FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 
     For the fiscal year ended  December  31, 1997 

                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934
     For the transition period from ___________ to ___________

                           Commission File No. 0-8574

                          MICROWAVE POWER DEVICES, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                       13-3622306
(State or other jurisdiction of                 (I.R.S. Employer Identification)
incorporation or organization)

   49 Wireless Boulevard
     Hauppauge, New York                                11788-3935
(Address of principal executive offices)                (Zip Code)

                                 (516) 231-1400
              (Registrant's telephone number, including area code)

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

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

                     Common Stock, par value $.01 per share
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                           Yes _X_     No___

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of 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. [ ]

Aggregate market value of voting stock held by  non-affiliates  of registrant as
of March 6, 1998: $29,006,065.

Number of shares of Common Stock outstanding as of March 6, 1998:  10,378,890

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's  definitive proxy statement  pursuant to Regulation
14A, which  statement will be filed not later than 120 days after the end of the
fiscal year covered by this Report,  are  incorporated  by reference in Part III
hereof.


<PAGE>


                          MICROWAVE POWER DEVICES, INC.
                         1997 ANNUAL REPORT ON FORM 10-K


                                TABLE OF CONTENTS

Item No.                                                                    Page
--------                                                                    ----

Part I

         1.     Business ......................................................3
         2.     Properties....................................................15
         3.     Legal Proceedings.............................................15
         4.     Submission of Matters to a Vote of Security Holders...........15

Part II

         5.     Market for Registrant's Common Equity
                  and Related Stockholder Matters.............................16
         6.     Selected Consolidated Financial Data..........................17
         7.     Management's Discussion and Analysis
                  of Financial Condition and Results of Operations............18
         8.     Financial Statements and Supplementary Data...................23
         9.     Changes in and Disagreements with
                  Accountants on Accounting and 
                   Financial Disclosure.......................................23

Part III

         10.    Directors and Executive Officers of the Registrant............24
         11.    Executive Compensation........................................24
         12.    Security Ownership of Certain 
                 Beneficial Owners and Management.............................24
         13.    Certain Relationships and Related Transactions................24

Part IV

         14.    Exhibits, Financial Statements and Reports on Form 8-K........24

Signatures....................................................................25

Exhibit Index.................................................................26


<PAGE>


                                     PART I

ITEM 1. BUSINESS

General

     Microwave Power Devices,  Inc. (the "Company")  designs,  manufactures  and
sells highly  linear power  amplifiers  and related  subsystems to the worldwide
wireless telecommunications market. These amplifiers,  which are a key component
in  wireless  base  stations  and  other  wireless  telecommunications  networks
(including  personal  communications  services  ("PCS")),  increase the power of
radio frequency ("RF") and microwave signals with low distortion.  The Company's
wireless  telecommunications  products consist of solid-state, RF and microwave,
single and  multi-channel  power amplifiers that support a broad range of analog
and digital  transmission  protocols  including AMPS,  CDMA, TDMA, TACS and GSM.
These products are marketed to the cellular, PCS, paging and wireless local loop
("WLL")  segments of the wireless  telecommunications  industry.  The  Company's
largest   wireless   telecommunications   customers  are   integrated   wireless
telecommunications  original equipment  manufacturers  ("OEMs").  The Company is
also   pursuing   opportunities   with  emerging   wireless   telecommunications
infrastructure equipment manufacturers and service providers.

     In addition to its  presence in the wireless  telecommunications  industry,
the Company  designs and  manufactures  high-power,  solid-state  amplifiers for
satellite communications and medical applications.  The Company also designs and
manufactures amplifiers and other products for the military market.

     The Company is capitalizing on its 30 years of experience  developing power
amplifiers  for  the  military  market  by  transitioning   that  technology  to
commercial applications. The Company began devoting substantial resources to the
wireless  telecommunications market at the end of 1994, and has already achieved
significant  market  penetration.  The Company has received purchase orders from
Lucent Technologies ("Lucent"), LG Information and Communications,  Ltd. ("LGIC"
or  "Goldstar")  and  QUALCOMM  Incorporated  ("Qualcomm")  and,  as part of its
business  strategy,  is actively  seeking to expand its business  with these and
other  integrated  wireless  telecommunications  OEMs,  as well as with emerging
industry participants.

     The Company was  incorporated in Delaware in July 1991 to acquire the stock
of MPD Technologies, Inc., the Company's operating subsidiary. MPD Technologies,
Inc. was incorporated in New York in 1967.

Forward-Looking Statements

     Certain  information   contained  in  this  Annual  Report  on  Form  10-K,
including,  without  limitation,  information  appearing  under  Part I, Item 1,
"Business,"  and Part II,  Item 7,  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations," are  forward-looking  statements
(within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934). Factors set forth under Part I, Item 1,
"Business - Risk  Factors,"  together  with other  factors  that appear with the
forward-looking  statements,  or in the Company's other  Securities and Exchange
Commission  filings,  including  its  Registration  Statement  on Form S-1 dated
September 29, 1995,  could affect the Company's  actual  results and could cause
the Company's  actual results to differ  materially  from those expressed in any
forward-looking  statements made by, or on behalf of, the Company in this Annual
Report on Form 10-K.

Wireless Telecommunications Industry Background

     Wireless  service  providers  compete in dynamic markets  characterized  by
evolving industry  standards,  technologies and  applications.  In recent years,
there  has  been  a   significant   increase   in  the   demand   for   wireless
telecommunications  services from business and consumer  users  worldwide.  This
trend has been driven by lower overall subscriber costs made possible by changes
in the regulatory  environment  that encourage  competition and the emergence of
new enabling  technologies.  Wireless service  providers are seeking to increase
system capacity in order to accommodate  the growing number of  subscribers.  To
increase  capacity,  these service  providers  are  investing in  infrastructure
equipment  that provides  greater  efficiency  in the  management of the limited
spectrum licensed to them.


                                       3
<PAGE>


     Wireless  service  has  been one of the  fastest  growing  segments  of the
wireless  telecommunications  market.  According  to  consensus  estimates  from
infrastructure  OEMs, there were approximately 140 million wireless  subscribers
worldwide at year-end 1996, as compared to U.S. Department of Commerce estimates
of  approximately  87 million,  52 million and 33 million at year-end 1995, 1994
and 1993, respectively.  The growth in wireless communications has required, and
will continue to require,  substantial  investment by wireless service providers
in wireless infrastructure  equipment.  Moreover,  intensified competition among
wireless service  providers is resulting in declining costs to end-users as well
as new types of service  offerings.  In response to the increase in subscribers,
wireless  service  providers  are taking  steps to expand the  capacity of their
existing systems, such as incorporating microcellular networks,  converting from
analog to digital protocols and implementing adaptive channel allocation.

     Partially  in response to concerns  about the limited  capacity of existing
wireless  networks,  the  Federal  Communications  Commission  ("FCC")  began to
allocate  spectrum  for new  wireless  services  in  1989.  This  has led to the
auctioning  of  spectrum  for PCS, a new  licensed  wireless  telecommunications
service. PCS proponents believe that increased competition, brought about by the
availability of additional spectrum,  will significantly lower rates, leading to
an increase in demand for wireless services. PCS applications may include mobile
telephone  services,  personal digital services and long distance carrier bypass
of local exchange carriers.

     In many developing  countries,  where access to the public switch telephone
network  ("PSTN")  by the  general  population  is  significantly  less  than in
developed  countries,  the Company  believes  that  wireless  telecommunications
systems are the most economic  means to provide  basic  telephone  service.  The
expense, difficulty and time requirements of building and maintaining a wireless
network  are  generally  less  than  the  cost of  building  and  maintaining  a
comparable wireline network.  Thus, in many less developed  countries,  wireless
service  may  provide the  primary  service  platform  for both mobile and fixed
telecommunications  applications.  In a WLL system,  channels use radio  systems
instead of wireline networks to connect  telephone  subscribers to the PSTN. The
Company    believes    that   the   potential    opportunities    for   wireless
telecommunications  in countries without reliable or extensive  wireline systems
may be even greater than in countries with developed telecommunications systems.
The Company also  believes  that in developed  countries,  market trends such as
deregulation  and  increased  competition  for  subscribers  are  leading to the
increased use of WLL systems as an alternative to the existing wireline network.

     The   same   factors   which   are   driving   the   growth   of   wireless
telecommunications  services and  equipment  sales are also  creating new market
dynamics for industry participants.  The Company believes that competition among
wireless service providers for subscribers will intensify and that future market
growth  will be  realized  primarily  through the  penetration  of the  consumer
market.   The  shift  of  the   customer   base  from   relatively   high-usage,
price-insensitive  business subscribers to price-sensitive  consumer subscribers
is expected to lead to reduced revenue per subscriber.  The Company also expects
that  increasing   competition  for  subscribers  and  decreasing   revenue  per
subscriber will cause wireless service providers to seek the most cost-effective
infrastructure   available  without  sacrificing   quality.  In  addition,   the
uncertainty  surrounding  analog and  emerging  digital  protocols  provides  an
incentive  for service  providers to minimize  platform  and protocol  selection
risk. These changing market conditions, the emergence of open hardware standards
and protocols,  and new market  entrants in the form of PCS providers  create an
opportunity for new equipment suppliers to emerge.


                                       4
<PAGE>


Power Amplification

     Given the large  expenditures  associated with wireless  telecommunications
infrastructure  equipment,  those  wireless  service  providers that are able to
increase the  efficiency and lower the cost of new and existing  systems,  while
improving  reliability,  will be  positioned  to compete most  effectively.  The
Company  believes that the following five factors must be addressed by amplifier
manufacturers in order to compete effectively in this evolving market:

     Linearity.  Wireless service  providers'  ability to manage scarce spectrum
     resources more  effectively  and accommodate a larger number of subscribers
     is largely  dependent  on their  ability  to  broadcast  signals  with high
     linearity,  which  pertains to the ability of a component to amplify a wave
     form without  altering its  characteristics  in  undesirable  ways.  Linear
     amplifiers  allow  signals to be  amplified  without  introducing  spurious
     emissions that might  interfere with adjacent  channels.  Higher  linearity
     increases the capacity of wireless systems by enabling a more efficient use
     of  digital  transmission  technologies,  microcellular  architectures  and
     adaptive  channel  allocation.  In  current  wireless  systems,  the  power
     amplifier  is  generally  the  source  of the  greatest  amount  of  signal
     distortion. Consequently, obtaining power amplifiers with high linearity is
     critical  to  wireless  service  providers'  ability  to  improve  spectrum
     efficiency.

     Analog to Digital Transition. Traditional wireless systems, which are based
     on analog  technology,  are capable of carrying  only one call per channel.
     Such systems are being supplanted by digital  systems,  which allow a given
     channel to carry multiple calls  simultaneously  thereby  increasing system
     capacity.  In addition,  in order to maintain  compatibility  with existing
     analog  subscriber  equipment while  converting  their systems to a digital
     platform,  many  wireless  service  providers  in  the  United  States  are
     installing   dual  mode  systems  that  support  both  digital  and  analog
     technologies simultaneously.

     Multiple  Protocols.  Current and emerging wireless networks throughout the
     world utilize  different  protocols.  In order to address the needs of OEMs
     and  service  providers,  design and  development  efforts  must  result in
     amplifiers  that can be used for each  specific  protocol.  Current  analog
     protocols include AMPS, TACS and NMT, and current digital protocols include
     CDMA, TDMA and GSM.  Digital  protocols that are being utilized in emerging
     PCS systems include CDMA, TDMA and GSM.

     Multi-Channel  Functionality.  Single channel amplifiers require a separate
     power  amplifier and cavity filter for each  channel.  Multi-channel  power
     amplifiers allow for the simultaneous  amplification of all channels within
     a base station. Multi-channel power amplifiers require significantly higher
     linearity compared to single channel designs,  but do not require separate,
     high-maintenance,  tunable cavity filters.  This  architecture  allows less
     space to be allocated  to the  amplifier  in the base  station,  while also
     reducing  deployment  and  maintenance  costs.  In addition,  multi-channel
     amplification  functionality  enables  adaptive  channel  allocation  which
     instantaneously  allocates  unused channels  between cell sites in order to
     increase system capacity.

     Reliability  and Low  Maintenance.  The  Company  believes  that the  power
     amplifier in cell sites  historically has been the single most common point
     of equipment failure in wireless telecommunications networks.  Increasingly
     reliable  power  amplifiers,  therefore,  will improve the level of service
     offered by wireless  service  providers,  while  reducing  their  operating
     costs.  In  addition,  multi-channel  amplifiers  eliminate  the  need  for
     high-maintenance,  tunable  cavity  filters,  which should  further  reduce
     costs.

     By drawing on its experience in producing  high-quality,  custom amplifiers
for the military market, the Company has developed the technical capabilities to
achieve high linearity in its amplification  products. The Company has developed
products that support a number of existing analog and digital protocols,  and is
continuing to develop new products for other protocols. Certain of the Company's
products  support both analog and digital  protocols in a dual mode format.  The
Company has also developed and is supplying multi-channel amplification products
that  integrate the functions of multiple  power  amplifiers  and cavity filters
into a single smaller unit.  The Company has  consistently  manufactured  highly
reliable  amplifiers  that  conform to  stringent  military  specifications  and
effective March 25, 1996, the Company obtained ISO 9001 certification, which the
Company believes will ensure even greater process and quality control.

     The Company uses CAE/CAD and  computer-aided  modeling,  solid-state device
physics,  advanced signal  processing  techniques and digital control systems in
the  development  of  its  products.   The  Company  designs  amplifiers  to  be
manufactured  in high  volumes at low cost.  The  integration  of the  Company's
design and production processes is a


                                       5
<PAGE>


key  element in the  Company's  ability to address  wireless  telecommunications
OEMs' quantity and time to market requirements for power amplification products.

Strategy

     The Company's objective is to be one of the leading  independent  suppliers
of highly  linear power  amplification  products to wireless  telecommunications
OEMs. The Company's strategy incorporates the following key elements:

     Leverage  Existing  Technological  Expertise  to  Commercial  Markets.  The
Company has 30 years of  engineering  experience in the design and production of
power  amplifiers  for the military  market.  The Company  believes  that it has
compiled one of the most extensive  design  libraries in the  solid-state,  high
power amplifier industry. The Company intends to continue to adapt its expertise
to various  commercial  market  applications and new product  requirements.  The
Company believes that its long standing technological  capability will allow for
wireless  market  share  growth with a  continued  nurturing  of its  satellite,
medical and military product lines.

     Increase   Penetration  of  Leading  Integrated   Wireless   Infrastructure
Equipment  Manufacturers.  The Company has developed  relationships with certain
large integrated wireless telecommunications OEMs, principally with Lucent, LGIC
and  Qualcomm.  The  Company  seeks  to  capitalize  on  its  existing  customer
relationships and become a more significant source of its customers' amplifiers.
The Company  believes it can achieve this objective by working  closely with OEM
customers to develop insight into their amplification  product  requirements and
to design products that meet their specific needs.

     Develop  Relationships  with  Emerging  Wireless  Infrastructure  Equipment
Manufacturers.  The Company  anticipates that emerging  wireless  infrastructure
equipment  manufacturers  will make  contributions to the growth of the wireless
telecommunications industry,  especially in the WLL sector. The Company believes
that  its   multi-channel   power   amplifiers   will  assist  these   equipment
manufacturers  in providing  high  capacity,  low cost per channel  products and
continues  to  sell  amplifiers  to  several  emerging  wireless  infrastructure
equipment manufacturers.

     Develop Products for Multiple Protocols. The Company intends to continue to
invest  resources in the research  and  development  of new products for various
protocols.  For cellular systems, the Company currently supports the AMPS, TACS,
CDPD and  NMT-450  analog  protocols,  and the CDMA,  TDMA and  GSM-900  digital
protocols.  For PCS systems, the Company currently supports CDMA, TDMA, DCS-1800
and PCS-1900  digital  protocols.  In  addition,  the Company is  continuing  to
develop  products that  incorporate  protocols  which the Company  believes will
address the needs of  established  and emerging  wireless  systems.  The Company
believes the  development  of products for  multiple  protocols  will enable the
Company to benefit from the continuing  growth of existing  wireless systems and
other  emerging  wireless  telecommunications  markets while  reducing the risks
associated with relying on the success of one or a limited number of existing or
emerging industry protocols.

