UNITED STATES
                   SECURITIES AND EXCHANGE COMMISSION
                         Washington, D.C.  20549
                                FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the fiscal year ended December 26, 1998January 1, 2000
- -------------------------------------------
                                   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 number:       0-16088

                  CERAMICS PROCESS SYSTEMS CORPORATION

    (Exact name of registrant as specified in its charter)
Delaware                                     04-2832509
- ------------------------------------         ----------------
(State or other jurisdiction                 (I.R.S. Employer
of incorporation or organization)          Identification No.)

111 South Worcester Street, P.O. Box 338
Chartley, Massachusetts                      02712
- --------------------------------------------------
(Address of principal executive offices)     (Zip Code)

Registrant`s telephone no., including area code:  508-222-0614
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, $0.01 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
than the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days.
                         [X] Yes       [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant`s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to the Form 10-K. [ ]

The aggregate market value of the voting Common Stock held by non-
affiliates of the Registrant was $6,430,925$31,842,836 based on the average of the
reported closing bid and asked prices for the Common Stock on March 1,
1999 as reported on the OTC Bulletin Board.

Number of shares of Common Stock outstanding as of MarchJanuary 1,
1999:2000: 12,285,969 shares.

Documents incorporated by reference.

Part I
- -----------------------------------------------------------------------
Item 1.  Business.

     Ceramics Process Systems Corporation  (the `Company` or `CPS`)
serves the wireless communications satellite communications,infrastructure market, high-
performance microprocessor market, motor controller market, and other
microelectronic markets by developing, manufacturing, and marketing
advanced metal-matrix composite and ceramic components to house, interconnect and
thermally manage microelectronic devices.  The Company`s products are
typically in the form of housings, packages, lids, substrates, thermal
planes, or heat sinks, and are used in applications where thermal
management and and/or weight are important considerations.

     The Company`s products are manufactured by proprietary processes
the Company has developed including the QuicksetTM Injection Molding
Process (`Quickset Process`) and the QuickCastTM Pressure Infiltration
Process (`QuickCast Process`).

     Although the Company`s focus is in microelectronics markets,manufacturing components, the
Company participates in other markets through licensinghas sold licenses to portions of its technology to corporations who manufacture and sell productsstrategic
partners such as Hitachi Metals Ltd. In fiscal 1999, 100% of the
Company`s total revenue was derived from manufactured products; in other markets.  In
fiscal 1998 86.7% of the Company'sCompany`s total revenue was derived from
manufactured products and 13.3% from licensing fees,fees; and in fiscal 1997,
91.5% of the Company`s total revenue was derived from manufactured
products and 8.5% from licensing fees and in fiscal 1996, 96% of the Company`s total 
revenue was derived from manufactured products and 4% from licensing fees.

     The Company  was incorporated in Massachusetts in 1984. The Company
reincorporated in Delaware in April 1987, through merger into its
wholly-
ownedwholly-owned Delaware subsidiary organized for purposes of the
reincorporation.  In July 1987, the Company completed its initial public
offering of 1.5 million shares of its Common Stock.

Overview of Markets and Products
- --------------------
MARKETS--------------------------------
     Consumer demand continues to motivate the electronics industry to
produce products which:
- - operate at higher speeds;
- - are smaller in size; and
- - operate with higher reliability.

     While these three requirements result in products of ever-increasing
performance, these requirements also create a fundamental challenge for
the designer to manage the heat generated by the system moving at higher
speeds.  Smaller assemblies further concentrate the heat and increase
the difficulty of removing it.

     This challenge is found at each level in an electronic assembly:  at
the integrated circuit level speeds are increasing and line widths are
decreasing; at the circuit board level higher density devices are placed
closer together on circuit boards; and at the system level higher
density circuit boards are being assembled closer together.

     The Company`s primary markets are original equipment manufacturersdesigner must resolve the thermal management issues or the system
will fail.  For every 10 degree Celsius rise in temperature, the
reliability of a circuit is decreased by approximately half.  In
addition, heat usually causes changes in parameters which degrade the
performance of both active and passive electronic components.

     To resolve thermal management issues the designer is primarily
concerned with two properties of the materials which comprise the
system:  1) thermal conductivity, which is the rate at which heat moves
through materials, and 2) thermal expansion rate (Coefficient of Thermal
Expansion or CTE) which is the rate at which materials expand or
contract as temperature changes.  The designer must ensure that the
temperature of an electronic assembly stays within a range in which the
differences in the wireless communications,expansion rates of the materials in the assembly do
not cause a failure from breaking, delaminating, etc.

     CPS combines at the microstructural level a ceramic with a metal
to produce a composite material which has the thermal conductivity
needed to remove heat, and a thermal expansion rate which is
sufficiently close to other components in the assembly to ensure the
assembly is reliable.  The ceramic is silicon carbide (SiC), the metal
is aluminum (Al), and the composite is aluminum silicon carbide (AlSiC),
a metal-matrix composite.  CPS can adjust the thermal expansion rate of
AlSiC components to match the specific application by modifying the
amount of SiC compared to the amount of Al in the component.

     CPS produces products made of AlSiC in the shapes and
configurations required for each application - i.e., in the form of
lids, substrates, housing etc.  Every product is made to a customer`s
blueprint.  The CPS process technology allows most products to be made
to net shape, requiring no or little final machining.

     Although the Company`s focus today is on AlSiC components, the
Company believes its proprietary Quickset- Quickcast process technology
can be used to produce other metal-matrix composites which may meet
future market needs.

     Today, the problem of thermal management is most acute in high-
performance, high-density applications such as cellular basestations,
high-performance microprocessors, motor controllers and components for
satellite communications,communications.  However, as the trends towards faster speeds,
reduced size and motor 
controller markets.increased reliability continue, and as high-density
circuitry is used in a larger number of applications, the Company
believes that the Company`s products will be used in additional market
segments.


Specific Markets and Products
- -----------------------------

Wireless Communications Infrastructure Market
- ---------------------------------------------
     The demand for wireless telecommunications services such as
cellular and Personal Communications Systems (`PCS`) has grown
significantly during the past decade, driven by reduced costs for
wireless handsets, a more favorable regulatory environment, increasing
competition among service providers and a greater availability of
services and microwave spectrum.

     In developing countries wireless telephone networks are being
installed as an alternative to installing or upgrading traditional
wireline networks.  The growth in wireless communications has required,
and will continue to require, substantial investment by service
providers in infrastructure equipment such as basestations.

     The Company providesmanufactures substrates and heat sinks on which high-
performance circuits such as power amplifiers are mounted in wireless
basestations.  Use of the company`s products allows the basestation
manufacturer to reduce overall basestation size, increase the number of
calls a basestation can handle, and to improve reliability.


Lids for High-Performance Microprocessors and Other Integrated Circuits
- -----------------------------------------------------------------------
     Increases in speed, circuit density, and the number of connections
in microprocessor chips (MPUs) and application specific integrated
circuits (ASICs) are accelerating a transition in the way in which these
ICs are packaged.  Packages provide mechanical protection to the
integrated circuit (IC), enable the IC to be connected to other circuits
via pins, solder bumps or other connectors, and allow attachment of a
heat sink or fan to ensure the IC does not overheat.  In the past most
high-performance ICs were electrically connected to the package by fine
wires in a process known as wire bonding.  Increasingly high-performance
semiconductors are connected to the package by placing metal bumps on
the connection points of the die, turning the die upside down in the
package, and directly connecting the bumps on the die with corresponding
bumps on the package base by reflowing the bumps.  This is referred to
as a "flip-chip package".  Flip chip packages allow for connection of a
larger number of leads in a smaller space, and can provide other
electrical performance advantages compared to wire bonded packages.

     In many flip chip configurations a lid or cap is placed over the
die to protect the die from mechanical damage and to facilitate the
removal of heat from the die.  Often a heat sink or fan is then attached
to the lid.  For a high-density die the package designer must ensure
that the lid has sufficient thermal conductivity to remove heat from the
die, and that all components of the package assembly - the die itself,
the package base, and the package lid - are made from materials with
sufficiently similar thermal expansion rates to ensure the assembly will
not break itself apart over time as it thermally cycles.

     The Company`s composite material, AlSiC, has been developed to
meet these two needs: it is engineered to have sufficient thermal
conductivity to allow the heat generated by the die to be removed
through the lid, and it is engineered to expand upon heating at a rate
similar to other materials used in the package assembly in order to
ensure reliability of the package over time as it thermally cycles.  The
Company produces lids made of AlSiC for high performance microprocessors
used in servers and other applications.

     Most participants in the semiconductor industry believe the
densities of ICs will continue to increase following the well-known
"Moore`s Law".  As IC densities increase, generally so does the IC size,
and the amount of heat generated by the IC.  The company believes the
need for thermal management will continue to grow rapidly.  For example,
the Semiconductor Industry Association (SIA) 1997 Roadmap anticipates
the use of 1.5 GHz, 40 million transistor, 385mm2 microprocessor chips
dissipating as much as 110 Watts in workstations and servers to be
offered in 2001, and a further substantial increase to 3.5 GHz, 200
million transistor, 520 mm2 chips dissipating 160 watts for use in
workstations and servers to be offered in 2006.


Motor Controller Market
- -----------------------
     The use of power modules to control electric motors of all sizes is
growing.  This growth is the result of several factors including
emerging high-power applications which demand power controllers such as
trains, subways and certain industrial equipment, and cost declines in
power modules which increasingly make variable speed drives cost
effective.  Power semiconductors are a very significant portion of the
cost of variable speed drives, and the cost of the module housing interconnecting and
thermal management system are also significant; declines in the costs of
microelectronic devicesall these components is driving increased use of variable speed drives.
For example, worldwide approximately 50 million AC induction motors
greater than one-half horsepower are installed every year.  Today only a
small percentage of these motors use variable speed drives because of
costs; as costs decline industry observers predict increased use of
variable speed drives.

     The Company provides substrates, baseplates and heatsinks on which
power semiconductors are mounted to wireless communications infrastructure 
equipment manufacturers.produce modules for motor control.
The Company`s AlSiC baseplates have sufficient thermal conductivity to
allow for removal of heat through the baseplate, and have a thermal
expansion rate sufficiently similar to the other components in the
assembly to ensure reliability over time as the assembly thermally
cycles.  The Company believes this market will continue to grow as the
use of power modules penetrates additional motor applications, and as
electric motors themselves penetrate new applications such as the hybrid
electric vehicle.


Satellite Communications Market
- -------------------------------
     Satellites provide several advantages over earth-based facilities
for many telecommunications applications.  Satellites enable high-speed
communications service where there is no earth-based alternative
available which is often the case for military operations and for
communications services in developing countries.  Another advantage is
that the cost to provide services via satellite does not increase with
the distance between sending and receiving stations.  The cost of
providing services via satellite can be less than the cost of installing
copper or fiber optic networks.

     Demand for satellite telecommunications services for both military
and commercial applications is increasing.  Some satellite applications
have both military and commercial applications such as the Global
Positioning System.  Commercial applications include satellite based
mobile telephone services, direct-to-home television services, and
direct-to-home internet services. Military and commercial entities have
announced plans to deploy over 1,000 satellites during the next decade.

     The Company provides componentsproduces housings, substrates, baseplates, and
heatsinks on which circuitry is mounted for housing, interconnectinguse in satellites. In
addition to the thermal conductivity and the tailored thermal management of microelectronic devices to satellite subsystem and satellite 
manufacturers.

Motor Controller Market
     The use of power modules to control electric motors of all sizesexpansion
rate, AlSiC is 
growing.  This growth is the result of several factors including emerging 
high-power applications which demand power controllers such as hybrid and 
electric vehicles, and cost declines in power modules which increasingly 
make variable speed drives cost effective.  Power semiconductors are a very significant portion of the cost of variable speed drives, and the cost of 
the module housing and thermal management system are also significant; 
declines in the costs of all these componentslightweight material which is driving increased use of 
variable speed drives.  

     For example, worldwide approximately 50 million AC induction motors 
greater than one-half horsepower are installed every year.  Today only a 
small percentage of these motors use variable speed drives because of 
costs; as costs decline industry observers predict increased use of 
variable speed drives. The Company provides components for housing, 
interconnecting and thermal management of microelectronic devices to motor 
controller manufacturers.

PRODUCTS
     All markets described above have a common need for thermal 
management of electronic devices to improve system performance and 
reliability.  A second element which many segments within these markets 
have in common is the need for lightweight components, particularlyan important
attribute for applications which are air-borne, space-based,spaced-based or
transportation related.

Using its proprietary process technology, the Company produces metal-matrix 
composites with superior thermal properties and which are very lightweight 
to house and interconnect microelectronic devices.  Each of 
these products is produced to customers` blueprints to meet customers` 
specific requirements.  Typical form factors are housings, packages, 
lids, substrates, thermal planes, and heat sinks.

     The manufacture of microelectronic systems is comprised of three key 
steps: (1) the integration of transistors into integrated circuits 
(`ICs`), (2) the integration of ICs on boards or modules, and (3) the 
integration of boards and modules into systems.  The Company produces 
products for the second and third steps described aboveCustomers
- products used 
to integrate ICs on boards, and used to integrate boards and modules into 
systems.

