This conversion agreement is subject to agreement of
the final MPS creditor to conversion, reduction of the letter agreement into
definitive agreements, as well as approval of a majority of the Company's
shareholders.

As indicated previously, both MPS and MPM are indebted to DBS, and the Company
has guaranteed those obligations.  As of July 20, 1998, the Company (as
guarantor) reached an agreement with DBS for the payment of $1,177,397 as full
satisfaction of all obligations to DBS; this payment is due on May 1, 1999.  In
addition, the Company agreed to a payment of 5% of any monetary proceeds from
the settlement of a specific claim, and there were further considerations given
to DBS that are not considered material by the Company.  The Company has reached
further agreement with the lessor wherein the lessor would convert the amount
due to it into shares of Series A Preferred Stock.  This conversion agreement is
subject to agreement of the final MPS creditor to conversion, reduction of the
letter agreement into definitive agreements, as well as approval of a majority
of the Company's shareholders.

The Company's MPC subsidiary was informed in April 1997 that Carborundum
Corporation ("Carborundum"), its sole customer, was immediately cancelling the
manufacturing and related agreements with MPC as a result of Carborundum's sale
of its assets to a third party.

On April 5, 1997, a fire at the Company's MPC facility caused damage to the
building and certain equipment.  The Company is insured against the fire, and
has fully settled the claim with the Company's insurance carrier.  

                                     F-21
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company has closed the MPC operation and has terminated all of its MPC
employees. The Company has recorded the effect of the closure of this business
as of June 30, 1997, and the results of operations of MPC have been classified
as "Loss from discontinued operations" in the Consolidated Statement of
Operations.

Discontinued operations include management's best estimates of the amounts
expected to be realized on the sale of its assets associated with theses
discontinued operations and the expenses to be incurred through the disposal
date.  The amounts the Company will ultimately realize and incur could differ
materially in the near term from the amounts assumed in arriving at the loss on
disposal of the discontinued operation.  Management anticipates that the foreign
operations will be fully dissolved in 1999.  However, Management cannot predict
how long it may take the High Court of the Republic of Singapore to complete the
Winding Up of these companies.

All debt obligations originating in Singapore have been classified to the
caption "Debt and accrued interest of discontinued operations, in default, due
on demand."

"Current liabilities of discontinued operations, net" included in the
Consolidated Balance Sheets at December 31, 1997 consists of accounts payable
and accrued liabilities. Consistent with the 1997 presentation, all guaranteed
debt obligations have been reclassified to the caption "Debt and accrued
interest of discontinued operations, due on demand" and are included in the
discussion at Note 6.

On April 14, 1999, the final MPS creditor, which had not previously signed a 
letter agreement calling for the conversion into shares of Series A Preferred 
Stock, signed a Letter of Intent with a group of outside investors ("Investor") 
to assign its creditor position for undisclosed consideration. This Letter of 
Intent is subject to the Company obtaining approval of the debt conversion to 
equity by a majority of the Company's shareholders. In anticipation that this 
assignment will be completed, the Investor has signed a non-binding letter 
agreement which calls for the conversion of all the Company's obligations to 
this final MPS creditor into shares of Series A Preferred Stock.

NOTE 15  -  DECONSOLIDATION OF CURRENT LIABILITIES OF DISCONTINUED OPERATIONS,
            NET TO SHAREHOLDERS' DEFICIT

During 1998, the High Court of the Republic of Singapore ordered the Winding up
of MPM Singapore Pte. Ltd. ("MPM"), a wholly owned subsidiary of the Company.
As a result of this decision, MPM cannot continue as an operating business, and
it cannot be allowed to dispose of its assets or incur further liabilities.  In
addition, the Company does not have any control over the management of MPM.
This function is undertaken by the Receiver and Manager appointed by DBS Bank.

In September 1997, the High Court of the Republic of Singapore ordered the
Winding up of Microelectronic Packaging (S) Pte. Ltd. ("MPS"), also a wholly
owned subsidiary of the Company.  As with MPM, MPS cannot continue as an
operating business, and the Company does not have any control over the
management of MPS.  This function is undertaken by the Receiver and Manager
appointed by DBS Bank.

The Company has been informed by DBS and the Receiver and Manager for MPM and
MPS that there will not be any funds remaining (after the liquidation of assets)
to satisfy any claims of unsecured creditors for MPM and MPS.

Due the circumstances as described above, management, effective for 1998, has
not consolidated MPM and MPS, into the consolidated financial statements for MPI
and subsidiaries.  For MPM, the decision was based upon the Singapore High
Court's decision to Wind Up in September 1997, however, due to the material
amount of assets remaining to be liquidated and also due to requests made by
MPS' Receiver and Manager for the 

                                     F-22
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Company to assist them in the realization and disposal of MPS' remaining assets,
Management elected to consolidate until there was a clearer determination of the
control of the subsidiary and realization of its assets. In November 1998,
Management was informed of the sale of the two buildings owned by MPS. In
addition, it became more evident during 1998 that any remaining realization of
accounts receivable on the books of MPS was highly questionable. Accordingly the
decision was made to not consolidate MPM and MPS.