     Target Development to Meet Customer  Requirements.  The Company focuses its
development efforts on markets where it anticipates there to be emerging demand.
The Company  coordinates  its marketing and  development  functions by producing
prototypes for these targeted  markets toward the goal of being one of the early
suppliers to meet emerging customer requirements. In this way, the Company hopes
to develop additional  relationships with worldwide wireless  telecommunications
OEMs.

     Provide Support from Product Design through Installation and Operation. The
Company works with its customers throughout the design process to assist them in
refining and developing their amplifier specifications.  Once the specifications
have been met and the  product  delivered,  the  Company  continues  to  provide
technical  support to  facilitate  system  integration,  start-up and  continued
operation.  By providing customer support services from the product design phase
through  installation and operation,  the Company believes it fosters  increased
levels of customer loyalty and satisfaction.


                                       6
<PAGE>


     Maintain Control of the Manufacturing Process. As part of the transition to
becoming an amplifier  supplier to the wireless  telecommunications  market, the
Company  has  implemented,  and  continues  to  implement,   in-house  automated
manufacturing processes in order to control its production schedule. The Company
believes that this strategy will help prevent delays in product  shipments as it
would maintain control over all major stages of the manufacturing  process.  The
Company has made the strategic decision in certain instances to select single or
limited source  suppliers in order to obtain lower pricing,  receive more timely
delivery and maintain quality control.

Wireless Technology

     A typical  wireless  communications  system  comprises a geographic  region
containing a number of cells,  each with a base station,  which are networked to
form a wireless service provider's coverage area. Each base station or cell site
houses the equipment that transmits and receives telephone calls to and from the
wireless  subscriber  within  the cell and the  switching  office  of the  local
wireline  telephone  system.  Currently,  such  equipment  includes  a series of
transceivers,  power  amplifiers,  tunable cavity  filters and an antenna.  In a
single  channel  system,  each channel  requires a separate  transceiver,  power
amplifier and tunable cavity filter. The power amplifier within the base station
receives a relatively weak signal from the transceiver and significantly  boosts
the power of the outgoing wireless signal so that it can be broadcast throughout
the cell.  The radio power  levels  necessary  to  transmit  the signal over the
required   range   must  be   achieved   without   distorting   the   modulation
characteristics  of the signal. The signal must also be amplified with linearity
in order to remain in the assigned  channel with low distortion or  interference
with adjacent channels.

     Conventional  cell  sites  today  are  macrocells   containing  high  power
amplifiers of 45 watts per channel which are designed to cover a geographic area
typically  up to three  miles in  radius.  With 48  channels  in a typical  base
station and one power amplifier per channel,  a conventional  analog macrocell's
capacity  is  typically  1,000   subscribers  per  cell,  or   approximately  20
subscribers  per  analog  channel  and  power  amplifier.  When  the  number  of
subscribers  within the cell exceeds the capacity of the macrocell's  equipment,
the cell may be split into several  smaller  radius  microcells  in order to add
capacity to a service  provider's  network.  These microcells require less power
and less expensive  equipment,  but necessitate adding more base stations in the
same geographic area.

     Because  the radio  frequencies  assigned  to  wireless  transmissions  are
finite,  wireless  service  providers  continuously  seek  new  methods  of more
efficiently  using  frequencies  in  order to  increase  the  capacity  of their
networks.  One  such  method,   adaptive  channel  allocation,   instantaneously
allocates unused channels between cell sites across a wireless network to follow
user loading  patterns.  Commuter  density changes during rush hours and traffic
jams are  examples  of the dynamic  nature of user  loading  patterns.  Adaptive
channel  allocation  allows the wireless service provider to re-allocate  unused
channels automatically from less active cell sites to busier adjacent cell sites
as the load moves. A key enabling  technology for adaptive channel allocation is
multi-channel  amplification,  in which all channels are amplified together by a
multi-channel  power  amplifier  rather than each channel using a separate power
amplifier.  The multi-channel  power amplifier allows  instantaneous  electronic
channel  allocation.  Functionally,  it provides the same capability as numerous
single channel  amplifiers  and cavity  filters but its  technology  permits the
amplification of 2 to 96 channels without adding hardware.  Multi-channel  power
amplifiers  require  significantly  higher linearity  compared to single channel
designs.

     In addition to adaptive channel allocation and multi-channel amplification,
wireless  service   providers  are   transitioning   from   traditional   analog
technologies  to  various  digital  technologies  in  order to  increase  system
capacity  and  reduce  the  cost of  wireless  service.  Conversion  to  digital
transmission is expected to allow up to 10 times as many voice  conversations to
occupy the same frequency  bands.  Significant  improvements  in power amplifier
linearity permit multiple conversations on a single channel without unacceptable
channel interference.

     A further trend in the development of base stations involves the transition
from  narrowband to broadband  capabilities.  This  transition is leading to the
reduction  in the  size of  base  station  equipment.  Size  constraints  are an
important  consideration  in urban areas,  which  typically  represent  the most
capacity  constrained  regions of existing  wireless  networks.  A multi-channel
power  amplifier   requires  less  space  than  multiple  single  channel  power
amplifiers,  facilitating  the size  reduction of base stations and  potentially
lowering the real estate costs associated with establishing base stations.


                                       7
<PAGE>


Products

     Wireless  Telecommunications.  The Company designs  customized  products to
address the  specific  requirements  and  protocols  of its OEM  customers.  The
Company  produces single channel and  multi-channel  amplifiers for the wireless
telecommunications  market in the 450-3400 MHz frequency bands,  with peak power
ranging from 10 watts to 2000 watts.  The Company's  amplifiers  meet  linearity
requirements  of  applicable  governmental  agencies,   industry  standards  and
customer specifications, as appropriate. The Company increases the efficiency of
its  product  development   efforts  by  employing  modular   architectures  and
configurable core technologies.

     The product development cycle begins with the prototype phase, with product
typically  designed  for a  particular  customer  using core  technologies.  The
Company usually  manufactures such prototypes in the engineering lab in order to
help  market its  products in a timely  manner.  Low volume  production  (or the
pre-production  phase) of such  prototypes  has not  contributed  a  significant
amount to the  Company's  backlog.  If customer  demand for such  pre-production
units is sufficient,  the Company  designs  additional  customized  features and
implements high volume production  methodologies.  The Company believes that the
evolution to the high volume  production  phase from the prototype  phase can be
implemented  in most cases within three to six months  following the decision to
proceed  with high volume  production  methods.  The  following  tables list the
Company's  single  channel  and  multi-channel  amplifiers,  within the  product
development cycle,  ranging from the prototype phase to pre-production  units to
high-volume production products:

--------------------------------------------------------------------------------
                       Single Channel Amplifiers       Multi-Channel Amplifiers
 Wireless System             Protocol                        Protocol
--------------------------------------------------------------------------------
 Analog Cellular:              AMPS                           AMPS
                               CDPD                           N-AMPS
                                                              TACS
                                                              SETACS
                                                              ETACS
                                                              NMT-450

--------------------------------------------------------------------------------
 Digital Cellular:             CDMA                           CDMA
                               TDMA                           TDMA
                               GSM-900                        GSM-900

--------------------------------------------------------------------------------
 PCS:                          CDMA                           CDMA *
                               W-CDMA *                       TDMA *
                               TDMA                           DCS-1800 *
                               DCS-1800                       PCS-1900 *
                               PCS-1900

--------------------------------------------------------------------------------
*    Products in the prototype phase.

     The Company has used its  technological  expertise to improve the linearity
of its amplifiers by introducing various compensation techniques. Several of the
Company's   single  channel   amplifiers   include   linearity   correction  and
compensation  networks.  These  techniques  are combined with digital  automatic
error  correction  circuits  to enhance the  linearity  and  performance  of the
Company's feed-forward  amplifiers.  The Company's digital processing techniques
implemented in its feed-forward products allow for simultaneous amplification of
NMT, AMPS, TDMA and CDMA channels.

     The Company's wireless  telecommunications  amplifiers can be configured as
modules, separate plug-in amplifier units or integrated subsystems, and range in
price from approximately  $500 to $30,000. A power amplifier  subsystem consists
of  multiple  cast  housings  and adds  digital  signal  processing  to  enhance
linearity. The Company's products are


                                       8
<PAGE>


integrated into systems by OEM customers, and therefore must be engineered to be
compatible  with industry  standards and with certain  customer  specifications,
such as frequency,  power, linearity and built-in test (BIT) for automatic fault
diagnostics.

     Satellite Communications. The Company's solid-state amplifiers are critical
components in the International  Maritime  Satellite  Organization  ("INMARSAT")
communications  system used by commercial  and military  aircraft.  The INMARSAT
communication  link  is a vast  improvement  over  high  frequency  oceanic  and
continental  communications  and is  becoming  the  primary  communication  link
between  ground  control and  in-flight  aircraft.  INMARSAT  allows  commercial
aircraft flying over any region in the world to communicate instantaneously.  In
addition,  weather-related variations in communication transmissions are all but
eliminated.  For  passengers,  INMARSAT  means  better  and  more  comprehensive
in-flight voice and data service.

     Medical. The Company's primary focus in the medical equipment market is the
production of microwave  driver  amplifiers for cancer  treatment  systems.  The
Company's  amplifiers provide the input signals at 3 GHz to a 10 megawatt,  tube
driven klystron amplifier,  which controls the intensity of an electron beam and
directs  it to an x-ray  target.  The  resultant  radiation  is then  focused to
provide precisely  calibrated dosages to exact cancerous  locations in the human
body.

     Military.   The  Company's  extensive  experience  in  military  amplifiers
includes  high-power  jammers,  communication,  radar and other defense oriented
equipment.  An  example  of a  military  system  that  incorporated  one  of the
Company's products was the "Worldwide Color Television" used in the Persian Gulf
War. The  Company's  amplifier  was a primary  component  of that system,  which
injected television and radio signals into the Iraqi communications  system. The
Company  continues to capitalize on this  experience,  both by  maintaining  its
military  activities and by developing  and producing  amplifiers for commercial
applications.  The Company also makes air-defense radar environment  simulators,
navigational simulators and test equipment, and electronic warfare simulators.

Backlog

     The  Company's  backlog of orders as of December  31, 1997 and December 31,
1996 was $83.9 million and $65.0 million, respectively, of which, as of December
31,  1997,  approximately  $33.4  million is  currently  scheduled to be shipped
during fiscal 1998.  The $83.9 million  backlog as of December 31, 1997 included
$8.2  million  to  wireless  telecommunications   customers,  $25.0  million  to
satellite communications customers, $6.5 million to medical and other commercial
customers  and $44.2  million to military  customers.  In  general,  the Company
includes in its backlog  only those  orders for which it has  accepted  purchase
orders. Backlog is not necessarily indicative of future sales. Moreover,  nearly
all of the  Company's  backlog can be  cancelled  at any time  without  penalty,
except,  in some cases, for the recovery of the Company's actual costs up to the
date of  cancellation.  Certain of the purchase  orders  comprising  backlog set
forth  product  specifications  that  would  require  the  Company  to  complete
additional  product  development.  A failure to develop  products  meeting  such
specifications  could lead to a  cancellation  of the  related  purchase  order.
Certain of the purchase orders  comprising  backlog at December 31, 1997 include
product specifications not yet achieved by the Company.

Customers, Sales and Marketing

     The market for wireless infrastructure  equipment is primarily concentrated
among a few companies  that supply  equipment to wireless  service  providers in
North  America  and  overseas.  The  Company  believes  that  Lucent,  Ericsson,
Motorola,  Nokia and Nortel  supply the majority of the wireless  infrastructure
equipment  worldwide with Qualcomm emerging as a leader in the global WLL arena.
In addition,  a number of South Korean  infrastructure OEMs are participating in
the  wireless  infrastructure  build-out  in that  country  and are  emerging as
providers  of  wireless  infrastructure  equipment  worldwide.  These  equipment
manufacturers  compete in  high-growth,  highly  competitive  market segments in
which technology changes rapidly and numerous industry standards currently exist
and are  continuing to evolve.  In response to these market  dynamics and as the
performance  requirements  of  certain  components  of  wireless  base  stations
increase,  many of these  equipment  manufacturers  are  focusing  on their core
technologies and competencies and are relying on independent sources for certain
system components, such as power amplifiers.


                                       9
<PAGE>


     The Company sells  wireless  power  amplification  products  throughout the
world to a limited number of OEM customers, including Lucent, LGIC and Qualcomm,
principally  through  its direct  sales  organizations,  as well as through  its
exclusive representative network. The Company expects that sales of its products
will continue to be concentrated  among a limited number of major OEM customers.
If the  Company  were to lose a major  OEM  customer  or if  orders  by such OEM
customer were to otherwise decrease, the Company's business, financial condition
and results of operations would be materially adversely affected.

     The Company uses a customer  focused,  team-based sales approach to address
the high-power  amplification  needs of its OEM  customers.  Sales to integrated
wireless  telecommunications  OEMs  require  close  account  management  by  the
Company.  As such,  relationships  are established at multiple levels of its OEM
customers'  organizations,  including  management,  engineering  and  purchasing
personnel.  In addition,  the Company's amplifiers require experienced sales and
engineering  personnel to match the  customer's  requirements  to the  Company's
product  capabilities.  The Company believes that close technical  collaboration
with  the  OEM  customer  during  the  design  and  qualification  phase  of new
communications  equipment is critical to the  integration  of its  amplification
products into the new base  stations.  The Company's  integrated  sales approach
involves  a team  consisting  of a  senior  executive,  a  business  development
specialist, members of the Company's engineering department and, occasionally, a
local technical sales  representative.  This sales approach allows the Company's
engineering  personnel  to  work  closely  with  their  counterparts  at the OEM
customer  to  assure   compliance   of  the   product  to  the  OEM   customer's
specification.  The  Company's  executive  officers are also involved in certain
aspects of the  Company's  relationships  with its major OEM  customers and work
closely  with  their  senior  managements.  At times,  the  Company  includes  a
transistor  supplier  as part of its sales  team when  working  with a major OEM
customer  and  will  consider  including  key  suppliers  in  its  future  sales
presentations.  As of December 31, 1997, the Company had a direct sales staff of
eight people.

     To date, the Company has sold its products  overseas with the assistance of
independent sales  representatives  to OEM customers.  The Company's sales staff
provides   direction  and  support  to  the   international   independent  sales
representatives. Sales outside of the United States represented 24%, 43% and 32%
of net sales in fiscal 1997,  1996 and 1995  respectively.  Sales outside of the
United  States  are  denominated  in U.S.  dollars  in order to reduce the risks
associated with the fluctuations of foreign currency exchange rates.

Manufacturing

     The Company assembles,  tests, packages and ships amplifier products at its
manufacturing   facility   located  in   Hauppauge,   Long  Island,   New  York.
Historically,  the  volume  of  the  Company's  production  requirements  in the
military markets was not sufficient to justify the  implementation  of automated
manufacturing  processes.  The Company anticipated that sales of its products to
the wireless telecommunications industry would require a significant increase in
the  Company's  manufacturing  capacity.   Accordingly,  the  Company  began  to
introduce automated  manufacturing  techniques in the second quarter of 1995. In
connection with its transition to automated manufacturing processes, the Company
purchased computerized  surface-mount machinery and related process equipment to
support  automated  assembly,  which were  delivered,  installed  and made fully
operational  during the third quarter of 1995. During the fourth quarter of 1997
a second  stencil  printer  and oven for the  surface-mount  center was put into
service.  It is  currently  anticipated  that a second  automated  surface-mount
pick-n-place  machine  will be added in fiscal  1998.  The  Company  intends  to
continue to maintain a low level of automated  assembly  outsourcing in order to
ensure a steady and reliable  external  source of high-volume  production  while
also providing excess capacity, if required.  In addition,  the Company began to
introduce  automated  tuning  and  testing  into  its  automated   manufacturing
processes  in the  second  half of 1996.  Essentially  all  wireless  production
amplifiers are now tuned and tested in an automated fashion.