     As the complexity, speed, and density of electronic devices 
continues to increase, the market increasingly demands housing and 
interconnecting products which have a thermal coefficient of expansion 
match to ICs, and which provide for the efficient removal of heat from 
the system while providing the necessary mechanical and electrical 
properties.

     The metal-matrix composite aluminum silicon carbide (`Al-SiC`), 
manufactured using the Company`s proprietary processes, is a material 
system which meets all these requirements and which is finding acceptance 
in the marketplace as a replacement for copper, copper-tungsten, copper-
moly, and graphite.  In addition, the Company`s aluminum nitride (`AlN`) 
ceramic components are used in applications where very high thermal 
conductivity is required.

CUSTOMERS---------
     The Company sells to major United States microelectronics systems
houses.  The Company`s customers typically purchase prototype and
evaluation quantities of the Company`s products over a one to three year
period before entering into recurring production.

     In fiscal 1999, the Company`s three largest customers accounted for
67%, 8%, and 6% of total revenues, respectively.  In fiscal 1998, the
Company'sCompany`s three largest customers accounted for 72%, 13%, and 6% of
total revenues, respectively.revenues. In fiscal 1997, these 
same companiesthe Company`s three largest customers
accounted for 56%, 9%, and 9% of total revenues.

    	In fiscal 1999, 89% of the Company`s revenues were derived from
commercial applications and 11% were derived from defense related
applications.   In fiscal 1998, 94% of the Company`s revenues were
derived from commercial applications and 6% were derived from defense
related applications.  In fiscal 1997, 76% of the Company`s total
revenues were derived from commercial business,applications and 6%24% were derived
from defense-related business.

Strategic Partnerships In Other Market Areas
- --------------------------------------------
     In addition to its primary focus in microelectronics markets, the 
Company participates in other markets through licensing its technology to 
corporations who manufacture and sell products in these other markets.

     In 1991, CPS and Sopretac, a subsidiary of Vallourec of Boulogne, 
France, established a joint venture, Metals Process Systems (`MPS`), to 
market on a worldwide basis licenses to use the Quickset Process for 
metal injection molding.  At December 30, 1995 the Company owned 40% of 
the voting stock in MPS (see Patents and Trade Secrets), and Sopretac 
owned 60%. In 1996, the Company`s ownership interest in MPS was reduced 
to less than 1%, based on additional investment in MPS by Sopretac. The 
Company accounted for its investment in MPS under the equity method and 
did not recognize any income or dividends from the joint venture in 1998.defense related applications.

Research and Development
- ------------------------
     The Company continues to perform product development under
prototype manufacturing agreements with customers.  The Company had no
externally funded collaborative research and development agreements in
fiscal years 1999, 1998, 1997, or 1996.1997.

Availability of Raw Materials
- -----------------------------
     The Company uses a variety of raw materials from numerous domestic
and foreign suppliers.  These materials are primarily aluminum ingots,
ceramic powders and chemicals.  Other than certain precious metals, of 
which little is used by the Company, theThe raw materials used by the
Company are available from domestic and foreign sources and none is
believed to be scarce or restricted for national security reasons.

Patents and Trade Secrets
- -------------------------
     As of December 26, 1998January 1, 2000, the Company had 1110 United States patents.
The Company also has several international patents covering the same
subject matter as the U.S. patents.  The Company`s licensees have rights
to use certain patents as defined in their respective license
agreements.  The Company has granted co-ownership of five of its patents
and licensing rights to MPSa joint venture company, Metals Process Systems
(MPS) in exchange for its equity ownership in MPS.  Under terms of the
agreement, MPS has the exclusive right to use such patents in the area
of metal powders and the Company has the exclusive right to use such
patents in all other areas, provided, however, that MPS has granted to
the Company a non-exclusive license to use the patents in the area of
metal powders.

     The Company intends to continue to apply for domestic and foreign
patent protection in appropriate cases.  In other cases, the Company
believes it may be better served by reliance on trade secret protection.
In all cases, the Company intends to seek protection for its
technological developments to preserve its competitive position.

Backlog and Contracts
- ---------------------
     As of December 26, 1998,January 1, 2000, the Company had a product backlog of $1.27$1.45
million compared with a product backlog of $2.07$1.27 million at December 27, 
1997.26,
1998.  The Company shipped 100% of the year-end 19971998 product backlog in
1998.fiscal 1999.

Competition
- -----------
     The Company has developed and expects to continue to develop
products for a number of different markets and will encounter
competition from different producers of metal matrixmetal-matrix composites and
ceramic products.other competing materials.

     The Company believes that the principal competitive factors in its
markets include technical competence, product performance, quality,
reliability, price, corporate reputation, and strength of sales and
marketing resources.  The Company believes its proprietary processes,
reputation, and the price at which it can offer products for sale will
enable it to compete successfully in the advanced microelectronics
markets. However, many of the American and foreign companies now
producing or developing metal matrixmetal-matrix composites have far greater
financial and sales and marketing resources than the Company, which may
enable them to develop and market products which would compete against
those developed by the Company.

Government Regulation
- ---------------------
     The Company produces non-nuclear, non-medical hazardous waste in
its development and manufacturing operations.  The disposal of such
waste is governed by state and federal regulations.  Various customers,
vendors, and collaborative development agreement partners of the Company
may reside abroad, thereby possibly involving export and import of raw
materials, intermediate products, and finished products, as well as
potential technology transfer abroad under collaborative development
agreements.  These types of activities are regulated by the Bureau of
Export Administration of the United States Department of Commerce.

The Company performs and solicits various contracts from the United 
States government agencies and also sells to other government 
contractors.

Employees
- ---------
     As of December 26, 1998,January 1, 2000, the Company and its wholly-owned subsidiary, 
CPS Superconductor Corporation (`CPSS`), had 4050 full-time employees, of
whom 3545 were engaged in manufacturing and engineering and 5 in sales and
administration.  The Company also employs temporary employees as needed
to support production and program requirements.

     None of the Company`s employees is covered by a collective
bargaining agreement.  The Company considers its relations with its
employees to be excellent.

Item 2.  Properties.

     The Company'sAll of the Company`s operations including corporate headquarters,
manufacturing operations and engineering activities and research and development laboratories toare located in a
leased facility in Chartley, Massachusetts. The Company is operating at
the Chartley facility as a tenant-at-will.

     The Company`s rental expense for operating leases was $82 thousand,
$68$82 thousand and $68 thousand in fiscal 1999, 1998 1997 and 1996,1997,
respectively.

Item 3.  Legal Proceedings.

     The Company is not a party to any litigation which could have a
material adverse effect on the Company or its business and is not aware
of any pending or threatened material litigation against the Company.

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

     No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 26, 1998.January 1, 2000.

Part II
- ------------------------------------------------------------------
Item 5.  Market for Registrant`s Common Stock and Related
Stockholder Matters

     On December 26, 1998,January 1, 2000, the Company had 836876 shareholders.  The high and
low closing bid prices of the Company`s common stock for each quarter
during the years ended January 1, 2000 and December 26, 1998 and December 27, 1997 are shown
below.

                                1999                1998                1997
                          ---------------      --------------
                          High       Low       High       Low
                          ----       ----      ----      ----
1st Quarter               $1.69      $1.19     $2.71    $2.00
$0.50    $0.31
2nd Quarter               $2.00      $1.38     $2.62    $1.38
$0.87    $0.34
3rd Quarter               $1.63      $1.00     $1.96    $1.25
$1.50    $0.62
4th Quarter               $1.19      $0.63     $1.53    $1.25     $2.62    $1.38

     The Company has never paid cash dividends on its Common Stock.  The
Company currently plans to reinvest its earnings, if any, for use in the
business and does not intend to pay cash dividends in the foreseeable
future.  Future dividend policy will depend, among other factors, upon
the Company`s earnings and financial condition.

     The Company`s Common Stock is traded on theNASD`s Over-the-Counter
Bulletin Board (OTCBB) under the symbol CPSX.

Item 6.  Selected Consolidated Financial Data

     The following selected financial data of the Company
should be read in conjunction with the consolidated financial statements
and related notes filed as part of this Annual Report on Form 10-K.



SELECTED CONSOLIDATED FINANCIAL DATA

For the Fiscal Year:           1999      1998      1997      1996    1995      1994
- ---------------------------------------------------------------------------
Summary of Operations
- ---------------------
Product Revenue              $5,525    $4,589    $2,007    $1,387    $1,192$4,806    $4,788    $4,198    $1,922    $1,385
License Revenue                   0       737       391        85         2
Operating Expenses            4,723     3,722     2,993     2,201     2,221     3,071
                             ------    ------    ------    ------    ------
Operating Income (Loss)          83     1,803     1,596     (194)     (834)
(1,879)
Net Other Income (Expense)      155     (131)     (219)     (217)     (274)      (38)
                             ------    ------    ------    ------    ------
Net Income (Loss)            $1,672$  238   $ 1,672   $ 1,377   $  (411)$( 411)  $(1,108)  $(1,917)
                             ======    ======    ======   ======     ======
Net Income (Loss) Per
  Basic Common Share         $ 0.02   $  0.16   $  0.18  $ (0.05)   $ (0.14)  $(0.25)$(0.14)
                             ======    ======    ======    ======    ======
Weighted Average Basic
  Number of Common Shares
  Outstanding                12,286    10,566     7,799     7,781     7,675
                             7,581
                             ======     ======    ======    ===========     =====     =====    ======
Net Income (Loss) Per
  Diluted Common Share       $ 0.02   $  0.14   $  0.13  $ (0.05)   $ (0.14)  $(0.25)$(0.14)
                             ======    ======    ======    ======    ======
Weighted Average Diluted
  Number of Common Shares
  Outstanding                12,483    12,547     12,280    7,781     7,675     7,581

                             ======    ======     ======   ======    ======
- --------------------------------------------------------------------------
Year-end Position
- -----------------

Working Capital (Deficit)    $1,782$1,812   $ 1,782   $(1,788)  $(3,200)  $(2,736)

$ (165)

Total Assets                  3,186     2,984     1,905       795       526

932

Long-term Obligations           197       125       310        88         -

1,620

Stockholders'Stockholders` Equity
  (Deficit)                  $2,389$2,627   $ 2,389   $(1,520)  $(2,905)  $(2,493) $(1,458)


Item 7.  Management`s Discussion and Analysis of Financial Condition and
Results of Operations

     This Annual Report on Form 10-K contains forward-looking statements
that involve a number of risks and uncertainties. There are a number of
factors that could cause the Company`s actual results to differ
materially from those forecasted or projected in such forward-looking
statements.  Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof.  The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to
reflect events or changed circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

Results of Operations
- ---------------------

Revenue
- -------
     Revenue from sales of products in fiscal 1999 was $4.81 million, up
slightly from sales of products in fiscal 1998 of $4.78 million.  No
revenue was received from licensing agreements in fiscal 1999 compared
to $0.74 million received from licensing agreements in fiscal 1998.
Because no licensing revenue was received in fiscal 1999, total revenue
decreased $720 thousand or 13% to $4.81 million in fiscal 1999 from
$5.52 million in fiscal 1998.

     Although product revenue increased only slightly in fiscal 1999
compared to fiscal 1998, the sources of product revenue changed
significantly.  Demand from the Company`s largest customer declined in
fiscal 1999 by $0.75 million, or 19%, compared to fiscal 1998, while
revenue from other customers increased by $0.77 million, or 94%.

     Total revenue increasedof $5.52 million in fiscal 1998 reflects an increase
of $936 thousand or 20% to $5.52 million in 1998 
from $4.59 million in 1997.  Totalover total revenue of $4.59 million in 1997 
reflects an increase of $2.58 million or 128% over total revenue of $2.01 
million in 1996.fiscal
1997.  The increase in revenue from fiscal 1997 to fiscal 1998 iswas due
to increased customer demand resulting in an increase in product shipments of $590 thousand, and increased revenues
from licensing activities of $347 thousand.

The increase in revenue from 1996 to 1997 is primarily the 
result of a shift in product sales mix from small prototyping runs to 
recurring production of several products.  Because metal-matrix composites 
are relatively new materials, the Company`s customers often take one to 
three years to evaluate prototypes and modify their designs to take 
advantage of the benefits metal-matrix composites offer before purchasing 
production quantities.  In 1997, several products, primarily for wireless 
communications applications, made this transition from prototyping 
quantities to production quantities.

Operating Costs
- ---------------

     Total operating costs were $4.7 million, $3.7 million, and $3.0
million for years fiscal 1999, fiscal 1998, and fiscal 1997,
respectively.

     Operating costs increased in fiscal 1999 compared to fiscal 1998
by $1 million as a result of two factors, 1) actions taken, primarily
the hiring of additional personnel, to strengthen and improve the
quality, engineering, manufacturing and sales functions within the
Company to prepare for future growth, and 2) changes in the product mix.
In fiscal 1999 the Company hired managers for new business development
and quality assurance, and technicians for product development, quality
assurance and maintenance, in addition to operators for production
positions.  The Company purchased additional capital equipment for the
quality department and manufacturing operations.  The Company also
conducted a year-long program to revise and upgrade its quality system
with the objective of achieving registration to the ISO 9001 standard in
early 2000.  Management believes these actions will enable the company
to better meet the rigorous quality requirements of its current and
future customer base.   Changes in product mix resulted in increases in
tooling and raw material expenses.  Operating costs increased in fiscal
1998 compared to fiscal 1997 by $0.7 million primarily as a result of
increased sales volume.

