10QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

(Mark One)

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

For the quarterly period ended April 2, 2005

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

For the transition period from                      to                     

Commission file number 0-11880

HYTEK MICROSYSTEMS, INC.

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

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

400 Hot Springs Road, Carson City, Nevada 89706

(Address of principal executive offices)

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

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

As of May 9, 2005, the issuer had outstanding 3,256,008 shares of Common Stock, no par value.

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

Hytek Microsystems, Inc.

Quarterly Report on Form 10-QSB

For the Three Months Ended April 2, 2005

Index

Item		Page
	PART I FINANCIAL INFORMATION
1.	Financial Statements (Unaudited)
	Condensed Balance Sheets at April 2, 2005 and January 1, 2005	2
	Condensed Statements of Operations for the three months ended April 2, 2005 and April 3, 2004	3
	Condensed Statements of Cash Flows for the three months ended April 2, 2005 and April 3, 2004	4
	Notes to Interim Condensed Financial Statements	5
2.	Management’s Discussion and Analysis or Plan of Operation	13
3.	Controls and Procedures	26
	PART II OTHER INFORMATION
1.	Legal Proceedings	27
2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
3.	Defaults Upon Senior Securities	27
4.	Submission of Matters to a Vote of Security Holders	27
5.	Other Information	27
6.	Exhibits	28
	SIGNATURES	S-1
	EXHIBITS	X-1

Cautionary Statement

This statement is for the purposes of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. This document includes various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events. Statements containing expressions, such as “believes”, “anticipates”, or “expects”, used in our press releases and periodic reports on Forms 10-KSB and 10-QSB filed with the Commission, are intended to identify forward-looking statements. All forward-looking statements involve risks and uncertainties. Although we believe our expectations are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurances that actual results will not materially differ from our expected results. We caution that these and similar statements included in this report are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. Such factors include those discussed in our Annual Report on Form 10-KSB for the year ended January 1, 2005 and in Part I, Item 2 of this Form 10-QSB. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of filing of this report. We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date of filing of this report.

PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

Hytek Microsystems, Inc.

Condensed Balance Sheets

	April 2, 2005			January 1, 2005
	(Unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	298,433		$	227,162
Trade accounts receivable, net of allowance for doubtful accounts of $23,550 and $31,429 at April 2, 2005 and January 1, 2005, respectively		1,461,536			1,608,782
Inventories		2,744,274			2,536,646
Prepaid expenses		116,446			102,982
Total current assets		4,620,689			4,475,572
Plant and equipment, at cost, less accumulated depreciation and amortization		666,216			709,922
Deposits		10,914			10,914
Total assets	$	5,297,819		$	5,196,408
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	798,403		$	593,860
Accrued employee compensation and benefits		245,559			377,946
Accrued warranty, commissions and other		537,592			556,785
Customer deposits		929,874			880,758
Total current liabilities		2,511,428			2,409,349
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value:
Authorized shares – 7,500,000
Issued and outstanding shares – 3,256,008 at April 2, 2005 and January 1, 2005		5,390,959			5,390,959
Additional paid-in capital		6,034			4,524
Accumulated deficit		(2,610,602	)		(2,608,424	)
Total shareholders’ equity		2,786,391			2,787,059
Total liabilities and shareholders’ equity	$	5,297,819		$	5,196,408

See accompanying notes.

2

Hytek Microsystems, Inc.

Condensed Statements of Operations

(Unaudited)

	Three Months Ended
	April 2, 2005			April 3, 2004
Net revenues	$	3,110,817		$	2,466,124
Cost of revenues		2,242,285			1,687,037
Engineering and development expenses		226,278			242,950
Sales and marketing expenses		161,972			137,815
General and administrative expenses		482,927			337,012
		3,113,462			2,404,814
Operating income (loss)		(2,645	)		61,310
Interest income (expense), net		467			(1,808	)
Net income (loss)	$	(2,178	)	$	59,502
Basic net income (loss) per share	$	0.00		$	0.02
Diluted net income (loss) per share	$	0.00		$	0.02
Shares used in calculating basic net income (loss) per share		3,256,008			3,256,008
Shares used in calculating diluted net income (loss) per share		3,256,008			3,276,535

See accompanying notes.

3

Hytek Microsystems, Inc.

Condensed Statements of Cash Flows

(Unaudited)

	Three Months Ended
	April 2, 2005			April 3, 2004
Operating activities:
Net income (loss)	$	(2,178	)	$	59,502
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		62,170			71,906
Gain on disposal of assets		(2,061	)		—
Stock-based compensation		1,510			—
Changes in operating assets and liabilities:
Trade accounts receivable, net		147,246			(36,117	)
Inventories		(207,628	)		(79,505	)
Prepaid expenses		(13,464	)		656
Deposits		—			—
Accounts payable		204,543			283,129
Accrued employee compensation and benefits		(132,387	)		(81,035	)
Accrued warranty, commissions and other		(19,193	)		(126,173	)
Customer deposits		49,116			(31,248	)
Net cash provided by operating activities		87,674			61,115
Investing activities:
Purchases of equipment		(18,464	)		(63,138	)
Proceeds from sale of equipment		2,061			200
Net cash used in investing activities		(16,403	)		(62,938	)
Financing activities:
Principal payments on note payable		—			(38,297	)
Net cash used in financing activities		—			(38,297	)
Net increase (decrease) in cash and cash equivalents		71,271			(40,120	)
Cash and cash equivalents at beginning of period		227,162			682,009
Cash and cash equivalents at end of period	$	298,433		$	641,889

See accompanying notes.