     The Company's movement during the past few years into high volume automated
production was the result of time to market and pricing  demands of the wireless
telecommunications  industry.  The  Company  believes  that it must  continue to
maintain direct control over this process if it wants to continue to satisfy the
timely needs of wireless  telecommunications OEMs. Furthermore,  the Company has
introduced these same automated  manufacturing  processes into its other product
segments much to the benefit of the  satellite,  medical and military  customers
and their associated  equipment.  As a result, the Company has begun to leverage
its high  volume  design  and  production  capabilities  into its low and medium
volume product lines.


                                       10
<PAGE>


Research and Development

     The Company's research and development efforts are focused on the design of
amplifiers for new protocols,  the improvement of existing product  performance,
cost reductions and improvements in the  manufacturability of existing products.
The Company is continuing  to focus  heavily on designs that support  continuous
flow, high volume production for its wireless  telecommunications  products. The
Company uses an automated design environment  employing advanced workstations to
model overall amplifiers and their associated circuits.

     The Company has historically devoted a significant portion of its resources
to  research  and  development  programs  and  expects to  continue  to allocate
significant  resources to these efforts.  The Company's research and development
expenses in fiscal 1997, 1996 and 1995 were $4.4 million, $7.4 million, and $4.3
million,  respectively,  and represented 8.4%, 15.5% and 15.8% respectively,  of
net sales.

     The  markets  in  which  the  Company  and its OEM  customers  compete  are
characterized by rapidly changing  technology,  evolving industry  standards and
continuous  improvements in products and services.  The Company's future success
depends on its ability to develop in a timely  manner new products  that compete
effectively on the basis of price and performance  and that  adequately  address
customer  requirements.  In  addition,  as is  characteristic  of  the  wireless
telecommunications equipment industry, the average sales prices of the Company's
products have  historically  decreased over the products' lives and are expected
to continue to do so.

Competition

     The ability of the Company to compete successfully depends in part upon the
rate at which OEM  customers  incorporate  the  Company's  products  into  their
systems.  The  Company  believes  that a  substantial  majority  of the  present
worldwide  production of power  amplifiers is captive  within the  manufacturing
operations of a small number of wireless telecommunications OEMs and offered for
sale as part of their wireless  telecommunications systems. The Company's future
success is dependent  upon the extent to which these OEMs elect to purchase from
outside sources rather than manufacture their own amplification products.  There
can be no assurance that OEM customers will  incorporate the Company's  products
into their systems or that, in general,  OEM customers will continue to rely, or
expand  their  reliance,   on  external   sources  of  supply  for  their  power
amplification  products.  Since each OEM product involves a separate proposal by
the amplifier supplier, there can be no assurance that the Company's current OEM
customers will not rely upon internal  production  capabilities or a non-captive
competitor for future amplifier product needs. The Company's major OEM customers
continuously evaluate whether to manufacture their own amplification products or
purchase  them from  outside  sources.  These  OEM  customers  and  other  large
manufacturers of wireless telecommunications equipment could also elect to enter
into  the  non-captive  market  and  compete  directly  with the  Company.  Such
increased  competition could materially adversely affect the Company's business,
financial condition and results of operations.

     Most of the Company's  competitors  have, and potential future  competitors
could have, substantially greater technical, financial, marketing,  distribution
and other  resources  than the Company and have,  or could  have,  greater  name
recognition  and  market  acceptance  of their  products  and  technologies.  In
addition,  certain of these competitors are already  established in the wireless
amplification  market. No assurance can be given that the Company's  competitors
will not develop  new  technologies  or  enhancements  to  existing  products or
introduce new products that will offer superior  price or performance  features.
To the extent that OEMs increase  their  reliance on external  sources for their
power amplification needs, more competitors could be attracted to the market.

     The Company expects its  competitors to offer new and existing  products at
prices  necessary  to gain or  retain  market  share.  The  Company  expects  to
experience significant price competition,  which could have a materially adverse
effect on gross margins.  Certain of the Company's  competitors have substantial
financial   resources  which  may  enable  them  to  withstand  sustained  price
competition or downturns in the power  amplification  market as well as enabling
them to more aggressively pursue various pre-production opportunities.

     In the military  market,  the Company competes with certain large OEMs that
design and  assemble  their own high power  amplifiers.  However,  almost all of
these OEMs are also the Company's customers. The Company believes this is due to
its broad range of solid-state  power and frequency  capabilities and its thirty
year military industry stature.


                                       11
<PAGE>


Proprietary Technology

     The Company  believes  that the success of its amplifier  business  depends
more  on its  specifications,  CAE/CAD  design  and  modeling  tools,  technical
processes  and  employee  expertise  than  on  patent  protection.  The  Company
generally enters into  confidentiality  and  non-disclosure  agreements with its
employees and limits access to and  distribution of its proprietary  technology.
The Company may in the future be notified that it is infringing  certain  patent
and/or other intellectual property rights of others.  Although there are no such
pending lawsuits  against the Company or unresolved  notices that the Company is
infringing  intellectual  property  rights of others,  there can be no assurance
that  litigation or  infringement  claims will not occur in the future.  Through
Republic  Electronics,  the Company has been awarded two U.S. patents,  owns two
U.S. trademarks and has one European and one U.S. patent pending.

Republic Electronics

     The Company acquired  substantially all the assets of Republic  Electronics
in April  1994.  Founded  in 1951,  Republic  Electronics  is a  high-technology
systems  engineering  and  manufacturing  firm and is among the world's  leading
developers  and  manufacturers  of air  defense  radar  environment  simulators,
navigational simulators and test equipment, and electronic warfare simulators. A
radar  environmental  simulator ("RES") provides a radar system with the signals
that it would normally receive if aircraft,  jammers,  environmental and clutter
effects were present. An RES injects, into the radar receiver,  the coherent and
non-coherent  RF and microwave  signals based on a  computer-generated  scenario
that includes parameters such as aircraft,  jammers,  chaff,  weather, sea state
and terrain  effects.  The Company  believes  that Republic  Electronics  is the
world's largest supplier of Tactical Air Navigation ("TACAN") beacon simulators,
and is a major  supplier of TACAN  flight line test sets and support  equipment.
The Company believes it is also the primary supplier of  "identification  friend
or foe" interrogator flight line test sets for the U.S. Navy and U.S. Air Force.
Republic  Electronics'  MTS-300A threat signal generator  provides  "end-to-end"
system checkout from antennas  through  cockpit display of installed  electronic
warfare systems on aircraft for verification of installation,  cabling,  antenna
and overall system  performance.  The Company's  backlog as of December 31, 1997
included $9.1 million of orders from Republic Electronics'  customers.  In 1997,
sales  attributable  to  Republic   Electronics'  business  were  $6.9  million,
comprising 13.2% of the Company's net sales.

     The  Company  has a U.S.  patent  (which  expires in January  2012),  and a
European  patent  pending,  relating to a windshear radar warning system tester.
The Company's  Weather/Windshear  Radar Tester (WRT-100) simulates  microbursts,
storms and gust fronts in order to test a commercial  aircraft's  radar  systems
signal  processing  ability to properly display hazard warning  conditions.  The
Company holds another U.S.  patent,  on an invention that eliminates the need to
return a repaired  nose-mount  type aircraft  radar radome to a radar test range
for recertification,  which expires in December 2011. "REPUBLIC" and "MRES 2000"
are U.S.  registered  trademarks  of the  Company.  The Company  also has a U.S.
patent  pending for a flightline  test of  satellite-based  airborne  navigation
systems.

Employees

     As of December 31, 1997, the Company had a total of 379 regular,  temporary
and  contract  employees,  including  235  in  operations  and  quality,  102 in
engineering,  11 in sales and  marketing and 31 in  administration.  The Company
believes  its future  performance  will  depend in large part on its  ability to
attract and retain highly skilled employees. 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.


                                       12
<PAGE>


Risk Factors

     Historically,  the Company's  revenues have been derived  principally  from
sales to military  markets.  The Company  only began to focus on the  commercial
wireless  telecommunications  market during the past few years. As a result, the
Company  is  subject  to all of the risks  inherent  in the  operation  of a new
business enterprise.

     The  Company  anticipates  that sales of its  products  to  relatively  few
customers  will continue to account for a significant  portion of its net sales.
In addition,  certain of the purchase orders comprising  backlog at December 31,
1997 set forth product specifications not yet achieved by the Company that would
require the Company to complete  additional  product  development.  A failure to
develop products meeting such specifications could lead to a cancellation of the
related purchase order. The reduction,  delay or cancellation of orders from one
or more significant  customers would  materially  adversely affect the Company's
business, financial condition and results of operations.

     The Company has limited  experience  in  producing  and  manufacturing  its
products  on a  high-volume  basis  and in  contracting  for  such  manufacture.
Manufacture of the Company's  products is an extremely complex process,  and the
Company  may  from  time to  time  experience  quality  problems  with  products
manufactured on an automated basis internally or by its contract  manufacturers.
Furthermore, there can be no assurance that the Company's internal manufacturing
processes will prove sufficient to fulfill the Company's production commitments,
or that contract  manufacturers  will be able to fulfill any shortfall.  If such
problems  occur,   the  Company  could  experience   increased  costs,   delays,
cancellations  or  reschedulings of orders or deliveries and product returns and
discounts,  any of which could damage  relationships with current or prospective
customers  and  have  a  material  adverse  effect  on the  Company's  business,
financial condition and results of operations.

     A large  portion  of the  Company's  expenses  are fixed and  difficult  to
reduce. If net sales do not meet the Company's expectations, the fixed nature of
the Company's  expenses would  exacerbate the effect of any net sales shortfall.
Other factors that may cause the Company's net sales,  gross margins and results
of operations to vary significantly from period to period include mix of systems
sold; price discounts;  market acceptance and the timing and availability of new
products by the Company or its customers;  usage of different  distribution  and
sales channels;  product  development,  warranty and customer support  expenses;
customization of systems; and general economic and political conditions.  All of
the above factors are difficult for the Company to forecast,  and these or other
factors could  materially  adversely  affect the Company's  business,  financial
condition and results of operations.

     Wireless  telecommunications OEMs have come under increasing price pressure
from cellular and PCS service  providers,  and the Company expects to experience
downward  pricing  pressure on its  products.  In  addition,  competition  among
non-captive  suppliers  has  increased  the  downward  pricing  pressure  on the
Company's products. As these wireless manufacturers  frequently negotiate supply
arrangements  far in advance of delivery dates, the Company often must commit to
price  reductions  for its  products  before  it is  aware of how,  or if,  cost
reductions  can be obtained.  To offset  declining  average  sales  prices,  the
Company will attempt in the near term to achieve  manufacturing  cost reductions
and,  in the longer  term,  to develop new  products  that can be sold at higher
average sales prices.  If,  however,  the Company is unable to achieve such cost
reductions  and to develop new products that can be sold at higher average sales
prices,  the Company's gross margins will decline,  and such decline will have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

     Despite the risks  associated  with  purchasing  components  from a limited
number of sources,  the Company  has made the  strategic  decision to enter into
arrangements  with a select group of limited source suppliers in order to obtain
lower  pricing,  receive  more timely  delivery and  maintain  quality  control.
Certain  of the  Company's  limited  source  suppliers  have  limited  operating
histories and limited  financial and other  resources and,  therefore,  they may
prove to be unreliable sources of supply. Further, the Company has only recently
begun to purchase key components in large volume.  If the Company were unable to
obtain  sufficient  quantities of components,  particularly  power  transistors,
delays or  reductions  in  product  shipments  could  occur  which  would have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations. Furthermore, delays in filling orders may have a material
adverse effect on the Company's relationships with its OEM customers,  which may
result in the termination of material orders from its OEM customers and/or cause
a permanent loss of future sales.


                                       13
<PAGE>


     Sales of power amplifiers to wireless  telecommunications OEMs are expected
to account for a majority of the Company's  future product sales. The success of
the  Company  depends to a  considerable  extent upon the  continued  growth and
increased  availability of cellular,  PCS and other wireless  telecommunications
services   in  the  United   States  and   internationally.   If  the   wireless
telecommunications  market  fails to grow or grows more  slowly than the Company
currently anticipates,  the Company's business,  financial condition and results
of operations would be materially and adversely affected.

     The  Company's  major  OEM  customers   continuously  evaluate  whether  to
manufacture  their own  amplification  products.  These OEM  customers and other
large  manufacturers  of wireless  telecommunications  equipment  could elect to
enter into the non-captive  market and compete directly with the Company.  Also,
the Company's  competitors could develop new technologies,  make enhancements to
existing products,  or introduce new products that could offer superior price or
performance  features.  Such increased  competition  could materially  adversely
affect the Company's business, financial condition and results of operations.

     Sales  of  the  Company's   products  outside  of  the  United  States  are
denominated  in United  States  dollars.  An  increase  in the value of the U.S.
dollar  relative to foreign  currencies  would make the Company's  products more
expensive  and,  therefore,  potentially  less  competitive  outside  the United
States.  The Company may in the future be notified that it is infringing certain
patent and/or other intellectual  property rights of others.  Although there are
no such  pending  lawsuits  against the Company or  unresolved  notices that the
Company is infringing  intellectual  property rights of others,  there can be no
assurance that litigation or infringement claims will not occur in the future.

     Regulatory   approvals  generally  must  be  obtained  by  the  Company  in
connection with the  manufacture and sale of its products,  and by the Company's
customers  to  operate  the  Company's  products.   The  United  States  Federal
Communications  Commission  ("FCC") recently proposed new regulations that would
impose  more   stringent   RF  and   microwave   emissions   standards   on  the
telecommunications  industry.  There can be no assurance  that if such  proposed
regulations are adopted,  the Company and its OEM customers will not be required
to alter the manner in which radio signals are  transmitted  or otherwise  alter
the equipment transmitting such signals, which could materially adversely affect
the Company's products and markets. Also, the enactment by federal, state, local
or  international  governments  of new laws or  regulations  or a change  in the
interpretation of existing regulations could affect the market for the Company's
products.

     The recent  financial  market turmoil and economic  slowdown in South Korea
may have a material adverse effect on the Company's sales. The Company's primary
customer  in this  region is LGIC which is one of a number of South  Korean OEMs
that are participating in the wireless infrastructure build-out in that country.
In  addition,  since  worldwide  pricing of the  Company's  products are in U.S.
dollars,  the  current  instability  in South  Korea and other  Asian  financial
markets may have the effect of making the Company's  products more  expensive to
LGIC as compared to those of other  manufacturers  whose  products are priced in
one of the affected Asian currencies.  As a result, LGIC may reduce or eliminate
future purchases of the Company's products.


                                       14
<PAGE>


ITEM 2. PROPERTIES.

     The Company's  operations  are located in an 86,000 square foot facility on
7.4  acres of land in  Hauppauge,  Long  Island,  New  York.  The  building  was
constructed  in 1986 and purchased by the Company in June 1992 with the proceeds
from Industrial  Development  Revenue Bonds ("IDRBs") issued through the Suffolk
County  Industrial  Development  Agency  ("SCIDA").   In  connection  with  this
financing,  the Company  transferred  ownership of this facility to the SCIDA at
closing,  and immediately  leased back the facility for a term equal to the term
of the  bonds.  The lease  provides  the  Company  with a $1.00  buyback  option
exercisable  at lease end and also  permits  for  transfer of  ownership  of the
facility back to the Company if it prepays the bonds.