     Cost of sales for fiscal years 1999, 1998, and 1997 were $3.8
million $3.0 million, and $2.2 
million for the fiscal years 1998, 1997, and 1996, respectively.  

     Cost of sales for the years 1998, 1997, and 1996 were $3.0 million 
$2.5 million, and $1.7 million, respectively.  Selling, general
and administrative costs were $0.7$0.9 million, $0.5$0.7 million, and $0.5
million for these same years, respectively.

     The $0.8 million increase in cost of sales in fiscal 1999 versus
fiscal 1998 is attributable to increased overhead expenses described
above, as well as increased raw material and labor expenses associated
with changes in product mix.  The $0.5 million increase in cost of sales
in fiscal 1998 versus fiscal 1997 is attributabledue to higher average sales volume
in fiscal 1998.  The $0.8 million increase in 
cost of sales in 1997 versus 1996 is attributable to higher sales volume in 
1997. Unit shipments in 1997 were 337% higher than unit shipments in 1996 
while cost of sales increased only 47%, reflecting a shift in mix from 
small prototyping runs to recurring production of several products.

     Gross margins on product revenue declined tofor fiscal years 1999, 1998 and
1997 were 21%, 37% in 1998 fromand 41% in 
1997 primarily due to increased manufacturing overhead expensesrespectively.  As the Company believes arehas
transitioned from a research and development focus to a manufacturing
focus, the Company has incurred expenses to build the manufacturing
infrastructure needed to support future growth.  Gross margins increased to 
41% in 1997 from 12% in 1996 as more products entered into recurring 
production and manufacturing efficiencies improved as processes operated on 
a consistent daily basis, labor content per part declined as capital 
equipment was installed, and the cost of raw materials per unit shipped 
declined asIn 1999, the Company
took advantage of reductions in vendors` prices as 
a result of higher quantity usage.

     The 1998 selling, generaladded engineering and administrative expenses of $685 
increased 33% from 1997 selling, general and administrative expenses of 
$517 primarily as a result of increased salary and travel expense.preventative maintenance personnel, for example.
The Company added personneldoes not anticipate continuing to add fixed costs at a
greater rate than revenue growth in the sales function in 1998 and the Company 
expects to continue to increase headcountnear future.   In addition,
fiscal 1999 gross margins were negatively affected by reduced shipments
in the sales function as it 
expends greater efforts on building it'ssecond half of fiscal 1999 to the Company`s largest customer,
resulting in the fixed costs being spread over a smaller base.

     Selling, general and administrative expenses offor fiscal years 1999,
1998 and 1997 were $0.9 million, $0.7 million, and $0.5 million
were consistentrespectively.  The increase of $0.2 million from fiscal 1998 to fiscal
1999, and the increase of $0.2 million from fiscal 1997 to 1996.fiscal 1998
primarily resulted from hiring additional sales personnel in fiscal 1999
and fiscal 1998, and incurring additional travel and sales promotion
expenses.  The Company began to sell product actively in Europe in
fiscal 1999.

     The Company continues to perform product development under
prototype manufacturing agreements with customers.  The Company had no
externally funded collaborative research and development agreements in
fiscal 1999, 1998 1997 or 19961997.

Net Other ExpensesIncome and Expense
- ------------------
     The Company had net other expensesincome (expense) of $149 thousand, $0 $219
thousand and $217($219) thousand for the fiscal years 1999, 1998 1997 and 19961997
respectively.  The decreaseincrease in net other expenseincome in 1998fiscal 1999 compared
to 1997fiscal 1998 is primarily due to reduced interest expense as a resultthe gain on sale of extinguishing debt or conversion of 
debt to equity in 1998.obsolete
equipment. Additionally, interest income increased due to average higher
cash balances.balances in fiscal 1999.  Net other expenses were similar in amount
in 19971999 and 1996,1998, and were primarily interest expense.

Income Taxes
- ------------
     The Company'sCompany`s Federal income taxes expense intax expenses were ($6), $36, and $21
thousand for 1999, 1998 was $57,126 which 
includes alternative minimum taxes for fiscaland 1997 of $21,060 and taxes for 
fiscal 1998 of $36,066.respectively.  The Company did not accrue or pay Federalpaid no
income taxestax in 19961999 due to its tax lossesloss carryforwards and changes in that year.the
tax code relating to small business and the alternative minimum tax.
The ($6) expense for 1999 is an adjustment for over accrual of taxes in
1998.

     Certain provisions of the Internal Revenue Code limit the annual
utilization of net operating loss carryforwards if, over a three-year
period, a greater than 50% change in ownership occurs.  The Company
believes that they did not exceed the 50% ownership change in the three-
year period ending  December 26, 1998,January 1, 2000; therefore, as of year-end 1998at January 1, 2000 all
net operating loss carryforwards are available to offset future taxable
income.

Liquidity and Cash Reserves
- ---------------------------
     Cash on hand increased $938of $1,034 thousand at fiscal year end 1999 reflects a
decrease of $465 thousand or 167% to31% over cash on hand of $1,499 thousand at
fiscal year end 1998 from $561 thousand1998.  Government securities on hand at fiscal year end
1997.1999 were $307 thousand compared to no government securities on hand at
fiscal year end 1998.  In 1998,fiscal 1999, operations generated net cash of
$1,266 thousand, investing activities 
generated net cash of $55 thousand, and financing activities, primarily 
payment of debt principal, consumed net cash of $383 thousand. Cash 
generated by operations increased in 1998 from 1997 primarily because of 
increased product and licensing revenues in 1998 compared to 1997.

     Cash on hand of $561 at fiscal year end 1997 reflects an increase of 
$448 thousand or 396% over cash on hand of $113 at fiscal year end 1996. In 
1997, operations generated net cash of $784$365 thousand, investing activities, primarily the purchase of capital
equipment and short term investments in the form of government
securities, consumed net cash of $215$784 thousand, and financing
activities, primarily paymentnamely principal payments of debt principal,capital lease obligations,
consumed net cash of $120$47 thousand.

     Cash on hand of $1,499 thousand at fiscal year end 1998 reflects
an increase of $938 thousand or 167% over cash on hand of $561 thousand
at fiscal year end 1997.  The increase in 1998 from 1997 is primarily
the result of receipt of licensing fees, and cash generated by
operations increased 
in 1997 from 1996 primarily because of increased product and licensing 
revenues in 1997 compared to 1996.operations.

     In 1999, 1998, and 1997 the Company financed its operations through
funds generated from operations.  Prior to 1997, the Company financed its 
operations primarily through, debt, contract research and development 
revenues, license fees, an equity placement, and sale of products.

     In 1994 and 1995, the Company issued notes and convertible notes
in the amount of $2.4 million to finance its working capital obligations
and building renovations cost.  In 1997, the Company paid down several
notes. In 1998, the Company converted the remaining notes into equity.
Specifically, in 1998 the Company issued 3,740,000 shares of common
stock upon conversion of note principal in the amount of $1,870,000, the
Company issued 723,916 shares of common stock upon conversion of accrued
interest in the amount of $361,958, and the Company paid accrued
interest in cash in the amount of $160,542.

     The Company believes it will be able to finance its working capital
obligations and capital expenditures for production equipment through funds generated from
operations throughout 1999.2000.  The Company continues to sell to a limited
number of customers and loss of any one of these customers could cause
the Company to require external financing.

As of year-end 1998 the Company has no notes outstanding.

Newly Issued Accounting Pronouncements and Future Accounting Changes
- ---------------------------------------------------------------------------------------------------

     In June 1998, the FASB issued FASSFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," FAS No. 133 requires that allwhich establishes
accounting and reporting standards for derivative instruments, be recorded on the balance sheet at their fair 
value.  Changesincluding
certain derivative instruments embedded in the fair value of derivatives are recorded each period 
in current earnings or other comprehensive income, depending on whether a 
derivative is designated as part of a hedge transactionscontracts and if it is, the 
type of hedge transaction.  The statement is effective for
fiscal years 
beginning after June 15, 1999.hedging activities.  The Company will adopt FASSFAS No. 133 for itsas required by
SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133", in
fiscal 2001.  To date the Company has not utilized derivative
instruments or engaged in hedging activities, and therefore the adoption
of SFAS No. 133 is not expected to have a material impact on the
Company`s financial position or results of operations.

     In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements".  SAB 101 summarizes the SEC`s view
in applying generally accepted accounting principles to selected revenue
recognition issues.  The application of the guidance in SAB 101 will be
required no later than the Company`s second quarter of the fiscal year
ending December 30, 2000.  The effect of applying the guidance, if any, will be reported as
a cumulative effect adjustment resulting from a change in accounting
principle.  The Company`s evaluation of SAB 101 is not yet complete.

Year 2000 Issue
- ---------------
     TheIn 1998 and 1999 the Company has identified three areas of possible
exposure to Year 2000 problems:  1) Applicationapplication programs (financial,
CAD/CAM and management information programs) used by the company, 2)
Embeddedembedded programs in production and analytical equipment used by the
Company, and 3) Programsprograms used by vendors, customers and other third
parties with whom the Company conducts business.

     The Company has completed an assessment of its exposure in each of
these three areas and has developed and implemented a plan and timetable to address issues
identified.  The assessment indicated the area of greatest risk iswas the
area of application programs.  In the process of addressing the Year
2000 issue, the Company has concurrently sought to upgrade certain computer
systems to provide greater functionality.  In fiscal 1998 and 1999, the
Company made capital expenditures of $84less than $100 thousand to purchase
and install new financial, accounting, and selected manufacturing
computer systems which are Year 2000 compliant and which provide greater
functionality . For the application 
programs which the Company does not intend to replace but which are not 
currently Year 2000 compliant, the Company has identified patches and 
upgrades which the company is implementing through the first half of 1999.functionality.

     Regarding the second area, the Company is testingtested all production and
analytical equipment one machine at a time to determine where Year 2000 problems exist,existed, and
to implement upgrades and or other remedies for 
problems identified.  The Company's timetable calls for completion of this 
process by the end of the first half of 1999.  Ifimplemented upgrades or other remedies are not possible for certainas appropriate. No production or
analytical equipment the Company believes it 
can replace the capital equipment in an orderly manner without disrupting 
production.  The Company does not currently believe any capital equipment 
will need to be replaced, but there is no guarantee this will be the case. 
The Company does not believe the costrequired replacement as a result of upgrades will be material, but 
there is no guarantee this will be the case.Year 2000
problems.

     Regarding the third area, the Company is interviewinginterviewed vendors and
customers to determine their exposure to Year 2000 issues.  The Company is 
developingissues, and developed
a contingency plan for sourcing materials and other services in the
event of noncompliance byan interruption.

     As of March 1, 2000 the Company has not experienced any
interruptions in its customersoperations from the Year 2000 issue, and vendors.  The contingency plandoes not
expect any interruptions in the future; however there can be no
assurance this will be in place by the end of 
the third fiscal quarter of 1999.case.

Inflation
- ---------
     Inflation had no material effect on the results of operations or
financial condition during 1999, 1998 1997 or 1996.1997. There can be no
assurance,assurance; however, that inflation will not affect the Company`s
operations or business in the future.

Item 8.  Financial Statements and Supplementary Data

     See Index to the Company`s Financial Statements and the
accompanying financial statements and notes which are filed as part of
this Annual Report on Form 10-K.

Item 9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

         None.

Part III
- --------------------------------------------------------------------
Item 10.  Directors and Executive Officers of the Registrant

     Directors of the Company are elected annually and hold office until
the next annual meeting of stockholders and until their respective
successors are duly elected and qualified. The executive officers of the
Company are appointed by the Board of Directors and hold office until
their respective successors are duly elected and qualified.

     The Directorsdirectors and executive officers of the Company are as
follows:

Name                     Age                 Position
- ----                     ---                 --------
Grant C. Bennett         4445                  President
                                             Chief Executive
                                             Officer,
                                             Treasurer
                                             and Director

Michael Bernique         5556                  Director

H. Kent Bowen            5758                  Director

Francis J. Hughes, Jr.   4849                  Director

     Mr. Grant C. Bennett has held the positions of President, Chief
Executive Officer and Director of the Company since September, 1992.
Prior to that time, he served as Vice President-Marketing and Sales of
the Company from November, 1985 to September, 1992.  Before joining CPS,
Mr. Bennett was a consultant at Bain & Company, a Boston-based
management consulting firm.

     Mr. Michael Bernique is currently President and CEO of TelOptica, a
network optimization and professional services firm.  He served as
President, Satellite Data Networks Group of General Instrument
Corporation from 1996 to 1998, as Senior Vice President, North American
Sales and Vice President and General Manager, Transmission Products
Division of DSC Communications from 19931989 to 1996, and in a variety of
positions with Motorola from 19861985 to 1993,1989, including Vice President
Domestic Operations, Cellular Infrastructure. Mr. Bernique was elected
to the Company'sCompany`s Board of Directors in 1999.  Mr. Bernique is also
a directorChairman of the Board of Directors of RF Monolithics, Inc.