4

Hytek Microsystems, Inc.

Notes to Interim Condensed Financial Statements

April 2, 2005

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed financial statements as of April 2, 2005 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation. The operating results for the three months ended April 2, 2005 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2005. The Company operates on a 52/53-week fiscal year, which approximates the calendar year. These condensed financial statements, notes and analyses should be read in conjunction with the financial statements for the fiscal year ended January 1, 2005, and notes thereto, which are contained in the Company’s Annual Report on Form 10-KSB for such fiscal year.

The report of the Company’s independent registered public accounting firm on the fiscal 2004 financial statements included an explanatory paragraph stating that there is substantial doubt with respect to the Company’s ability to continue operating as a going concern.

The balance sheet at January 1, 2005 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

The unaudited condensed financial statements as of April 2, 2005 have been prepared in accordance with accounting principles generally accepted in the United States, which require the use of estimates and assumptions that affect the amounts reported in the condensed financial statements and accompanying notes. Actual results could differ materially from those estimates.

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

2. Summary of Significant Accounting Policies

Trade Accounts Receivable and Allowance for Doubtful Accounts

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

5

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

Legal Contingencies

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

Inventories

Inventories are stated at the lower of standard cost (which approximates cost determined on a first-in, first-out basis) or market. The Company plans production based on orders received and forecasted demand. The valuation of inventories at the lower of cost or market requires the use of estimates regarding the amounts of current inventories that will be sold. These estimates are dependent on the Company’s assessment of current and expected orders from its customers, including consideration that orders are subject to cancellation with limited advance notice prior to shipment. Because the Company’s markets are volatile, and are subject to technological risks and price changes as well as inventory reduction programs by the Company’s customers, there is a risk that the Company will forecast incorrectly and produce excess inventories of particular products. As a result, actual demand will differ from forecasts, and such a difference may have a material adverse effect on actual results of operations. Inventory reserves were calculated in accordance with the Company’s policy, which is based on inventory levels in excess of demand for each specific product.

Plant and Equipment

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

The Company expenses normal maintenance and repair costs as incurred.

6

Long-Lived Assets

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

Revenue Recognition

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”, which superseded the earlier related guidance in SAB No. 101, “Revenue Recognition”. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured.

Revenue for product sales is generally recognized upon delivery of product and transfer of title to the customer, except when the sales contract requires formal customer acceptance. The Company generally ships products F.O.B. (free on board) shipping point at the Company’s facility. Product sales with contractual customer acceptance provisions are recognized as revenue upon written notification of customer acceptance, which generally occurs after the completion of inspection and testing at the customer’s site.

Stock-Based Compensation

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

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

7

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

	Three Months Ended
	April 2, 2005			April 3, 2004
Net income (loss) as reported	$	(2,178	)	$	59,502
Add: stock-based compensation expense included in reported net income (loss), net of related tax effects		1,510			—
Deduct: stock-based compensation expense determined under the fair value method for awards, net of related tax effects		(23,431	)		(24,714	)
Pro forma net income (loss)	$	(24,099	)	$	34,788
Net income (loss) per share:
Basic - as reported	$	0.00		$	0.02
Basic - pro forma	$	(0.01	)	$	0.01
Diluted - as reported	$	0.00		$	0.02
Diluted - pro forma	$	(0.01	)	$	0.01

Effective March 12, 2004, the Board of Directors amended the 2001 Stock Plan vesting provisions for 69,000 employee stock option grants from an annual vesting of the shares over four years to one-quarter of the shares vesting the first year following the vesting commencement date followed by monthly vesting over the remaining three years. Prior exercise prices and the number of shares underlying the options remained unchanged. Compensation expense was measured based on the awards’ intrinsic values at the date of the modification in excess of the awards’ original intrinsic values and amounted to approximately $21,000. The Company will recognize compensation expense over the new expected vesting period based on estimates of the numbers of options that employees ultimately will retain that otherwise would have been forfeited, absent the modification.

8

Product Warranty Costs

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

Income Taxes

The Company recognized no benefit from income taxes during the three months ended April 2, 2005 due to the Company recording of a valuation allowance to offset the expected tax benefit due to our operating loss. The Company recognized no provision for income taxes during the three months ended April 3, 2004 due to the Company’s carryover amounts relating to prior operating losses. The Company had net operating loss and tax credit carryforwards for federal income tax purposes of $4,634,142 and $32,795, respectively, as of January 1, 2005. These net operating loss carryforwards will begin to expire in 2009. Future utilization of the Company’s net operating loss and other credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses before utilization.

New Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment to ARB No. 43, Chapter 4”. The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application of SFAS No. 151 is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company does not expect the adoption of SFAS No. 151 to have a material impact on the Company’s financial position, cash flows or results of operations.

In December 2004, the FASB issued SFAS No. 123 (revised 2004, or “R”), “Share-Based Payment — a revision of FASB Statement No. 123 Accounting for Stock-Based Compensation”. SFAS No. 123 supersedes APB 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123(R) requires all share-based payments, including grants of stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for the Company’s fiscal 2006 first quarter ending April 1, 2006.

9

SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted prior to the effective date of SFAS 123(R) that remain unvested on the effective date.

2. A “modified retrospective” method, which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures for either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company has not determined which of the foregoing methods it will adopt.

As permitted by SFAS 123, the Company currently accounts for share-based payments using APB 25’s intrinsic value method and, as such, generally recognizes no compensation cost for stock options. Accordingly, the adoption of SFAS 123(R)’s fair value method will have a significant impact on the Company’s results of operations, although it will have no impact on its overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.

SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when optionees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions was $0 in fiscal 2004 and 2003, respectively.

3. Inventories

Inventories consist of the following:

	April 2, 2005			January 1, 2005
Raw materials	$	2,274,899		$	2,162,474
Work-in-process		780,430			546,242
Finished goods		114,945			183,930
		3,170,274			2,892,646
Allowance for obsolescence		(426,000	)		(356,000	)
	$	2,744,274		$	2,536,646

10

4. Net Income (Loss) per Share

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

	Three Months Ended
	April 2, 2005	April 3, 2004
Basic weighted average shares outstanding	3,256,008	3,256,008
Effect of dilutive securities:
Stock options	—	20,527
Diluted weighted average shares outstanding	3,256,008	3,276,535

Net income (loss) per share of common stock is computed in accordance with SFAS No. 128 “Earnings Per Share”. The calculation of basic and diluted net income (loss) per share is the same except for the dilutive effect of outstanding stock options (determined using the treasury stock method).

Employee and director stock options to purchase approximately 441,600 and 180,500 shares of the Company’s common stock for the three months ended April 2, 2005 and April 3, 2004, respectively, were not included in the computation of diluted loss per share because the effect would be anti-dilutive.

5. Product Warranties

The Company offers a 90-day warranty for all of its products, which provides a basic limited warranty, including parts and labor. The warranty period may be extended due to contractual terms and conditions or other instances as deemed necessary by the Company. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs at the time product revenues are recognized, approximately 2% to 4% of net revenues. Factors that affect the Company’s warranty liability include the amount of revenues, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Company’s warranty liability are as follows:

	Three Months Ended
	April 2, 2005			April 3, 2004
Balance at beginning of period	$	75,919		$	75,000
Warranties issued		119,608			73,856
Settlements made		(84,109	)		(26,881	)
Changes in liabilities, including expirations		(33,559	)		(35,818	)
Balance at end of period	$	77,859		$	86,157

11

6. Pending Merger

On February 11, 2005, the Company entered into a merger agreement with Natel Engineering Company, Inc. (“Natel”) and Natel Merger Sub, Inc. Under the terms of the merger agreement, Natel will pay $2.00 per share (subject to adjustment) in cash for all of the issued and outstanding shares of common stock of the Company, subject to certain conditions. The Company has incurred numerous expenses in connection with the proposed merger, including legal and investment banker fees. The transaction is conditioned on obtaining requisite shareholder approval from the shareholders of the Company and other customary closing conditions. Upon closing of the transaction, the Company will become a subsidiary of Natel and will no longer be a public company.

12

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

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

Overview

On February 11, 2005, we entered into a merger agreement with Natel Engineering Company, Inc. (“Natel”) and Natel Merger Sub, Inc. Under the terms of the merger agreement, Natel will pay $2.00 per share (subject to adjustment) in cash for all of the issued and outstanding shares of common stock of Hytek, subject to certain conditions. We have incurred numerous expenses in connection with the proposed merger, including legal and investment banker fees. The transaction is conditioned on obtaining requisite shareholder approval from the shareholders of Hytek and other customary closing conditions. Upon closing of the transaction, we will become a subsidiary of Natel and will no longer be a public company. The companies expect to close the transaction during the second quarter of 2005. Given the uncertainties of the shareholder vote and other merger agreement conditions, there are no assurances that the pending merger transaction will close. Failure to close the transaction would have a material adverse effect on our financial position, cash flows and results of operations.