     This  facility  houses  all of the  Company's  engineering,  manufacturing,
quality assurance,  sales and marketing and administrative  personnel. The plant
has been customized to suit the Company's operations,  which includes electrical
power  upgrades and a Class  100,000  clean room to support  hybrid  electronics
assembly  and test.  While the  current  facility is  sufficient  to support the
Company's  anticipated  growth  through fiscal year 1999, the Company has zoning
approvals and  architectural  drawings for a 55,000 square foot expansion of its
current  facility  which the  Company  believes  should be  adequate to meet the
Company's presently foreseeable needs.

ITEM 3. LEGAL PROCEEDINGS.

     On January  30,  1998,  a  complaint  was filed  against the Company in the
United  States  Bankruptcy  Court for the  Northern  District  of Texas,  Dallas
Division,  alleging the Company's failure to turn over property to the estate of
Pinpoint  Communications,  Inc. ("Pinpoint") which, as of August 13, 1996, is in
Chapter 7  liquidation.  The suit  alleges that the Company has failed to return
advance  monies of  approximately  $0.5 million paid by Pinpoint  pursuant to an
equipment  purchase  agreement  dated March 31, 1995  between the  parties.  The
Company  believes that the allegations are without merit. The Company expects to
incur  legal  expenses  in its  defense  of this suit and this suit will  likely
result in the diversion of management's  attention from daily  operations of the
Company's  business.  There can be no assurances  that this  litigation  will be
resolved in the Company's favor and an unfavorable  result could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operation.

     From time to time, the Company is involved in litigation relating to claims
arising out of its  operations in the normal course of business.  The Company is
currently  not party to any other  legal  proceedings,  the  adverse  outcome of
which,  individually  or in the  aggregate,  management  believes  would  have a
material  adverse  effect on the financial  position or results of operations of
the Company.

     The Company's  operations are subject to environmental laws and regulations
which impose  limitations on the discharge of pollutants  into the air and water
and  establish  standards for the  treatment,  storage and disposal of solid and
hazardous  wastes.  The  Company  reviews  the  effects  of  any  new  laws  and
regulations on its operations  and modifies its operations as  appropriate.  The
Company  believes  that it is in  substantial  compliance  with  all  applicable
environmental laws and regulations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     There were no matters  submitted to a vote of security  holders  during the
fourth quarter of 1997.


                                       15
<PAGE>


                                     PART II

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

     The Common  Stock of the Company is traded on The Nasdaq  Stock  Market(SM)
under  the  symbol  MPDI.  On March  6,  1998  there  were  approximately  2,300
beneficial owners of the Company's Common Stock.

     The following  table sets forth the high and low closing bid prices for the
Company's  Common  Stock  as  reported  by  Nasdaq.   Such  quotations   reflect
interdealer  prices  without  adjustments  for  retail  markups,  markdowns,  or
commissions and may not necessarily represent actual transactions.

            Calendar Period                    High                Low
            ---------------                    ----                ---
            1996:
            First Quarter....................  13-5/8              7-1/8
            Second Quarter...................  9-9/16              4-3/4
            Third Quarter....................  6-1/2               2-3/8
            Fourth Quarter...................  3-1/8               1-15/16
            1997:
            First Quarter....................  4-1/4               2-13/32
            Second Quarter...................  5-1/2               2-7/16
            Third Quarter....................  12-3/8              4-17/64
            Fourth Quarter...................  11                  4-3/4

     The Company has never  declared  or paid any cash  dividends  on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for the expansion and operation of its business and does not  anticipate  paying
cash dividends in the  foreseeable  future.  In addition,  the Company's  credit
facility contains provisions restricting the payment of dividends.


                                       16
<PAGE>


ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

     The following selected consolidated  financial data as of and for the years
ended  December 31, 1997 and 1996, and for the year ended December 31, 1995 have
been derived from, and are qualified by reference to, the Consolidated Financial
Statements of the Company  audited by Arthur  Andersen LLP,  independent  public
accountants, included elsewhere in this Annual Report on Form 10-K and should be
read in  conjunction  with those  Consolidated  Financial  Statements  and Notes
thereto and  Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations.  The following selected consolidated financial data as of
December  31, 1995 and as of and for the year ended  December 31, 1994 have been
derived from the  Consolidated  Financial  Statements of the Company  audited by
Arthur Andersen LLP,  independent public  accountants,  not included herein. The
following  selected  consolidated  financial  data as of and for the year  ended
December 25, 1993 have been derived from the Consolidated  Financial  Statements
of the Company audited by Ernst & Young LLP, independent auditors,  not included
herein.

<TABLE>
<CAPTION>
                                                                                     Year Ended
                                                     -------------------------------------------------------------------------------
                                                      December 31,     December 31,     December 31,     December 31,   December 25,
                                                         1997              1996            1995             1994            1993
                                                     ------------     ------------     ------------     ------------   ------------
Consolidated Statements of Operations Data:                               (in thousands, except per share data)
<S>                                                     <C>              <C>              <C>              <C>             <C>     
Net sales ......................................        $ 52,037         $ 47,362         $ 27,302         $ 25,134        $ 23,763
Cost of sales ..................................          38,142           41,501           20,122           17,371          16,266
                                                        --------         --------         --------         --------        --------
Gross profit ...................................          13,895            5,861            7,180            7,763           7,497
Operating expenses:
   General and administrative ..................           3,575            3,221            3,091            2,585           2,316
   Selling .....................................           3,963            3,720            3,346            2,749           1,627
   Research and development ....................           4,367            7,364            4,306            1,150             781
                                                        --------         --------         --------         --------        --------
     Total operating expenses ..................          11,905           14,305           10,743            6,484           4,724
                                                        --------         --------         --------         --------        --------
Income (loss) from operations ..................           1,990           (8,444)          (3,563)           1,279           2,773
Interest expense, net ..........................           1,237              948            1,310              832             632
Other (income) expense, net ....................             (16)               6               55               67             (11)
                                                        --------         --------         --------         --------        --------
Income (loss) before income taxes ..............             769           (9,398)          (4,928)             380           2,152
Provision (benefit) for income taxes ...........             189           (3,759)          (1,976)              33             475
                                                        --------         --------         --------         --------        --------
Net income (loss) ..............................        $    580         $ (5,639)        $ (2,952)        $    347        $  1,677
                                                        ========         ========         ========         ========        ========
Net income (loss) per common share:
   Basic .......................................        $   0.06         $  (0.54)        $  (0.36)        $   0.05        $   0.22
                                                        ========         ========         ========         ========        ========
   Diluted .....................................        $   0.06         $  (0.54)        $  (0.36)        $   0.05        $   0.22
                                                        ========         ========         ========         ========        ========
Common shares used in computing
per share amounts:
   Basic .......................................          10,376           10,375            8,172            7,500           7,500
                                                        ========         ========         ========         ========        ========
   Diluted .....................................          10,465           10,375            8,172            7,500           7,500
                                                        ========         ========         ========         ========        ========
</TABLE>

<TABLE>
<CAPTION>
                                                       December 31,     December 31,    December 31,     December 31,   December 25,
                                                          1997            1996             1995             1994           1993
                                                       ------------     ------------    ------------     ------------   ------------
Consolidated Balance Sheet Data: ..................                                 (in thousands)
<S>                                                      <C>             <C>             <C>             <C>             <C>    
Cash and cash equivalents .........................      $   687         $ 1,149         $   388         $   410         $ 1,533
Working capital ...................................       18,183          16,151          24,529           8,614           5,706
Total assets ......................................       41,822          38,890          41,227          21,834          19,224
Total debt ........................................       13,276          12,789           9,718          11,903           9,495
Total stockholders' equity ........................       18,949          18,302          23,941           6,416           6,128
</TABLE>

                                       17
<PAGE>


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

Overview

     The Company  commenced  operations in 1967.  During the past 30 years,  the
Company has designed,  manufactured and marketed high power, solid-state, RF and
microwave  power  amplifiers  and  related  subsystems  for  military,  medical,
satellite and, most recently, wireless telecommunications applications.

     The Company historically has been dependent upon the military market as its
principal source of revenue. In 1992, as the military market was declining,  the
Company  increased  the scope of its  business and entered  commercial  markets,
thereby  broadening its product  offerings.  The Company now develops  precision
high-power amplifiers for a variety of commercial uses.

     The following table summarizes certain key financial information:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                                  Change                          Change
                                                   1997           from            1996             from         1995
                                                 ($000s)        prior year       ($000s)         prior year     ($000s)
---------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                 <C>         <C>                  <C>         <C>     
Net Sales                                        $ 52,037            10%         $ 47,362             73%         $ 27,302
---------------------------------------------------------------------------------------------------------------------------
Gross Profit                                     $ 13,895           137%         $  5,861            (18)%        $  7,180
Gross Profit Margin                                  26.7%                           12.4%                            26.3%
---------------------------------------------------------------------------------------------------------------------------
General and Administrative Expenses              $  3,575            11%         $  3,221              4%         $  3,091
Percentage of Net Sales                               6.9%                            6.8%                            11.3%
---------------------------------------------------------------------------------------------------------------------------
Selling Expenses                                 $  3,963             7%         $  3,720             11%         $  3,346
Percentage of Net Sales                               7.6%                            7.9%                            12.2%
---------------------------------------------------------------------------------------------------------------------------
Research and Development Expenses                $  4,367           (41)%        $  7,364             71%         $  4,306
Percentage of Net Sales                               8.4%                           15.5%                            15.8%
---------------------------------------------------------------------------------------------------------------------------
Interest Expense                                 $  1,237            30%         $    948            (28)%        $  1,310
Percentage of Net Sales                               2.3%                            2.0%                             4.8%
---------------------------------------------------------------------------------------------------------------------------
Provision (Benefit) for Income Taxes             $    189           N/A          $ (3,759)           (90)%        $ (1,976)
Effective Tax Rate                                   24.6%                           40.0%                            40.1%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       18
<PAGE>


Results of Operations

Fiscal Years Ended December 31, 1997 and December 31, 1996

     Net Sales.  The Company derives its revenues  principally  from the sale of
solid-state,  RF and  microwave,  power  amplifiers  and  from the sale of radar
environmental and electronic warfare  simulators.  Net sales increased by 10% to
$52.0  million in 1997 from  $47.4  million in 1996.  This  sales  increase  was
primarily  due  to  higher  shipments  of  the  Company's  commercial  products,
partially offset by slightly lower shipments of the Company's military products.
Sales of  commercial  products  increased  by 15% to $38.6  million in 1997 from
$33.6 million in 1996,  representing 74% and 71%, respectively,  of net sales in
such years.  The  commercial  sales  increase  was  predominantly  due to higher
shipments  to one domestic  wireless  telecommunications  OEM and one  satellite
communications  OEM, partially offset by lower shipments to one foreign wireless
telecommunications  OEM.  Sales of military  products  decreased  by 3% to $13.4
million  in  1997  from  $13.8  million  in  1996,  representing  26%  and  29%,
respectively,  of net sales in such  years.  The  military  sales  decrease  was
predominantly due to an overall lower market demand for Republic products.

     International  sales  decreased by 38% to $12.7  million in 1997 from $20.6
million in 1996,  totaling 24% of net sales in 1997 compared to 43% in 1996. The
decrease in  international  sales was primarily  due to lower  foreign  wireless
telecommunications  OEM business,  partially  offset by higher foreign  military
business.  In 1997,  sales  to two  domestic  commercial  OEMs  (Customer  B and
Customer D) and a foreign commercial OEM (Customer A) accounted for 33%, 16% and
13%,  respectively,  of the  Company's  net sales.  In 1996,  sales to a foreign
commercial OEM (Customer A) and a domestic commercial OEM (Customer B) accounted
for 34% and 19%, respectively, of the Company's net sales.

     Gross Profit.  The Company's cost of sales  consists  principally of direct
labor, labor overhead,  direct material,  material overhead,  other direct costs
and work-in-process inventory changes from the beginning to the end of a period.
Gross  profit  increased  by 137% to $13.9  million in 1997 from $5.9 million in
1996.  The  Company's  gross profit  margin (gross profit as a percentage of net
sales)  increased to 26.7% in 1997 from 12.4% in 1996. The increase in the gross
profit margin was primarily due to the  non-recurrence  of the 1996 $4.9 million
write-off of wireless  multi-channel  work-in-process  inventory  caused by then
diminished demand for those particular products, the 1996 $1.0 million write-off
of wireless multi-channel  work-in-process inventory related to the cancellation
of the remainder of the AirNet  contract and the 1996 $0.7 million  write-off of
wireless  single  channel   work-in-process   inventory  caused  by  a  domestic
commercial  OEM's  decision  to  internally   manufacture   amplifiers  for  the
production  portion of the  PCS-TDMA  program.  The increase in gross profit was
primarily  due to the  non-recurrence  of the  above  mentioned  items  plus the
recognition  of a more  favorable  gross  profit  associated  with the net sales
increase in 1997. In addition,  the  following  factors  adversely  affected the
Company's  1997  gross  profit  margin:  (i) low gross  profits  the  Company is
experiencing  on three military OEM contracts (the result of production  delays,
technical problems and software integration difficulties),  (ii) the overall low
gross profit margin obtainable on the Company's  multi-channel product line (the
result of competitive  pricing  pressures),  (iii) engineering and manufacturing
difficulties  experienced  on the  pre-production  phase of two  newer  wireless
products  and (iv) a high level of  warranty  expense  (as a  percentage  of net
sales)  specifically  related  to  those  warranty  costs  associated  with  the
Company's more recent introduction of wireless telecommunications products.

     Certain of the Company's  inventory costing techniques involve developing a
standard cost which estimates the average,  or standard,  cost per unit over the
extended life cycle of a product.  Such costs  include  labor,  material,  other
direct costs and related overheads. If the extended life cycle of a product does
not materialize or if there is no reasonable  certainty that product  maturation
will take place within the near future,  write-offs of work-in-process inventory
would be  required.  Such  write-offs  could  materially  adversely  affect  the
Company's gross profit and results of operations.

     Certain of the purchase orders or contracts  comprising backlog at December
31, 1997 set forth product  specifications  not yet achieved by the Company that
would require the Company to complete additional product development. Failure to
develop products meeting such  specifications  could lead to the cancellation of
the related purchase orders or contracts.  The reduction,  delay or cancellation
of orders or contracts from one or more  significant  customers could materially
adversely  affect the  Company's  business,  financial  condition and results of
operations.


                                       19
<PAGE>


     There can be no assurances  that gross profit will continue to improve.  If
the  Company  is  not  able  to  reduce  its  production  costs  to  the  extent
anticipated,  or to introduce new products with greater margins,  and if average
selling prices decline beyond current  expectations,  the Company's gross profit
and results of operations could be materially adversely affected.  The Company's
gross profit may also be affected by a variety of other  factors,  including the
mix of systems and equipment sold; production,  reliability or quality problems;
and price competition.

     General and Administrative  Expenses.  General and administrative  expenses
consist  principally  of salaries and other  expenses for  management,  finance,
accounting,   contracts  and  human   resources  as  well  as  legal  and  other
professional services.  General and administrative  expenses increased by 11% to
$3.6  million  in 1997 from $3.2  million in 1996,  representing  6.9% and 6.8%,
respectively,  of net sales. The increase in general and administrative expenses
was primarily due to the Company-wide upgrade of computer hardware, software and
data  processing  equipment  (that  portion of which did not meet the  Company's
capitalization criteria) as well as higher accounting and legal expenses.

     Selling  Expenses.  Selling  expenses  consist  principally of salaries and
other  expenses for sales and marketing  personnel,  sales  commissions,  travel
expenses,  advertising and trade shows. Selling expenses increased by 7% to $4.0
million  in 1997  from  $3.7  million  in  1996,  representing  7.6%  and  7.9%,
respectively,  of net sales. The increase in selling expenses resulted primarily
from higher bid and  proposal  expenses  (incurred  in  connection  with a $12.0
million  foreign  military  order  awarded  in the third  quarter  of 1997 and a
generally higher level of proposal activity across all product lines).