     Dr. H. Kent Bowen has served as a Professor at Harvard Business
School since July, 1992.  Prior to that time, he held the position of
Ford Professor of Engineering at the Massachusetts Institute of
Technology (`MIT`) from 1981 to 1992.  Dr. Bowen served as Co-Director
of the Leaders for Manufacturing Program at MIT from 1991 through July,
1992.  Dr. Bowen has been a Director of the Company since 1984 and
served as Chairman of the Board of Directors of the Company from 1984 to
August, 1988. Dr. Bowen is also a director of General SignalSPX Corporation.

     Mr. Francis J. Hughes, Jr. has served as President of American
Research and Development Corporation (`ARD`), a venture capital firm,
since 1992. Mr. Hughes joined ARD`s predecessor organization in 1982,
and became Chief Operating Officer in 1990. Mr. Hughes served as General
Partner of the following venture capital funds: ARD I, L.P., ARD II,
L.P. (since July, 1985), ARD III, L.P. (since April, 1988), Hospitality
Technology Fund, L.P. (since(since June, 1991) and Egan-Managed Capital, L.P.
(since February, 1997). Mr. Hughes has served as a Director of the
Company since 1993. Mr. Hughes is also a director of RF Monolithics,
Inc., and Texas Micro, Inc.

     There are no family relationships between or among any executive
officers or Directorsdirectors of the Company.

Item 11.  Executive Compensation

     The following table sets forth certain information with respect to
the annual and long-term compensation of the Company`s Chief Executive
Officer for the three fiscal years ended December 26, 1998.January 1, 2000.  No other
executive officer of the Company serving on the last day of fiscal year
19981999 received total annual salary and bonus in excess of $100,000.

SUMMARY COMPENSATION TABLE

                          Annual Compensation     Long Term Compensation
                                        Other                  All Other
                                      Compen- Options/    LTIP Compensa-
Name & Position   Year   Salary Bonus  sation    SAR`s Payouts      tion
- ---------------------- -------- ----- ------- -------- ------- ---------
                                 ($)   ($)     ($)      (#)($)     ($)    ($)
Grant C. Bennett  1999 $125,000  $0    $0       0       $0      $0     $0
 President and    1998 $104,026  $0    $0       0       $0      $0     $0
 President andChief Executive  1997 $100,163  $0    $0       0       $0      $0     $0
 Chief Executive  1996 $ 95,550  $0    $0       0       $0      $0     $0
 Officer

     The Company`s President and Chief Executive Officer did not receive
option grants during fiscal year 1998.1999.  During fiscal year 19981999 no
options were exercised by him, and at the end of the fiscal year 19981999 no
options were held by him.

Directors` Fees
- ---------------
     UnderThe Company adopted the terms of the Company`s 1992 Director Stock Option Plan (the 
`Director Plan`("1992
Director Plan"), Directors who are neither officers nor employees on February 20, 1992. As of the 
Company (the `Outside Directors`) are entitled to receive stock options 
as compensation for their services as Directors.  A non-statutory stock 
option (the `initial option`) to purchase up to 4,000 shares of Common 
Stock was granted on MayJanuary 1, 1992 to each eligible Director who was then 
serving as a Director, and shall be granted to each other eligible 
Director upon his or her initial election as a Director.  Also, each 
eligible Director is entitled to receive a non-statutory stock option 
(the `reelection option`) to purchase up to 2,000 shares of Common Stock 
on each subsequent date that he or she is reelected as a Director of the 
Company.  In addition, under the terms of the Plan, the Director serving 
as Chairman of the Board and each Director serving on a standing 
committee of the Board is entitled to receive an option to an additional 
500 shares as part of his initial option and each reelection option.  
Options vest in 12 equal monthly installments beginning one month from 
the date of grant, provided that 2,000 shares of each initial option vest 
immediately.  No options were granted to Directors under the Director 
Plan in 1998.  At December 26, 1998,2000 options to
purchase 35,50035,000 shares of Common Stock were outstanding under the 1992
Director Plan.  No grants were made under this plan in fiscal 1999, 1998
or 1997.  The 1992 Director Plan expired on April 16, 1998 and no new
grants are available under it.

     The Company adopted the 1999 Stock Incentive Plan ("1999 Plan") on
January 22, 1999.  Under the terms of the 1999 Plan, all of the
Company`s employees, officers, directors, consultants and advisors are
eligible to be granted options, restricted stock awards, or other stock-
based awards.  In 1999, options to purchase 24,000 shares of the
Company`s Common Stock were granted to directors under the 1999 Plan.
All options granted are nonstatutory stock options granted at the fair
market value of the stock, are exercisable one year from the date of
grant, and expire ten years from the date of grant.  The 1999 Plan
includes provisions for the acceleration of vesting in the event of a
change in control of the Company.  Outside Directorsdirectors may receive expense
reimbursements for attending Boardboard and Committee 
Meetings.committee meetings.  Directors
who are officers or employees of the Company do not receive any
additional compensation for their services as Directors.directors.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     The following table sets forth certain information, as of March 1,
1999,2000, with respect to the beneficial ownership of the Company`s Common
Stock by (i) each person known by the Company to own beneficially more
than 5% of the outstanding shares of Common Stock, (ii) each Director of
the Company, (iii) each Executive Officer of the Company named above in
the Summary Compensation Table, and (iv) all Directors and Officers as a
group:

                                                   Percentage of
                                   Common Stock        Shares of
Name and Address                   Beneficially     Common Stock
of Beneficial Owner                       Owned  (1) Outstanding
- -------------------                   ------------   -------------
Ampersand Specialty Materials
 Ventures Limited Partnership
 (`ASMV`)
 55 William-----------
ARD Master, L.P.
  30 Federal Street
  Suite 240
 Wellesley,Boston, MA 02181                 1,837,810       15.0%02110-2508	              1,173,214  (2)        9.5%

ARD I, L.P.
  30 Federal Street
  Boston, MA 02110-2508               1,021,884  (3)         8.3

Waco Partners
 c/o Wechsler & Co., Inc.
 105 South Bedford Road, Suite 310
 Mount Kisco, NY  10549               1,669,980            13.6%

American Research and
 Development III, L.P.
 (`ARD III`)
 30 Federal Street
 Boston, MA  02110-2508               1,219,191 (2)    9.9%

American Research and
 Development I, L.P.
 (`ARD I`)
 30 Federal Street
 Boston, MA  02110-2508               1,021,884 (3)    8.3%

Grant C. Bennett (Director & Officer) 1,642,331       13.4%1,627,331            13.2%

Michael Bernique (Director)               None8,000  (4)           *

H. Kent Bowen (Director)                 None16,000  (5)           *

Francis J. Hughes, Jr. (Director)     2,245,575 (4)2,199,598  (6)       18.3%

All Directors and Officers as a
 group (three(four  persons)                3,887,906 (5)3,850,929  (7)       31.6%

*Less than 1% of the total number of outstanding shares of
Common Stock.

(1)1. The inclusion herein of any shares of Common Stock deemed
beneficially owned does not constitute an admission of beneficial
ownership of those shares.  Unless otherwise indicated, each
stockholder referred to above has sole voting and investment power
respect to the shares listed.

(2)2. Total of 1,219,1911,173,214 shares includes 1,216,471consists of 1,170,494 shares owned by ARD
IIIMaster L.P., and options to purchase 2,720 shares of common stock
exercisable within 60 days after March 1, 1999.2000.  Excludes shares described in Footnote 3 below, 
and excludes options to
purchase 4,500 shares of common stock held by Mr. Hughes which are
exercisable within 60 days after March 1, 1999.

(3)2000.

3. Total of 1,021,884 shares includesconsists of 1,019,604 shares owned by ARD
I, L.P., and options to purchase 2,280 shares of common stock
exercisable within 60 days after March 1, 1999.2000.  Excludes shares described in Footnote 2 above, 
and excludes options to
purchase 4,500 shares of common stock held by Mr. Hughes which are
exercisable within 60 days after March 1, 1999.

(4)	Total2000.

4. Consists of 2,245,575 includes a) 1,216,471 shares of Common Stock owned 
by ARD III, 1,019,604 shares of common stock owned by ARD I, options to purchase 2,7208,000 shares of common stock
exercisable within 60 days after March 1, 1999 owned by ARD III and2000

5. Consists of options to purchase 2,28016,000 shares of Common Stockcommon stock
exercisable within 60 days after March 1, 19992000.

6. Consists of shares and options to purchase shares described in
Footnotes 2 and 3 above owned by ARD I, 
as to which shares Mr. Hughes disclaims beneficial ownership (Mr. Hughes, a 
Director of the Company, is a General Partner of partnerships which controlMaster, L.P., and ARD I, L.P.,
and ARD III) and, b) options to purchase 4,500 shares of common stock held by Mr.
Hughes which are exercisable within 60 days after March 1, 1999

(5)	Total2000.

7. Consists of 3,887,906 includes 2,245,575all shares and options to purchase shares described in
Footnote 4Footnotes 4,5 and 6 above, and 1,642,331 shares owned by Mr.Grant C. Bennett
a director and 
officer of the Company.listed in above table.


Item 13.  Certain Relationships and Related Transactions

     In 1994, the Company issued convertible subordinated notes to
affiliates of Directors and other persons knowknown by the Company to
beneficially own more than 5% of the outstanding shares of the Company.
In 1998 all remaining notes were converted into equity and accrued
interest was paid in cash or converted into equity as summarized below.
There were no notes outstanding as of December 26, 1998.year-end 1998 or year-end 1999.

                                       Shares Issued Upon Conversion of
                                       Principal and Shares Issued or cash
                                       Paid for Accrued Interest in 1998
                              Per        ---------------------------------
                            Annum      Principal    Interest    Interest
                Principal Interest    Conversion  Conversion     Payment
                   Amount    Rate         Shares      Shares        Cash
Noteholder            ($)     (%)     ----------  ----------   ---------

ASMV             $660,000     10%      1,320,000     517,810           -

Waco Partners    $750,000     10%      1,500,000           -    $132,260

ARD III          $141,440     10%        282,880     112,122           -

ARD I            $118,560     10%        237,120      93,984           -

Affiliates of
 Directors as
 a group         $260,000     10%        520,000     206,106           -

Part IV
- ------------------------------------------------------------------------
Item 14.  Exhibits, Financial Statement Schedules, and Reports on
          Form 8-K.

(a)  Documents filed as part of this Form 10-K.

     1.   Financial Statements
          --------------------
          The financial statements filed as part of this
          Form 10-K are listed on the Index to Consolidated
          Financial Statements on page 21 of this Form 10-K.

     2.a. Exhibits
          --------
          The exhibits to this Form 10-K are listed on the
          Exhibit Index on pages 18-20 of this Form 10-K.

     2.b. Reports on Form 8-K
          -------------------
          None.


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.

CERAMICS PROCESS SYSTEMS CORPORATION

By:  /s/ Grant C. Bennett
     --------------------------
     Grant C. Bennett
     President
     Date: March 26, 199830, 2000

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

Signature                  Title                                Date
- --------------------       ------------------------     ------------



/s/ Grant C. Bennett         President, Treasurer and Director}
- --------------------------   (Principal Executive Officer)    }
Grant C. Bennett                                              }
                                                              }
                                                              }
                                                              }
/s/ Michael Bernique            Director                      }
- --------------------------                                    }
Michael Bernique                                              } March 26,
                                                              } 1998}Mar. 30,
                                                              }2000
                                                              }
                                                              }
/s/ H. Kent Bowen            Director                         }
- --------------------------                                    }
H. Kent Bowen                                                 }
                                                              }
                                                              }
                                                              }
/s/ Francis J. Hughes, Jr.   Director                         }
- --------------------------                                    }
Francis J. Hughes, Jr.                                        }
                                                              }



             CERAMICS PROCESS SYSTEMS CORPORATION
                         EXHIBIT INDEX

Exhibit
No.            Description                                         Page
- -------        -----------                                         ----
  3.1**        Restated Certificate of Incorporation of the
               Company, as amended, is incorporated herein by
               reference to Exhibit 3 to the Company`s
               Registration Statement on Form 8-A
               (File No. 0-16088)                                  --

  3.2**        By-laws of the Company, as amended, are
               incorporated herein by reference to Exhibit 3.2
               to the Company`s Registration Statement on Form
               S-1 (File No. 33-14616)(the `1987 S-1Registration
               Statement`)                                         --

  4.1**        Specimen certificate for shares of Common Stock of
               the Company is incorporated herein by reference to
               Exhibit 4 to the 1987 S-1 Registration Statement    --

  4.2**        Description of Capital Stock contained in the
               Restated Certificate of Incorporation of the
               Company, as amended, filed as Exhibit 3.1           --

(1)10.1**      1984 Stock Option Plan of the Company, as amended,
               is incorporated herein by reference to Exhibit
               10(b) to the Company`s Annual Report on Form 10-K
               for the year ended December 31, 1988                --