On April 15, 2005, we reduced our workforce by nine employees, representing approximately 10% of our workforce. This reduction was primarily due to the discontinuation and winding down of our product sales to Medtronic. Severance costs associated with the workforce reduction were approximately $17,000. For additional information regarding Medtronic, see our Report on Form 8-K filed on January 31, 2005 with the Securities and Exchange Commission, which information is incorporated herein by reference. We do not currently anticipate any additional lay-offs in connection with the loss of the Medtronic business.

We manufacture high reliability micro-electronic circuits used in military applications, geophysical exploration, medical instrumentation, satellite systems, industrial electronics, opto-electronics and other OEM applications. Although we have research and design capabilities, most of our products are “build-to-print” as specified by our customers. We also have some standard product offerings, including thermo-electric cooler controllers (“TECC”), laser diode drivers (“LDD”), heaters and delay lines. For the first quarter of fiscal 2005, these standard products accounted for approximately 5% of net revenues, down from approximately 8% during the first quarter of fiscal 2004.

We feel our market is fragmented without a predominate player and that we have only slightly penetrated the markets we serve. As a “build-to-print” supplier in a competitive and fragmented market, it is important to establish a competitive advantage. The primary factors of competition in the markets served by us are product reliability, timely delivery, price, performance and stability of the manufacturer. We believe that we generally compete favorably with respect to all of these factors; however, our stability (losses in the past four fiscal years, as well as an accumulated deficit as of January 1, 2005) may be a concern to certain customers. If our stability causes a competitive disadvantage, this will have a material adverse effect on our financial position, cash flows and future operating results.

13

As of April 2, 2005, we employed a total of 91 employees (including 90 full-time employees), of whom 69 were in manufacturing, 11 were in engineering and development, 5 were in sales and marketing and 6 were in administration.

During the first quarter of fiscal 2005, we had two major customers, Medtronic, Inc. (“Medtronic”) and Chesapeake Sciences Corporation (“Chesapeake”), which together accounted for 50% of our net revenues. On January 24, 2005, we received notice (the “Notice”) by e-mail from Medtronic A/S (“Medtronic”) that Medtronic would place no further purchase orders under that certain Supply Agreement dated August 1, 2003 between Hytek Microsystems, Inc., as supplier, and Medtronic, as purchaser (the “Medtronic Supply Agreement”), relating to a specified product (the “Product”). Concurrently, Medtronic reduced its required 12-month forecast for the Product to be supplied by us under the Agreement to (i) existing purchase orders scheduled for delivery within the three months ending March 31, 2005 (although a grace period for the actual shipment of Products was given through April 15, 2005), (ii) materials purchases previously committed to us for the period from April 1, 2005 through June 30, 2005, and (iii) zero units for delivery from July 1, 2005 through December 31, 2005. Medtronic’s Notice made it clear that Medtronic did not intend to place any additional orders with us for the Product. Accordingly, on January 28, 2005, we sent six-months’ notice of termination of the Medtronic Supply Agreement to Medtronic (through non-renewal), which termination shall be effective August 1, 2005. See our Report on Form 8-K filed on January 31, 2005. As disclosed in our Quarterly Reports on Form 10-QSB for the second and third quarters of fiscal 2004, Medtronic previously indicated its intent to develop a second source for the Product. Medtronic has recently indicated to us that it intends to develop an internal source of supply for the Product based upon its own business considerations. Medtronic confirmed to us that its discontinuation of purchases of the Product from us was not based upon any dissatisfaction with the quality of Products manufactured by us for Medtronic. Due to the fact we have been successful in booking new business from other customers, we believe this event will not have a material adverse effect on our results of operations for fiscal 2005. However, should our remaining top customers have a slow-down in demand or discontinue their relationship with us, there would be a material adverse effect to the extent we could not rapidly replace this lost business. Should these remaining customers become credit risks, this, too, would have a material adverse effect on our financial position, cash flows and results of operations.

Our current fiscal 2005 internal revenue forecast indicates a revenue level approximately 5% to 10% higher than fiscal 2004. This forecast is based on a combination of firm backlog and a forecast of orders anticipated to be placed and shipped during the balance of fiscal 2005. In the event that forecast orders do not become actual sales, or are placed later in the fiscal year than anticipated, the fiscal 2005 revenue results could be lower than anticipated, which would have a material adverse effect on fiscal 2005 financial position, cash flows and results of operations.

14

Our cash position was stable during the second half of fiscal 2004 and the first quarter of fiscal 2005 after paying off our short-term note payable in May 2004; however, cash is forecasted to remain tight during fiscal 2005 as we pay our Natel deal cost obligations and fulfill our customer deposit (material pre-payment) obligations. We have not had an available line of credit since our facility with Bank of the West was canceled in May 2003.

We have experienced operating losses on an annual basis in fiscal 2001 through fiscal 2004 and have had an accumulated deficit since December 29, 2001. The report of our independent registered public accounting firm on our January 1, 2005 financial statements includes an explanatory paragraph indicating there is substantial doubt about our ability to continue as a going concern. We have developed a plan to address these issues that we believe will allow us to continue as a going concern through at least the end of fiscal 2005 should the merger not close. This plan includes sustaining revenues through our backlog and projected new business in the ensuing year, increasing the gross margin percentage and reducing operating expenses as necessary. Although we believe the plan will be successful, there is no assurance that these events will occur.