     Research  and  Development  Expenses.  Research  and  development  expenses
consist principally of direct labor, labor overhead,  direct material,  material
overhead and other direct costs  associated with product  development.  Research
and  development  expenses  decreased  by 41% to $4.4  million in 1997 from $7.4
million in 1996,  representing 8.4% and 15.5%,  respectively,  of net sales. The
decrease in research and development  expenses  resulted  primarily from reduced
military  and,  to  a  lesser  extent,   wireless   telecommunications   product
development  efforts.  Military  research  and  development  expenses  decreased
predominantly as a result of the Company  completing the majority of the product
development efforts, in 1996, for a Republic MRES 2000 simulator product. In the
military environment,  customer funding of product development costs is typical.
The Republic MRES 2000 program was an exception,  however, as the Company funded
a large majority of this product development effort throughout 1996. The Company
believes  that the  continued  introduction  of new products is essential to its
competitiveness,  especially in the wireless  telecommunications  market, and is
committed to continued investment in research and development. The Company views
the decrease in wireless  telecommunications  research and development  expenses
(the  majority of which  occurred in the first  quarter of 1997) as a short term
solution  used to  assist  in  reducing  costs  to match  corresponding  reduced
wireless revenue (which also occurred in the first quarter of 1997). Fundamental
to this effort was a temporary reallocation of some of the Company's engineering
and technology resources to either revenue producing or customer-funded  product
development during the first quarter of 1997. This action enabled the Company to
leverage  its other  commercial  and  military  product  lines while  insuring a
continued  and  focused   emphasis  on  critical   wireless   telecommunications
development projects.

     Interest  Expense.   Interest  expense  consists  principally  of  interest
expended on the Company's credit facility, IDRBs and promissory notes, partially
offset by interest  earned on the  Company's  cash  balances.  Interest  expense
increased by 30% to $1.2  million in 1997 from $0.9  million in 1996,  primarily
reflecting increased average borrowings under the Company's credit facility.

     Provision  for Income  Taxes.  The Company  accounts for income taxes under
Statement of Financial  Accounting  Standards ("SFAS") No. 109,  "Accounting for
Income  Taxes." The Company has recorded  deferred tax assets of $3.8 million in
1996  and $2.0  million  in 1995  for the  benefit  of  federal  income  tax net
operating loss carryforwards  ("NOLs") and timing differences generated in those
years. The Company has reserved a portion of the deferred tax asset with respect
to its NOLs.  Realization is dependent on generating  sufficient  taxable income
prior to expiration of the NOLs. Although realization is not assured, management
believes it is more likely than not that all of the net  deferred tax asset will
be  realized.  The  amount  of the  deferred  tax asset  considered  realizable,
however, could be reduced in the near term if estimates of future taxable income
during the  carryforward  period are reduced.  The Company's  effective tax rate
decreased  to 24.6% in 1997  from  40.0% in 1996.  The 1997  rate was  favorably
impacted by the partial recovery of the previously  reserved  deferred tax asset
resulting  from the  Company's  improved  profitability  position as compared to
1996. Without the benefit of this change in the reserve,  the effective tax rate
for 1997 would have been 40.2%. The Company will continue to assess the reserved
deferred tax asset each reporting quarter. The 1996 rate was due to the net


                                       20
<PAGE>


loss incurred by the Company in 1996,  the benefit of which the Company  expects
to utilize to offset future taxable income, as prescribed by SFAS No. 109. There
can be no assurances that the Company will continue to achieve taxable income in
the future.

Fiscal Years Ended December 31, 1996 and December 31, 1995

     Net Sales.  Net sales  increased by 73% to $47.4 million in 1996 from $27.3
million in 1995.  This sales  increase was primarily due to higher  shipments of
the Company's  commercial products and, to a lesser extent,  higher shipments of
the Company's military products.  Sales of commercial  products increased by 80%
to $33.6 million in 1996 from $18.7 million in 1995,  representing  71% and 68%,
respectively,  of net sales in such years.  The  commercial  sales  increase was
predominantly  due to higher shipments to two wireless  telecommunications  OEMs
and one satellite  communications  OEM. Sales of military products  increased by
60% to $13.8  million in 1996 from $8.6  million in 1995,  representing  29% and
32%,  respectively,  of net sales in such years. The military sales increase was
predominantly  due to greater  market demand for one Republic  product,  initial
hardware shipments for another Republic product and an overall modest resurgence
of shipments to U.S. prime contractors for various military products.

     International  sales  increased by 138% to $20.6  million in 1996 from $8.6
million in 1995,  totaling 43% of net sales in 1996 compared to 32% in 1995. The
increase in  international  sales was primarily due to higher  foreign  wireless
telecommunications OEM business and, to a lesser extent, higher foreign military
business. In 1996, sales to a foreign commercial OEM (Customer A) and a domestic
commercial  OEM  (Customer B) accounted  for 34% and 19%,  respectively,  of the
Company's net sales. In 1995,  sales to one foreign  commercial OEM (Customer A)
and two domestic  commercial OEMs (Customer B and Customer C) accounted for 26%,
21% and 10%, respectively, of the Company's net sales.

     Gross  Profit.  Gross profit  decreased by 18% to $5.9 million in 1996 from
$7.2 million in 1995.  The  Company's  gross profit  margin  (gross  profit as a
percentage  of net  sales)  decreased  to  12.4%  in 1996  from  26.3%  in 1995,
primarily   due  to  a  $4.9  million   write-off   of  wireless   multi-channel
work-in-process  inventory caused by then diminished demand for those particular
products,  a $1.0 million  write-off of wireless  multi-channel  work-in-process
inventory  related to the  cancellation  of the remainder of the AirNet contract
and  a  $0.7  million  write-off  of  wireless  single  channel  work-in-process
inventory  caused  by  a  domestic   commercial  OEM's  decision  to  internally
manufacture  amplifiers for the production  portion of the PCS-TDMA program.  In
addition,  the Company's 1996 gross profit margin was adversely  affected by the
overall  low gross  profit  margin  obtainable  on  cellular-CDMA  multi-channel
amplifiers  due to  competitive  pricing  pressure,  low  gross  profit  margins
experienced  on a number of military  OEM  contracts  due to various  production
delays,  low gross profit margins  experienced  on various other  commercial OEM
contracts due in part to a number of engineering and manufacturing difficulties,
and higher commercial warranty expenses (as a percentage of net sales).

     General and Administrative  Expenses.  General and administrative  expenses
increased by 4% to $3.2 million in 1996 from $3.1 million in 1995,  representing
6.8% and  11.3%,  respectively,  of net  sales.  The  increase  in  general  and
administrative  expenses was primarily  the result of greater  costs  associated
with  being a public  company,  for a full year.  The  decrease  in general  and
administrative  expenses as a percentage  of net sales was  attributable  to the
overall sales volume growth in 1996 as compared to 1995.

     Selling Expenses. Selling expenses increased by 11% to $3.7 million in 1996
from $3.3 million in 1995,  representing  7.9% and 12.2%,  respectively,  of net
sales.  The increase in selling  expenses  resulted  primarily from higher sales
representative  commissions  and higher  accrued  warranty  expenses,  partially
offset by lower bid and proposal  expenses and lower sales  incentive  expenses.
The decrease in selling  expenses as a percentage of net sales was  attributable
to the overall sales volume growth in 1996 as compared to 1995.

     Research  and  Development  Expenses.  Research  and  development  expenses
increased by 71% to $7.4 million in 1996 from $4.3 million in 1995, representing
15.5% and 15.8%,  respectively,  of net sales. This increase resulted  primarily
from higher wireless  telecommunications  product  development  and, to a lesser
extent, higher military product development.


                                       21
<PAGE>


     Interest Expense. Interest expense decreased by 28% to $0.9 million in 1996
from $1.3 million in 1995, primarily reflecting a loan repayment,  in the latter
part of 1995, to the Company's largest stockholder (through the utilization of a
portion of the proceeds from the Company's initial public offering ("IPO")).  In
addition,  1995 interest  expense included a one time charge of $0.1 million for
deferred financing costs as a result of the repayment of the debt outstanding at
the time of the IPO and also  included a $0.1  million  amendment  fee  expense,
charged  by  Fleet  Capital  Corporation,  related  to a  restructuring  of  the
Company's credit facility to provide additional financing pending the completion
of the IPO.

     Provision  for Income  Taxes.  The  Company's  effective  tax rate remained
relatively unchanged at 40.0% in 1996 from 40.1% in 1995. These rates are due to
the net losses  incurred  by the  Company in both 1996 and 1995,  the benefit of
which the  Company  expects to  utilize  to offset  future  taxable  income,  as
prescribed by SFAS No. 109.

Liquidity and Capital Resources

     In the fourth quarter of 1995, the Company successfully  completed its IPO,
raising net  proceeds to the Company of  approximately  $20.4  million  from the
Company's  sale of 2,875,000  shares of Common Stock,  including the exercise of
the underwriters' over-allotment option. Since the IPO, the Company had financed
its  operations  and met its  capital  requirements  through the  following  two
sources:   (i)  a  credit  facility  and/or  (ii)  cash  provided  by  operating
activities.

     The Company has entered into a loan  agreement  with IBJ Schroder  Business
Credit  Corporation  ("IBJ") which provides for a $15.45 million credit facility
consisting of a revolving line of credit in the amount of $10.3 million,  a term
loan in the  amount  of  $2.15  million  and a $3.0  million  capital  equipment
("Capex") loan facility. The revolving line of credit and both the term loan and
Capex loan bear  interest at annual  rates equal to the prime rate plus 0.5% and
the prime rate plus 0.75%, respectively. The credit facility matures in February
2001 and  automatically  renews itself for one-year periods  thereafter,  unless
terminated  by  either  the  Company  or IBJ.  Aggregate  borrowings  under  the
revolving line of credit are limited by a borrowing base, which is calculated as
the sum of 85% of eligible accounts receivable and 40% of eligible raw materials
and  work-in-process  inventories  (with borrowings based on aggregate  eligible
inventory  limited to $6.0 million).  The term loan requires a monthly principal
payment of $0.05 million.  The revolver  increases each month  commensurate with
term loan repayments  until a maximum  revolving line of credit of $12.0 million
is  reached.  The  Capex  loan  requires  monthly  principal  payments  that are
recalculated  each month based on the prior  month's Capex  borrowings,  if any,
amortized over 60 months.  Capex loans  borrowings  must occur prior to February
27,  1999.  The credit  facility is subject to customary  covenants,  including,
among other things, limitations with respect to incurring indebtedness,  payment
of dividends and affiliate  advances,  and a provision for maintaining a certain
fixed charge coverage ratio.

     Operating activities provided net cash of $0.5 million and used net cash of
$1.4 million in 1997 and 1996, respectively.  From December 31, 1996 to December
31,  1997,  accounts  receivable,   inventory,  and  accounts  payable,  accrued
liabilities  and  customer  advance  payments  increased by $0.8  million,  $2.6
million and $1.8 million,  respectively. The increase in accounts receivable was
primarily due to the higher revenue level in the fourth quarter of 1997 compared
with the fourth quarter of 1996. The increase in inventory was predominantly due
to an increase in  work-in-process  inventory  associated  with three  long-term
military programs and a  build-to-forecast  wireless  telecommunication  product
and, to a lesser extent, an increase in component inventory  associated with one
of the long-term  military programs.  The increase in accounts payable,  accrued
liabilities and customer advance payments was primarily due to the receipt of an
advance  payment in the fourth quarter of 1997 from a foreign  military OEM and,
to a lesser  extent,  a  greater  year end 1997  payroll  and  related  benefits
accrual,  partially offset by more current vendor payments when compared to year
end  1996.  Investing   activities,   which  consisted  primarily  of  equipment
acquisitions,  used net cash of $1.3  million and $0.9 million in 1997 and 1996,
respectively.   Financing  activities,  which  consisted  predominantly  of  net
proceeds  from the credit  facility,  provided net cash of $0.4 million and $3.0
million in 1997 and 1996, respectively.

     Capital  expenditures  were $1.3 million and $0.9 million in 1997 and 1996,
respectively.  These expenditures were funded primarily through cash provided by
beginning of year cash balances,  operating  activities and the Company's credit
facility.  Principal  expenditures  for 1997 included  upgrades to the Company's
information  systems'  hardware  and  software,  purchases  of  engineering  and
manufacturing test equipment, upgrades to the Company's CAD systems and expanded
surface mount capabilities.  The Company expects that 1998 capital expenditures,
anticipated to minimally include a second automated  surface-mount  pick-n-place
machine and additional engineering and manufacturing test


                                       22
<PAGE>


equipment,  will be  financed  by cash  provided by  operating  activities,  the
Company's credit facility and/or third party financing sources.

     As of December 31, 1997, the Company had working  capital of  approximately
$18.2 million,  compared to approximately $16.2 million as of December 31, 1996.
Working capital as of December 31, 1997 included  approximately $8.3 million and
$16.9 million in accounts  receivable and inventory,  respectively,  compared to
December 31, 1996 working capital which included  approximately $7.5 million and
$14.4 million in accounts receivable and inventory,  respectively. The Company's
current ratio (ratio of current  assets to current  liabilities)  as of December
31, 1997 was 2.8:1,  compared  with a current  ratio of 3.1:1 as of December 31,
1996. As of both December 31, 1997 and December 31, 1996,  the Company's debt to
equity ratio was 0.7:1.

     The Company believes that cash generated from operations, amounts available
under its credit facility, and/or other third party financing will be sufficient
to fund necessary  capital  expenditures and to provide adequate working capital
for at least the next 12 months.  There can be no assurance,  however,  that the
Company  will not require  additional  financing  prior to such date to fund its
operations,  and,  if  required,  that  such  financing  will  be  available  on
commercially  reasonable terms. In addition,  the Company may require additional
financing after such date to fund its operations.

     The  majority of any Year 2000 issues have  already  been  addressed by the
Company.  In 1997, the Company's  business and computing system was upgraded and
is now Year 2000 "friendly". The remaining efforts for the Company, all of which
are scheduled for 1998, include a few personal computer applications and Windows
95 upgrades.  These efforts are not expected to cause a financial burden for the
Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     See Item 14 of Part IV of this Report.

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

     None.


                                       23
<PAGE>


                                    PART III


     The information  required by Part III (Items 10 through 13) is incorporated
by reference to the captions "Principal  Stockholders," "Election of Directors,"
"Management"  and  "Certain  Transactions"  in the  Company's  definitive  Proxy
Statement to be filed  pursuant to Regulation  14A within 120 days after the end
of the Company's fiscal year covered by this Report.

                                     PART IV

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

     (a) See Index to Financial Statements immediately following Exhibit Index.

     (b) No  reports on Form 8-K have been  filed  during the fourth  quarter of
1997.

     (c) Exhibits

         See Exhibit Index immediately following signature pages.



                                       24
<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.

                                    MICROWAVE POWER DEVICES, INC.


                                    By  /s/ Edward J. Shubel
                                        ---------------------------------
                                            Edward J. Shubel
                                            Chief Executive Officer

Date:  March 16, 1998


     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.

<TABLE>
<S>                               <C>                                 <C> 
/s/ Edward J. Shubel              Chief Executive Officer             March 16, 1998
------------------------          (Principal Executive Officer)
    Edward J. Shubel              

/s/ Paul E. Donofrio              Chief Financial Officer             March 16, 1998
------------------------          (Principal Financial Officer and
    Paul E. Donofrio              Principal Accounting Officer)   
                                  
/s/ George J. Sbordone            Director                            March 16, 1998
------------------------
    George J. Sbordone

/s/ Merril M. Halpern             Director                            March 16, 1998
------------------------
    Merril M. Halpern

/s/ A. Lawrence Fagan             Director                            March 16, 1998
------------------------
    A. Lawrence Fagan

/s/ Alfred Weber                  Director                            March 13, 1998
------------------------
    Alfred Weber

/s/ David J. Aldrich              Director                            March 16, 1998
------------------------
    David J. Aldrich

/s/ Warren A. Law                 Director                            March 11, 1998
------------------------
    Warren A. Law

/s/ James S. Silver               Director                            March 16, 1998
------------------------
    James S. Silver
</TABLE>


                                       25
<PAGE>


                                  EXHIBIT INDEX

3.1-      Certificate of Incorporation of the Company (incorporated by reference
          to Exhibit 3.1 to the  Company's  Registration  Statement  on Form S-1
          dated September 29, 1995 (Registration No. 33-94142)).