(1)10.2**      1989 Stock Option Plan of the Company, is
               incorporated by reference to Exhibit 10.6 to the
               Company`s 1989 S-1 Registration Statement           --

(1)10.3**      1992 Director Stock Option Plan is incorporated by
               reference to Exhibit 10.5 to the Company`s Annual
               Report on Form 10-K for the fiscal year ended
               December 28, 1991                                   --

  10.4**       Participation Agreement, dated February 14, 1991,
               between the Company and Sopretac, a French societe
               anonyme, is incorporated by reference to Exhibit
               10.10 to the Company`s Annual Report on Form 10-K
               for the year ended December 28, 1991                --

(1)10.5**      Retirement Savings Plan, effective September 1,
               1987 is incorporated by reference to Exhibit 10.35
               to the Company`s 1989 S-1 Registration Statement    --

(1)10.6**      Severance Benefit Program, effective June 1, 1989,
               is incorporated by reference to Exhibit 10.36 to
               the Company`s S-1 Registration Statement            --

10.7**         Research and Development Agreement, dated as of
               June 26, 1991, between the Company and Carpenter
               Technology Corporation (`CarTech`) is
               incorporated by reference to Exhibit 10.17 to the
               Company`s Annual Report on Form 10-K for the year
               ended December 28, 1991                             --

  10.8**       Option and License Agreement, dated as of June 26,
               1991, between the Company and CarTech is
               incorporated by reference to Exhibit 10.19 to the
               Company`s Annual Report on Form 10-K for the year
               ended December 28, 1991                             --

  10.9**       License Agreement, dated as of December 11, 1992,
               between the Company and CarTech is incorporated by
               reference to Exhibit 10.19 to the Company`s Annual
               Report on Form 10-K for the fiscal year ended
               January 2, 1993                                     --

  10.10**      Amendment to Research and Development Agreement,
               dated as of December 11, 1992, between the Company
               and CarTech is incorporated by reference to Exhibit
               10.20 to the Company`s Annual Report on Form 10-K
               for the fiscal year ended January 2, 1993           --

  10.11**      Amendment to Option and License Agreement, dated as
               of December 11, 1992, between the Company and
               CarTech is incorporated by reference to Exhibit
               10.21 to the Company`s Annual Report on Form 10-K
               for the fiscal year ended January 2, 1993           --

  10.12**      BancBoston lease line of credit, dated December 23,
               1991, between the Company and The First National
               Bank of Boston is incorporated by reference to
               Exhibit 10.20 to the Company`s Annual Report on
               Form 10-K for the year ended December 28, 1991      --

  10.13**      Amendment to BancBoston lease line of credit, dated
               December 31, 1992, between the Company and the
               First National Bank of Boston is incorporated by
               reference to Exhibit 10.21 to the Company`s Annual
               Report on Form 10-K for the fiscal year ended
               January 2, 1993                                     --

  10.14**      Form of 10% Convertible Subordinated Note Due June
               30, 1995 and related Common Stock Purchase Warrant
               between the Company and noteholder is incorporated
               by reference to Exhibit 10.22 to the Company`s
               Annual Report for the fiscal year ended January 1,
               1994                                                --

  10.15**      10% Convertible Subordinated Note Due April 21,
               2001 between the Company and Waco Partners and
               related Subordinated Convertible Note Purchase
               Agreement between the Company and Wechsler & Co.,
               Inc. is incorporated by reference to Exhibit 10.21
               to the Company`s Annual Report for the fiscal year
               ended December 31, 1994                             --

  10.16**      10% Convertible Subordinated Note Due January 31,
               1996 and related Common Stock Purchase Warrant
               between the Company and Ampersand Specialty
               Materials Ventures Limited Partnership is
               incorporated by reference to Exhibit 10.22 to the
               Company`s Annual Report for the fiscal year ended
               December 31, 1994                                   --

  10.17**      Form of 10% Convertible Subordinated Note Due April
               24, 1996 and related Common Stock Purchase Warrant
               between the Company and noteholder is incorporated
               by reference to Exhibit 10.23 to the Company`s
               Annual Report for the fiscal year ended December
               31, 1994                                            --


  10.18**      Senior Secured Promissory Note Due March 30, 1996
               and related Security Agreement between the Company
               and Aavid Thermal Technologies, Inc. is
               incorporated by reference to Exhibit 10.24 to the
               Company`s Annual Report for the fiscal year ended
               December 31, 1994                                   --

  10.19**      Secured Line of Credit Note Due June 30, 1996 and
               related Security Agreement between the Company and
               Kilburn Isotronics, Inc.                            --

  10.20**      Amended and Restated Promissory Note dated July
               31, 1996 between the Company and Texas Instruments
               Incorporated

--10.21 1999 Stock Incentive Plan adopted by the Company`s
Board of Directors on January 22, 1999

  21**         Subsidiaries of the Registrant are incorporated
               herein by reference to Exhibit 22 to the Company`s
               Annual Report on Form 10-K for the year ended
               December 31, 1988                                   --

  23.1         Consent of PricewaterhouseCoopers LLP

**   Incorporated herein by reference.

(1) Management Contract or compensatory plan or arrangement filed as an
exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.



          INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                              OF
             CERAMICS PROCESS SYSTEMS CORPORATION



                                                        Page
- ------------------------------------------------------------

Report of Independent Accountants                         22

Consolidated Balance Sheets as of January 1, 2000 and
     December 26, 1998 and
     December 27, 1997                                 23-24

Consolidated Statements of Operations for the years ended
     January 1,2000, December 26, 1998,
     and December 27, 1997
     and December 28, 1996                                25

Consolidated Statements of Stockholders` Equity (Deficit)
     for the years ended January 1, 2000,
     December 26, 1998 and December 27, 1997              and December 28, 1996           26-2726

Consolidated Statements of Cash Flows for the years ended
     January 1, 2000, December 26, 1998,
     and December 27, 1997                                and December 28, 1996                                2827

Notes to Consolidated Financial Statements             3028-37


All schedules are omitted because they are not applicable or
the required information is included in the financial
statements or notes thereto.



Report of Independent Accountants
- ------------------------------------------------------------------------


To the Board of Directors and Stockholders
Ceramics Process Systems Corporation:

In our opinion, the consolidated financial statements listed in the
accompanying consolidated balance sheets and the 
related consolidated statements of operations, stockholders' equity 
(deficit) and cash flowsindex present fairly, in all material respects, the
financial position of Ceramics Process Systems Corporation (the "Company")and its
subsidiary at January 1, 2000 and December 26, 1998, and December 27, 1997, and the results
of their operations and their cash flows for each of the threefiscal years
in the period 
ended January 1, 2000, December 26, 1998 and December 27, 1997 in
conformity with accounting principles generally accepted accounting 
principles.in the United
States. These financial statements are the responsibility of the
Company'sCompany`s management; our responsibility is to express an opinion on
these financial statements based on our audits.  We conducted our audits
of these statements in accordance with auditing standards generally
accepted auditing standardsin the United States, which 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for the opinion expressed
above.



PricewaterhouseCoopers LLP

Boston, Massachusetts
March 8, 1999	

3, 2000




















                           CONSOLIDATED BALANCE SHEETS
                      Ceramics Process Systems Corporation

                                   ASSETS

                                           January 1,      December 26,
                                                 December 27,2000              1998              1997
                                             --------          --------
Current assets:
     Cash & cash equivalents             $  1,033,522      $  1,498,774
     $    561,166Short-term investments                   306,672                --
     Accounts receivable                      547,134           626,121receivable-trade                387,569           514,152
     Accounts receivable-other                109,065            32,982
     Inventories                              307,348           204,200           123,325
     Prepaid expenses                          30,193             1,830            15,528
                                         ------------      ------------
       Total current assets                 2,174,369         2,251,938         1,326,140

Property & equipment:
     Production equipment                   2,013,331         1,569,021         1,470,253
     Office equipment                         202,523           155,232            70,404
     Accumulated depreciation
      and amortization                    (1,204,000)       (1,000,637)         (967,161)
                                         ------------      ------------
       Net property and equipment           1,011,854           723,616           573,496
                                         ------------      ------------
     Deposits                                      --             8,772             5,072
                                         ------------      ------------
       Total assets
                                         $  2,984,3263,186,223      $  1,904,7082,984,326
                                         ============      ============

The accompanying notes are an integral part of the consolidated
financial statements.

                           CONSOLIDATED BALANCE SHEETS (continued)
                            Ceramics Process Systems Corporation

                        LIABILITIES & STOCKHOLDERS'STOCKHOLDERS` EQUITY

                                             (DEFICIT)January 1,     December 26,
                                                   December 27,2000             1998            1997
                                                --------          ------

Current liabilities:
     Accounts payable                       $    96,753142,667      $   154,65796,753
     Accrued expenses                            157,300         184,032         677,109
     Deferred revenue                              142,266         163,430 
     Notes payable                                       --         206,962
     Current portion of convertible notes payable:                         
     Related parties                                     --         260,000
     Other                                               --       1,610,0009,884          10,670
     Current portion of capital lease
      obligations                                 52,255          46,959          42,205
                                              ----------        --------
     Total current liabilities                   470,010       3,114,363

     Long term portion: 
     Notes payable                                       --         137,868
      Capital362,107         338,414


      Deferred revenue                           124,000         131,596
      Long-term portion of capital lease
       obligations                                72,900         125,155         172,114
                                              ----------        --------
          Total liabilities                      559,006         595,165       3,424,345
                                              ----------        --------
Stockholders'Stockholders` Equity (Deficit)
     Common stock, $0.01 par value,
      authorized 15,000,000 shares; issued
      12,308,852 shares at January 1, 2000
      and 12,308,852 shares at
      December 26, 1998	                         and 7,824,582 shares at December 27, 1997     123,089         78,246123,089

     Additional paid-in capital                32,656,353     30,464,83332,656,353

     Accumulated deficit                     (30,091,390)   (30,329,446)    (32,001,881)

     Less treasury stock, at cost, 22,883
      common shares                             (60,835)        (60,835)
                                              ----------        --------

          Total stockholders'equity (deficit)stockholders`equity            2,627,217       2,389,161      (1,519,637)
                                              ----------        --------
          Total liabilities & stockholders'stockholders`
           equity                           (deficit)$  3,186,223     $ 2,984,326

                                             $ 1,904,708
                              						           
=======================     ===========

The accompanying notes are an integral part of the consolidated
financial statements.


                          CONSOLIDATED STATEMENTS OF OPERATIONS
                          Ceramics Process Systems Corporation

                                            For the years ended
                                  January 1,  December 26,  December 27,
                                        December 28,2000          1998          1997

                                 1996

                                 ------------  ------------  -----------------------
Revenue:
  Product sales                   $4,805,865    $4,787,790    $4,197,912
  $1,922,006
  License revenues                        --       737,504       391,001        85,000
                                  ----------    ----------    ----------
    Total revenue                  4,805,865     5,525,294     4,588,913     2,007,006
                                  ----------    ----------    ----------
Operating expenses:
  Cost of sales                    3,812,094     3,037,351     2,475,140     1,686,148
  Selling, general, and
  administrative                     910,343       684,658       517,362       515,346
                                  ----------    ----------    ----------
Total operating expenses           4,722,437     3,722,009     2,992,502     2,201,494
                                  ----------    ----------    ----------

Operating income                      (loss)83,428     1,803,285     1,596,411      (194,488)
                                  ----------    ----------    ----------

Other income (expense):
  Interest income                     59,739        41,455         3,581
  --
  Interest expense                 ( 15,957)     (132,202)     (237,968)
  (248,500)

  Other income                       104,917        90,774        15,122        31,683
                                  ----------    ----------    ----------
  Income (loss) before taxes                232,127     1,803,312     1,377,146

  (411,305)

  Provision forfor(benefit from) taxes    5,929      (130,877)           --           --
                                  ----------    ----------    ----------

Net income                        (loss)$  238,056    $1,672,435    $1,377,146    $ (411,305)
                                  ==========    ==========    ==========
Net income (loss) per
  basic common share                   $0.02         $0.16       $0.18        $(0.05)$  0.18
                                   ==========    ==========   ==========
Weighted average
  number of basic common
  shares outstanding              12,285,969    10,565,961     7,799,279     7,780,766
                                 ===========    ==========    ==========
Net income (loss) per
  diluted common share                 $0.02         $0.14       $0.13        $(0.05)$  0.13
                                  ==========    ==========    ==========
Weighted average number
  of diluted common
  shares outstanding              12,483,279    12,547,427    12,279,643     7,780,766
                                 ===========    ==========    ==========
The accompanying notes are an integral part of the consolidated
financial statements.