The accompanying condensed financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Critical Accounting Policies

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

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

15

Revenue Recognition and Warranty Liability

Revenue for product sales is generally recognized upon delivery of product and transfer of title to the customer, except when the sales contract requires formal customer acceptance. We generally ship products F.O.B. (free on board) shipping point at our facility. Product sales with contractual customer acceptance provisions are recognized as revenue upon written notification of customer acceptance, which generally occurs after the completion of inspection and testing at the customer’s site.

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

Allowance for Doubtful Accounts

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

Inventory Reserves

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

16

Legal Contingencies

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

Results of Operations

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

	Three Months Ended
	April 2, 2005		April 3, 2004
Statements of Operations Data:
Net revenues	100.0	%	100.0	%
Cost of revenues	72.1		68.4
Engineering and development expenses	7.3		9.9
Sales and marketing expenses	5.2		5.6
General and administrative expenses	15.5		13.6
	100.1		97.5
Operating income (loss)	(0.1	)	2.5
Interest income (expense), net	0.0		(0.1	)
Income before provision (benefit) for income taxes	(0.1	)	2.4
Income tax provision (benefit)	—		—
Net income (loss)	(0.1	)%	2.4	%

17

Net Revenues. Net revenues were $3,111,000 in the first quarter of fiscal 2005 compared to $2,466,000 in the first quarter of fiscal 2004. The increase of $645,000, or 26%, was primarily the result of increased sales in medical products to Medtronic of approximately $547,000, partially offset by a decrease in military sales to Chesapeake of approximately $133,000. We only expect sales of approximately $72,000 to Medtronic during the second quarter of fiscal 2005 and no further sales after that quarter. The remaining fluctuation is attributable to the timing of shipments to our other customers.

Cost of Revenues. Cost of revenues was $2,242,000, or 72% of net revenues, in the first quarter of fiscal 2005 compared to $1,687,000, or 68% of net revenues in the first quarter of fiscal 2004. The increase of $555,000, or 33%, was the result of several factors. The first factor is attributable to our scrap recovery in the first quarter of fiscal 2004 of approximately $119,000, or 5% of net revenues, which reduced our scrap expense to $34,000, or 1% of net revenues compared to scrap expense of $207,000, or 7% or net revenues, during the first quarter of fiscal 2005. The second factor is an increase in our warranty expense of approximately $60,000 during the first quarter of fiscal 2005 compared to same quarter a year ago. This was due to a contractually longer warranty period for the Medtronic product than our standard product warranty period, coupled with the fact that we experienced historically higher returns from Medtronic during the wind-down phase of production in fiscal 2005. The third factor is an increase in our outside service costs of approximately $67,000 during the first quarter of fiscal 2005 compared to the same quarter a year ago. The reason for the increase is outside testing, relating to our prototype work for the Boeing Company, and outside assembly for the Medtronic and Chesapeake products. The fourth factor is an increase in our indirect labor expense and associated benefits of approximately $32,000 during the first quarter of fiscal 2005 compared to the same quarter a year ago. This increase is due to our hiring of a purchasing manager in March 2004, as well as general wage increases for support personnel. The remaining increase was the result of higher revenues and corresponding product cost.

Engineering and Development Expenses. Engineering and development expenses were $226,000, or 7% of net revenues, in the first quarter of fiscal 2005 compared to $243,000, or 10% of net revenues, in the first quarter of fiscal 2004. The overall decrease of $17,000, or 7%, is primarily attributable to decreased health insurance costs as we changed providers at the beginning of January 2005. There was no significant change in our personnel in the first quarter of fiscal 2005 compared to same quarter a year ago. During the first quarter of fiscal 2005 and 2004, there was no material amount spent on research and development. The engineering resources available have been focused on the introduction and start-up of new custom products, program management, sustaining engineering and yield improvement.

Sales and Marketing Expenses. Sales and marketing expenses were $162,000, or 5% of net revenues, in the first quarter of fiscal 2005 compared to $138,000, or 6% of net revenues, in the first quarter of fiscal 2004. The overall increase of $24,000, or 17%, is attributable to our hiring of a regional sales manager during the second quarter of 2004 and increased travel and commission expenses related to increased sales and marketing efforts.

18

General and Administrative Expenses. General and administrative expenses were $483,000, or 16% of net revenues, in the first quarter of fiscal 2005 compared to $337,000, or 14% of net revenues, in the first quarter of fiscal 2004. The overall increase of $146,000, or 43%, is primarily due to approximately $160,000 of legal, investment banking and other deal-related costs incurred during the first quarter of fiscal 2005 associated with the pending Natel merger that were not present during the comparable quarter one year ago.