In 1998, the Company revised its estimate of the amount it will ultimately owe
under debt obligations originating in Singapore. Revision of the estimate arose
primarily from the sale of two buildings in Singapore. In November 1998,
Management was informed of the sale of the two buildings owned by MPS, and such
buildings were sold in excess of their book value. The net proceeds from these
sales were utilized to retire a portion of Singapore debt obligations. The
revised estimate of the amount ultimately owed under these debt obligations
resulted in recording a gain on the estimated disposal of discontinued
operations of $3,916,000 for the year ended December 31, 1998. This gain is
included on the Consolidated Statement of Operations in the caption "Estimated
gain (loss) on disposal of discontinued operations."

The effect of this decision was to reduce the Current Liabilities of
Discontinued Operations, net and improve the Shareholders' Deficit by $10.2
million as of December 31, 1998.

NOTE 16  -  GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,                                     1998          1997           1996
<S>                                                     <C>           <C>           <C>
Net sales to unaffiliated customers:
  United States                                         $19,271,000   $28,522,000   $19,044,000
  Singapore                                                      --            --            --
-----------------------------------------------------------------------------------------------
Net sales as reported in the
  accompanying consolidated statements of operations    $19,271,000   $28,522,000   $19,044,000
===============================================================================================
Net income (loss) from operations:
  United States                                         $   725,000   $   289,000   $(2,526,000)
  Singapore                                                      --            --            --
-----------------------------------------------------------------------------------------------
Income (loss) from operations as reported in the
  accompanying consolidated statements of operations    $   725,000   $   289,000   $(2,526,000)
===============================================================================================
</TABLE> 

December 31,                                             1998          1997
------------------------------------------------------------------------------
Identifiable assets:                              
  United States                                     $ 6,885,000   $  9,911,000
  Singapore and Indonesia                                    --
------------------------------------------------------------------------------
Total assets as reported in the                   
  accompanying consolidated balance sheets          $ 6,885,000   $  9,911,000
==============================================================================
Identifiable liabilities:                         
  United States                                     $ 5,022,000   $  9,517,000
  Singapore                                          27,055,000     40,626,000
------------------------------------------------------------------------------
Total liabilities as reported in the              
  accompanying consolidated balance sheets          $32,077,000   $ 50,143,000
==============================================================================

                                     F-23
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17  -  EARNINGS PER SHARE
<TABLE> 
<CAPTION>
                                                 For the Year Ended December 31, 1998
                                           ---------------------------------------------
                                               Income            Shares        Per-Share
                                             (Numerator)      (Denominator)      Amount
                                           ---------------------------------------------
<S>                                          <C>              <C>              <C> 
Net income from continuing operations          $725,000
BASIC EPS
Income available to common stockholders         725,000        10,817,695        $0.07
                                                                                ======= 
Effect of Dilutive Securities
Stock Options                                        --           150,542
Warrants                                             --                --
                                               --------       -----------       
DILUTED EPS
Income available to common
  stockholders + assumed conversions           $725,000        10,968,237        $0.07
                                               ========        ==========       ======= 
</TABLE> 
Options to purchase 1,920,133 shares and warrants to purchase 660,000 shares of
common stock at prices ranging from $0.42 to $6.50 were outstanding during 1998,
but were not included in the computation of diluted EPS because the options' and
warrants' exercise prices were greater than the average market price of the
common shares. The options and warrants, which expire between April 1999 and
July 2008 were still outstanding as of December 31, 1998.

<TABLE>
<CAPTION>
                                                      For the Year Ended December 31, 1997
                                                --------------------------------------------------
                                                  Income               Shares            Per-Share
                                                (Numerator)         (Denominator)          Amount
                                                --------------------------------------------------
<S>                                              <C>               <C>                   <C>  
Net income from continuing operations             $289,000
BASIC EPS
Income available to common stockholders            289,000           10,360,841              $0.04
                                                                                           =======
Effect of Dilutive Securities
Stock Options                                           --              525,478
Warrants                                                --                   --
                                                  --------           ----------          
DILUTED EPS
Income available to common
  stockholders + assumed conversions              $289,000           10,886,319              $0.03
                                                  ========           ==========            =======
</TABLE> 
Options and warrants to purchase shares of common stock were outstanding during
the second half of 1997 but were not included in the computation of diluted EPS
because the options' and warrants' exercise prices were greater than the average
market price of the common shares.