         
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'CONSOLIDATED STATEMENTS OF STOCKHOLDERS` EQUITY (DEFICIT)
       For the years ended January 1, 2000, December 26, 1998 and
                            December 27, 1997
                Ceramics Process Systems Corporation

             Common stock                                        Stock-
             -----------------Additional                         holders`
            Number    Par     Paid-in     Accumulated  Treasury  equity
            of shares Value   capital     deficit      stock     (deficit)
            -------  -------  ----------   ----------   -------  -----------
Balance at December 28, 1996
           7,780,766 $77,808 $30,457,384  $(33,379,027) $(60,835) $(2,904,670)
Stock Options Exercised
              43,816     438       7,449            --        --        7,887
Net income
                  --      --          --     1,377,146        --    1,377,146
             ------- -------     -------     ---------    ------    ---------
Balance at December 27, 1997
           7,824,582  78,246  30,464,833    32,001,881   (60,385)  (1,519,637)
Common stock issued in debt conversion
           4,463,916  44,639   2,187,319            --        --    2,231,958
Stock Options Exercised
              20,354     204       4,201            --        --        4,405
Net income
                  --      --          --     1,672,435        --    1,672,435
             ------- -------     -------       -------    -------    --------
Balance at December 26,1998
          12,308,852 123,089  32,656,353   (30,329,446)  (60,385)   2,389,161
Net income
                  --      --          --       238,056        --      238,056
             ------- -------     -------       -------    -------   ---------
Balance at January 1, 2000
          12,308,852$123,089 $32,656,353  $(30,091,390) $(60,835)  $2,627,217
          ========== ======= ===========   ============  ========   =========

The accompanying notes are an integral part of the consolidated
financial statements.



                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Ceramics Process Systems Corporation
                                    For the years ended
                                      Jan. 1,      Dec. 26,      Dec 27,
                                         2000          1998         1997
                                   ----------    ----------    ---------

Cash flows from operating activities:
 Net income                         $  238,056    $1,672,435  $1,377,146
 Adjustments to reconcile net income
 to cash provided by
 operating activities:
 Depreciation                          167,359       146,234     115,994
 Amortization                           46,959        36,600      36,500
 Gain on disposal of equipment        (104,225)      (53,800)         --
Changes in assets and liabilities:
 Accounts receivable, trade            126,583        78,987    (485,086)
 Accounts receivable, other             17,982
 Inventories                          (103,148)      (80,875)     33,120
 Prepaid expenses                      (28,364)       13,698     (14,188)
 Accrued interest on investments        (6,672)           --          --
 Accounts payable                       45,914       (57,904)     25,895
 Accrued expenses                      (26,732)     (131,120)   (112,657)
 Deferred revenue                       (8,382)     ( 21,164)   (192,557)
   Net cash provided by            -----------    ----------    --------
   operating activities                365,330     1,603,091     784,167
                                   -----------    ----------    --------
Cash flows from investing activities:
 Additions to property and equipment  (502,555)     (332,954)   (212,827)
 Proceeds on disposal of property and
  equipment                             10,160        53,800          --
 Deposits                                8,772        (3,700)     (2,735)
 Purchase of marketable securities    (300,000)
   Net cash used in investing      -----------    -----------  ---------
   activities                         (783,623)     (282,854)   (215,562)
                                   -----------    -----------  ---------
Cash flows from financing activities:
 Principal payment of capital lease    (46,959)      (42,204)    (23,487)
  obligations
 Principal payments of notes payable        --      (344,830)   (105,170)
 Proceeds from issuance of common stock     --         4,405       7,887
   Net cash used in                -----------     ----------- ---------
   financing activities                (46,959)     (382,629)   (120,770)
                                   -----------     -----------  --------
Net increase (decrease) in cash       (465,252)      937,608     447,835
Cash and cash equivalents at beginning
 of period                           1,498,774       561,166     113,331
Cash and cash equivalents at       -----------     ---------     -------
 end of period                      $1,033,522    $1,498,774    $561,166
                                   ===========   ===========     =======

The accompanying notes are an integral part of the consolidated
financial statements


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- ------------------------------------------------------------------------

(1)  Nature of Business
     ------------------
The Company serves the wireless communications infrastructure
market, high-performance microprocessor market, motor controller market,
and other microelectronic markets by developing, manufacturing, and
marketing advanced metal-matrix composite components to house,
interconnect and thermally manage microelectronic devices.

(2)  Summary of Significant Accounting Policies
     ------------------------------------------

(2)(a) Principles of Consolidation
       ---------------------------
     The consolidated financial statements include the accounts of
Ceramics Process Systems Corporation (the "Company") and its wholly-
owned subsidiary, CPS Superconductor Corporation(`CPSS`).  All
intercompany balances and transactions have been eliminated in
consolidation.

(2)(b) Basis of Presentation
       ----------------------
     Certain amounts in the financial statements and notes thereto have
been reclassified to conform to fiscal year 1999 classifications.

(2)(c) Cash, Cash Equivalents, and Investments
       ---------------------------------------
     The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.

     Management determines the appropriate classification of securities
at the time of purchase and re-evaluates such designation as of each
balance sheet date. As of January 1, 2000, in addition to cash and cash
equivalents, the Company held investments in government securities with
an original maturity of greater than three months in the amount of
$306,672.  These government securities are classified as held-to-
maturity and carried at amortized cost.  As of January 1, 2000, the
estimated fair value of each investment approximated its amortized cost
and therefore there were no significant unrealized gains or losses.  No
investments were held as of December 26, 1998.

     Short-term investments of $306,672 held at January 1, 2000 had
maturities of less than one year.

(2)(d) Inventories
       -----------
     Inventories are stated at the lower of cost or market.  Cost is
determined using the first-in, first-out (FIFO) method.  Year-end
inventory balances consisted of the following:

                     January 1, December 26,
                     2000       1998
                     ---------  ---------
Raw materials       $   71,134   $107,259
Work-in-process        236,214     96,941
                     ---------  ---------
                    $  307,348   $204,200
                     =========  =========

(2)(e) Property and Equipment
       ----------------------
     Property and equipment are stated at cost.  Depreciation of
equipment is calculated on a straight-line basis over the estimated
useful life, generally five years.  Amortization under capital leases is
calculated on a straight-line basis over the life of the lease.
Depreciation of leasehold improvements is calculated using the straight-
line method over the lease term or the estimated useful lives, whichever
is shorter.  Maintenance and repairs are charged to expenses as incurred
and betterments are capitalized. Upon retirement or sale, the cost and
related accumulated depreciation or amortization are removed from their
respective accounts. Any gains or losses are included in the results of
operations in the period in which they occur.


(2)(f) Revenue Recognition
       -------------------
     The Company recognizes product revenue generally upon shipment.
Revenue related to license agreements is recognized upon receipt of the
license payment or over the license period, if the Company has
continuing obligations under the agreement.  Advance payments in excess
of revenue recognized are recorded as deferred revenue.

(2)(g) Research and Development Costs
       ------------------------------
     The Company continues to perform product development under
prototype manufacturing agreements with customers.  In fiscal 1999 and
fiscal 1998, the Company did not incur any costs for research and
development and did not perform any externally funded research and
development programs.  In prior periods research and development costs
were charged to expense as incurred.

(2)(h) Income Taxes
       ------------
     The Company accounts for income taxes utilizing the asset and
liability method which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between tax and financial statement basis of assets and
liabilities, measured using enacted tax rates expected to be in effect
in the period which the temporary differences reverse.

(2)(i) Net Income Per Common Share
       ---------------------------
      Basic net income per common share is calculated by dividing net
income by the weighted average number of common shares outstanding
during the period.  Diluted net income per common share is calculated by
dividing net income by the sum of the weighted average number of common
shares plus additional common shares that would have been outstanding if
potential dilutive common shares had been issued for granted stock
option and stock purchase rights.

(2)(j) Comprehensive Income
        --------------------
     The Company has no items of comprehensive income, and therefore
net income is equal to comprehensive income.

(2)(k) Recent Accounting Pronouncements
        --------------------------------
     In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for
hedging activities.  The Company will adopt SFAS No. 133 as required by
SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133", in
fiscal 2001.  To date the Company has not utilized derivative
instruments or engaged in hedging activities, and therefore the adoption
of SFAS No. 133 is not expected to have a material impact on the
Company`s financial position or results of operations.

     In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements".  SAB 101 summarizes the SEC`s view
in applying generally accepted accounting principles to selected revenue
recognition issues.  The application of the guidance in SAB 101 will be
required no later than the Company`s second quarter of the fiscal year
2000.  The effect of applying the guidance, if any, will be reported as
a cumulative effect adjustment resulting from a change in accounting
principle.  The Company`s evaluation of SAB 101 is not yet complete.


(2)(l) Use of Estimates in the Preparation of Financial Statements
       -----------------------------------------------------------
     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 these estimates.

(2)(m) Risks and Uncertainties
       -----------------------
     The Company manufactures its products to customer specifications
and a significant portion of the Company`s revenues have historically
been generated from three customers. Financial instruments which
potentially subject the Company to concentrations of credit risk consist
of trade and other accounts receivable.  The Company has not incurred
significant losses on its accounts receivable in the past.

 (2)(n) Fiscal Year-End
       ---------------
     The Company`s fiscal year end is the last Saturday in December or
the first Saturday in January, which results in a 52- or 53-week year.
Fiscal year 1999 consisted of 53 weeks and fiscal years 1998, and 1997,
consisted of 52 weeks.

 (2)(o) Stock-based Compensation Plans
       -------------------------------
     The Company has adopted the disclosure requirements of Statements
of Financial Accounting Standards (SFAS) No.123, `Accounting for Stock-
Based Compensation`.  The Company continues to recognize compensation
costs using the intrinsic value based method described in Accounting
Principles Board Opinion No. 25, `Accounting for Stock Issued to
Employees`.  No stock-based compensation costs were recognized in 1999,
1998, and 1997.


(3)  Supplemental Cash Flow Information
     ----------------------------------
     No equipment was acquired through capital lease obligations in
1999 or 1998. The Company acquired equipment through capital lease
obligations in 1997 in the amount of $135,160. The Company paid interest
on these capital leases amounting to $15,957, $20,710, and $15,196 in
fiscal years 1999, 1998, and 1997, respectively. In fiscal 1998 the
Company issued 4,463,916 shares of common stock upon conversion of note
principal and accrued interest in the amount of $2,231,959, and paid
$160,542 in cash for accrued interest. The Company paid federal income
taxes of $36,066 and $21,060 in 1998 and 1997 respectively.  In 1999 the
Company recognized a gain of $104,225 on the sale of equipment. At
January 1, 2000 a receivable of $94,065 was outstanding on the
transaction.

(4)  Leases
     ------
     At January 1, 2000 the Company had production equipment with a
cost of $262,108 and accumulated amortization of $125,349 under capital
leases.  At December 26, 1998 the Company had production equipment with
a cost of $262,108 and accumulated amortization of $78,390 under capital
leases.

     Future payments required under capital lease
obligations are as follows at January 1, 2000:

     2000                                                      62,916
     2001                                                      56,940
     2002                                                      21,497
                                                             --------
Total future minimum lease payments                           141,353
                                                             --------
  Less amount representing interest                            16,198
                                                             --------
Present value of net future lease payments                    125,155

  Less current portion                                         52,255
                                                             --------
Long-term obligation under capital leases                  $   72,900
                                                             ========

     The Company is operating at its Chartley facility as a tenant-at-
will. Total rental expense for operating leases was $82,000 for 1999,
$82,000 for 1998 and $67,500 for 1997.


(5)  Stock-Based Compensation Plans
     ------------------------------

     In 1999 no options were exercised by Company employees.  In 1998
Company employees exercised options for 20,354 shares of common stock at
market prices between $0.18 and $.0625.  In 1997 Company employees
exercised options for 43,816 shares of common stock at market prices
between $0.625 and $2.375.

     In 1999 the Company granted 311,500 options at fair market values
of $1.00 to $1.53 under the 1989 Stock Option Plan and the 1999 Stock
Incentive Plan. In 1998 the Company granted 51,000 options at fair
market values of $1.44 to $2.375 under the 1989 Stock Option Plan. In
1997, under the 1989 Stock Option Plan, the Company granted 109,000
options at fair market value of $0.18 with similar terms and conditions
to existing option holders in exchange for the previously issued
options.  As of January 1, 2000, the total number of options outstanding
under all option plans was 632,853.

     The Company adopted the 1999 Stock Incentive Plan ("1999 Plan") on
January 22, 1999.  Under the terms of the 1999 Plan all of the Company`s
employees, officers, directors, consultants and advisors are eligible to
be granted options, restricted stock awards, or other stock-based
awards.  In 1999, options to purchase 273,500 shares of the Company`s
Common Stock were granted to employees and directors under the 1999
Plan.  All options were nonstatutory stock options granted at the fair
market value of the stock, and expire ten years from the date of grant.
The options granted to employees vest in equal annual installments over
a five-year period.  The options granted to directors vest one year from
date of grant. The 1999 Plan includes provisions for the acceleration of
vesting in the event of a change in control of the Company.

     Under the 1999 Plan a total of 1,250,000 shares of common stock is
available for issuance.  In 1999, options to purchase 273,500 shares of
the Company`s Common Stock were granted to employees and directors,
leaving 976,500 shares available for grant as of January 1, 2000.

     As of January 1, 2000 the 1999 Plan is the only stock option plan
from which awards can be made, all other options plans have expired.
The 1984 Stock Option Plan expired on August 24, 1994 and no additional
grants can be made from this plan.  The 1989 Stock Option Plan expired
on February 22, 1999 and no additional grants can be made from this
plan.  The 1992 Director Stock Option Plan expired on April 16, 1998 and
no additional grants can be made from this plan.  A total of 359,353
options granted under the 1984, 1989 and 1992 Plans prior to their
expiration dates were outstanding as of January 1, 2000.