Interest Income (Expense), Net. Interest income, net of interest expense, increased $2,000 in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004 due to the Company repaying its note payable in May 2004. This increase is attributable to interest earned on our depository accounts during the first quarter of both fiscal 2005 and 2004, which, during the first quarter of fiscal 2004, was more than offset by our interest expense incurred on our note payable. This note payable was repaid in May 2004.

Provision For (Benefit From) Income Taxes. During the first quarter of fiscal 2005, we recognized no benefit from income taxes due to our recording of a valuation allowance to offset the expected tax benefit due to our operating loss. During the first quarter of fiscal 2004, we recognized no provision for income taxes because we had carryover amounts relating to prior operating losses.

Liquidity and Capital Resources

We incurred a net loss of $2,000 during the first three months of fiscal 2005 and had an accumulated deficit of $2,611,000 at April 2, 2005. We had cash and cash equivalents of $298,000 at April 2, 2005, as compared to $227,000 at January 1, 2005. During the first three months of fiscal 2005, cash provided by operating activities of $88,000 was primarily due to cash generated by an increase in accounts payable and a decrease in trade accounts receivable, partially offset by cash used for an increase in inventories and decreases in accrued employee compensation and benefits, and accrued warranty, commissions and other. During the same period, cash used in investing activities of $16,000 was primarily for the purchase of machinery and equipment. There was no cash generated by or used in financing. During the first quarter of fiscal 2004, cash provided by operating activities of $61,000 was primarily due to cash generated by an increase in accounts payable. During the same period, cash used in investing activities of $63,000 was primarily for the purchase of capital equipment and cash used in financing activities of $38,000 was due to principal payments on our short-term note payable. We had no outstanding borrowings at April 2, 2005 or at January 1, 2005.

Accounts receivable decreased $147,000, or 9%, and were $1,462,000 at April 2, 2005, as compared to $1,609,000 at January 1, 2005. This overall decrease is a result of collection activity that occurred during the first quarter of fiscal 2005. At April 2, 2005, accounts in excess of 60 days totaled less than 1% of total receivables, as compared to 1% at January 1, 2005. As of April 2, 2005, we have reviewed our exposure to losses resulting from bad debts and as a result have decreased our reserve for bad debt losses by $8,000 during the first quarter of fiscal 2005.

19

Inventories increased $207,000, or 8%, and were $2,744,000 at April 2, 2005 as compared to $2,537,000 at January 1, 2005. The increase is a result of an increase in raw materials and work-in-process necessary to meet our future production demands, partially offset by a decrease in finished goods, due to shipments to customers.

Prepaid expenses increased $13,000, or 13%, and were $116,000 at April 2, 2005 as compared to $103,000 at January 1, 2005. The increase is a result of prepayment of certain premiums upon renewing our general business insurance policies.

Plant and equipment decreased $44,000, or 6%, and was $666,000 at April 2, 2005 as compared to $710,000 at January 1, 2005. The decrease is a result of depreciation and amortization expense of $62,000, partially offset by purchases of machinery and equipment of $18,000 during the fiscal year.

Accounts payable increased $204,000, or 34%, to $798,000 at April 2, 2005 as compared to $594,000 at January 1, 2005. This increase is attributable to the timing of our inventory scheduling and receipts of orders, as well as our utilization of available cash to pay service providers involved with the pending merger, which has caused us to experience an increase in amounts due to our suppliers.

Accrued employee compensation and benefits decreased $132,000, or 35%, to $246,000 at April 2, 2005 compared to $378,000 at January 1, 2005. The decrease is attributable to the timing of our payroll, as well as payments of previously accrued managerial and executive bonuses and medical insurance premium payments to our prior provider.

Accrued warranty, commissions and other accrued liabilities decreased $19,000, or 3%, to $538,000 at April 2, 2005 as compared to $557,000 at January 1, 2005. This decrease is primarily attributable to payment for audit and other professional services previously accrued.

Customer deposits increased $49,000, or 6%, to $930,000 at April 2, 2005 as compared to $881,000 at January 1, 2005. This increase is attributable to advance payments for orders placed in which a customer has prepaid for material to commence production of their products, net of shipments of finished products to customers and the corresponding decrease in deposits associated with those shipments.

We had no long-term debt as of April 2, 2005 and January 1, 2005.

At January 1, 2005, we had net operating loss carryforwards for federal income tax purposes of approximately $4,634,000. These loss carryforwards will begin to expire in 2009. We also have future tax credit carryforwards for federal income tax purposes of approximately $33,000 at January 1, 2005. These tax credit carryforwards will not expire. Future utilization of our net operating loss and other credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses before utilization.

20

We have certain non-cancelable operating leases (primarily facilities) that carry through 2015 in the aggregate of $2,043,000.