3.2-      By-laws of the Company  (incorporated  by  reference to Exhibit 3.2 to
          the Company's  Registration  Statement on Form S-1 dated September 29,
          1995 (Registration No. 33-94142)).

10.1-     Loan and  Security  Agreement  dated as of February 13, 1997 among IBJ
          Schroder  Bank  &  Trust  Company,   as  Lender  and  Agent,  and  MPD
          Technologies,  Inc.  (incorporated by reference to Exhibit 10.1 to the
          Company's  Form 8-K  dated  February  13,  1997  (Commission  File No.
          0-8574)).

10.2-     Indenture of Trust, $4,810,000,  Suffolk County Industrial Development
          Agency, 1992 Industrial Development Revenue Bonds (MPD Wireless,  Inc.
          Facility - Series A and Series B) dated June 1, 1992  (incorporated by
          reference to Exhibit 10.2 to the Company's  Registration  Statement on
          Form S-1 dated September 29, 1995 (Registration No. 33-94142)).

10.3-     Lease  Agreement  dated as of June 1, 1992 between MPD Wireless,  Inc.
          and the Suffolk County Industrial  Development Agency (incorporated by
          reference to Exhibit 10.3 to the Company's  Registration  Statement on
          Form S-1 dated September 29, 1995 (Registration No. 33-94142)).

10.4-     Registration  Rights  Agreement  dated as of June 29,  1995  among the
          Registrant,  Charter Technologies Limited Liability Company, George J.
          Sbordone,   Edward  J.   Shubel,   James  S.   Silver  and  Lee  Leong
          (incorporated   by  reference   to  Exhibit  10.4  to  the   Company's
          Registration   Statement  on  Form  S-1  dated   September   29,  1995
          (Registration No. 33-94142)).

10.5-     Microwave Power Devices,  Inc. 1995 Stock Option Plan (incorporated by
          reference to Exhibit 10.5 to the Company's  Registration  Statement on
          Form S-1 dated September 29, 1995 (Registration No. 33-94142)).

10.6-     Employment  Agreement  dated  September 3, 1991 between MPD  Wireless,
          Inc. And Edward J. Shubel  (incorporated  by reference to Exhibit 10.6
          to the Company's  Registration  Statement on Form S-1 dated  September
          29, 1995 (Registration No. 33-94142)).

10.7-     Deferred Compensation Agreement dated as of April 21, 1992 between MPD
          Wireless,  Inc.  and Edward J. Shubel  (incorporated  by  reference to
          Exhibit 10.7 to the Company's Registration Statement on Form S-1 dated
          September 29, 1995 (Registration No. 33-94142)).

10.8-     Agreement  dated as of April 21, 1992 between MPD  Wireless,  Inc. and
          Edward J. Shubel  (incorporated  by  reference  to Exhibit 10.8 to the
          Company's  Registration Statement on Form S-1 dated September 29, 1995
          (Registration No. 33-94142)).

10.9-     Consulting   Agreement  with  George  J.  Sbordone   (incorporated  by
          reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K
          dated December 31, 1995 (Commission File No. 0-8574)).

10.10-    Consulting  Agreement with James S. Silver  (incorporated by reference
          to Exhibit  10.11 to the  Company's  Annual  Report on Form 10-K dated
          December 31, 1995 (Commission File No. 0-8574)).

10.11-    Microwave Power Devices,  Inc. 1996 Stock Option Plan (incorporated by
          reference  to Exhibit  10.12 to the  Company's  Annual  Report on Form
          10-K/A-1 dated December 31, 1995 (Commission File No. 0-8574)).

10.12-    Security  Control  Agreement  dated  September  5,  1997  between  MPD
          Technologies, Inc. and the United States Department of Defense.

10.13-    Amendment  No. 1 dated as of February  27, 1998 to a Loan and Security
          Agreement  dated as of February 13, 1997 among IBJ  Schroder  Business
          Credit Corporation, as Lender and Agent, and MPD Technologies, Inc.

21.1-     Subsidiaries  of  the  Company   (incorporated  by  reference  to  the
          Company's   Annual  Report  on  Form  10-K  dated  December  31,  1995
          (Commission File No. 0-8574)).

23.1-     Consent of Independent Public Accounts.

27.1-     Financial Data Schedule.


                                       26
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)
                          INDEX TO FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----

Report of Independent Public Accountants.....................................F-2

Consolidated Balance Sheets as of 
 December 31, 1997 and 1996..................................................F-3

Consolidated Statements of Operations for the 
 three years ended December 31, 1997.........................................F-4

Consolidated Statements of Shareholders' Equity 
 for the three years ended December 31, 1997.................................F-5

Consolidated Statements of Cash Flows 
 for the three years ended December 31, 1997.................................F-6

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


                                      F-1
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Microwave Power Devices, Inc.:

    We have audited the  accompanying  consolidated  balance sheets of Microwave
Power Devices,  Inc. (formerly MPD Holdings,  Inc.) (a Delaware corporation) and
subsidiary  as of  December  31,  1997 and 1996,  and the  related  consolidated
statements of  operations,  shareholders'  equity and cash flows for each of the
three years in the period ended December 31, 1997.  These  financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

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

    In our opinion,  the financial  statements referred to above present fairly,
in all material  respects,  the financial  position of Microwave  Power Devices,
Inc. and  subsidiary as of December 31, 1997 and 1996,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.


                                               ARTHUR ANDERSEN LLP

Melville, New York
March 2, 1998


                                      F-2
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

                           CONSOLIDATED BALANCE SHEETS

                        AS OF DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                    1997       1996
                                                                                    ----       ----
                                                                                     (in thousands,
                                                                                   except share data)
                                 ASSETS
<S>                                                                              <C>         <C>     
CURRENT ASSETS:
   Cash and cash equivalents .................................................   $    687    $  1,149
   Accounts receivable, net of allowance for doubtful accounts of
      $75 and $76, respectively ..............................................      8,329       7,482
   Inventories, net ..........................................................     16,931      14,362
   Prepaid expenses and other current assets .................................        706         657
   Deferred income taxes .....................................................      1,777         345
                                                                                   ------      ------
         Total current assets ................................................     28,430      23,995

PROPERTY, PLANT AND EQUIPMENT, net ...........................................      8,273       8,057
INTANGIBLE ASSETS, net .......................................................        389         369
OTHER LONG-TERM ASSETS .......................................................        903       1,015
DEFERRED INCOME TAXES ........................................................      3,827       5,454
                                                                                   ------      ------
                                                                                 $ 41,822    $ 38,890
                                                                                  =======     =======
                        LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Current portion of long-term debt .........................................   $    650    $     45
   Accounts payable ..........................................................      4,848       5,103
   Accrued liabilities .......................................................      3,186       2,696
   Customer advance payments .................................................      1,563        --
                                                                                   ------      ------
         Total current liabilities ...........................................     10,247       7,844
                                                                                   ------       -----

LONG-TERM DEBT ...............................................................     12,626      12,744
                                                                                   ------      ------
COMMITMENTS AND CONTINGENCIES (Note 13)

SHAREHOLDERS' EQUITY:
   Preferred stock, $.01 par value; 5,000,000 shares authorized;
          no shares issued or outstanding ....................................       --          --
   Common stock, $.01 par value; 25,000,000 shares authorized;
         10,378,750 and 10,375,000 shares issued and outstanding, respectively        104         104
   Additional paid-in capital ................................................     23,306      23,276
   Notes receivable from shareholders ........................................       (188)       (225)
   Retained earnings (accumulated deficit) ...................................     (4,273)     (4,853)
                                                                                  -------     -------
         Total shareholders' equity ..........................................     18,949      18,302
                                                                                  -------      ------
                                                                                  $41,822     $38,890
                                                                                  =======     =======
</TABLE>


                 The accompanying notes are an integral part of 
                       these consolidated balance sheets.


                                      F-3
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                 Year Ended
                                                                -------------------------------------------------
                                                                December 31,     December 31,        December 31,
                                                                   1997             1996                1995
                                                                ------------     ------------        ------------
                                                                   (in thousands, except per share data)
<S>                                                              <C>                <C>                <C>     
NET SALES ....................................................   $ 52,037           $ 47,362           $ 27,302
COST OF SALES ................................................     38,142             41,501             20,122
                                                                 --------           --------           --------
      Gross profit ...........................................     13,895              5,861              7,180
                                                                 --------           --------           --------

OPERATING EXPENSES:
   General and administrative ................................      3,575              3,221              3,091
   Selling ...................................................      3,963              3,720              3,346
   Research and development (Note 2) .........................      4,367              7,364              4,306
                                                                 --------           --------           --------
                                                                   11,905             14,305             10,743
                                                                 --------           --------           --------
      Income (loss) from operations ..........................      1,990             (8,444)            (3,563)

INTEREST EXPENSE, net ........................................      1,237                948              1,310
OTHER (INCOME) EXPENSE, net ..................................        (16)                 6                 55
                                                                 --------           --------           --------
      Income (loss) before income taxes ......................        769             (9,398)            (4,928)

PROVISION (BENEFIT) FOR INCOME TAXES .........................        189             (3,759)            (1,976)
                                                                 --------           --------           --------
      Net income (loss) ......................................   $    580           $ (5,639)          $ (2,952)
                                                                 ========           ========           ========

PER SHARE INFORMATION (Note 2):
   Net income (loss) per common share:
      Basic ..................................................   $   0.06           $  (0.54)          $  (0.36)
                                                                 ========           ========           ========
      Diluted ................................................   $   0.06           $  (0.54)          $  (0.36)
                                                                 ========           ========           ========
   Common shares used in computing per share amounts:
      Basic ..................................................     10,376             10,375              8,172
                                                                 ========           ========           ========
      Diluted ................................................     10,465             10,375              8,172
                                                                 ========           ========           ========
</TABLE>


 The accompanying notes are an integral part of these consolidated statements.


                                      F-4
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                   Unrealized 
                                                                                                   Gain (Loss)
                                                                                         Notes     on Investment  Retained
                                                                           Additional  Receivable      in         Earnings
                                                                            Paid-in      from       Marketable  (Accumulated
                                       Preferred Stock      Common Stock    Capital   Shareholders  Securities    Deficit)    Total
                                       ---------------      ------------    -------   ------------  ----------    --------    -----
                                       Shares  Amount    Shares    Amount
                                       ------  ------    ------    ------
<S>                                       <C>   <C>      <C>      <C>        <C>        <C>         <C>         <C>         <C>     
BALANCE, December 31, 1994 ............   --   $ --      7,500   $     75   $  2,925   $   (263)   $    (59)   $  3,738    $  6,416
   Net loss ...........................   --     --         --         --         --         --          --      (2,952)     (2,952)
   Unrealized gain on
      investment in
      marketable securities ...........   --     --         --         --         --         --          31          --          31
   Realized loss on
      investment in
      marketable securities ...........   --     --         --         --         --         --          28          --          28
   Initial public offering ............   --     --      2,875         29     20,351         --          --          --      20,380
   Reclassification of
      notes receivable
      from shareholders
      (Note 8) ........................   --     --         --         --         --         38          --          --          38
                                        ----   ----     ------   --------   --------   --------    --------     --------    --------
BALANCE, December 31, 1995 ............   --     --     10,375        104     23,276       (225)         --         786      23,941
   Net loss ...........................   --     --         --         --         --         --          --      (5,639)     (5,639)
                                        ----   ----     ------   --------   --------   --------    --------     --------    --------
BALANCE, December 31, 1996 ............   --     --     10,375        104     23,276       (225)         --      (4,853)     18,302
   Net income .........................   --     --         --         --         --         --          --         580         580
   Exercise of stock
      options .........................   --     --          4         --         30         --          --          --          30
   Repayment of notes
      receivable from
      shareholders (Note 8) ...........   --     --         --         --         --         37          --          --          37
                                        ----   ----     ------   --------   --------   --------    --------     --------    --------
BALANCE, December 31, 1997 ............   --   $ --     10,379   $    104   $ 23,306   $   (188)   $     --    $ (4,273)   $ 18,949
                                        ====   ====     ======   ========   ========   ========    ========     ========    ========
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.


                                      F-5
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                       Year Ended
                                                                                     -----------------------------------------------
                                                                                     December 31,      December 31,     December 31,
                                                                                         1997              1996             1995
                                                                                     -----------       -----------       -----------
                                                                                                       (in thousands)
<S>                                                                                    <C>               <C>               <C>      
OPERATING ACTIVITIES:
  Net income (loss) ..........................................................         $    580          $ (5,639)         $ (2,952)
  Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
   Depreciation and amortization .............................................            1,211             1,189               958
   Deferred income taxes .....................................................              194            (3,699)           (1,981)
   (Gain) loss on sale of property, plant and equipment ......................              (19)                3                23
   Loss on sale of investment in marketable securities .......................               --                --                28
   Amortization of deferred financing costs as interest expense ..............               --                --               126
   Changes in operating assets and liabilities:
    Accounts receivable ......................................................             (847)            1,944            (5,351)
    Inventories ..............................................................           (2,569)            4,551           (11,621)
    Prepaid expenses and other assets ........................................              104              (433)             (431)
    Accounts payable and accrued liabilities .................................              235               707             3,908
    Customer advance payments ................................................            1,563                --                --
                                                                                       --------          --------          --------
            Net cash provided by (used in) operating activities ..............              452            (1,377)          (17,293)
                                                                                       --------          --------          --------
INVESTING ACTIVITIES:
  Purchases of property, plant and equipment .................................           (1,337)             (912)           (2,315)
  Proceeds from sale of property, plant and equipment ........................               23                15                 8
  Investment in marketable securities ........................................               (4)               --                --
                                                                                       --------          --------          --------
            Net cash used in investing activities ............................           (1,318)             (897)           (2,307)
                                                                                       --------          --------          --------
FINANCING ACTIVITIES:
  Proceeds from long-term debt ...............................................            2,700                --               800
  Principal payments of long-term debt .......................................             (495)              (40)           (2,992)
  Net proceeds from (repayments on) revolving credit loans ...................           (1,717)            3,110             2,859
  Advances to affiliates, net ................................................               --                --            (1,443)
  Deferred financing costs ...................................................             (114)              (35)              (26)
  Net proceeds from issuance of common stock .................................               30                --            20,380
                                                                                       --------          --------          --------
            Net cash provided by financing activities ........................              404             3,035            19,578
                                                                                       --------          --------          --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................             (462)              761               (22)
CASH AND CASH EQUIVALENTS, beginning of year .................................            1,149               388               410
                                                                                       --------          --------          --------
CASH AND CASH EQUIVALENTS, end of year .......................................         $    687          $  1,149          $    388
                                                                                       ========          ========          ========
SUPPLEMENTAL DATA:
  Cash paid for interest .....................................................         $  1,302          $  1,049          $  1,311
                                                                                       ========          ========          ========
  Cash paid for income taxes .................................................         $    104          $     23          $     27
                                                                                       ========          ========          ========
</TABLE>

 The accompanying notes are an integral part of these consolidated statements.


                                      F-6
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1997 and 1996
                      (in thousands, except per share data)

1.   THE COMPANY:

     On  September  3, 1991,  Charter  Electronics  Group,  Inc.  acquired  from
M/A-Com,  Inc. all of the outstanding  capital stock of Microwave Power Devices,
Inc. On June 14, 1995, the name of this entity was changed to MPD Wireless, Inc.
and on October 9, 1995 the name of this entity was changed to MPD  Technologies,
Inc. ("MPD").  On October 21, 1991, Charter  Electronics Group, Inc. changed its
name to MPD  Holdings,  Inc.,  which was changed on June 13,  1995 to  Microwave
Power Devices,  Inc. (the "Parent").  Prior to the  acquisition of MPD,  Charter
Electronics  Group,  Inc., which was formed on August 24, 1991, was engaged only
in activities related to its formation, the acquisition and its financing.