     The following is a summary of stock option activity for all of the
above plans for the fiscal years 1999, 1998 and 1997.

                            1999                1998                1997
                          --------            --------            --------
                          Weighted            Weighted            Weighted
                          Average             Average             Average
                          Exercise            Exercise            Exercise
                Shares    Price     Shares    Price     Shares    Price
                ------------------  ------------------  ------------------

Outstanding at
 beginning of
 year            338,698   $ 0.81    374,386   $ 0.93    430,961   $ 0.68
  Granted at fair
   market value  311,500   $ 1.09     51,000   $ 2.04    109,000   $ 1.00
  Exercised                          (20,354)  $ 0.22    (43,816)  $ 0.18
  Cancelled      (17,345)  $ 1.58    (66,334)  $ 2.57   (121,759)  $ 0.41
                --------- --------  ---------  ------   --------   ------
Outstanding at
 end of year     632,853    $ .92    338,698   $ 0.81    374,386   $ 0.93
                ========= =======  =========    =====   ========   ======
Options exercisable
 at year-end     273,053    $ .56    176,734   $ 0.60    165,461   $ 1.44


     The following table summarizes information about stock options
outstanding at January 1, 2000:

                           Options Outstanding       Options Exercisable
                           -------------------       -------------------

                           Weighted
                           Average
Range                      Remaining   Weighted                  Weighted
Of                         Contractual Average                   Average
Exercise       Number      Life        Exercise      Number      Exercise
Price          Outstanding (in years)  Price         Exercisable Price
- --------       ----------- ----------- --------      ----------- --------
$0.18              203,353      6.2       $0.18       203,353       $0.18
0.75-0.875          12,000      2.3        0.80        12,000        0.80
$1.00              243,000      9.6        1.00             0           0
1.3 - 1.53         115,000      8.48       1.35        32,666        1.35
2.188 - 2.88        59,500      6.89       2.36        25,034        2.56
                   -------                             ------

$0.18 - $2.88      632,853      7.9       $0.93       273,053       $0.56
                  ========                            =======

     The fair value of each option grant under SFAS 123 is estimated on
the date of grant using the Black-Scholes option-pricing model.  The
following table presents the annualized weighted average values of the
significant assumptions used to estimate the fair values of the options:

                                               1999          1998      1997
                                               ----          ----      ----
Options issued                              311,500        51,000    59,000
Risk-free interest rate                       5.30%         5.52%     6.27%
Expected life in years                            7             7         7
Expected volatility                             95%           88%       80%
Expected dividends                                0             0         0

     All options are granted at the fair market value on the date of
grant.

     Had compensation cost for the Company`s two employee stock option
plans been recorded based on the fair value of awards at grant date
consistent with the alternative method prescribed by SFAS 123, the
Company`s pro forma net income for 1999, 1998, and 1997 would have been
$181,810, $1,632,788, and $1,362,316 respectively.  Diluted
income per share for 1999, 1998 and 1997 would have been $.01, $0.14,
and $0.13, respectively.  The pro forma amounts include
amortized fair values attributable to options granted after December 15,
1994 only and therefore, are not likely to be representative of the
effects on reported net income for future years.



(6) Accrued Expenses
     ------------
     Accrued expenses consist of the following:

                                          January 1,   December 26,
                                                2000           1998
                                            --------     --------

        Accrued legal and accounting       $  37,000       $ 47,500
        Accrued payroll                       87,814        107,383
        Accrued other                         32,486         29,149
                                            --------       --------
                                           $ 157,300       $184,032
                                            ========       ========


(7) Income Taxes
      ------------
     Deferred tax assets and liabilities are as follows:

                                        January 1,     December 26,
                                              2000             1998
                                      ------------     ------------
        Net operating losses           $10,683,000      $10,851,000
        Vacation and other accrued
         expenses                           88,000           79,000
        Depreciation                      (107,000)        (99,000)
                                      ------------     ------------
             Total                      10,664,000       10,831,000
        Valuation allowance            (10,664,000)    (10,831,000)
                                       -----------      -----------
                                                --               --
                                      ============     ============

     Due to the uncertainty related to the realization of the net
deferred tax asset, a full valuation allowance has been provided.  At
January 1, 2000, the Company had net operating loss carryforwards of
approximately $30,900,000 available to offset future income for U.S.
Federal income tax purposes, and $2,800,000 for state income tax
purposes. These operating loss carryforwards expire at various dates
from the years 2000 through 2011 for federal income tax purposes and the
years 1999 through 2001 for state income tax purposes.

     Certain provisions of the Internal Revenue Code limit the annual
utilization of net operating loss carryforwards if, over a three-year
period, a greater than 50% change in ownership occurs. The Company
believes that it did not exceed the 50% ownership change in the three-
year period ending at year-end 1999 therefore as of year-end 1999 all
net operating loss carryforwards are available to offset future taxable
income.


(10) Retirement Savings Plan
     -----------------------
     Effective September 1, 1987, the Company established the Retirement
Savings Plan (the `Plan`) under the provisions of Section 401 of the
Internal Revenue Code.  Employees, as defined in the Plan, are eligible
to participate in the Plan after 30 days of employment.  Under the terms
of the Plan, the Company may match employee contributions under such
method as described in the Plan and as determined each year by the Board
of Directors.  Through January 1, 2000, no employer matching
contributions had been made to the Plan since inception.


(11) Significant Customers and Segment Information
     ---------------------------------------------
     Significant customers in 1999, 1998, and 1997 were as follows:

                                   Significant    Significant
                                   Customer       Customer
     Year ended   January 1, 2000  A              67%
                                   B               8%
                                   C               6%
                                   D               4%

     Year ended December 26, 1998  A              72%
                                   B              13%
                                   C               6%
                                   D               1%

     Year ended December 28, 1997  A              56%
                                   B               9%
                                   C               9%
                                   D              10%