As of April 2, 2005, we had the following contractual obligations:

			Payments Due by Period
Contractual Obligations	Total		Less than 1 1 Year		1-3 Years		3-5 Years		More than 5 Years
Operating Leases	$	2,043,000	$	195,000	$	588,000	$	414,000	$	846,000
Total	$	2,043,000	$	195,000	$	588,000	$	414,000	$	846,000

We do not have any contractual obligations that are due after eleven years.

We have no off-balance sheet financing arrangements as of April 2, 2005.

We have no material commitments for capital expenditures as of April 2, 2005.

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

Our management team believes that our existing backlog and projected new business in the current year, together with cost-reduction measures already initiated, can provide sufficient cash to meet normal operating needs without additional financing activity through fiscal 2005. We may pursue additional debt or equity financing should the need arise; however, there is no certainty that such financing could be obtained or that the terms on which it might be obtained would be favorable.

Factors Affecting Future Results

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

Failure to Consummate Planned Merger

We executed an agreement of merger dated as of February 11, 2005 providing for our acquisition by Natel, subject to the satisfaction or waiver of the conditions set forth therein. The announcement and pendency of the merger may have a negative impact on our ability to sell our products and attract new customers and may impact our future revenue. Uncertainty created by the announcement of the merger may cause some customers to delay their purchase decisions until the closing of the merger or alter their purchase decisions, which could cause our financial results to be significantly below our expectations.

21

Our results of operations have been and will continue to be adversely affected by increased legal and other professional fees related to the merger. The merger may also have a negative impact on our ability to retain employees and existing customers. The merger is subject to approval by our shareholders, and there can be no assurance that the merger will be successfully completed.

If the merger is not completed, we will be subject to a number of material risks, including but not limited to the following: costs related to the merger, such as legal, accounting and other professional fees, must be paid even if the merger is not completed and we have incurred and will continue to incur significant merger-related costs; our relationships with some of our customers may be adversely affected as they may delay or defer purchasing decisions; our ability to attract and retain employees may be adversely affected; and we may be required to pay Natel a termination fee of up to $275,000 under certain circumstances.

Lack of Liquidity and Availability of Financial Resources

We have limited financial resources currently available to invest in new initiatives, additional key personnel, new equipment and operating capital. Although we are seeking additional sources of capital, there are no assurances we will be successful. As cash is a limited resource, any long-term manufacturing disruption, unforeseen expenses or other cash utilization activities not in the ordinary course of business could have a material adverse effect on us. Our cash position decreased in the first half of fiscal 2004 and then stabilized through the second half of fiscal 2004, and is forecasted to remain stable, albeit low, during fiscal 2005 as we pay out accrued liabilities consisting primarily of accounts payable, other current payment obligations and merger-related costs.

The report of independent registered public accounting firm on our January 1, 2005 financial statements includes an explanatory paragraph indicating there is substantial doubt about our ability to continue as a going concern. We have developed several plans to address these issues and allow us to continue as a going concern through at least the end of fiscal year 2005. The first plan includes the successful completion of the merger with Natel. If the merger with Natel is not consummated, we have an alternative plan of sustaining revenues and increasing the gross margin percentage from fiscal 2004 and reducing operating expenses as necessary. Although we believe one of these plans will be realized, there is no assurance that this will occur. In the event that we are unsuccessful, we may pursue additional debt or equity financing. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

22

Customer Concentration

During first quarter of fiscal 2005, we had two customers, Medtronic and Chesapeake that together accounted for 50% of our net revenues. On January 24, 2005, we received notice by e-mail from Medtronic that Medtronic would place no further purchase orders under the Medtronic Supply Agreement. See our Report of Form 8-K filed on January 31, 2005. Due to the fact that we have been successful in booking new business from other customers, we believe this event will not have a material adverse effect on our results of operations for fiscal 2005. However, should our remaining top customers have a slow-down in demand or discontinue their relationship with us, there would be a material adverse effect to the extent we could not rapidly replace this lost business. Should these remaining customers become credit risks, this, too, would have a material adverse effect on our financial position, cash flows and results of operations.

Dependence on Key Suppliers

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

Economic Factors

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

New Programs

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

23

Manufacturing

Historically, manufacturing yield has been a major cost element of our financial performance. From time to time, we have experienced significant yield problems, which have reduced our net revenues and increased our cost of revenues. Although we saw some improvement in manufacturing yields in fiscal 2004 compared to fiscal 2003, there can be no assurances that this improvement can be maintained. Failure to do so could have an adverse effect on our financial position, cash flows and results of operations. In addition, much of our manufacturing equipment, although currently in good working order, is nearing the end of its useful life. We currently do not have the financial resources to invest heavily in new equipment and, as a result, run the risk of manufacturing delays and associated costs should a key piece of equipment become non-functional or irreparable.