                                     F-24
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                      For the Year Ended December 31, 1996
                                                --------------------------------------------------
                                                   Income               Shares           Per-Share
                                                 (Numerator)         (Denominator)         Amount
                                                --------------------------------------------------
<S>                                             <C>                <C>                   <C>   
Net loss from continuing operations             $ (2,526,000)
BASIC EPS
Income available to common stockholders           (2,526,000)        5,445,380             $(0.46)
                                                                                         =========
Effect of Dilutive Securities
Stock Options                                             --                --
Warrants                                                  --                --
                                                ------------       -----------  
DILUTED EPS
Income available to common
  stockholders + assumed conversions            $ (2,526,000)        5,445,380             $(0.46)
                                                =============      ===========           =========
</TABLE> 

Options and warrants to purchase shares of common stock which were outstanding
during the second half of 1996 were not included in the computation of diluted
EPS because the options' and warrants' effect on EPS would be anti-dilutive.

NOTE 18  -  FOURTH QUARTER ADJUSTMENTS

During the fourth quarter of 1998, the Company recorded certain non-recurring 
adjustments, the most significant of which was a change in the estimated amount 
payable to secured creditors relating to the Company's discontinued operations 
(see Note 14).  This change in the amount due to secured creditors was primarily
due to the sale of the two buildings owned by MPS which resulted in a net 
reduction in debt incurred by discontinued operations (guaranteed by the 
Company) and a gain on disposal of discontinued operations, totaling $3.5 
million. After the effect of this reduction in debt of discontinued operations, 
the Company owes approximately $27.1 million at December 31, 1998 of debt and 
accrued interest, which amount is classified as "Debt and accrued interest of 
discontinued operations, in default, due on demand" in the Consolidated Balance 
Sheet.

                                     F-25
<PAGE>
 
             REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
                        FINANCIAL STATEMENTS SCHEDULES


Board of Directors
Microelectronic Packaging, Inc.
San Diego, California

The audits referred to in our report dated March 11, 1999, except for Note 14,
paragraph 15, which is as of April 14, 1999, relating to the consolidated
financial statements of Microelectronic Packaging, Inc., which is contained in
Item 8 of this Form 10-K included the audit of the financial statement schedule
listed in the accompanying index. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based upon our audits.

In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has a working capital deficiency
of $27,120,000 and an accumulated deficiency of $65,335,000 as of December 31,
1998, is in default of most of it's loan agreements, is economically dependent
on a single customer, has three foreign subsidiaries in receivership and/or
liquidation under Singapore law, has various claims and lawsuits filed against
the Company and it's subsidiaries and may be forced to seek protection for the
Company and certain subsidiaries under United States bankruptcy law. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 2. Continuation of the Company is dependent on the Company's ability to
negotiate arrangements with its lenders, raise sufficient capital, achieve
sufficient cash flow to meet its debt obligations and profitability. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

                                                BDO SEIDMAN, LLP



Costa Mesa, California
March 11, 1999 except for Note 14,
  paragraph 14, which is as of
  April 14, 1999.

                                     F-26
<PAGE>
 
                        MICROELECTRONIC PACKAGING, INC.
                VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                  FOR THE THREE YEARS ENDED DECEMBER 31, 1998
                                  SCHEDULE II

<TABLE>
<CAPTION>
                                                          Additions
                                      Balance At         Charged To       Transfers to
                                     Beginning Of         Costs And       Discontinued                    Balance At End
                                        Period            Expenses         Operations      Deductions       Of Period
                                     -----------------------------------------------------------------------------------
Allowance For Doubtful 
 Accounts for the Year Ended:
<S>                                  <C>                 <C>              <C>              <C>            <C>
  December 31, 1996                  $   199,000         $   99,000       $                $              $   298,000
  December 31, 1997                      298,000                 --                 --         (63,000)        235,000
  December 31, 1998                      235,000                 --                 --              --         235,000
Inventory Valuation Reserves for
 the Year Ended:
  December 31, 1996                  $ 1,030,000         $  606,000       $         --     $  (312,000)   $ 1,324,000
  December 31, 1997                    1,324,000             49,000           (909,000)       (220,000)       244,000
  December 31, 1998                      244,000            455,000                 --              --        699,000
Other Valuation Reserves (1)
for the Year Ended:
  December 31, 1996                  $   983,000         $1,817,000       $         --     $        --    $ 2,800,000
  December 31, 1997                    2,800,000                 --         (2,526,000)             --        274,000
  December 31, 1998                      274,000                 --                 --        (200,000)        74,000
Property, Plant And Equipment -
 Continuing Operations
 for the Year Ended:
  December 31, 1997                  $ 6,163,000         $       --         (6,163,000)    $        --    $        --
  December 31, 1998                           --                 --                 --              --             --
Property, Plant And Equipment -
 Discontinued Operations
 for the Year Ended:
  December 31, 1997                  $14,943,000         $  755,000       $  6,163,000     $        --    $21,861,000
  December 31, 1998                   21,861,000                 --                 --     (21,861,000)            --
</TABLE>

(1)  Pertains To Other Receivables, Including Innoventure Receivable for 1996.

                                     F-27