     All of the Company`s long-lived assets and operations are located
in the United States. Revenue generated from overseas customers
accounted for 0%, 13% and 1% for 1999, 1998, and 1997 and December 28, 1996
Ceramics Process Systems Corporation
Common stock ----------------- Additional Number Par Paid-in Accumulated Treasury Stockholders' of shares Value capital deficit stock equity (deficit) ------- ------- ------- ------- --- - ---- ------- Balance at December 30, 1995 7,780,766 $77,808 $30,457,384 $(32,967,722) $(60,835) $(2,493,365) Net loss -- -- -- (411,305) - -- (411,305) ------- ------- ------- ------- --- - ---- ------- Balance at December 28, 1996 7,780,766 -- -- (411,305) - -- (411,305) Stock Options Exercised 43,816 438 7,449 -- - -- 7,887 Net income -- -- -- 1,377,146 - -- 1,377,146 ------- ------- ------- ------- ---- - --- ------- Balance at December 27, 1997 7,824,582 438 7,449 965,841 - -- 973,728 Common stock issued in debt conversion 4,463,916 44,639 2,187,319 -- - -- 2,231,958 Stock Options Exercised 20,354 204 4,201 -- - -- 4,405 Net income -- -- -- 1,672.435 - -- 1,672,435 ------- ------- ------- ------- ---- - --- --------- Balance at December 26, 1998 12,308,852 $123,089 $32,656,353 $(30,329,446) $(60,835) $2,389,161 ========== ======== =========== ============ ========= ========== The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Ceramics Process Systems Dec. 26, Dec. 27, Dec 28, 1998 1997 1996 ---------- ---------- --------- Cash flows from operating activities: Net income (loss) $1,672,435 $1,377,146 $(411,304) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation 146,234 115,994 108,070 Amortization 36,600 36,500 5,290 Gain on disposal of equipment (53,800) -- (27,043) Changes in assets and liabilities: Accounts receivable, trade 78,987 (485,086) 70,540 Inventories (80,875) 33,120 (127,419) Prepaid expenses 13,698 (14,188) 9,484 Other current assets 475 Accounts payable (57,904) 25,895 (47,732) Accrued expenses (131,120) (112,657) 214,558 Due to customer 51,950 Deferred revenue (21,164) (192,557) 355,987 Net cash provided by ----------- ----------- --------- operating activities 1,603,091 784,167 202,856 ----------- ----------- ---------- Cash flows from investing activities: Additions to property and equipment (332,954) (212,827) (147,768) Proceeds on disposal of property and equipment 53,800 27,500 Deposits (3,700) (2,735) (1,384) Net cash used in investing ----------- ----------- ---------- activities (282,854) (215,562) (121,652) ----------- ----------- ---------- Cash flows from financing activities: Principal payment of capital lease (42,204) (23,487) obligations Principal payments of notes payable (344,830) (105,170) -- Proceeds from issuance of common stock 4,405 7,887 -- Net cash used in ----------- ----------- ---------- financing activities (382,629) (120,770) -- ----------- ----------- ---------- Net increase in cash 937,608 447,835 81,204 Cash and cash equivalent at beginning of period 561,166 113,331 32,127 Cash and cash equivalent at end ----------- ----------- ---------- of period $1,498,774 $ 561,166 $113,331 =========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ceramics Process Systems Corporation - ------------------------------------------------------------------------ (1) Nature of Business ------------------ Ceramics Process Systems Corporation serves the wireless communications, satellite communications, motor controller and other microelectronic markets by developing, manufacturing, and marketing advanced metal-matrix composite and ceramic components to house, interconnect, and thermally manage microelectronic devices. (2) Summary of Significant Accounting Policies ------------------------------------------ (2)(a) Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Ceramics Process Systems Corporation and its wholly-owned subsidiary, CPS Superconductor Corporation (`CPSS`). All significant intercompany balances and transactions have been eliminated in consolidation. (2)(b) Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. (2)(c) Inventories ----------- Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Year end inventory balances consisted of the following: 26-Dec-98 27-Dec-97 --------- --------- Raw materials $ 107,259 $ 11,097 Work-in-process 96,941 112,228 --------- --------- $ 204,200 $123,325 ========= ========= (2)(d) Property and Equipment ---------------------- Property and equipment are stated at cost. Depreciation of equipment is calculated on a straight-line basis over the estimated useful life, generally five years. Amortization under capital leases is calculated on a straight-line basis over the life of the lease. Depreciation of leasehold improvements is calculated using the straight- line method over the lease term or the estimated useful lives, whichever is shorter. Upon retirement, the cost and related accumulated depreciation or amortization are removed from their respective accounts. Any gains or losses are included in the results of operations in the period in which they occur. (2)(e) Revenue Recognition ------------------- The Company recognizes product revenue generally upon shipment. Revenue related to license agreements is recognized upon receipt of the license payment or over the license period, if the Company has continuing obligations under the agreement. Revenue related to research and development contracts is recognized on the percentage-of-completion basis, which is generally based on the relationship of incurred costs to total estimated costs on each contract. Advance payments in excess of revenue recognized are recorded as customer deposits. (2)(f) Research and Development Costs ------------------------------ The Company continues to perform product development under prototype manufacturing agreements with customers. In fiscal 1998 and fiscal 1997, the Company did not incur any costs for research and development and did not perform any externally funded research and development programs. In prior periods research and development costs were charged to expense as incurred. (2)(g) Income Taxes ------------ The Company accounts for income taxes utilizing the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between tax and financial statement basis of assets and liabilities, measured using enacted tax rates expected to be in effect in the period which the temporary differences reverse. (2)(h) Net Income Per Common Share --------------------------- Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is calculated by dividing net income by the sum of the weighted average number of common shares plus additional common shares that would have been outstanding if potential dilutive common shares had been issued for granted stock option and stock purchase rights. (2)(i) Comprehensive Income -------------------- The Company has adopted Financial Accounting Standards Board Statement No. 130 (`FAS 130`) `Reporting Comprehensive Income` effective for fiscal years beginning after December 15, 1997. FAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. FAS 130 requires that all components of comprehensive income shall be reported in the financial statements in the period in which they are recognized. Furthermore, a total amount for comprehensive income shall be displayed in the financial statement where the components of other comprehensive income are reported. The Company has no items of comprehensive income, and therefore net income is equal to comprehensive income. (2)(j) Recent Accounting Pronouncements -------------------------------- In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," FAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transactions and, if it is, the type of hedge transaction. The statement is effective for fiscal years beginning after June 15, 1999. The Company will adopt FAS No. 133 for its fiscal year ending December 30, 2000. (2)(k) Use of Estimates in the Preparation of Financial Statements ----------------------------------------------------------- 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 these estimates. (2)(l) Risks and Uncertainties ----------------------- The Company manufactures its products to customer specifications and a significant portion of the Company`s revenues have historically been generated from three customers. Financial instruments which potentially subject the Company to concentrations of credit risk consist of trade accounts receivable. The Company has not incurred significant losses on its accounts receivable in the past. (2)(m) Financial Instruments --------------------- Although the Company has no borrowings outstanding as of year-end 1998, in the past a substantial portion of the Company's borrowings have been financed by significant stockholders of the Company, one of which reduced its ownership interest in 1996. The Company was in default of a significant portion of its convertible notes payable at year-end 1997; in 1998 these convertible notes payable were converted into equity. (2)(n) Fiscal Year-End --------------- The Company`s fiscal year end is the last Saturday in December or the first Saturday in January, which results in a 52- or 53-week year. Fiscal years 1998, 1997, and 1996, consisted of 52 weeks. (3) Supplemental Cash Flow Information ---------------------------------- The Company acquired equipment through capital lease obligations in 1997 in the amount of $135,160 and in 1996 in the amount of $111,079. Additionally, the Company paid interest on leases amounting to $20,710, $15,196, and $5,891 in 1998, 1997, and 1996, respectively. In 1998 the Company issued 3,740,000 shares of common stock upon conversion of note principal in the amount of $1,870,000, the Company issued 723,916 shares of common stock upon conversion of accrued interest in the amount of $361,958, and the Company paid accrued interest in cash in the amount of $160,542. In 1998 the Company's Federal income taxes expense was $57,126 which includes alternative minimum taxes for fiscal 1997 of $21,060 and taxes for fiscal 1998 of $36,066. The Company did not accrue or pay Federal income taxes in 1996 due to its tax losses in that year. (4) Leases ------ At December 26, 1998 the Company had production equipment with a cost of $262,108 and accumulated amortization of $78,390 under capital leases. At December 27, 1997 the Company had production equipment with a cost of $262,108 and accumulated amortization of $41,790 under capital leases. Future payments required under capital lease obligations are as follows at December 26, 1998: 1999 $ 62,916 2000 62,916 2001 56,940 2002 21,497 -------- Total future minimum lease payments 204,269 -------- Less amount representing interest 32,155 -------- Present value of net future lease payments 172,114 Less current portion 46,959 -------- Long-term obligation under capital leases $ 125,155 ======== The Company is operating at its Chartley facility as a tenant-at- will. Total rental expense for operating leases was $82,000 for 1998,and $67,500 each year for 1997 and 1996, respectively. (5) Stock-Based Compensation Plans ------------------------------ The Company has adopted the disclosure requirements of Statements of Financial Accounting Standards (SFAS) No.123, `Accounting for Stock-Based Compensation`. The Company continues to recognize compensation costs using the intrinsic value based method described in Accounting Principles Board Opinion No. 25, `Accounting for Stock Issued to Employees`. No compensation costs were recognized in 1998, 1997, and 1996. In 1998, Company employees exercised options for 20,354 shares of common stock at market prices between $0.18 and $0.625. In 1998, the Company maintained two stock option plans affording employees and other persons affiliated with the Company, excluding non- employee Directors, the opportunity to purchase shares of its common stock. In August, 1994, one of the stock option plans expired and no new grants are currently available under it. Under the remaining plan, the Board of Directors may grant incentive stock options to officers and other key employees of the Company. Additionally, the remaining plan permits the Board of Directors to issue non-qualified stock options to officers and other key employees and consultants of the Company. All incentive stock options are granted at the fair market value of the stock or in the case of certain optionees, at 110% of such fair market value at the time of the grant. Such options are exercisable in installments following a minimum period of employment and expire within ten years from the date granted. All non-qualified stock options are granted at a price not less than 50% of the fair market value at the time of the grant. Options vest over various periods not exceeding 5 years. In addition, during 1992 the Company adopted the 1992 Director Option Plan (the `Director Plan`) to compensate outside directors for their services. Under the Director Plan, eligible directors are initially granted options to purchase up to 4,000 shares of the Company`s common stock, and are granted options to purchase up to 2,000 shares of the Company`s common stock upon re-election as a director. Additionally, directors serving on standing committees of the Board are granted options to purchase up to 500 shares of the Company`s common stock. No options to purchase shares of the Company`s common stock under the Director Plan were granted in 1998, 1997 or 1996. At December 26, 1998, options to purchase 20,500 shares of Common Stock were outstanding under the Director Plan. In 1998 the Company granted 51,000 options at the current fair market values of $1.44 to $2.375. In 1997, and 1996 the Company granted 109,000 and 330,461 options at the then current fair market value of $0.18 and $1.50, respectively, with similar terms and conditions to existing option holders in exchange for the previously issued options. As of December 26, 1998, the total remaining number of shares authorized for issuance under these stock option plans amounted to 411,862. The following is a summary of stock option activity for all of the above plans for the fiscal years 1998, 1997 and 1996. 1998 1997 1996 -------- -------- -------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------ ------------------ ------------------ Outstanding at beginning of year 374,386 $ 0.93 430,961 $ 0.68 447,267 $ 0.93 Granted at fair market value 51,000 $ 2.04 109,000 $ 1.00 330,461 $ 0.18 Excerised (20,354) $ 0.22 (43,816) $ 0.18 Cancelled (66,334) $ 2.57 (121,759) $ 0.41 (346,767) $ 0.52 ------------------ ------------------ ------------------ Outstanding at end of year 338,698 $ 0.81 374,386 $ 0.93 430,961 $ 0.68 ================== ================== ================== Options exercisable at year-end 176,734 $ 0.60 165,461 $ 1.44 100,500 $ 2.34 The following table summarizes information about stock options outstanding at December 26, 1998: Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Range Remaining Weighted Weighted Of Contractual Average Average Exercise Number Life Exercise Number Exercise Price Outstanding (in years) Price Exercisable Price - -------- ----------- ----------- -------- ----------- -------- $0.18 204,198 7.25 $0.18 129,234 $0.18 0.625 - 0.875 12,000 3.39 0.80 12,000 0.80 1.312 - 1.50 59,000 8.96 1.36 16,333 1.35 2.188 - 3.75 63,500 7.46 2.35 19,167 2.68 ------- ------- $0.18 - $3.75 338,698 7.45 $0.81 176,734 $0.60 ======== ======== The fair value of each option grant under SFAS 123 is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents the annualized weighted average values of the significant assumptions used to estimate the fair values of the options: 1998 1997 1996 ---- ---- ---- Options issued 51,000 59,000 222,886 Risk-free interest rate 5.52% 6.27% 6.31% Expected life in years 7 7 7 Expected volatility 88% 80% 80% Expected dividends 0 0 0 All options are granted at the fair market value on the date of grant. Had compensation cost for the Company`s two employee stock option plans been recorded based on the fair value of awards at grant date consistent with the alternative method prescribed by SFAS 123, the Company`s pro forma net income (loss) for 1998, 1997, and 1996 would have been $1,632,788, $1,362,316, and $(419,108), respectively. Diluted income (loss) per share for 1998, 1997 and 1996 would have been $0.14, $0.13, and $(0.05), respectively. The pro forma amounts include amortized fair values attributable to options granted after December 15, 1994 only and therefore, are not likely to be representative of the effects on reported net income for future years. (6) Notes Payable - ------------- Notes payable consisted of the following at December 27, 1997: Note Payable 1 Note payable dated March 31, 1995 as amended October 1, 1997, with interest payable at a rate of 10% per year; due in installments on January 1, 1998, April 1, 1998, July 1, 1998, October 1, 1998 and December 31, 1998. The note is collateralized by accounts receivable, inventory, property and equipment. $218,750 Note Payable 2 Note payable dated July 19, 1995, as amended July 31, 1996 and July 31, 1997, with interest payable at a rate of 10% per year due in installments on March 29, 1998, June 26, 1998, September 25, 1998, December 24, 1998, March 26, 1999 and June 25, 1999. 126,080 -------- $344,830 ======== In 1998, Notes Payable 1 and 2 were paid in cash and no Notes Payable were outstanding as of December 26, 1998. (7) Convertible Notes Payable ------------------------- Convertible notes payable consisted of the following at December 27, 1997: Convertible Note Payable 1 Unsecured notes payable dated February 16, 1994 with five parties, due June 30, 1995 plus interest at 10% per annum. $ 250,000 Convertible Note Payable 2 Unsecured note payable dated April 21, 1994, due April 21, 2001; interest at 10% per annum is due semi-annually on September 30 and March 31. 500,000 Convertible Note Payable 3 Unsecured note payable dated July 20, 1994, due January 31, 1996 plus interest at 10% per annum. 120,000 Convertible Note Payable 4 Unsecured notes payable dated October 26, 1994 with six parties, due April 24, 1996 plus interest at 10% per annum. 1,000,000 ---------- $1,870,000 ========== At December 27, 1997, the Company was in default of Convertible Notes Payable 1, 2, 3 and 4. The Company cured all conditions of default in the first fiscal quarter of 1998. $260,000 of the principal balance of the convertible notes payable at December 27, 1997 represent amounts due to holders of greater than 10% of the Company's common stock for which the related accrued interest and interest expense as of December 27, 1997 was $86,667 and $25,929 respectively. In 1998 all Convertible Notes Payable were converted into common stock of the Company and no Notes Payable were outstanding as of December 26, 1998. (8) Accrued Expenses ------------ Accrued expenses consist of the following: December 26, December 27, 1998 1997 -------- -------- Accrued legal and accounting $ 47,500 $ 33,190 Accrued interest -- 526,294 Accrued payroll 107,383 108,242 Accrued other 29,149 172,813 -------- -------- $ 184,032 $840,539 ======== ======== (9) Income Taxes ------------ Deferred tax assets and liabilities are as follows: December 26, December 27, 1998 1997 ------------ ------------ Net operating losses $10,851,000 $11,410,000 Vacation and other accrued expenses 79,000 79,000 Depreciation (99,000) (93,000) ------------ ------------ Total 10,831,000 11,396,000 Valuation allowance (10,831,000) (11,396,000) ----------- ----------- -- -- ============ ============ Due to the uncertainty related to the realization of the net deferred tax asset, a full valuation allowance has been provided. At December 26, 1998, the Company had net operating loss carryforwards of approximately $31,000,000 available to offset future income for U.S. Federal income tax purposes, and $4,200,000 for state income tax purposes. These operating loss carryforwards expire at various dates from the years 2000 through 2011 for federal income tax purposes and the years 1998 through 2001 for state income tax purposes. Certain provisions of the Internal Revenue Code limit the annual utilization of net operating loss carryforwards if, over a three-year period, a greater than 50% change in ownership occurs. The Company believes that it did not exceed the 50% ownership change in the three- year period ending at year-end 1998 therefore as of year-end 1998 all net operating loss carryforwards are available to offset future taxable income. (10) Retirement Savings Plan ----------------------- Effective September 1, 1987, the Company established the Retirement Savings Plan (the `Plan`) under the provisions of Section 401 of the Internal Revenue Code. Employees, as defined in the Plan, are eligible to participate in the Plan after 30 days of employment. Under the terms of the Plan, the Company may match employee contributions under such method as described in the Plan and as determined each year by the Board of Directors. Through December 26, 1998, no employer matching contributions had been made to the Plan. (11) Significant Customers and Segment Information --------------------------------------------- Significant customers in 1998, 1997, and 1996 were as follows: Significant Significant Customer Customer Year ended December 26, 1998 A 72% B 13% C 6% D 1% Year ended December 28, 1997 A 56% B 9% C 9% D 10% Year ended December 30, 1996 A 61% B 0% C 10% D 17 All of the Company's long-lived assets and operations are located in the United States. Revenue generated from overseas customers accounted for 13%, 1% and 0% for 1998, 1997, and 196 respectively. (12) Earnings Per Share ------------------ SFAS 128 requires the following reconciliation of the basic and diluted EPS calculations. For the years ended Jan. 1, 2000 Dec. 26, 1998 Dec. 27, 1997 Dec. 28, 1996 ------------- ------------- ------------- Basic EPS Computation: Numerator: Net income (loss) $ 1,672,435 $ 1,377,146 $ (411,305) Denominator: Weighted average common shares outstanding 10,565,961 7,799,279 7,780,766 Basic EPS Computation: Numerator: Net income $ 238,056 $ 1,672,435 $1,377,146 Denominator: Weighted average common shares outstanding 12,285,969 10,565,961 7,799,279 Basic EPS $ 0.02 $ 0.16 $ 0.18 $(0.05) Diluted EPS Computation: Numerator: Net income (loss) $ 1,672,435 $ 1,377,146 $(411,305) Interest on convertible debt 87,290 186,489 -- ----------- ----------- ---------- Total net income (loss) $ 1,759,725 $ 1,563,635 $(411,305) Denominator: Weighted average common shares outstanding 10,565,961 7,799,279 7,780,766 Stock options 204,749 191,040 -- Interest converted 359,292 -- -- Convertible debt 1,417,425 4,289,324 -- ----------- ----------- ---------- Total Shares 12,547,427 12,279,643 7,780,766 Diluted EPS Computation: Numerator: Net income $ 238,056 $ 1,672,435 $1,377,146 Interest on convertible debt -- 87,290 186,489 ----------- ----------- ---------- Total net income $ 238,056 $ 1,759,725 $1,563,635 Denominator: Weighted average common shares outstanding 12,285,969 10,565,961 7,799,279 Stock options 197,310 204,749 191,040 Interest converted 359,292 -- Convertible debt -- 1,417,425 4,289,324 ----------- ----------- ---------- Total Shares 12,483,279 12,547,427 12,279,643 Diluted EPS $ 0.02 $ 0.14 $ 0.13 $ (0.05)