Dependence on Key Personnel

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

Military Certification

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

Inventory Excess and Obsolescence

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

24

Competition

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

Legal Proceedings

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

For example, we received an inquiry in February 2004 from the Business Software Alliance (“BSA”) regarding the potential unlicensed use of certain office and computer-aided design software by us. During the first quarter of fiscal 2004, we conducted an audit of the software being used at our facility and on March 31, 2004, we sent a formal response that, as of that date, we were in full compliance with the licensing requirements of the software utilized by us. On July 23, 2004, we received a request from BSA for further information concerning this matter and on August 13, 2004, we responded to this request. On October 29, 2004, we received another request from BSA for additional information and on December 10, 2004, we responded and provided the requested information. On January 18, 2005, BSA responded that it was still in the process of reviewing our audit results. On April 21, 2005, BSA sent us an offer of settlement, which we currently intend to negotiate with them; however, such negotiations have not yet taken place. If BSA does not reduce its requested settlement amount significantly, or pursues litigation regarding the alleged past unlicensed use of software, the costs of such settlement or litigation could have a material adverse effect on our financial position, cash flows and results of operations.

25

Recently Issued Accounting Pronouncements

From time to time, accounting regulatory agencies (such as the SEC, FASB and PCAOB) issue pronouncements that require changes in accounting. The implementation of such accounting changes can have a material adverse effect on our financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004, or “R”), “Share-Based Payment — a revision of FASB Statement No. 123 Accounting for Stock-Based Compensation”. SFAS No. 123 supersedes APB 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123(R) will require all share-based payments, including grants of stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure will no longer be an alternative. The new standard will be effective for our fiscal 2006 first quarter ending April 1, 2006. As permitted by SFAS 123, we currently account for share-based payments using APB 25’s intrinsic value method and, as such, generally recognize no compensation cost for stock options. Accordingly, the adoption of SFAS 123(R)’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.

Item 3. Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of April 2, 2005. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures are effective to ensure that we record, process, summarize and report information required to be disclosed by us in our reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms.

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

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

26

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

Not Applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not Applicable.

Item 3. Defaults Upon Senior Securities.

Not Applicable.

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

Not Applicable.

Item 5. Other Information.

Not Applicable.

27

Item 6. Exhibits.

2.1 +	Agreement and Plan of Merger dated as of February 11, 2005, among Natel Engineering Company, Inc., Natel Merger Sub, Inc. and the Registrant.
10.1 #	Form of Severance Agreement dated February 11, 2005 between the Registrant and the following officers and certain employees: John F. Cole, Philip S. Bushnell, Payne W. Bair, Kathy Cano, Al Dey, Dan Esau and Martin Sosa.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

* Furnished, not filed.

+ Incorporated by reference to Exhibit filed with the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 14, 2005.

# Incorporated by reference to the Exhibit filed with the Annual Report on Form 10-KSB for the year ended January 1, 2005.

28

SIGNATURES

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

HYTEK MICROSYSTEMS, INC.
By:	/s/ Philip S. Bushnell
	Philip S. Bushnell
Chief Financial Officer and Secretary (Principal Financial Officer) Date: May 9, 2005

S-1

Hytek Microsystems, Inc.

Quarterly Report on Form 10-QSB

For the Three Months ended April 2, 2005

EXHIBIT INDEX

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

Exhibit Number	Exhibit Description
2.1 +	Agreement and Plan of Merger dated as of February 11, 2005, among Natel Engineering Company, Inc., Natel Merger Sub, Inc. and the Registrant.
10.1 #	Form of Severance Agreement dated February 11, 2005 between the Registrant and the following officers and certain employees: John F. Cole, Philip S. Bushnell, Payne W. Bair, Kathy Cano, Al Dey, Dan Esau and Martin Sosa.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

* Furnished, not filed.

+ Incorporated by reference to Exhibit filed with the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 14, 2005.

# Incorporated by reference to the Exhibit filed with the Annual Report on Form 10-KSB for the year ended January 1, 2005.

X-1

EX-31.1

Exhibit 31.1

CERTIFICATION

I, John F. Cole, certify that:

1. I have reviewed this Quarterly Report on Form 10-QSB of Hytek Microsystems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: May 9, 2005

By:	/s/ John F. Cole
	John F. Cole
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Philip S. Bushnell, certify that:

1. I have reviewed this Quarterly Report on Form 10-QSB of Hytek Microsystems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: May 9, 2005

By:	/s/ Philip S. Bushnell
	Philip S. Bushnell
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, John F. Cole, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Hytek Microsystems, Inc. on Form 10-QSB for the quarter ended April 2, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such quarterly report fairly presents in all material respects the financial condition and results of operations of Hytek Microsystems, Inc.

By:	/s/ John F. Cole
Name:	John F. Cole
Title:	President and Chief Executive Officer
Date:	May 9, 2005

I, Philip S. Bushnell, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Hytek Microsystems, Inc. on Form 10-QSB for the quarter ended April 2, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such quarterly report fairly presents in all material respects the financial condition and results of operations of Hytek Microsystems, Inc.

By:	/s/ Philip S. Bushnell
Name:	Philip S. Bushnell
Title:	Chief Financial Officer
Date:	May 9, 2005