     The  Company,  headquartered  in  Hauppauge,  Long  Island,  New  York,  is
primarily  engaged in the engineering and  manufacturing  of radio frequency and
microwave power amplifiers for commercial and military applications.

2.   SIGNIFICANT ACCOUNTING POLICIES:

     Principles of Consolidation

     The consolidated  financial  statements  include the accounts of the Parent
and its wholly-owned operating subsidiary,  MPD (together,  the "Company").  All
intercompany balances and transactions have been eliminated in consolidation.

     Fiscal Year

     Effective July 1, 1995, the Company elected to report on a calendar year.

     Cash and Cash Equivalents

     The Company considers all highly liquid investments with a maturity, at the
purchase date, of three months or less to be cash equivalents.

     Concentration of Credit Risk

     For the year ended  December 31, 1997,  sales to U.S.  commercial  original
equipment manufacturers ("OEMs") and U.S. prime contractors, the U.S. government
and foreign  entities  accounted  for 72%,  4%, and 24% (14% and 10% to Asia and
Europe, respectively), respectively, of net sales. Accounts receivable from such
customers represent 62%, 7% and 31% of total accounts receivable,  respectively,
at  December  31,  1997.  For the year ended  December  31,  1997,  sales to two
domestic  commercial OEMs (Customer B and Customer D) and one foreign commercial
OEM (Customer A) accounted for 33%, 16% and 13%, respectively,  of net sales. At
December 31, 1997 two domestic  commercial  OEMs (Customer B and Customer D) and
one foreign  military OEM  (Customer  E) represent  26%, 11% and 12% of accounts
receivable, respectively.


                                      F-7
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     For the year ended  December 31, 1996,  sales to U.S.  commercial  OEMs and
U.S. prime contractors,  the U.S.  government and foreign entities accounted for
49%, 8%, and 43% (34% and 9% to Asia and Europe, respectively), respectively, of
net sales.  Accounts receivable from such customers represent 66%, 6% and 28% of
total  accounts  receivable,  respectively,  at December 31, 1996.  For the year
ended  December 31, 1996,  sales to one foreign  commercial OEM (Customer A) and
one  domestic   commercial   OEM   (Customer  B)  accounted  for  34%  and  19%,
respectively,  of net sales.  At December 31, 1996, one domestic  commercial OEM
(Customer B) and one foreign  military OEM (Customer F) represent 24% and 13% of
accounts receivable, respectively.

     For the year ended  December 31, 1995,  sales to U.S.  commercial  OEMs and
U.S. prime contractors,  the U.S.  government and foreign entities accounted for
57%,  11% and 32% (27%,  4% and 1% to Asia,  Europe and  Canada,  respectively),
respectively,  of net sales.  Accounts  receivable from such customers represent
61%, 15% and 24% of total  accounts  receivable,  respectively,  at December 31,
1995. For the year ended December 31, 1995, sales to one foreign  commercial OEM
(Customer  A) and two  domestic  commercial  OEMs  (Customer  B and  Customer C)
accounted  for 26%,  21% and 10%,  respectively,  of net sales.  At December 31,
1995, one domestic  commercial  OEM (Customer B) and one foreign  commercial OEM
(Customer A) represent 34% and 16% of accounts receivable, respectively.

     The  Company  generally  performs  credit  evaluations  of  its  customers'
financial condition prior to the extension of credit. The Company generally does
not require collateral, and, where appropriate,  requires that letters of credit
be provided on foreign sales.

     Inventories

     Inventories are stated at the lower of cost (using the first-in,  first-out
cost method) or net  realizable  value.  Work-in-process  associated  with fixed
price  long-term  contracts  is valued at the sum of the  direct  labor,  direct
material,  other direct costs and related  overhead  costs  incurred  under each
contract, less amounts charged to cost of sales.

     Progress Payments

     Progress  payments  received from customers are offset against  inventories
associated  with the contracts  for which the payments  were received  (Note 4).
Under contractual  arrangements by which progress payments are received from the
U.S.  Government,  the  U.S.  Government  has  a  lien  title  interest  in  the
inventories identified with related contracts.

     Long-term Contracts

     In  accordance  with industry  practice,  all  contract-related  assets and
liabilities   are   classified  as  current,   even  though   certain  of  these
contract-related  assets and  liabilities  may not be realized  within one year.
This practice is reflective  of the  Company's  operating  cycle as a contractor
under long-term contracts.

     Property, Plant and Equipment

     Property,   plant  and  equipment  is  stated  at  cost  less   accumulated
depreciation  and  amortization  (Note 5).  Depreciation  and  amortization  are
provided using the  straight-line  method over the estimated useful lives of the
assets which are as follows:

         Building and improvements............................   7 to 40 years
         Machinery and equipment..............................   3 to 7 years
         Furniture and fixtures...............................   5 to 10 years


                                      F-8
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     Intangible Assets

     Intangible  assets,  net of accumulated  amortization of approximately $328
and $235 at December 31, 1997 and December  31, 1996,  respectively,  consist of
goodwill,  bond issuance costs and deferred financing costs. Goodwill represents
costs in excess of net assets acquired related to certain  acquisitions  made by
the Company and is being amortized over periods of 5 and 10 years. Bond issuance
costs  are  being  amortized  over 30 years,  which  represents  the term of the
respective  underlying  debt  agreement.  Deferred  financing  costs  were being
amortized over 5 years. However,  during 1995, in connection with the use of the
proceeds of the initial  public  offering  to pay down the related  debt,  these
deferred financing costs were charged to interest expense. During 1997 and 1996,
the Company  incurred $114 and $35,  respectively,  in deferred  financing costs
associated  with the New Loan Agreement (Note 7), which will be amortized over 3
years.

     Long-Lived Assets

     Effective  January 1, 1996, the Company  adopted the 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." This statement
establishes  financial  accounting and reporting standards for the impairment of
long-lived assets,  certain  identifiable  intangibles,  and goodwill related to
those  assets  to be held  and  used,  and for  long-lived  assets  and  certain
identifiable  intangibles  to be disposed of. The effect of the adoption of this
standard and its current application have not been material.

     Investment in Marketable Securities

     Effective  January 1, 1994, the Company  adopted SFAS No. 115,  "Accounting
for Certain  Investments in Debt and Equity  Securities." In connection with the
adoption  of this  pronouncement,  the debt  securities  held by the Company and
included in the  accompanying  consolidated  balance  sheets that may be sold in
response to changes in interest rates, prepayments,  and other factors have been
classified as  available-for-sale.  Such  securities are reported at fair value,
with  unrealized  gains and losses  excluded  from  earnings  and  reported in a
separate  component of shareholders'  equity (on an after-tax basis).  Gains and
losses  on  the  disposition  of  securities  are  recognized  on  the  specific
identification  method in the  period in which  they  occur.  During  1995,  the
Company  realized gross proceeds of $451 and realized a loss of $28 on a sale of
these securities. There were no sales of these securities in 1996 or 1997.

     Revenue Recognition

     Revenue and profits on fixed-price  long-term and commercial  contracts are
recognized using the unit of delivery method. Profits expected to be realized on
contracts  are based on total  sales  value as  related  to  estimated  costs at
completion. These estimates are reviewed and revised periodically throughout the
lives of the contracts, and adjustments to profits resulting from such revisions
are made  cumulative  to the date of the change.  Estimated  losses on long-term
contracts-in-progress  are  recorded in the period in which such  losses  become
known.

     Research and Development

     Research  and  development  costs  incurred by the Company are  included in
expenses in the year incurred. Such costs amounted to $4,367, $7,364, and $4,306
in the years ended  December 31, 1997,  December 31, 1996 and December 31, 1995,
respectively.  Certain other  development  costs are incurred in connection with
long-term  contracts  pursuant to which these costs are financed  under  related
contracts.  These costs are  included in cost of sales and the related  revenues
are  included  in net  sales  in the  accompanying  consolidated  statements  of
operations.


                                      F-9
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     Income Taxes

     The Company  provides  for income  taxes in  accordance  with SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method specified by
SFAS No.  109,  the  deferred  tax amounts  included  in the  balance  sheet are
determined based on the difference between the financial statement and tax bases
of assets and  liabilities  as measured by the enacted tax rates that will be in
effect  when  these  differences   reverse.   Differences   between  assets  and
liabilities  for  financial  statement and tax return  purposes are  principally
related to property, plant and equipment, inventories, accrued vacation expense,
accrued  warranty  costs,  real estate taxes,  accounts  receivable and contract
research and development.

     Net Income (Loss) Per Common Share

     Effective  December 31, 1997, the Company  adopted SFAS No. 128,  "Earnings
Per Share."  Basic net income  (loss) per common share ("Basic EPS") is computed
by dividing net income  (loss) by the weighted  average  number of common shares
outstanding.  Diluted  net income  (loss) per common  share  ("Diluted  EPS") is
computed by dividing net income (loss) by the weighted  average number of common
shares and dilutive  common share  equivalents  then  outstanding.  SFAS No. 128
requires the  presentation  of both Basic EPS and Diluted EPS on the face of the
consolidated  statement  of  operations.  The  impact  of the  adoption  of this
statement was not material to all previously reported EPS amounts.

     A  reconciliation  between the numerator and  denominator  of Basic EPS and
Diluted EPS is as follows:

<TABLE>
<CAPTION>
                                                                           Net Income
                                                 Net Income     Common     (Loss) Per
                                                  (Loss)        Shares    Common Share
                                                  ------        ------    ------------
                                                  For the year ended December 31, 1995
                                                  ------------------------------------
<S>                                                  <C>          <C>     <C>      
Basic EPS
Net loss attributable to common stock                $(2,952)     8,172   $  (0.36)
Effect of dilutive securities: stock options              --         --      --
                                                     -------    -------   --------    
Diluted EPS 
Net loss attributable to common stock and           
    assumed option exercises                         $(2,952)     8,172   $  (0.36) 
                                                     =======    =======   ========    

                                                  For the year ended December 31, 1996
                                                  ------------------------------------
Basic EPS
Net loss attributable to common stock                $(5,639)    10,375   $  (0.54)
Effect of dilutive securities: stock options              --         --      --
                                                     -------    -------   --------    
Diluted EPS
Net loss attributable to common stock and            
      assumed option exercises                       $(5,639)    10,375   $  (0.54) 
                                                     =======    =======   ========    

                                                   For the year ended December 31, 1997
                                                   ------------------------------------
Basic EPS
Net income attributable to common stock               $  580     10,376   $   0.06
Effect of dilutive securities: stock options              --         89       --
                                                      ------     ------    -------
Diluted EPS
Net income attributable to common stock and         
     assumed option exercises                         $  580     10,465   $   0.06
                                                     =======    =======   ========
</TABLE>

     Diluted EPS for 1995 and 1996 does not include the impact of stock  options
then outstanding as their inclusion would be anti-dilutive.


                                      F-10
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     Stock-Based Compensation

     Effective  January 1, 1995, the Company  adopted SFAS No. 123,  "Accounting
for Stock-Based  Compensation." This statement  establishes financial accounting
and reporting  standards for stock-based  employee  compensation plans. SFAS No.
123  encourages  entities to adopt a fair value based method of  accounting  for
stock  compensation  plans.  However,  SFAS No. 123 also  permits the Company to
continue   to  measure   compensation   costs  under   pre-existing   accounting
pronouncements.  If the fair value based  method of  accounting  is not adopted,
SFAS No. 123 requires pro forma  disclosures of net income (loss) and net income
(loss) per common  share in the notes to financial  statements.  The Company has
elected to provide the necessary pro forma disclosures (Note 10).

     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 and  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.

     Reclassifications

     Certain prior year financial  statement  amounts have been  reclassified to
conform with the current year's presentation.

3.   INITIAL PUBLIC OFFERING:

     In October 1995, the Company  completed an initial public offering of 2,500
shares of common stock at $8.00 per share. In November 1995, the Company sold an
additional  375  shares of  common  stock at $8.00  per  share  pursuant  to the
underwriters' overallotment related to the October 1995 initial public offering.
Aggregate  net proceeds to the Company  from the  offering,  after  deduction of
direct expenses,  were $20,380.  The Company used a portion of these proceeds to
repay $15,860 of its debt obligations outstanding at the closing date.

     During  1995,  in  connection  with  the  initial  public  offering  of its
securities,  the Company  effected a  recapitalization  whereby  the  previously
outstanding  Class A voting and Class B non-voting common stock was converted to
7,500 shares of a single class of common stock. All information contained in the
accompanying  financial statements and footnotes has been retroactively restated
to give effect to this transaction.

4.   INVENTORIES, NET:

     At December 31, 1997 and 1996, inventories, net consist of the following:

                                                             1997         1996
                                                           --------    --------
Raw materials ..........................................   $  7,504    $  6,333
Work-in-process ........................................     12,349       8,918
Unliquidated progress payments .........................     (1,789)       (231)
                                                           --------    --------
                                                             18,064      15,020
Less: Reserves .........................................     (1,133)       (658)
                                                           --------    --------
                                                           $ 16,931    $ 14,362
                                                           ========    ========


                                      F-11
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


     During  1996,  the Company  wrote-off  $6,550 of  wireless  work-in-process
inventory due to decreased  product demand and the resulting impact on estimated
costs at completion.

5.   PROPERTY, PLANT AND EQUIPMENT, NET:

     At December 31, 1997 and 1996, property,  plant and equipment, net consists
of the following:

                                                           1997           1996
                                                         --------      --------
Land ...............................................     $    937      $    937
Building and improvements ..........................        4,384         4,361
Machinery and equipment ............................        7,448         6,606
Furniture and fixtures .............................          201           131
                                                         --------      --------
                                                           12,970        12,035
Less: Accumulated depreciation and amortization ....       (4,697)       (3,978)
                                                         --------      --------
                                                         $  8,273      $  8,057
                                                         ========      ========

6.   ACCRUED LIABILITIES:

     At  December  31,  1997  and  1996,  accrued  liabilities  consist  of  the
following:

                                                           1997            1996
                                                          ------          ------
Accrued payroll and benefits ...................          $1,868          $1,450
Accrued commissions ............................             474             422
Accrued warranty ...............................             715             400
Other ..........................................             129             424
                                                          ------          ------
                                                          $3,186          $2,696
                                                          ======          ======

7.   LONG-TERM DEBT:

     At December 31, 1997 and 1996, long-term debt consists of the following:

                                                          1997           1996
                                                        --------       --------
Industrial Development Revenue Bonds (a) .........      $  4,620       $  4,665
Loan and security agreement (b) ..................         8,656          8,124
                                                        --------       --------
                                                          13,276         12,789
Less: Current portion ............................          (650)           (45)
                                                        --------       --------
                                                        $ 12,626       $ 12,744
                                                        ========       ========

(a)       On June 30,  1992,  MPD  purchased  a 7.4 acre  parcel  of land and an
     86,000  square  foot  building  for  use as a  corporate  headquarters  and
     manufacturing  operation  for $4,295.  MPD  financed the  acquisition  with
     Industrial  Development  Revenue  Bonds  ("IDRBs")  totaling  $4,810 issued
     through the Suffolk County Industrial  Development  Agency  ("SCIDA").  The
     issuance was  comprised of $490 Series A Bonds at 7.75% and $4,320 Series B
     Bonds at 8.5% with interest payable  quarterly.  The Series A Bonds and the
     Series B Bonds mature on June 30, 2002 and June 30, 2022, respectively, and
     are subject to annual mandatory sinking fund redemptions on June 30 of each
     year beginning with June 30, 1993 and June 30, 2003, respectively. The


                                      F-12
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


     Series B Bonds include a $425 Debt Service  Reserve Fund due and payable on
     June 30,  2022.  Approximately  $441 and $437 was in an escrow  account  in
     accordance with the terms of the IDRBs and is included in long-term  assets
     in the accompanying consolidated balance sheets as of December 31, 1997 and
     December  31,  1996,  respectively.   Under  IDRB  terms,  MPD  transferred
     ownership of this facility to the SCIDA at closing and  immediately  leased
     back the  facility  with a lease term equal to the IDRB terms and  provided
     for a one dollar buy-back option at lease end.

(b)       At December 31, 1996, the Company had an amended and restated loan and
     security  agreement with a lender (the "Loan Agreement") which provided for
     borrowings  up to  $8,400  in  the  form  of  revolving  credit.  Aggregate
     borrowings  under the Loan  Agreement  were  limited  by a  borrowing  base
     calculation to the sum of 85% of accounts  receivable,  as defined,  35% of
     raw materials,  35% of "non-wireless"  work-in-process,  as defined, 50% of
     "wireless"  work-in-process,  as defined  (reduced by 1% per week until 35%
     was reached on February 21, 1997), and 65% of finished goods inventory,  as
     defined  (borrowings  based on eligible  inventory  were  limited to $6,000
     (reduced  by $40 per week until  $5,680 was  reached on January 3,  1997)).
     Borrowings  under  the  Loan  Agreement  were  collateralized  by  accounts
     receivable,  inventory,  equipment  and  certain  other  assets.  The  Loan
     Agreement  was to expire on April 5, 1999 and was  renewable  for  one-year
     terms.  Borrowings  under the Loan  Agreement  at December  31, 1996 relate
     strictly to revolving credit loans,  which bore interest at the bank's base
     rate (8.25% at December 31, 1996) plus 1.0%, and totaled $8,124.

          On February 13, 1997,  the Company  replaced the Loan Agreement with a
     credit  facility from another  lender (the "New Loan  Agreement").  The New
     Loan  Agreement  provided  for  borrowings  up to  $13,000 in the form of a
     revolving  line of credit in the amount of  $10,300  and a term loan in the
     amount of $2,700. At December 31, 1997 the line of credit and term loan had
     outstanding  borrowings  of  $6,406  and  $2,250,  respectively.  Aggregate
     borrowings  under the New Loan  Agreement  are limited by a borrowing  base
     calculation to the sum of 85% of accounts receivable, as defined and 40% of
     raw materials and work-in-process inventories, as defined (borrowings based
     on eligible inventory are limited to $6,000). Borrowings under the New Loan
     Agreement are collateralized by accounts receivable,  inventory,  equipment
     and certain other assets.  The New Loan  Agreement  expires on February 12,
     2000 and is renewable thereafter for one-year terms. The New Loan Agreement
     contains a covenant  to maintain a certain  fixed  charge  coverage  ratio.
     Borrowings  under the New Loan  Agreement for the revolving  line of credit
     and the term loan will bear  interest at the bank's base rate plus 1.0% and
     1.25%,  respectively.  Effective  February 1, 1998, in accordance  with the
     terms of the loan document, the above rates have been reduced by 0.5% each.

     The aggregate  annual  maturities of long-term  debt, at December 31, 1997,
are as follows:

     1998........................................................        $   650
     1999........................................................            655
     2000........................................................          7,516
     2001........................................................             65
     2002........................................................             70
     Thereafter..................................................          4,320
                                                                         -------
                       Total.....................................        $13,276
                                                                         =======

     On  February  27,  1998,  Amendment  No.  1 to the New Loan  Agreement  was
executed which  provided for (a) an overall  increase in the value of the credit
facility to $15,450 by adding a $3,000 capital equipment loan facility,  (b) the
establishment  of a  method  by  which  the  revolving  line of  credit  will be
increased  from $10,300 to a maximum of $12,000 with each monthly $50  repayment
of the term loan  beginning with the March 1, 1998 payment and (c) the extension
of the Amended New Loan Agreement to February 12, 2001.


                                      F-13
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


8.   SHAREHOLDERS' EQUITY:

     Notes  receivable  from  shareholders  resulted  from the  issuance  of the
Company's  common  stock and are secured by the pledge of such stock.  The notes
bore  interest at 8.0% and were due on September 3, 1996.  On February 24, 1997,
the notes were extended to September 3, 1998 and bear interest at 8.0%. On March
2, 1998, the notes were approved to be extended to September 3, 2001 and to bear
interest  at  8.0%.  In  1996,  $38 of the  outstanding  notes  receivable  from
shareholders was repaid.  An additional $37 of the outstanding  notes receivable
from shareholders was repaid in 1997.

9.   INCOME TAXES:

     For the years ended  December 31, 1997,  December 31, 1996 and December 31,
1995, the provision (benefit) for income taxes consists of the following:

                                         1997            1996             1995
                                        -------         -------         -------
Current:
         Federal ...............        $    --         $    --         $    --
         State .................             --              --              --
                                        -------         -------         -------
Deferred:
         Federal ...............            170          (3,384)         (1,779)
         State .................             19            (375)           (197)
                                        -------         -------         -------
                                            189          (3,759)         (1,976)
                                        -------         -------         -------
                                        $   189         $(3,759)        $(1,976)
                                        =======         =======         =======

     The following table reconciles the Federal  statutory rate to the Company's
effective  income tax rate for the years ended  December 31, 1997,  December 31,
1996 and December 31, 1995:

                                                            1997     1996   1995
                                                            ----     ----   ----
Statutory rate ...........................................    34%     34%    34%
State taxes, net of federal benefit ......................     6       6      6
Change in valuation allowance on deferred tax asset ......   (15)     --     --
                                                             ---     ---    ---
Effective Rate ...........................................    25%     40%    40%
                                                             ===     ===    ===


                                      F-14
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


         For the years ended  December 31, 1997,  December 31, 1996 and December
31, 1995, the deferred income tax provision  (benefit) is related to differences
between the financial and tax bases of assets and liabilities resulting from the
following:

                                                1997        1996         1995
                                              -------      -------      -------
Depreciation ............................     $    46      $  (137)     $   (96)
Inventories .............................        (218)         (56)          41
Accrued vacation expense ................         (23)         (34)          77
Accrued warranty costs ..................        (126)        (126)         (10)
Prepaid real estate taxes ...............          (7)           3          (30)
Accounts receivable .....................          --           (3)           7
Contract research and development .......         (46)         231           --
Net operating loss carryforwards ........         563       (3,637)      (1,965)
                                              -------      -------      -------
                                              $   189      $(3,759)     $(1,976)
                                              =======      =======      =======

     The Company has  recorded  deferred tax assets of $3,759 in 1996 and $1,976
in 1995 for the  benefit of federal  income  tax loss  carryforwards  and timing
differences  generated in those years. The Company has reserved a portion of the
deferred  tax asset  with  respect  to its loss  carryforwards.  Realization  is
dependent on  generating  sufficient  taxable  income prior to expiration of the
loss carryforwards.  Although realization is not assured, management believes it
is more likely than not that all of the net deferred tax asset will be realized.
The amount of the deferred tax asset considered  realizable,  however,  could be
reduced  in the near term if  estimates  of future  taxable  income  during  the
carryforward period are reduced.

         The tax effects of temporary  differences that give rise to significant
portions of the deferred  tax asset,  net, at December 31, 1997 and December 31,
1996, are as follows:

                                                          1997            1996
                                                        -------         -------
Depreciation ...................................        $  (268)        $  (222)
Inventories ....................................            528             311
Accrued vacation expense .......................            276             253
Accrued warranty costs .........................            286             160
Prepaid real estate taxes ......................            (53)            (60)
Accounts receivable ............................             30              30
Contract research and development ..............           (185)           (231)
Net operating loss carryforwards ...............          5,406           6,094
                                                        -------         -------
                                                          6,020           6,335
Less: valuation allowance ......................            416             536
                                                        -------         -------
Deferred tax asset, net ........................        $ 5,604         $ 5,799
                                                        =======         =======


                                      F-15
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10.  STOCK OPTION PLANS:

     In June 1995,  the Company  adopted  the 1995 Stock  Option Plan (the "1995
Plan")  pursuant to which key employees of the Company and eligible  consultants
to the Company are  eligible to receive  incentive  and/or  non-qualified  stock
options to purchase up to 525 shares of the  Company's  common  stock.  The 1995
Plan,  which  expires on June 26,  2005,  is  administered  by the  Compensation
Committee of the Board of  Directors.  The selection of  participants,  grant of
options, determination of price and other conditions relating to the exercise of
options is determined by the Compensation Committee of the Board of Directors.

     In March 1996,  the Company  adopted the 1996 Stock  Option Plan (the "1996
Plan"),  which was approved by the  Stockholders in May 1996,  pursuant to which
key  employees  of the  Company  and  eligible  consultants  to the  Company are
eligible to receive incentive and/or  non-qualified stock options to purchase up
to 475 shares of the  Company's  common stock.  The 1996 Plan,  which expires on
March 5, 2006, is  administered  by the  Compensation  Committee of the Board of
Directors.  The selection of  participants,  grant of options,  determination of
price and other conditions  relating to the exercise of options is determined by
the Compensation Committee of the Board of Directors.

     In March 1998, the Company amended the 1996 Stock Option Plan (the "Amended
1996  Plan"),   subject  to  stockholder  approval  at  the  Annual  Meeting  of
Stockholders  to be held on May 7, 1998,  pursuant to which key employees of the
Company  and  eligible  consultants  to the  Company  are  eligible  to  receive
incentive and/or non-qualified stock options to purchase up to an additional 500
shares of the Company's  common stock.  The Amended 1996 Plan,  which expires on
March 5, 2006, is  administered  by the  Compensation  Committee of the Board of
Directors.  The selection of  participants,  grant of options,  determination of
price and other conditions  relating to the exercise of options is determined by
the Compensation Committee of the Board of Directors.

     Incentive and non-qualified  stock options granted under the 1995 Plan, the
1996 Plan and the  Amended  1996 Plan are  exercisable  for a period of up to 10
years  from the date of grant at an  exercise  price  which is not less than the
fair market value of the common shares on the date of the grant, except that the
term of an incentive stock option granted under the 1995 Plan, the 1996 Plan and
the Amended 1996 Plan to a shareholder  owning more than 10% of the  outstanding
common shares may not exceed 5 years and its exercise price may not be less than
110% of the fair market value of the common shares on the date of the grant.


                                      F-16
<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


     Transactions  involving the 1995 Plan and the 1996 Plan for the years ended
December 31, 1997,  December  31, 1996 and December 31, 1995 are  summarized  as
follows:

<TABLE>
<CAPTION>
                                                         1995 Plan                         1996 Plan
                                                         ---------                         ---------
                                                    Shares       Option Price         Shares        Option Price
                                                    ------       ------------         ------        ------------
<S>                                                   <C>      <C>                      <C>      <C>      <C>    
           Year Ended December 31, 1995
      Granted................................         459       $8.00 - $10.75           --               $--
      Exercised..............................          --             --                 --                --
      Cancelled..............................         (4)           $8.00                --                --
                                                      --            -----             ------              ---

      Outstanding at December 31, 1995.......         455       $8.00 - $10.75           --               $--
                                                      ===       ==============          ===               ===

           Year Ended December 31, 1996
      Granted................................          70      $11.125 - $11.375         49           $11.125
      Exercised..............................          --             --                 --                --
      Cancelled..............................        (12)       $8.00 - $10.75           --                --
                                                     ----       --------------          ---                --
      Outstanding at December 31, 1996.......         513       $8.00 - $11.375          49           $11.125
                                                      ===       ===============          ==           =======

           Year Ended December 31, 1997
      Granted................................          25       $2.875 - $9.50          187       $2.875 - $9.50
      Exercised..............................         (4)           $8.00                --                --
      Cancelled..............................        (18)       $8.00 - $10.75          (8)            $2.875
                                                     ----       --------------          ---            ------
      Outstanding at December 31, 1997.......         516      $2.875 - $11.375         228      $2.875 - $11.125
                                                      ===      ================         ===      ================
</TABLE>


     At  December  31,  1997,  450 shares  were  exercisable  and 5 shares  were
available for grant under the 1995 Plan and 16 shares were  exercisable  and 247
shares were available for grant under the 1996 Plan.

     The  Company  accounts  for these  plans  under APB No. 25,  under which no
compensation cost is recognized for stock options granted with an exercise price
at or  above  the  prevailing  market  price  on  the  date  of the  grant.  Had
compensation cost for these plans been determined consistent with the fair value
approach  required  by SFAS No. 123,  the  Company's  net income  (loss) and net
income (loss) per common share would have been the following pro forma amounts:

<TABLE>
<CAPTION>
                                                           1997             1996             1995
                                                           ----             ----             ----
<S>                                    <C>                  <C>          <C>              <C>     
       Net income (loss):              As reported          $580         $(5,639)         $(2,952)
                                       Pro forma              78          (6,202)          (3,174)

       Basic net income (loss)
         per common share:             As reported         $0.06          $(0.54)          $(0.36)
                                       Pro forma            0.01           (0.60)           (0.39)

       Diluted net income (loss)
         per common share:             As reported         $0.06          $(0.54)          $(0.36)
                                       Pro forma            0.01           (0.60)           (0.39)
</TABLE>

                                      F-17

<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


     The fair value of each option  grant is  estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:

                                           1997          1996           1995
                                           ----          ----           ----
Fair value                                 $1.94         $5.26         $3.53
Expected life (years)                       4.0           4.0           3.5
Risk-free interest rate                     6.1%          5.5%          5.8%
Volatility                                 70%           54%           52%
Dividend yield                              0%            0%            0%

     The effects of applying SFAS No. 123 in this pro forma  disclosure  may not
be  indicative  of future  amounts  because SFAS No. 123 does not apply to stock
options granted prior to January 1, 1995 and additional  stock option grants are
anticipated in future years.

11.  DEFINED CONTRIBUTION PENSION PLAN:

     MPD   maintains  a  defined   contribution   pension   plan  which   covers
substantially  all employees,  and provides for employee  contributions of up to
14% of their salary, a portion of which is matched by MPD.  Contributions by MPD
were $500, $493, and $464, in 1997, 1996 and 1995, respectively.

12.  TRANSACTIONS WITH RELATED PARTIES:

     Prior to the Company's  initial public offering in 1995,  corporate charges
were  assessed  by a  related  party for  management  services  provided  to the
Company.  These  charges  were  $0,  $0,  and  $342  in  1997,  1996  and  1995,
respectively,  and are  included in general and  administrative  expenses in the
accompanying consolidated statements of operations.

     The  acquisition  of MPD  was  partially  financed  by a  $4,773  unsecured
promissory  note  from the  Company's  principal  shareholder,  of which  $2,853
remained  outstanding at December 31, 1994. Amounts  outstanding under this note
bore  interest  at 6.5% and were due on  September  3, 1996.  During  1995,  the
Company repaid this note with the proceeds from the initial  public  offering of
its securities.

13.  COMMITMENTS AND CONTINGENCIES:

     Operating Leases

     Rent expense,  including  amounts  charged to inventory as part of overhead
allocations  and the rental of  machinery  and  equipment  (on a  month-to-month
basis) in all three years was $1,487,  $1,434,  and $571 in 1997, 1996 and 1995,
respectively.

     Litigation

     In the normal course of business,  the Company is a party to various claims
and/or  litigation.  Management  believes that the settlement of all such claims
and/or litigation, considered in the aggregate, will not have a material adverse
effect on the Company's financial position and results of operations.

                                      F-18

<PAGE>


                  MICROWAVE POWER DEVICES, INC. AND SUBSIDIARY
                  (formerly MPD Holdings, Inc. and subsidiary)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


         Employment and Consulting Agreements

     The  Company  has an  employment  agreement  with its  President  and Chief
Executive  Officer  which  expires on August 30, 1998 and provides for an annual
base salary of $264.  The terms of the agreement are  automatically  renewed for
successive one year terms.  Additionally,  the Company has consulting agreements
with two  director/shareholders  which provide for aggregate annual compensation
of $225.

     Letters of Credit

     As of December 31, 1997 and December 31, 1996, the Company had  outstanding
letters of credit aggregating $1,799 and $260, respectively.

                                      F-19